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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-24392
DOUBLETREE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0762415
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
410 NORTH 44TH STREET
SUITE 700
PHOENIX, ARIZONA 85008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (602) 220-6666
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 3, 1997: $1,002,251,685
The number of shares of the Registrant's Common Stock outstanding as of
March 3, 1997 was 39,559,658.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 2, 1997 ARE INCORPORATED BY REFERENCE INTO PART
III AS SET FORTH HEREIN.
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TOTAL PAGES 55
EXHIBIT INDEX ON PAGE 53
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Doubletree Corporation (the "Company" or "Doubletree") is one of the
largest full service hotel operating companies in the United States. At December
31, 1996, the Company managed, leased, or franchised 241 hotels with an
aggregate of 56,037 rooms in 39 states, the District of Columbia, the U.S.
Virgin Islands and Mexico. This represents a 108% and 83% increase in number of
hotels and aggregate room count, respectively, for the fiscal year ended
December 31, 1996 as compared to fiscal year ended December 31, 1995. Excluding
the Red Lion Acquisition and the RFS Acquisition (each of which is defined
below), this growth was 21% and 18%, respectively. The Company provides hotel
owners with management and franchise services under its Doubletree Hotels,
Doubletree Guest Suites, Doubletree Club Hotels and Club Hotels by Doubletree
(collectively "Club Hotels") brand names, as well as management services for Red
Lion hotels and other non-Doubletree brand hotels. At December 31, 1996, the
Company's portfolio of hotels included 58 Doubletree Hotels, 36 Doubletree Guest
Suites, 16 Club Hotels, 56 Red Lion hotels and 75 hotels operated by Doubletree
under third party brand names or as independent hotels.
In late 1995 and 1996, the Company announced several strategic
developments -- the acquisitions of RFS, Inc. and Red Lion Hotels, Inc., the
formation of a joint venture in Candlewood Hotel Company, L.L.C. ("Candlewood"),
the formation of a strategic alliance with Patriot American Hospitality, Inc.
and the introduction of the Club Hotel by Doubletree concept, each of which is
discussed in more detail in the "Recent Developments" section below. Unless the
context indicates otherwise, the discussion herein addresses the Company as of
December 31, 1996.
HISTORY
The Company's current hotel management and franchise business was formed on
December 16, 1993 with the acquisition of Doubletree Hotels Corporation ("DHC")
by Guest Quarters Hotel Partnership ("GQHP"), a general partnership, which was
renamed Doubletree Partners upon such acquisition (the "Combination
Transaction"). The Company was incorporated in Delaware in May 1994 to succeed
to the business of Doubletree Partners. Unless the context indicates otherwise,
all references herein to the "Company" or "Doubletree" refer to Doubletree
Corporation and its consolidated subsidiaries.
On June 30, 1994 (immediately prior to the initial public offering of the
Company's common stock (the "Common Stock")) the partners of Doubletree
Partners, other than Samantha Hotel Corporation ('Samantha") contributed their
general partnership interests to the Company and the owners of Samantha
contributed Samantha to the Company in consideration for 15,500,000 shares of
Common Stock in proportion to their partnership interests in Doubletree Partners
prior to such transfer (the "Reorganization"). As a result of the
Reorganization, the Company succeeded to all the assets, liabilities and
business operations of Doubletree Partners.
The principal executive offices of the Company are located at 410 North
44th Street, Suite 700, Phoenix, Arizona 85008, telephone (602) 220-6666.
RECENT DEVELOPMENTS
Doubletree recently has taken the following steps to implement and further
its business and growth strategies:
Acquisition of Red Lion. On November 8, 1996, the Company, through the
merger of a wholly-owned subsidiary of the Company with and into Red Lion
Hotels, Inc. ("Red Lion"), acquired all of the outstanding stock of Red Lion in
a transaction valued at approximately $1.2 billion. The Company paid $695.0
million in cash, repaid $124.0 million of existing Red Lion indebtedness, issued
7,381,588 shares of Common Stock (the "Red Lion Acquisition Shares") with a fair
value of approximately $292.0 million and assumed net liabilities of $90.0
million (the "Red Lion Acquisition"). As a result of the Red Lion Acquisition,
Red Lion became a wholly-owned subsidiary of the Company. The Board of Directors
of the Company was expanded to
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include two additional members designated by Red Lion, a California Limited
Partnership (the "Partnership"), an entity affiliated with Kohlberg Kravis
Roberts & Co. References herein to the Partnership include its wholly-owned
subsidiaries. See "The Red Lion Acquisition."
At December 31, 1996, the Company operated 56 full-service Red Lion hotels,
17 of which were owned, eight of which were operated pursuant to joint venture
agreements and 17 of which were leased pursuant to a long-term lease with the
Partnership. The remaining 14 hotels were operated pursuant to management
contracts, with 10 of such managed hotels owned by Red Lion Inns Limited
Partnership (the "MLP"), the general partner of which is a wholly-owned
subsidiary of the Company.
As a result of the Red Lion Acquisition, the Company expanded its size and
geographic presence which the Company believes will enhance Doubletree's
national brand awareness. The consolidation of the Company and Red Lion is
progressing as planned. The Company has integrated its management team with Red
Lion's and is in the process of adopting the best practices of each
organization. The Company intends to convert 40 to 45 of the Red Lion hotels to
the Doubletree brand. Four Red Lion hotels were converted to the Doubletree
brand in the first quarter of 1997 and the remainder are anticipated to be
converted at a rate of approximately 15 hotels per quarter. The Company believes
that due to Doubletree's national brand recognition, marketing strength, and
higher average daily rate ("ADR") as compared to Red Lion's, the conversion of
the Red Lion hotels to the Doubletree brand presents opportunities for
improvement in both ADR and occupancy rates. Management believes that the Red
Lion Acquisition has created a combined entity with the resources to compete
more effectively on a national basis; however, the Company will continue to be
subject to the competitive and economic factors associated with the lodging
industry. For a more detailed discussion of the Red Lion hotels, see "Hotels --
Red Lion Hotels."
Acquisition of RFS Management. In February 1996, Doubletree significantly
expanded its portfolio of non-Doubletree brand hotels with the acquisition (the
"RFS Acquisition") of RFS, Inc., a privately held hotel operator ("RFS
Management"). As a result of the RFS Acquisition, RFS Management became a
wholly-owned subsidiary of the Company. With the RFS Acquisition, Doubletree
acquired an independent hotel management company with experienced hotel
management personnel and an established infrastructure, which has allowed
Doubletree to pursue further non-Doubletree brand management contract and lease
opportunities. At December 31, 1996, RFS Management operated 64 hotels (the "RFS
Hotels"), 52 of which were leased and operated by RFS Management, four of which
were leased by RFS Management and operated by third party management, and eight
of which were managed for owners other than RFS Partnership, L.P., a limited
partnership (the "Landlord"). The RFS Hotels principally operate in the
limited-service and the extended stay segments of the lodging industry, comprise
10,120 rooms and are operated under such franchise brands as Holiday Inn,
Holiday Inn Express, Residence Inn by Marriott, Hampton Inn, Sheraton, Ramada
and Comfort Inn. See "Hotel Operations -- Non-Doubletree Brand Franchise
Agents." In addition, in connection with the RFS Acquisition, Doubletree entered
into an arrangement with RFS Hotel Investors, Inc., a leading hotel real estate
investment trust (the "REIT"), granting Doubletree the right to lease and manage
any hotels acquired or developed by the REIT or the Landlord during the ten
years following the RFS Acquisition, with limited exceptions (the "Right of
First Refusal"). The Right of First Refusal provides Doubletree with an
additional source of additions to Doubletree's hotel portfolio. In 1996, eight
hotels joined the Doubletree portfolio as a result of the Right of First
Refusal. At December 31, 1996, the REIT had five hotels under development which
will be subject to the Right of First Refusal. See "The RFS Acquisition."
Formation of Candlewood. In November 1995, Doubletree announced its
entrance into the mid-priced ($40-50 per night) extended stay segment of the
hotel market with its investment in Candlewood Hotel Company, L.L.C. (the
"Candlewood LLC"). The Candlewood LLC was formed to develop, own, manage and
franchise hotels containing fully furnished studio units designed to serve the
value-oriented extended stay guest. Mr. Jack DeBoer, the founder of Residence
Inns and whom the industry credits with creating the extended stay concept, was
the President and Chief Executive Officer of the Candlewood LLC. In August 1996,
Candlewood Hotel Company, Inc. ("Candlewood") was formed to succeed to the
business of the Candlewood LLC. In November 1996, Candlewood completed an
initial public offering of its common stock. In connection with the offering,
Doubletree's interest in the Candlewood LLC was converted into an equivalent
interest in Candlewood. Doubletree currently is entitled to nominate two
directors out of a six
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person board of directors, and currently owns approximately 29% of the
outstanding common stock of Candlewood. Mr. DeBoer is the President and Chief
Executive Officer of Candlewood. At December 31, 1996, there was one Candlewood
hotel in operation, eight Candlewood hotels under construction and 29 sites
under contract or letter of intent to become Candlewood hotels. Doubletree
believes that Candlewood provides it with an opportunity to participate in a
quickly expanding and high demand segment of the lodging industry. Candlewood is
in the preliminary stages of development, and there can be no assurance of its
success. See "Investments and Commitments."
Formation of Joint Venture Strategic Alliance With Patriot American
Hospitality, Inc. In August 1996, Doubletree and Patriot American Hospitality,
Inc. ("Patriot") announced the formation of a joint venture strategic alliance.
Pursuant to the strategic alliance, Doubletree and Patriot will work together to
identify hotels potentially suitable for acquisition by Patriot, which will then
be operated as Doubletree brand hotels or luxury non-Doubletree brand hotels, in
each case to be leased and/or managed by Doubletree. Patriot and Doubletree have
committed to invest an aggregate of approximately $180.0 million and $20.0
million, respectively, into the purchase of hotels as part of the strategic
alliance. The joint venture strategic alliance provides Doubletree with another
source of long-term hotel management and/or lease opportunities. As of December
31, 1996, the joint venture had successfully completed the acquisition of six
hotels that are or will be Doubletree brand hotels and as of December 31, 1996,
the Company had funded approximately $10.7 million of the $20.0 million
commitment to the strategic alliance. In the first quarter of 1997, the joint
venture completed the acquisition of two more hotels. Patriot recently announced
that it is acquiring, and will be converting into, a "paired-share" REIT, which,
once completed, will allow it to manage properties on its own behalf. Patriot
and the Company have reached an agreement in principle in which (i) the six
existing leases will be converted into management contracts in connection with
the Patriot "paired-share" transaction and (ii) pending and future transactions
will be operated by Doubletree under management contracts rather than leases.
The two transactions in the first quarter of 1997 closed under this new
management arrangement. Despite these acquisitions, there can be no assurance of
the joint venture strategic alliance's success. There is no assurance that
Doubletree's equity investment in any hotel that is purchased as part of the
strategic alliance will be profitable.
Introduction of Club Hotels by Doubletree. In January 1996, Doubletree
introduced "Club Hotels by Doubletree," a new hotel brand specifically targeted
at the frequent business traveler, which was developed by Doubletree utilizing
an innovative co-branding approach with Steelcase, Au Bon Pain and Kinko's.
Subsequent to the brand launch, Doubletree and Kinko's decided to end Kinko's
involvement in the brand. Doubletree expects to announce the substitution of a
new nationally branded business product service and supply provider to replace
Kinko's. Each hotel features a multipurpose Business Club ranging from 3,000 to
5,000 square feet in size. One portion of the Business Club is dedicated to the
nationally branded state of the art business center and contains equipment, such
as computer printers, fax machines, photocopiers and office and shipping
supplies. Each Business Club features private mini offices and small conference
rooms designed by Steelcase, and features an Au Bon Pain bakery cafe, where
guests may enjoy breakfast, lunch or dinner. Doubletree plans to grow the Club
Hotels by Doubletree brand through the acquisition of management contracts of
underperforming hotels in target locations, a focused franchising program and
the conversion of certain existing Doubletree Club Hotels. The first two
conversions of hotels to Club Hotels by Doubletree, containing fully operational
Business Clubs, opened in Jacksonville, Florida and San Antonio, Texas in August
1996 and September 1996, respectively. At December 31, 1996, there were nine
additional hotels in the process of converting, or under contract to become,
Club Hotels by Doubletree.
THE LODGING INDUSTRY
Overview
Doubletree believes that the lodging industry is benefiting from an
improved supply and demand balance, which has led to overall profitability of
the lodging industry. Room supply growth in the lodging industry, particularly
in the principal segments in which Doubletree competes, has slowed dramatically
in recent years as the industry has absorbed some of the oversupply of rooms
that resulted from an average annual room supply growth of approximately 4% from
1987 to 1990. According to industry reports, this growth slowed to an
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estimated 1.4% in 1993, 1.5% in 1994, 1.6% in 1995 and 2.1% in 1996. Increases
in occupancy rates (measured by occupied rooms) increased an estimated 3.1% in
1993, 4.0% in 1994, 2.9% in 1995 and 2.9% in 1996. Average daily room rates
increased an estimated 2.8%, 4.8%, 4.9% and 4.5%, respectively, during the same
periods. Due to the cyclical nature supply and demand in the lodging industry,
there can be no assurance that such increases will continue.
Industry Segments
Industry segments within the lodging industry are principally based on
levels of service, guest amenities, room size, room configuration and price. The
Company's Doubletree brand hotels currently compete in three segments of the
lodging industry: full-service hotels, all-suite hotels, and mid-price hotels.
Full-service hotels typically include swimming pools, meeting and banquet
facilities, gift shops, restaurants, cocktail lounges, room service, parking
facilities and other services. All-suite hotels provide the guest with a two
room suite, including a bedroom and a living room. This segment can also be
further divided depending on the level of food and beverage services provided at
the hotel. Mid-price hotels typically do not include services such as extensive
meeting and banquet facilities or extensive food and beverage facilities.
Red Lion hotels compete mostly in the full-service segment of the lodging
industry. The Company's other non-Doubletree brand hotels compete in most
segments, but primarily in the limited-service and extended stay segments of the
lodging industry. Extended stay hotels are designed to combine the convenience
of a hotel with many of the comforts of an apartment, and generally contain a
furnished kitchen area and may include living areas separate from sleeping
areas.
HOTELS
Doubletree Hotels
Doubletree's full-service hotels are targeted at business travelers, group
meetings and leisure travelers. The total guest room revenue for the year ended
December 31, 1996 for Doubletree's full-service hotels was derived approximately
41% from group meetings, 36% from business travelers, and 23% from leisure
travelers. Doubletree believes these percentages are consistent with other
full-service hotel brands in the industry.
At December 31, 1996, Doubletree's full-service hotels included 58 hotels
in 22 states, the District of Columbia, U.S. Virgin Islands and Mexico, with a
total of 17,590 guest rooms. The hotels range in size from 120 to 632 rooms.
Room rates generally range from $45 to $280 per night depending upon location,
time of year and day of the week. These hotels typically include a swimming
pool, gift shop, meeting and banquet facilities, at least one restaurant and
cocktail lounge, room service, parking facilities and other services.
The following table sets forth certain information regarding the Doubletree
full-service hotels at December 31, 1996:
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
Managed Hotels(1).................................... 38 12,233
Franchised Hotels(2)................................. 15 4,117
Leased Hotels(3)..................................... 5 1,240
== ======
Total...................................... 58 17,590
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(1) The Company owns a minority joint venture interest in nine of such hotels.
(2) The Company owns a minority joint venture interest in one of such hotels.
(3) The Company owns a minority joint venture interest in one of such hotels.
Doubletree Guest Suite Hotels
The Doubletree Guest Suite all-suite hotels comprise one of the largest
all-suite hotel chains in the United States as measured by number of suites and
system revenues. Doubletree's all-suite hotels are targeted
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at business travelers and families who have a need or desire for greater space
than typically is provided at most traditional hotels. The total guest room
revenue for the year ended December 31, 1996 for Doubletree's all-suite hotels
was derived approximately 45% from business travelers, 29% from group meetings
and 26% from leisure travelers.
At December 31, 1996, Doubletree's all-suite hotels included 36 Doubletree
Guest Suite hotels in 18 states and the District of Columbia, with a total of
7,773 guest rooms. The hotels range in size from 55 to 460 guest suites. Suite
rates generally range from $60 to $250 per night. Each guest suite has a
separate living room and dining/work area, with a color television, refrigerator
and wet bar.
The following table sets forth certain information regarding the Doubletree
Guest Suite all-suite hotels at December 31, 1996:
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
Managed Hotels(1)...................................... 24 5,495
Franchised Hotels...................................... 11 2,039
Owned Hotels........................................... 1 239
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Total........................................ 36 7,773
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(1) The Company owns a minority joint venture interest in one of such hotels.
Club Hotels
Club Hotels are moderately-priced hotels primarily targeted at individual
business travelers. The total guest room revenue for the year ended December 31,
1996 was derived approximately 53% from business travelers, 23% from group
meetings and 24% from leisure travelers.
At December 31, 1996, the portfolio of Club Hotels included 16 hotels (two
of which were Club Hotels by Doubletree) in 10 states, with a total of 3,333
guest rooms. These hotels range in size from 158 to 399 rooms with room rates
generally ranging from $50 to $135 per night.
The following table sets forth certain information regarding Doubletree's
Club Hotels at December 31, 1996:
NUMBER OF NUMBER OF
HOTELS ROOMS
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Managed Hotels(1)...................................... 3 512
Franchised Hotels...................................... 11 2,313
Leased Hotels(2)....................................... 2 508
== =====
Total........................................ 16 3,333
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(1) The Company owns a minority joint venture interest in one of such hotels.
(2) The Company owns a minority joint venture interest in two of such hotels.
Doubletree plans to grow its Club Hotels by Doubletree brand through the
acquisition of management contracts of unaffiliated underperforming hotels, a
focused franchising program and the conversion of certain existing Doubletree
Club Hotels. See "Recent Developments -- Introduction of Club Hotels by
Doubletree."
Red Lion Hotels
The Company's Red Lion brand hotels are targeted at business travelers,
group meetings and leisure travelers. The total guest room revenue for the year
ended December 31, 1996 for Red Lion hotels was derived approximately 56% from
business travelers, 33% from group meetings and 11% from leisure travelers.
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At December 31, 1996, the Company's Red Lion hotels included 56 hotels in
10 states with a total of 14,859 guest rooms. These hotels range in size from 58
to 850 rooms. Room rates generally range from $45 to $200 per night depending
upon location, time of year and day of the week. Red Lion hotels typically
include a swimming pool, gift shop, meeting and banquet facilities, at least one
restaurant and cocktail lounge, room service, parking facilities and other
services.
The following table sets forth certain information regarding the Red Lion
hotels at December 31, 1996:
NUMBER OF NUMBER OF
HOTELS ROOMS
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Managed Hotels......................................... 14 4,519
Owned Hotels........................................... 17 3,755
Leased Hotels.......................................... 17 3,989
Joint Venture Hotels................................... 8 2,596
== ======
Total........................................ 56 14,859
The Company is in the process of converting most of the Red Lion hotels to
one of the Doubletree brands. See "Recent Developments -- Acquisition of Red
Lion."
Other Non-Doubletree Brand Hotels
At December 31, 1996, Doubletree managed or leased 75 hotels under
non-Doubletree brands with a total of 12,482 rooms in 26 states, including
luxury, full-service, limited-service and extended stay hotels. Many of these
hotels became a part of the Doubletree hotel portfolio as a result of the RFS
Acquisition. See "The RFS Acquisition." These non-Doubletree brand hotels are
operated under brand names such as Hampton Inn, Residence Inn by Marriott,
Sheraton, Ramada, Holiday Inn, Holiday Inn Express and Comfort Inn or as
independent hotels. See "Hotel Operations -- Non-Doubletree Brand Franchise
Agreements."
The following table sets forth certain information regarding the Company's
other non-Doubletree brand hotels at December 31, 1996:
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
Managed Hotels(1)...................................... 17 4,314
Leased Hotels.......................................... 58 8,168
== ======
Total........................................ 75 12,482
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(1) The Company owns a minority joint venture interest in one of such hotels.
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All Hotel Properties
The following table presents as of December 31, 1996 certain comparative
information with respect to the Company's hotel properties:
OTHER NON-
DOUBLETREE DOUBLETREE
---------------------------------------- RED LION BRAND
FULL-SERVICE GUEST SUITES CLUB HOTELS HOTELS HOTELS TOTAL
------------ ------------ ------------ --------- ---------- ---------
Number of Hotels(1)................. 58 36 16 56 75 241
Total Number of Rooms(1)............ 17,590 7,773 3,333 14,859 12,482 56,037
Average Number of Rooms Per
Hotel(1).......................... 303 216 208 265 166 232
Percentage of all Doubletree
Rooms............................. 31 14 6 27 22 100
Occupancy Percentage(2)(3)
Year 1994......................... 70.5 % 73.7 % 65.9 % 72.1 % 69.8 % 71.6 %
Year 1995......................... 71.3 74.8 66.2 72.7 71.8 72.4
Year 1996......................... 73.2 76.1 65.9 71.8 72.7 72.8
Average Daily Rate(2)(3)
Year 1994......................... $ 78.59 $ 95.49 $ 63.10 $ 70.52 $ 71.90 $ 76.44
Year 1995......................... 82.96 99.79 66.42 75.17 75.46 80.86
Year 1996......................... 88.97 107.67 71.24 80.65 81.09 86.94
REVPAR(2)
Year 1994......................... $ 55.38 $ 70.38 $ 41.59 $ 50.85 $ 50.16 $ 54.74
Year 1995......................... 59.16 74.66 43.99 54.64 54.20 58.56
Year 1996......................... 65.12 81.93 46.94 57.87 58.96 63.26
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(1) Includes all owned, leased, managed, franchised and properties operated
pursuant to joint venture agreements as of December 31, 1996.
(2) For the years ended 1994, 1995 and 1996, includes only information for
hotels continuously managed by Doubletree, RFS Management and Red Lion since
January 1, 1994.
(3) Based upon rooms occupied, excluding complimentary rooms.
The principal executive offices of Doubletree are located in Phoenix and
are occupied pursuant to a lease that expires March 31, 1998. In addition to its
executive offices, at December 31, 1996, Doubletree leased office space in
Vancouver (Washington), Memphis, Washington, D.C., Chicago, San Francisco, Los
Angeles, Cincinnati and Philadelphia. Management believes that such properties
are sufficient to meet its present needs and does not anticipate any difficulty
in securing additional space, as needed, on terms acceptable to Doubletree.
MARKETING AND SALES
To enhance Doubletree's brand image, recognition and national presence, the
Company launched its multi-million dollar "Sweet Dreams" marketing campaign in
February 1995. The "Sweet Dreams" campaign continues to evolve and is intended
to increase awareness among business travelers of Doubletree's distinguishing
characteristics and features Doubletree's chocolate chip cookie -- a symbol of
Doubletree's commitment to provide warm and caring service to its guests.
According to Nationwide Surveys, Inc., 1996 brand awareness of the Doubletree
brand name in the business travel segment was at an all-time high of 82%.
Doubletree advertises nationally on network and cable TV and in major
newspapers and magazines. Doubletree has established marketing alliances with
major airlines, car rental and credit card companies to share customer lists and
build trade through joint promotions. Additionally, Doubletree is the official
hotel sponsor of the NFL and an official corporate partner of the NCAA. All
Doubletree brand hotels participate in national, regional and local advertising
and promotion programs.
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Subject to the receipt of necessary third party approvals, Doubletree is in
the process of converting most of the Red Lion hotels to one of the Doubletree
brands by the end of 1997, thereby significantly increasing its market coverage
for Doubletree's full service product, particularly in the western United
States. Based on its examination of the Red Lion hotels, Doubletree believes
that such properties are generally in well maintained condition and of high
quality. The Company intends to convert 40 to 45 of the Red Lion hotels to the
Doubletree brand. Four Red Lion hotels were converted to the Doubletree brand in
the first quarter of 1997 and the remainder are anticipated to be converted at a
rate of approximately 15 hotels per quarter. Doubletree is currently assessing
the future of the Red Lion hotels which do not convert to the Doubletree brand
name as well as the future of the Red Lion brand name.
Doubletree provides a simple and cost effective means for making
reservations through its toll free telephone service. Doubletree operates
reservation centers in Vancouver (Washington) and Phoenix. Doubletree has
commenced the integration of Doubletree's reservation system into Red
Lion's -- capitalizing on its state of the art technology. Doubletree promotes
its hotels to reservation makers, including all major airline systems and over
115,000 travel agencies globally.
Doubletree's marketing and sales objective for non-Doubletree brand hotels
is to increase the revenues and profitability of those hotels through a direct
sales program at each hotel. In addition to direct sales and marketing efforts
at each non-Doubletree brand franchised hotel, each such hotel takes advantage
of the advertising and promotional strength of its particular franchise
organization.
Doubletree's National Sales Organization includes offices in Chicago, Los
Angeles, Sacramento, San Francisco, Philadelphia, Washington, D.C., Phoenix,
Vancouver (Washington) and Mexico City. Additionally, Doubletree is represented
internationally through marketing alliances. Doubletree uses a centralized
telemarketing group, is represented at major trade shows in the United States
and abroad and specifically targets Fortune 500 companies and large national and
regional associations.
HOTEL OPERATIONS
Management Contracts
Under the Company's management contracts, the Company operates or
supervises all aspects of the hotel's operations, including guest services,
hiring and training of hotel staff (who generally are employees of the Company),
local sales and marketing, purchasing and budgeting. In exchange for these
services, the Company receives a base fee, typically tied to the hotel's
revenues. In addition, certain of the Company's management contracts provide for
the Company to receive an incentive fee based on achieving specified operating
performance goals. Pursuant to the management contracts, the Company also
typically provides certain centralized corporate services for which it is
reimbursed at cost, including reservations, national sales and marketing, public
relations, centralized accounting services, management information systems,
internal audit and specialized training. The hotel owner may purchase hotel
supplies from the Company, including brand-specific products, for which the
Company earns a profit. Additionally, the Company has capitalized on
opportunities which leverage its buying power by implementing several purchasing
agreements that lower the cost of products to the hotel owner while concurrently
providing the Company with a fee for administering the program. The Company also
provides design, construction and other technical services for a fee. The hotel
owner generally is responsible for all costs, expenses and liabilities incurred
in connection with operating the hotel, including the expenses, salaries and
benefits of all hotel employees, and generally is required to provide a certain
percentage of hotel revenues for capital replacement. The Company may be
responsible for certain liabilities, such as workers compensation, environmental
and general tort liability, associated with a hotel's operations. The Company
carries general liability insurance to protect itself from most potential
liability claims. See "Insurance."
Upon assumption of the management of a hotel, the Company concentrates on
improving the value of the hotel while minimizing the impact of the transition
on employees, guests and the local marketplace. In addition, upon conversion of
a hotel to its management, the Company often works with the hotel owner to
renovate the hotel to improve its marketability and value and to meet the other
financial objectives of the owner.
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At December 31, 1996 the Company operated 10 Red Lion brand hotels pursuant
to a management contract with Red Lion Inns Limited Partnership (the "MLP")
expiring in 2062, including all renewal options. A wholly-owned subsidiary of
the Company is the general partner of the MLP. The Company's compensation under
the management agreement with the MLP is comprised of an annual base management
fee equal to 3% of gross revenues of the hotels and an annual incentive
management fee. The annual incentive management fee is a percentage of adjusted
operating profit, subject to increase if certain operating profits targets are
met.
Beginning January 1, 1998, federal tax regulations mandate that the MLP
become subject to corporate taxes on its income. The MLP is not currently a
taxable entity. The payment of income taxes by the MLP will not reduce cash
available for payment of any fees, including the incentive management fee, due
to the Company under the MLP management contract. The payment of income taxes by
the MLP will, however, directly reduce cash available for distributions to the
partners in the MLP and cash available to repay advances owed to the Company.
Distributions to partners after December 31, 1997 will be considered taxable
dividends. The general partner of the MLP is currently assessing alternatives
relating to this change in tax status, but no assurance can be provided that any
actions taken will lessen the impact of such taxes.
The balance of the Company's management contracts are with a variety of
different owners, the largest portfolio of which is seven hotels managed on
behalf of one owner or its affiliates. The average remaining terms of the
Company's management contracts (excluding the MLP management contract) is
approximately 11 years.
Management of the Company's hotels is coordinated from Doubletree's
headquarters in Phoenix, with a regional operations office in Vancouver
(Washington) and an accounting office in Cincinnati.
Doubletree Franchise Agreements
Doubletree's franchised hotels are licensed under the Doubletree,
Doubletree Guest Suites and Club Hotels brands and include hotels in the
full-service, all-suite and mid-priced segments of the hotel industry. At
December 31, 1996, Doubletree franchised 37 hotels, representing 8,469 guest
rooms. Until 1995, Doubletree had franchised hotels primarily when a managed
hotel was sold to an owner/manager who chose to manage the hotel, while
maintaining the use of one of Doubletree's brand names. In 1995, Doubletree
created a franchise sales organization to capitalize on additional franchising
opportunities as awareness of the Doubletree brand increased. Doubletree's
centralized corporate services for franchised hotels include centralized
reservations, sales and marketing, public relations and national media
advertising. While franchising remains secondary to hotel management contract
growth, Doubletree intends to take advantage of franchising opportunities on a
selective basis and expects that the percentage of franchised hotels in its
system will increase.
Doubletree's franchise agreements have varying terms and typically require,
among other things, franchisees to pay an initial application fee upon
acceptance of the property, annual franchise fees based upon revenues and
marketing/reservation fees for the costs associated with the use of Doubletree's
centralized corporate services. Doubletree's franchise agreements have average
remaining terms of approximately 10 years. Many of Doubletree's franchisees
purchase hotel supplies from Doubletree, including brand-specific products.
Non-Doubletree Brand Franchise Agreements
Of the 75 non-Doubletree brand hotels, 69 are licensed to operate under
franchise agreements, including 17 hotels licensed as Hampton Inn hotels, 12
hotels licensed as Residence Inn by Marriott hotels, 11 hotels licensed as
Holiday Inn hotels, nine hotels licensed as Holiday Inn Express hotels, eight
hotels licensed under other brands, seven hotels licensed as Comfort Inn hotels,
and five hotels licensed as Sheraton hotels. Holiday Inn and Holiday Inn Express
are registered trademarks of Holiday Inn, Inc. Comfort Inn is a registered
trademark of Choice Hotels International, Inc. Residence Inn by Marriott is a
registered trademark of Marriott Corporation. Hampton Inn is a registered
trademark of Promus Hotel Corporation. Sheraton is a
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registered trademark of ITT Corporation. The Company as lessee holds the
franchise license for each hotel it operates and is responsible for paying the
franchise fees.
Generally, each franchise agreement gives the Company and/or the hotel's
owner the right to operate the particular hotel under a franchise for an initial
term of between 10 and 20 years. The franchise agreements typically provide for
termination at the franchisor's option upon the occurrence of certain events.
With respect to most of the franchise agreements the Company and/or the hotel's
owner is entitled to terminate the franchise agreement by giving at least 12
months notice and paying a specified amount of liquidated damages. The franchise
agreements under which the Company is a franchisee generally impose similar
obligations on Doubletree as those the Company imposes on its franchisees.
Owned Hotels
At December 31, 1996, the Company owned and managed 18 hotels, 17 of which
were Red Lion brand hotels and one of which was a Doubletree Guest Suite hotel,
representing 3,994 rooms. The Company is responsible for all aspects of these
hotels, including, without limitation, all of the costs associated with their
operation. The Company also receives substantially all of the revenues generated
by its owned hotels.
The Company is subject to varying degrees of risk generally related to
owning real estate. In addition to general risks related to the lodging
industry, these risks include, among others, changes in national, regional and
local economic conditions, inflation and its effect on operating costs, local
real estate market conditions, changes in interest rates and in the
availability, cost and terms of financing, the potential for uninsured casualty
and other losses, the impact of present or future environmental legislation and
compliance with environmental laws, and adverse changes in zoning laws and other
regulations, many of which are beyond the control of the Company. Moreover, real
estate investments are relatively illiquid, which means that the ability of the
Company to vary its portfolio of hotels in response to changes in economic and
other conditions may be limited.
It is the Company's goal not to be the long-term owner of real estate. The
Company intends to improve the operating results of the Company's owned hotels
and realize their appreciated value through their sale over approximately the
next 18 months.
Leases
Under the Company's leases, the Company leases the hotel from its owner and
is responsible for all aspects of the hotel's operations, once again including
guest services, staffing at the hotel, sales and marketing, accounting
functions, purchasing and budgeting. As the lessee of a hotel, the Company
recognizes all revenues and substantially all expenses associated with the
hotel's operations. Typically, other than real estate taxes, casualty insurance
costs, maintenance of underground utilities and structural elements costs,
furniture, fixtures and equipment and other capital improvements costs, each of
which are the landlord's obligation, the Company is required to pay all of the
costs associated with operating the hotel, including rent, personal property
taxes, utility costs, employee liability costs, liability insurance costs and
the like. The Company is entitled to retain all revenues derived from the
operation of a leased hotel, subject to the payment of its obligations under the
lease, including rent. Lease terms typically require the payment of a fixed
monthly base rent regardless of the performance of the hotel leased, in addition
to a variable rent based on a percentage of revenues. There can be no assurance
that any particular lease will be profitable for the Company after the payment
of its obligations under the lease.
In addition, most of the Company's leases typically provide that the
Company indemnify its landlord against certain liabilities resulting from the
leasing, operation or use of the hotel. Examples of these liabilities may
include (i) injury to persons or property at the hotel, (ii) environmental
liability caused by the Company and (iii) liability resulting from the sale of,
consumption of alcoholic beverages at the hotel.
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The Percentage Leases
At December 31, 1996, the Company leased 56 hotels, representing 7,982
rooms, pursuant to substantially similar leases (the "Percentage Leases") with
the Landlord (see, "The RFS Acquisition"). Four of the hotels leased pursuant to
Percentage Leases are managed by third parties. Each of the Percentage Leases
has an initial term of not less than 15 years from the date of inception (with
expiration dates ranging from 2008 to 2015), is subject to early termination
upon the occurrence of certain contingencies and requires the monthly payment of
base rent and the quarterly payment of percentage rent.
During 1996, the base rent component of the Percentage Lease expense was
approximately 42% of total Percentage Lease expense. Top percentage rents ranged
from 50% to 76.5% of incremental room revenue. For the year ended December 31,
1996, room revenue for each of the hotels subject to the Percentage Leases
exceeded the amount required to trigger the top tier of percentage rent. If the
Landlord enters into an agreement to sell a hotel, it may terminate a Percentage
Lease and either (i) pay Doubletree the fair market value of Doubletree's
leasehold interest or (ii) offer to lease to Doubletree a substitute hotel on
terms that would create an equivalent value. Events of default under the
Percentage Leases, in addition to customary events of default, include (i) the
occurrence of an event of default under any other lease between the Landlord and
Doubletree or an affiliate of Doubletree (only with respect to those leases that
were in place at the time of the closing of the RFS Acquisition), (ii) the
failure of RFS Management to maintain a minimum net worth of $15.0 million or a
ratio of total debt to consolidated net worth (as defined in the Percentage
Leases) of 50% or less, exclusive of capitalized leases, and (iii) the
termination by the franchisor, as a result of any action or failure to act by
Doubletree, of the franchise agreement with respect to any hotel. See "The RFS
Acquisition." If an event of default occurs and continues beyond any cure
period, the Landlord may terminate the Percentage Leases as well as the Right of
First Refusal. The Landlord has indemnified RFS Management against undisclosed
matters and certain environmental liabilities, other than RFS Managements' acts
or grossly negligent failures to act.
The Partnership Lease
At December 31, 1996, the Company leased 17 Red Lion brand hotels,
representing 3,989 rooms, pursuant to a long-term lease with the Partnership
(the "Partnership Lease"), which was entered into on August 1, 1995. The initial
term of the Partnership Lease is 15 years from August 1995, subject to earlier
termination by the Partnership upon the occurrence of one or more Events of
Default (as defined in the Partnership Lease). In addition, the Company has the
option to extend the Partnership Lease on a hotel-by-hotel basis for five
additional five year periods on the same terms. Rental payments under the
Partnership Lease consist of base rent, payable quarterly, and additional rent
payable annually, if applicable. The base rent for all of the hotels is $15.0
million per year. The additional rent for the hotels will be equal to 7.5% of
the amount, if any, by which the aggregate Operating Revenues (as defined in the
Partnership Lease) for all of the hotels for the given year exceeds the
aggregate Operating Revenues at all such hotels for the twelve month period
ended September 30, 1996. This long-term arrangement allows the Company to
retain all of the benefit from any increase in operating income from these
properties during the term of the Partnership Lease, subject to the payment of
Additional Rent. The Partnership has the right to sell all of its hotels to one
or more third parties, subject to the terms of the Partnership Lease. Upon any
sale of a hotel by the Partnership, the hotel would be leased under a stand
alone lease which would be modified to provide, among other things, for a
calculation of additional rent based on the Gross Revenues (as defined in the
Partnership Lease) of that hotel alone. The Partnership has informed the Company
that it has entered into an agreement to sell all of the hotels subject to the
Partnership Lease to a third party buyer. The Partnership has acknowledged in
writing the Company's intention to change the name of each of the hotels to a
Doubletree brand name and confirmed that such action would not constitute a
breach of the Partnership Lease.
Other Leases
At December 31, 1996, the Company leased nine hotels, pursuant to leases
other than the Percentage Leases and the Partnership Lease. Such leases contain
varying terms, but are generally "triple net" leases, the terms of which are in
substantial conformity to the general description above in "Hotel
Operations -- Leases".
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Joint Ventures
At December 31, 1996, the Company owned at least a 50% interest in eight
joint ventures (five of which it controls), each of which owns a hotel,
representing 2,596 rooms. In addition, at December 31, 1996, the Company owned a
minority non-controlling interest in eight joint ventures which own, directly or
indirectly, 16 hotels, representing 4,424 rooms.
In addition to its ownership interest in the joint ventures, the Company is
responsible for the day-to-day operations of the hotels owned by the joint
ventures (with the exception of one franchised hotel with 374 rooms) and
receives management fees for operating the hotels. Under each joint venture
agreement or separate management contract with respect to a hotel, the Company's
compensation is comprised of either an annual base management fee, an annual
incentive management fee (based on a percentage of cash flow or operating
profit) or both. The Company has made significant advances to certain of the
joint ventures. Repayment of these advances receives priority distribution from
the cash flow distributable to the joint venture's partners.
INVESTMENTS AND COMMITMENTS
The Company makes selective debt and equity investments (collectively
"Investments") in the underlying hotels that it leases or manages as a means of
obtaining and enhancing the profitability of its leases or management contracts.
For many of these same purposes, the Company may make or guarantee loans to
hotel owners for renovations, acquisitions, conversions, or working capital,
among other things. Such loans or loan guarantees are typically nonrecourse
other than to the hotel property and if secured, are subordinate. The Company
may make Investments in hotels in a variety of forms, including through
partnerships, corporations and limited liability companies, which typically are
minority and illiquid positions. The Company may also make guarantees of hotel
performance to an owner, which guarantees normally are limited in time or
amount. The Company may also make payments directly to the hotel owner, normally
in consideration of special financial or other accommodations to the Company in
management contract terms and conditions, which payments are capitalized and
amortized. The Company believes that such Investments better align its interests
with those of the hotel owners and provide a competitive advantage in acquiring
and maintaining management of hotels over management companies which do not make
investments; however, such Investments and commitments often are characterized
by enhanced risk.
At December 31, 1996, the Company had minority/non-controlling interests in
16 partnerships, the majority of which own hotels and the remainder of which own
retail or industrial properties. The Company's percentage of ownership in such
partnerships ranges from less than 1% to 50% and at December 31, 1996, had an
aggregate book value of $58.2 million.
At such date, the Company also had loans outstanding to certain hotel
owners with an aggregate book value of $45.1 million, and had guaranteed certain
mortgages, leases and construction bonds for hotel owners up to $4.9 million
($1.0 million is collateralized by letters of credit). Additionally, the Company
has approximately $5.5 million of bonds outstanding as collateral for the
payment of claims arising out of workers' compensation claims at its leased or
managed hotels.
As a result of the Red Lion Acquisition the Company will now be required to
invest substantially in the renovation and general upkeep of its owned hotels
and the hotels in which it has a controlling joint venture interest.
Additionally, the Company anticipates spending $10.0 million to $15.0 million
during 1997 to convert the majority of the Red Lion hotels to the Doubletree
brand name. Accordingly, investments in property and equipment will increase
substantially in 1997 as compared to historical levels of capital expenditures
made when the Company principally managed or leased hotel properties. At
December 31, 1996, the Company had commitments relating to capital improvement
projects aggregating approximately $3.9 million.
The Company may also make Investments in institutional hotel owners rather
than in particular hotels, with varying levels of assurance that such
Investments will lead to management arrangements. At December 31, 1996, the
Company had invested $18.5 million in the REIT Preferred Shares, and had the
Right of First Refusal with respect to certain future hotel leases from the
Landlord. Additionally, the Company had
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investments in the REIT's common stock and partnership units of the Landlord
with a net book value of $1.5 million. At such date, the Company had a
commitment to invest, subject to certain conditions, an additional $2.0 million
in Thayer Hotel Investors II ("Thayer"), a limited partnership which invests in
hotel properties and for which the Company manages certain hotels. The Company
has a 4.35% limited partnership interest in Thayer. The terms of the Company's
investment in Thayer do not assure that the Company will be offered the
opportunity to manage hotels acquired by Thayer, but the Company anticipates
that at least 50% of the properties acquired by Thayer will either be managed or
franchised by the Company.
The Company may also make Investments in other lodging industry companies
for strategic reasons and to enhance the Company's value. Commencing in November
1995 and continuing through November 1996, the Company made investments in the
Candlewood LLC. Prior to Candlewood's initial public offering in November 1996
the Company's investment in the Candlewood LLC was structured as an equity
contribution with the Company earning a preferred return. In connection with the
initial public offering, the Company's contributions in excess of $200,100 and
its preferred return were converted to an interest bearing note in the amount of
approximately $12.1 million plus interest (the "Candlewood Note"). In addition,
the Company agreed to extend to Candlewood a five-year, $15 million subordinated
credit facility of which amounts outstanding under the Candlewood Note
constitute a part. Amounts outstanding under the credit facility and the
Candlewood Note bear interest at rates of 7% per annum for the first 12 months
following contribution, 10% per annum for second 12 months following
contribution and 15% per annum thereafter. At December 31, 1996, the aggregate
amount outstanding under the credit facility (including the Candlewood Note) was
approximately $12.5 million. In addition, in August 1996 the Company committed
to provide credit support for a loan facility that will be utilized by
Candlewood to arrange to provide construction and permanent financing to
Candlewood franchisees on terms that, in most cases, are much more attractive
than those which the franchisees could obtain on their own. In providing such
credit support, the Company's maximum exposure on any one Candlewood franchise
will be approximately $1.0 million, with the aggregate amount of exposure for
all such credit support capped at between $20.0 million and $30.0 million. At
December 31, 1996, the loan facility had not been utilized.
Also in August 1996, the Company formed a joint venture strategic alliance
with Patriot, pursuant to which the Company and Patriot will seek to identify
hotels potentially suitable for acquisition by Patriot and to be operated as the
Company brand hotels or luxury non-Doubletree brand hotels, in each case to be
leased and/or managed by the Company. The Company has agreed to invest
approximately 10% of the equity in each hotel that is purchased as part of the
joint venture strategic alliance up to an aggregate of $20.0 million. As of
December 31, 1996, the Company had invested $10.7 million in the joint venture.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
THE RED LION ACQUISITION
On November 8, 1996, the Company consummated the Red Lion Acquisition. As a
result of the Red Lion Acquisition, Red Lion became a wholly-owned subsidiary of
the Company. The Red Lion Acquisition presented the Company with the opportunity
to augment its management team with individuals from Red Lion's management team.
As a result of the Red Lion Acquisition, the Board of Directors of the Company
was expanded to include Messrs. Edward A. Gilhuly and Michael W. Michelson, who
were designated by the Partnership.
At December 31, 1996, the Company operated 56 full-service Red Lion brand
hotels, 17 of which were owned, eight of which were operated pursuant to joint
venture agreements and 17 of which were leased pursuant to the Partnership
Lease. The remaining 14 hotels were operated pursuant to management contracts,
and 10 of such managed hotels are owned by the MLP, the general partner of which
is a wholly-owned subsidiary of the Company, and are managed by the Company
pursuant to a management agreement with the MLP. See "-- Management Contracts."
To raise the funds required to consummate the Red Lion Acquisition, the
Company (i) borrowed $493.2 million under a term loan and revolving credit
facility committed by Morgan Stanley Senior Funding, Inc. and the Bank of Nova
Scotia (the "New Credit Facility"); (ii) raised approximately $210.7 million
from an equity offering of 5,600,000 shares of the Company's Common Stock; (iii)
raised $100.0 million through an equity investment by the Trustees of General
Electric Pension Trust ("GEPT") whereby GEPT purchased
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2,627,533 shares of Common Stock and was issued warrants to purchase 262,753
shares of Common Stock in return for its $100.0 million investment (the "GEPT
Equity Investment"); and (iv) utilized $34.2 million of existing cash on hand.
Prior to the consummation of the Red Lion Acquisition, the Partnership
owned 66.7% of the then outstanding shares of common stock of Red Lion. As a
result of the Red Lion Acquisition, the Partnership received 4,836,260 shares of
the Company's Common Stock as well as approximately $445.2 million in cash, for
a total of approximately $636.5 million in aggregate consideration.
THE RFS ACQUISITION
On February 27, 1996, Doubletree acquired all of the outstanding stock of
RFS Management in exchange for 2,727,811 shares of Doubletree Common Stock. At
December 31, 1996, RFS Management operated 64 hotels 52 of which were leased and
operated by the Company, four of which were leased and operated by third party
management, and eight of which were managed for owners other than the Landlord.
The sole general partner and approximately 98.6% owner of the Landlord is the
REIT. The 64 hotels, principally operating in the limited-service and extended
stay segments of the market, comprise approximately 10,120 rooms and are
operated under such franchise brands as Holiday Inn, Holiday Inn Express,
Residence Inn by Marriott, Comfort Inn, Hampton Inn, Ramada and Sheraton.
In connection with the RFS Acquisition, Doubletree and the REIT entered
into agreements, pursuant to which Doubletree purchased the REIT Preferred
Shares. There is no current market for the REIT Preferred Shares. The REIT
Preferred Shares pay an annual fixed dividend of $1.45 per share and are
convertible into shares of the REIT's common stock on a one-for-one basis at the
end of seven years. The REIT Preferred Shares are redeemable by the REIT after
seven years. Doubletree has also been granted the Right of First Refusal with
respect to the future lease and management of hotels to be acquired or developed
by the Landlord or the REIT during the ten year period following the RFS
Acquisition. Pursuant to these rights, RFS Management is entitled, for a minimum
of seven years, to written notice from the Landlord specifying the terms and
conditions upon which the Landlord would be willing to lease the hotel to
Doubletree. In the event that Doubletree does not initially agree to such terms
or declines to lease the hotel, Doubletree has the right to match the terms
proposed to an alternative lessee by the Landlord. In the event that the REIT
terminates its status, for federal tax purposes, as a real estate investment
trust, the Landlord may elect to terminate the then existing Percentage Leases
and the Right of First Refusal by providing notice to Doubletree and redeeming
any REIT Preferred Shares then owned by Doubletree; provided, however, if the
termination occurs within ten years after the closing of the RFS Acquisition,
the Landlord must pay to Doubletree an amount equal to $5.0 million minus
$41,667 for each calendar month which has passed during such ten year period and
the Landlord pays to Doubletree the fair market value of the then existing
Percentage Leases, based upon the remaining length of their terms.
Until the earlier of the expiration of ten years following the closing of
the RFS Acquisition or the date of the redemption or conversion of the REIT
Preferred Shares, without the prior written approval of the Landlord, Doubletree
may not permit any merger or sale of RFS Management's stock or the transfer or
conveyance of all or substantially all of RFS Management's assets, if, as a
result thereof, RFS Management would cease to be controlled by Doubletree. The
foregoing restriction does not restrict any change in control or ownership of
Doubletree.
In November 1996, the REIT engaged in a financing transaction
collateralized by the Landlord's interest in certain of the Percentage Leases.
In connection with such transaction, the Landlord transferred its lessor
interest in 15 of the Percentage Leases into a bankruptcy remote subsidiary, and
at the request of the REIT, the Company also transferred its lessee interest
under such Percentage Leases (as well as the management contracts relating to
such hotels) into a bankruptcy remote subsidiary of the Company.
THE RENAISSANCE TRANSACTION
On January 5, 1997, the Company entered into a Memorandum of Understanding
for the acquisition of Renaissance Hotel Group N.V. ("Renaissance") in a
transaction valued at $890.0 million including assumed debt of $70.0 million.
The Memorandum of Understanding provided that in the event Renaissance entered
into a merger or acquisition agreement with a party other that the Company
within four months, the Company
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was to receive a breakup fee of $15.0 million. In February 1997, Renaissance
pursued discussions with another party and on February 20, 1997, the Company
received the $15.0 million breakup fee. After payment of expenses associated
with the Company's acquisition efforts, the balance at the cash received will be
available for general corporate purposes.
COMPETITION
The Company's managed and franchised hotels are in competition for guests
with a wide range of lodging facilities offering full-service, limited-service
and all-suite lodging options to the public. Competitive factors in the lodging
industry include room rates, quality of accommodations, name recognition,
service levels and convenience of location. There can be no assurance that new
or existing competitors will not significantly expand or improve facilities in a
market in which the Company's hotels compete, thereby adversely affecting the
Company's operations.
The Company also competes for management contracts, leases and franchise
agreements with other hotel management companies and national brand franchisers.
Some of the larger hotel chains with which the Company competes include
Marriott, Sheraton, Hyatt, Hilton, Westin, Wyndham and Embassy Suites. In
addition, many of its competitors are hotel management companies that do not
have their own brand.
The Company believes its ability to offer both hotel management services
and a recognized brand name gives it an advantage over its competitors without
their own brand because hotel owners who contract with such competitors are
required to pay two separate fees, which the Company believes are, in most
cases, in excess of the Company's single fee. The Company also believes that
some of its larger competitors are constrained in pursuing new management
contract opportunities in certain areas by the proximity of their own existing
hotels. The Company is large enough to benefit from a nationally recognized
brand; however, there are still a significant number of available markets in
which the Company is not yet represented.
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and beverages (such as health and liquor license laws) and building and
zoning requirements. Also, the Company and its customers are subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
Company is also subject to federal regulations and certain state laws that
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
noncompetition provisions and termination or nonrenewal of a franchise. Some
states require that certain materials be approved before franchises can be
offered or sold in that state. The failure to obtain or retain liquor licenses
or approvals to sell franchises, or an increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, could adversely
affect the Company. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. The Company believes
that the hotels that it owns or that are under its management are substantially
in compliance with these requirements; however, a determination that such hotels
are not in compliance with the ADA could result in the imposition of fines, an
award of damages to private litigants or significant expense to the Company in
bringing these hotels into compliance. These and other initiatives could
adversely affect the Company as well as the hotel industry in general.
ENVIRONMENTAL MATTERS
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. For example, liability may arise as a result of
the historical use of a site or from the migration of contamination from
adjacent or nearby properties. Any such contamination or liability may also
reduce the value of the property. In addition, certain environmental laws and
common law principles could be used to impose liability for release of
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from
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owners or operators of real properties for personal injury associated with
exposure to released ACMs. Environmental laws also may impose restrictions on
the manner in which property may be used or businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership or
operation of hotels, including properties managed, leased or franchised by the
Company, the Company may be potentially liable for any such costs; there can be
no assurance that there are no environmental liabilities or claims of which the
Company is unaware or that the current condition of the Company's properties
have not been or will not be affected by the historical or current uses of such
properties or the activities in the vicinity of such properties or that
liability resulting from non-compliance or other claims relating to
environmental matters will not have a material adverse effect on the Company.
Pursuant to the Partnership Lease, the Partnership and its affiliates are
indemnified for any matter arising by reason of or in connection with violations
of Environmental Laws, discharges, disposal or releases of Hazardous Materials,
presence of Hazardous Materials, including any which are the result of off-site
migration onto the Red Lion hotels subject to the Partnership Lease, and certain
exposures to Hazardous Materials (as such terms are defined in the Partnership
Lease) which exist at or are released from any of such hotels prior to or during
the term of the Partnership Lease. Such indemnities will survive the termination
of the Partnership Lease. In addition, the Partnership and its affiliates were
indemnified by Red Lion from and against any and all liabilities, costs, losses
and damages (including, without limitation, interest, penalties and costs of
mitigation) incurred in connection with any environmental laws arising out of
any event or condition relating to the assets, liabilities and businesses
contributed by it in the formation of Red Lion. Pursuant to a partnership
services agreement among Doubletree, Red Lion and certain affiliates at Red
Lion, Doubletree has agreed to guarantee Red Lion's indemnity obligation to the
Partnership following the effective time of the Red Lion Acquisition.
Some of the Red Lion hotels are on, adjacent to or near properties that
have contained in the past or currently contain underground storage tanks and/or
above-ground storage tanks used to store petroleum products or other hazardous
or toxic substances. Monitoring wells have been installed at some of these
sites. In addition, certain of the Red Lion hotels are on, adjacent to or near
properties upon which others have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances into the soil or groundwater. One of the Red Lion hotels is located
on property that was used as a landfill. The state agency responsible for
oversight of potentially contaminated properties has determined the leachate
from the landfill has contaminated groundwater, and the state agency has placed
the landfill on the list of sites where a release of hazardous substances has
been confirmed. Although the state agency has not placed the landfill on the
list of sites requiring investigation or remediation, there can be no assurance
that the Company will not be required in the future to investigate or remediate
any contamination resulting from the landfill.
INTELLECTUAL PROPERTY
The trademarks "Doubletree Hotels," "Doubletree Guest Suites," "Doubletree
Suites," "Doubletree Club Hotels," "Club Hotels by Doubletree," "Guest Quarters
Suite Hotels," "Guest Quarters Suites by Doubletree," "Red Lion," "Red Lion
Inn," "Red Lion Hotel" and related marks and logos are material to the Company's
business. The Company, as well as its franchisees, actively use these marks. All
of the Company's material marks are registered, or are on application for
registration, with the United States Patent and Trademark Office. In connection
with the sale of Red Lion in 1985, the use of the Red Lion trademark and central
reservations system was licensed to one of the founders of Red Lion for the
operation of certain Red Lion hotels in Nevada. Under the terms of the current
license agreement, the Company licenses the Red Lion name and Red Lion central
reservation system to two hotels in Nevada and a hotel in Wyoming (which are not
included in the 56 Red Lion hotels) for which the Company receives an annual
license fee of $25,000 per hotel. The license agreement terminates with respect
to the hotel in Wyoming at such time as a Red Lion hotel is opened in the
Jackson Hole area of Wyoming and otherwise expires with respect to all of these
hotels, two years after the earlier of the death of the founder or transfer of
the founder's interests in the hotels.
The Company knows of approximately nine lodging and food service
establishments located in the United States that use "Red Lion" in their names
(some of which may have used the name before the Red Lion chain was
established), but which have no existing or historical relationship with Red
Lion.
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INSURANCE
The Company currently has the types and amounts of insurance coverage,
including comprehensive general liability insurance with a coverage limit of
$2.0 million, and additional excess general liability and property, earthquake
and business interruption insurance, that it believes is appropriate for a
company in the hotel business. While management believes that its insurance
coverage is adequate, if the Company were held liable for amounts exceeding the
limits of its insurance coverage or for claims outside of the scope of its
insurance coverage, the Company's business, results of operations and financial
condition could be materially and adversely affected.
EMPLOYEES
At December 31, 1996, the Company had approximately 23,200 full-time
employees and 5,800 part-time employees. Of these full-time employees,
approximately 800 of these employees are employed at the corporate level and
approximately 22,400 employees are employed at the hotel properties. The wages
and salaries, health insurance and other employee benefits of persons employed
at the Company's hotels are paid out of the operations of the hotel property.
Corporate personnel are paid directly by the Company. Employees at four of the
Company's managed hotels are members of labor unions. The Company believes its
ongoing labor relations are good.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. The Company believes that such
litigation is not material to the business of the Company, either individually
or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's initial public offering of Common Stock was effected as of
July 1, 1994. The Company's Common Stock is listed on the Nasdaq National Market
under the symbol "TREE." The following table sets forth, for the calendar
periods indicated, the rage of high and low closing prices for the Common Stock,
as reported by the Nasdaq National Market:
1995 1996
------------------ -----------------
HIGH LOW HIGH LOW
------ ------- ------ ------
1st Quarter.................................... $20.25 $ 16.25 $28.50 $22.75
2nd Quarter.................................... $22.00 $ 18.75 $35.75 $26.50
3rd Quarter.................................... $24.75 $18.938 $40.38 $30.75
4th Quarter.................................... $26.38 $ 20.50 $47.50 $39.25
The closing sales price of the Company's Common Stock on March 3, 1997 was
$41.50. The approximate number of stockholders of record on March 3, 1997 was
500.
The Company has not declared or paid any dividends on its Common Stock
since its inception and does not currently plan to declare or pay any dividends.
The payment of dividends in the future will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. The Company is currently prohibited under the New
Credit Facility from paying cash dividends or other distributions.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Auditors)
The following tables present selected historical consolidated financial
information for the Company and its Predecessor (Samantha Hotel Corporation
("Samantha"), the entity which owned 92% of GQHP prior to the Combination
Transaction). The 1992 historical financial information for the Predecessor
includes only the operations of GQHP. From January 1, 1993 to December 16, 1993,
the historical financial information for the Predecessor includes the operations
of GQHP and RFS Management and subsequent to such date, includes the combined
operations of GQHP, RFS Management and DHC. The results of operations for Red
Lion have been included commencing November 8, 1996 through December 31, 1996.
The following tables also present pro forma information for the years ended
December 31, 1995 and 1996, giving effect to the Red Lion Acquisition as if it
had occurred on January 1, 1995. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Unaudited Pro Forma Consolidated Statements of
Operations". The selected historical consolidated financial information
presented below as of and for the years ended December 31, 1994, 1995 and 1996
has been derived from the audited financial statements of the Company. The
selected historical consolidated financial information presented below as of and
for the fiscal years ended December 31, 1992 and 1993 has been derived from the
audited financial statements of Samantha.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
PREDECESSOR(1) DOUBLETREE
----------------- -------------------------------------------------------------
ACTUAL ACTUAL PRO FORMA(3)
----------------- ------------------------------------ ----------------------
1992 1993 1994 1995 1996(2) 1995 1996
------- ------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Management and franchise fees.......... $ 8,556 $10,612 $ 26,330 $ 30,082 $ 38,621 $ 41,171 $ 49,341
Owned hotel revenues................... 3,786 9,943 92 7,081 38,350 219,569 228,362
Leased hotel revenues.................. 5,932 14,923 73,769 141,942 205,163 274,154 326,594
Purchasing and service fees............ -- 329 10,746 16,487 19,848 61,611 63,365
Other fees and income.................. 419 2,547 1,545 994 2,953 1,235 3,160
------- ------- -------- -------- -------- -------- --------
Total revenues.................. 18,693 38,354 112,482 196,586 304,935 597,740 670,822
------- ------- -------- -------- -------- -------- --------
Operating costs and expenses:
Corporate general and administrative
expenses............................. 5,683 7,485 11,879 14,901 18,079 25,811 24,882
Owned hotel expenses................... 2,810 6,400 101 6,049 27,889 148,500 150,376
Leased hotel expenses.................. 4,972 14,266 68,981 132,644 190,797 242,394 287,584
Purchasing and service expenses........ -- 620 9,807 13,437 14,796 56,081 56,066
Depreciation and amortization.......... 599 1,572 2,943 4,686 12,018 47,155 48,358
Business combination expenses.......... -- 1,865 -- 2,565 -- -- --
------- ------- -------- -------- -------- -------- --------
Total operating costs and
expenses...................... 14,064 32,208 93,711 174,282 263,579 519,941 567,266
------- ------- -------- -------- -------- -------- --------
Operating income......................... 4,629 6,146 18,771 22,304 41,356 77,799 103,556
Interest expense....................... -- (1,228) (831) (227) (6,648) (42,541) (42,290)
Interest income........................ 159 254 1,630 4,147 5,561 9,217 11,113
------- ------- -------- -------- -------- -------- --------
Income before income taxes and minority
interest............................... 4,788 5,172 19,570 26,224 40,269 44,475 72,379
Minority interest share of net (income)
loss................................. (372) 175 -- 35 (373) (724) (1,726)
------- ------- -------- -------- -------- -------- --------
Income before income taxes............... 4,416 5,347 19,570 26,259 39,896 43,751 70,653
Income tax expense..................... (65) (414) (6,335)(5) (8,468) (13,962) (19,426) (29,393)
------- ------- -------- -------- -------- -------- --------
Net income............................... $ 4,351 $ 4,933(4) $ 13,235(5) $ 17,791 $ 25,934 $ 24,325 $ 41,260
======= ======= ======== ======== ======== ======== ========
Earnings per share....................... $ 0.66(5) $ 0.80 $ 1.01 $ 0.63 $ 1.04
======== ======== ======== ======== ========
Weighted average shares outstanding...... 20,071 22,219 25,766 38,669(6) 39,834(6)
======== ======== ======== ======== ========
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AS OF DECEMBER 31,
--------------------------------------------------------
1992(1) 1993(1) 1994 1995 1996
------- ------- -------- -------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,741 $ 6,826 $ 23,169 $ 32,652 $ 25,588
Total assets............................... 22,368 89,072 134,701 163,107 1,730,949
Long-term debt, net of current portion..... 5,736 25,000 -- -- 506,235
Stockholders' equity....................... 9,773 13,645 91,587 114,386 801,530
- ---------------
(1) Predecessor only.
(2) Includes the operating results of Red Lion Hotels, Inc. (Red Lion) for the
period commencing November 8, 1996 through December 31, 1996.
(3) Pro forma adjustments have been made to (a) give effect to the acquisition
of Red Lion and related transactions as if such transactions had occurred on
January 1, 1995, (b) exclude business combination expenses related to the
Red Lion and RFS Management transactions and (c) exclude Red Lion formation
expenses related to the 1995 restructuring and initial public offering of
Red Lion.
(4) On a pro forma basis, giving effect to the Combination Transaction and the
Reorganization as if each of these events had occurred on January 1, 1993
net income and earnings per share would have been $8.6 million and $0.47,
respectively.
(5) Doubletree's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of Doubletree prior to its initial
public offering. Had a 35% rate been incurred, 1994 net income and earnings
per share would have been $12.7 million and $0.63, respectively.
(6) Assumes that the 16.4 million shares issued in connection with the Red Lion
Acquisition, which was accounted for as a purchase, were outstanding for
both periods.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
As of December 31, 1996, the Company had a portfolio of 241 properties, of
which 204 were managed and/or leased and 37 were franchised. Of the managed
properties, 18 are wholly-owned by the Company, eight are operated pursuant to
joint venture agreements (in which the Company owns 50% or more of the venture),
82 are leased and 96 are managed for third party owners. The Company derives its
revenues from five sources:
Management and franchise fees -- As a manager of hotels, the Company is
typically responsible for supervising or operating the hotel in exchange for
base fees tied to revenues. In addition, the Company may also earn revenues
through incentive fees based on the performance of the hotel. As a franchisor,
the Company licenses its brand name to the hotel operator in exchange for a
franchise fee based on revenues.
Owned hotel revenues -- As the owner and manager of hotels, the Company
includes as revenues the entire property's revenues.
Leased hotel revenues -- As the lessee of hotels that the Company also
manages, the Company exercises similar control over the operation and
supervision of the hotel as is given to it as a manager, however, the Company
recognizes all revenues and substantially all expenses associated with the
operation of the hotel.
Purchasing and service fees -- Purchasing and service fees represent fees
from administering purchasing agreements with preferred vendors, sales of
furniture, supplies and other frequently used items to hotels for a profit, and
fees from technical services provided to hotel owners in connection with the
construction/renovation of hotels.
Other fees and income -- Other fees and income primarily comprise contract
termination fees and equity in income/losses of hotel partnerships and similar
ventures, including gains/losses upon sale of a hotel.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
The operating results for the year ended December 31, 1996 reflect the
inclusion of the operating results of Red Lion from the date of its acquisition
on November 8, 1996 through December 31, 1996. A summary of revenues and
operating expenses for 1996 is as follows (in thousands):
DOUBLETREE RED LION TOTAL
---------- -------- --------
REVENUES
Management and franchise fees....................... $ 37,202 $ 1,419 $ 38,621
Owned hotel revenues................................ 7,927 30,423 38,350
Leased hotel revenues............................... 187,193 17,970 205,163
Purchasing and service fees......................... 16,029 3,819 19,848
Other fees and income............................... 3,139 (186) 2,953
-------- ------- --------
Total revenues................................. 251,490 53,445 304,935
-------- ------- --------
OPERATING COSTS AND EXPENSES
Corporate general and administrative expenses....... 16,613 1,466 18,079
Owned hotel expenses................................ 6,228 21,661 27,889
Leased hotel expenses............................... 173,918 16,879 190,797
Purchasing and service expenses..................... 11,253 3,543 14,796
Depreciation and amortization....................... 5,883 6,135 12,018
-------- ------- --------
Total operating costs and expenses............. 213,895 49,684 263,579
-------- ------- --------
Operating income.......................... $ 37,595 $ 3,761 $ 41,356
======== ======= ========
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Total revenues increased $108.3 million or 55% to $304.9 million for the
year ended December 31, 1996 compared to $196.6 million for the year ended
December 31, 1995.
Revenues from management and franchise fees increased $8.5 million or 28%
due to fees from new contracts (net of contracts lost) of $3.7 million ($1.4
million of which is attributable to Red Lion Acquisition), higher incentive fees
of $3.5 million and increased fees from comparable hotels of $1.3 million. The
increase in incentive fees and 11% increase in fees from comparable hotels
resulted from the improved operating performance at certain hotels.
Owned hotel revenues increased $31.3 million and the margin increased $9.4
million in 1996 as compared to 1995 of which $30.4 million and $8.8 million,
respectively is attributable to the Red Lion Acquisition. Prior to the
acquisition of Red Lion, the Company owned one hotel in Southfield, Michigan.
Revenues from the Southfield property increased $0.9 million or 12% over the
1995 period due to a significantly improved occupancy rate.
Leased hotel revenues increased $63.2 million or 45% principally due to an
increase in the size of the Company's leased hotel portfolio in 1996 as compared
to 1995 and improved occupancy and average daily rates. The margin on leased
hotel operating results increased 55% to $14.4 million. Excluding the impact of
the Red Lion Acquisition, revenues increased $45.3 million or 32% and the margin
on leased hotels increased $4.0 million or 43% reflecting the net addition of
properties and an improvement in the operating margin from 6.6% to 7.1%.
Purchasing and service fees increased $3.4 million in 1996 or 20% to $19.8
million. Excluding the impact of the Red Lion Acquisition, revenues decreased
nominally while the margin increased from $3.1 million in 1995 to $4.8 million
in 1996 or 57% reflecting a shift in mix from high volume, low margin bulk
purchasing programs (whereby the Company purchases goods and resells such goods
to its hotel owners) to preferred vendor programs (whereby the Company earns
fees for administering the programs).
Other fees and income increased $2.0 million from $1.0 million in 1995 to
$3.0 million in 1996 due to a gain of $1.3 million realized on the sale of a
hotel in which the Company had an equity interest and $1.2 million of dividends
from the investment in the convertible preferred stock of the REIT. These
increases were offset by equity losses of $0.5 million principally attributable
to the Company's equity investment in Candlewood.
General and administrative expenses increased $3.2 million to $18.1 million
in 1996. Excluding the impact of the Red Lion Acquisition, expenses increased
$1.7 million or 11% primarily due to the addition of new employees and higher
travel and professional fees, all of which is attributable to the Company's
growth.
Depreciation and amortization increased $7.3 million from $4.7 million in
1995 to $12.0 million reflecting the additional depreciation of assets and
amortization of goodwill resulting from the Red Lion Acquisition.
Business combination expenses of $2.6 million in 1995 were attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred in connection with the Company's acquisition of RFS
Management.
Operating income was $41.4 million, an increase of $19.1 million or 85%
from 1995. Excluding the charge for business combination expenses in 1995 and
the impact of the Red Lion Acquisition in 1996, operating income would have
increased $12.7 million or 51% from the prior period.
The Company incurred net interest expense of $1.1 million in 1996 compared
to generating $3.9 million of net interest income in 1995. The increase in net
interest expense resulted from interest expense on the debt incurred in the Red
Lion Acquisition.
The increase of $0.4 million in the minority interest share of net income
reflects the profits allocable to third party owners of certain consolidated
joint ventures of Red Lion.
The provision for income taxes reflects a 35% effective tax rate for 1996
compared to a 32.2% effective tax rate for 1995. The lower effective tax rate
for 1995 reflects the election by RFS Management to be taxed as a
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Subchapter S corporation effective January 1, 1995. Accordingly, the earnings of
RFS Management were generally not subject to federal income taxes.
Net income and earnings per share for the year ended December 31, 1996 were
$25.9 million and $1.01, respectively, compared to net income of $17.8 million
and $0.80, respectively, in 1995. On a pro forma basis, net income for the year
ended December 31, 1996 increased 70% from $24.3 million in 1995 to $41.3
million in 1996 and earnings per share was $1.04 in 1996 as compared to $0.63 in
1995, an increase of 65%.
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
Total revenues increased $84.1 million or 75% to $196.6 million for the
year ended December 31, 1995 compared to $112.5 million for the year ended
December 31, 1994.
Revenues from management and franchise fees increased $3.8 million or 14%
due to fees from new contracts (net of contracts lost) of $2.0 million,
increased fees from comparable hotels of $0.9 million and higher incentive fees
of $0.6 million. Fees from renegotiated contracts and fees from contracts which
converted from management to franchise contracts in connection with the sale of
the underlying hotels also increased $0.3 million.
Owned hotel revenues represent the revenues derived from the Southfield
hotel acquired in December 1994.
Leased hotel revenues increased $68.2 million or 92% principally due to an
increase in the number of leased hotels in 1995 compared to 1994. Leased hotel
revenues for 1995 reflect the net addition of nine leased hotels since December
31, 1994 plus the full year of revenues from the 31 hotels RFS Management began
leasing during 1994. The margin on leased hotel results increased $4.5 million
to $9.3 million reflecting the net addition of these properties since the prior
year.
Purchasing and service fees increased $5.7 million or 53% primarily due to
increased purchasing volume, the net addition of new properties and increases in
revenues from existing properties. The margin from purchasing and service fees
increased $2.1 million to $3.1 million or 210% principally reflecting the
implementation of several purchasing agreements that lower the price of products
to the hotel owner while concurrently providing the Company with a fee in return
for negotiating and administering the program.
Other fees and income decreased $0.6 million or 36% resulting principally
from $0.8 million of termination fees received in 1994 in connection with the
termination of two management contracts. The Company subsequently entered into
management contracts with the new owners of these two hotels.
General and administrative expenses increased $3.0 million or 25%, $2.2
million of which was attributable to the growth of RFS Management, which added
31 hotels in 1994, and $0.8 million which was attributable to DHC's increased
legal costs and costs associated with the formation of the franchise development
team.
Depreciation and amortization increased $1.7 million in 1995 primarily due
to the acquisition of the Southfield, Michigan property in December 1994 and
increased amortization associated with investments in management contracts.
Business combination expenses of $2.6 million in 1995 are attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred in connection with the Company's acquisition of RFS
Management.
Interest income increased $2.5 million due to an increase in interest
earned on loans to hotel owners in conjunction with obtaining management
contracts and higher interest income on invested cash balances. Interest expense
decreased $0.6 million due to the repayment in July 1994 of all of the
outstanding indebtedness under the Company's then existing credit facility with
a portion of the proceeds from the initial public offering.
The provision for income taxes in 1994 reflects a 32.4% effective tax rate
principally due to the organizational structure of the Company prior to its
initial public offering in July 1994 offset by a slightly
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higher rate on the earnings of RFS Management. The provision in 1995 reflects a
combined 32.2% effective tax rate which is lower than the Company's effective
tax rate of 35% due to the election by RFS Management to be taxed as a
Subchapter S corporation effective January 1, 1995. Accordingly, the earnings of
RFS Management for 1995 were generally not subject to federal income taxes.
Net income and earnings per share for the year ended December 31, 1995 were
$17.8 million and $0.80, respectively, compared to $13.2 million and $0.66,
respectively, in 1994. Excluding the business combination expenses in 1995 and
with a normalized effective tax rate for both 1994 and 1995 of 35%, net income
would have increased 47% to $18.7 million from $12.7 million and per share
earnings would have increased 33% to $0.84 from $0.63.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's balance sheet reflected negative
working capital of $60.4 million, $39.2 million of which represents the current
maturity of a note payable related to one of the properties acquired from Red
Lion. The note matures in July 1997 and the Company is in the process of
refinancing the note. In the event the Company is unsuccessful in refinancing
the note, the Company's New Credit Facility makes available additional
borrowings of up to $40.0 million to refinance the existing note and extend the
repayment date beyond 1997. The commitment under the New Credit Facility expires
June 30, 1997.
In February 1997, the Company received $15.0 million in cash from
Renaissance Hotel Group N.V. (Renaissance) as a break-up fee in accordance with
the terms of a memorandum of understanding between Renaissance and the Company.
After payment of expenses associated with the Company's acquisition efforts, the
balance of the cash received will be available for general corporate uses.
Additionally, during 1996 the Company generated cash from operating activities
of $42.7 million as compared to $24.5 million in 1995. The increase was
principally due to increases in net income and expenses (depreciation and
amortization) not requiring the use of cash. Giving effect to the Red Lion
Acquisition, operating income, on a pro forma basis, before depreciation and
amortization was $151.9 million for the year ended December 31, 1996.
Accordingly, management does not believe that the negative working capital
position will adversely impact its results of operations or liquidity in the
future.
Historically, the Company required capital primarily for making selective
investments in the underlying hotels that it manages as a means of obtaining and
enhancing the profitability of management contracts. Excluding the net cash of
$819.0 million used for the acquisition of Red Lion, the Company used $60.6
million of cash during 1996 for investing activities. In February 1996, the
Company contributed $18.5 million to RFS Management which subsequently invested
in 973,684 shares of convertible preferred stock in RFS Hotel Investors, Inc.
(the "REIT Preferred Shares"). In conjunction with obtaining management and/or
lease agreements for the underlying hotel property, the Company invested $13.2
million in hotel partnerships and ventures and loaned $8.9 million to owners of
hotels. The Company has committed to contribute up to $15.0 million to
Candlewood, of which $12.3 million has been funded as of December 31, 1996
($11.1 million during 1996). The balance of the commitment is anticipated to be
contributed during the next year and will be used for general corporate purposes
as well as funding a portion of the development/construction costs of certain
hotels.
In August 1996, the Company committed to provide credit support for a loan
facility that will be utilized by Candlewood to arrange to provide construction
and permanent financing to Candlewood franchisees on terms that, in most cases,
are much more attractive than those which the franchisees could obtain on their
own. The source of the loan facility is General Motors Acceptance Corporation
Mortgage Group. In providing such credit support, the Company's maximum exposure
on any one Candlewood franchise will be approximately $1.0 million, with the
aggregate amount of exposure for all such credit support capped at between $20.0
and $30.0 million, assuming that the aggregate amount of loans made under the
loan facility is between $100.0 and $150.0 million.
In August 1996, the Company and Patriot American Hospitality, Inc.
("Patriot") formed a joint venture wherein the Company will invest up to $20.0
million of capital ($10.7 million of which had been invested as of
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December 31, 1996) to be combined with up to $180.0 million of capital from
Patriot to be used for the acquisition of hotels. The Company has a 10% interest
in the venture.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $4.9 million ($1.0 million of which is collateralized by a letter of
credit). Additionally, the Company has approximately $5.5 million of bonds
outstanding as collateral for payment of claims arising out of workers'
compensation claims and has committed to contribute an additional $2.0 million
to an investment partnership formed for the purpose of acquiring hotel
properties. The Company has a 4.35% limited partnership interest in the venture.
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, the Company may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if the
Company elects not to fund the shortfall, the hotel owner may elect to terminate
the management contract. If the Company elects to fund the shortfall, but
performance standards are not achieved at the expiration of the funding period,
the owner may elect to terminate the management contract at that time. The
Company funded $0.5 million in June 1996 in connection with a shortfall at one
hotel. There were no shortfall funding payments in 1995 or 1994.
With the acquisition of the 17 Red Lion owned hotels, the Company will now
be required to invest substantially in the renovation and general upkeep of the
hotel properties. Additionally, the Company anticipates spending $10.0 to $15.0
million during 1997 to convert the majority of the Red Lion hotels to the
Doubletree brand name. Accordingly, investments in property and equipment will
increase substantially in 1997 as compared to historical levels of capital
expenditures made when the Company principally managed hotel properties. As of
December 31, 1996, the Company had commitments relating to capital improvement
projects aggregating approximately $3.9 million.
In connection with the Red Lion Acquisition, the Company terminated its
existing facility and entered into a new $633.2 million credit facility (New
Credit Facility). The New Credit Facility has three components: (1) a $100.0
million revolving credit facility, (2) a $362.2 million term loan (Term Loan A),
and (3) a $171.0 million term loan (Term Loan B). At the option of the Company,
interest rates may be based on either (a) the higher of the federal funds rate
plus 1/2% or the prime rate or (b) the Eurodollar rate plus an interest rate
margin which ranges from 1.125% to 2.000% with respect to the revolving line of
credit and Term Loan A and 2.25% to 2.50% with respect to Term Loan B. The
interest margins at any time are related to the financial condition and
performance of the Company.
The $100.0 million revolving credit facility can be used for general
corporate purposes, matures in 2002 and was undrawn as of December 31, 1996.
Term Loan A is a fully amortizing loan and makes available additional borrowings
of up to $40.0 million to refinance an existing hotel mortgage (the commitment
for which expires June 30, 1997). As of December 31, 1996, the principal balance
outstanding was $300.7 million and the interest margin was 1.375%. Principal
payments are due quarterly, increasing from approximately $1.0 million per
quarter in 1997 to $18.8 million quarterly in 2002, at which time the term loan
matures.
Term Loan B requires quarterly principal payments of approximately $376,000
through 2002 and then increases to approximately $25.3 million quarterly through
maturity in May 2004. As of December 31, 1996, the principal balance outstanding
was $160.9 million and the interest margin was 2.25%.
The Company entered into interest rate swap agreements in order to reduce
its exposure to interest rate fluctuations. As of December 31, 1996, the Company
had three agreements which have converted $250.0 million of debt from floating
rates (5.625% at December 31, 1996) to a fixed rate of 5.92% (prior to the
applicable margin). The agreements expire March 31, 1999.
The New Credit Facility contains numerous covenants which place
restrictions on additional indebtedness, mergers, acquisitions, the payment of
dividends and investments and requires the Company to maintain certain financial
ratios. Additionally, the Company is required to make mandatory principal
payments with the proceeds from excess cash flow from operations (as defined) or
equity offerings and the sale of assets or refinancing of certain indebtedness.
All obligations are guaranteed and secured by substantially all of the assets of
the Company and its significant subsidiaries.
Depending on the timing and magnitude of the Company's future investments
(either in the form of debt or equity), the working capital necessary to satisfy
current obligations is anticipated to be generated from
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operations. To the extent the Company identifies significant acquisition and/or
investment opportunities in excess of its available cash, the Company may borrow
under the credit facility or may seek additional sources of capital to fund such
investments. Management believes that a combination of its existing cash and
cash equivalents, net cash provided from operations, and its borrowing ability
under the New Credit Facility will be sufficient to fund its operations, capital
outlays and commitments.
SEASONALITY
The operating results of hotels are affected by seasonality. Though the
Company's hotels are distributed throughout the United States, revenues and
profitability are typically higher in summer periods than in winter periods.
IMPACT OF INFLATION
Operation of the Company can be impacted by inflation. Though operators of
hotels possess the ability to adjust room rates periodically, inflation can also
cause increases in operating costs and impact the travel patterns of guests.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
The Financial Accounting Standards Board has issued several Statements of
Financial Accounting Standards for which the required implementation date has
not yet become effective. None of these accounting standards will have a
material impact on the Company's consolidated financial statements.
25
27
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations for
the years ended December 31, 1995 and 1996 present the consolidated results of
operations of the Company (including RFS Management) as if Red Lion had been
acquired at the beginning of 1995. The following information is not necessarily
indicative of the results of operations of the Company as they may be in the
future or as they might have been had the Red Lion Acquisition been consummated
at the beginning of the period shown. The Unaudited Pro Forma Consolidated
Statements of Operations should be read in conjunction with the audited
historical Consolidated Financial Statements of the Company and notes thereto.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------------------------- ----------------------------------------------------
DOUBLETREE, DOUBLETREE,
AS PRO FORMA AS PRO FORMA
REPORTED RED LION ADJUSTMENTS TOTAL REPORTED(1) RED LION(2) ADJUSTMENTS TOTAL
---------- -------- ----------- -------- ---------- ----------- ----------- --------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Management and
franchise fees..... $ 30,082 $ 11,388 $ (299)(a) $ 41,171 $ 38,621 $ 10,910 $ (190)(a) $ 49,341
Owned hotel
revenues........... 7,081 185,414 27,074(a) 219,569 38,350 175,432 14,580(a) 228,362
Leased hotel
revenues........... 141,942 132,212 -- 274,154 205,163 121,431 -- 326,594
Purchasing and
service fees....... 16,487 45,124 -- 61,611 19,848 43,517 -- 63,365
Other fees and
income............. 994 241 -- 1,235 2,953 207 -- 3,160
-------- -------- -------- -------- -------- -------- -------- --------
Total
revenues.... 196,586 374,379 26,775 597,740 304,935 351,497 14,390 670,822
-------- -------- -------- -------- -------- -------- -------- --------
Operating costs and
expenses:
Corporate general and
administrative
expenses........... 14,901 10,910 -- 25,811 18,079 6,803 -- 24,882
Owned hotel
expenses........... 6,049 121,913 20,538(a) 148,500 27,889 111,033 11,454(a) 150,376
Leased hotel
expenses........... 132,644 109,750 -- 242,394 190,797 96,787 -- 287,584
Purchasing and
service expenses... 13,437 42,644 -- 56,081 14,796 41,270 -- 56,066
Depreciation and
amortization....... 4,686 19,328 23,141(b) 47,155 12,018 17,001 19,339(b) 48,358
Business combination
expenses........... 2,565 14,662 (17,227)(c) -- -- 8,369 (8,369)(f) --
-------- -------- -------- -------- -------- -------- -------- --------
Total
operating
costs and
expenses.... 174,282 319,207 26,452 519,941 263,579 281,263 22,424 567,266
-------- -------- -------- -------- -------- -------- -------- --------
Operating income....... 22,304 55,172 323 77,799 41,356 70,234 (8,034) 103,556
Interest expense..... (227) (19,408) (22,906)(d) (42,541) (6,648) (15,118) (20,524)(d) (42,290)
Interest income...... 4,147 5,070 -- 9,217 5,561 5,552 -- 11,113
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes and minority
interest............. 26,224 40,834 (22,583) 44,475 40,269 60,668 (28,558) 72,379
Minority interest
share of net
(income) loss...... 35 (759) -- (724) (373) (1,353) -- (1,726)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................ 26,259 40,075 (22,583) 43,751 39,896 59,315 (28,558) 70,653
Income tax expense... (8,468) (7,325) (3,633)(e) (19,426) (13,962) (23,087) 7,656(e) (29,393)
-------- -------- -------- -------- -------- -------- -------- --------
Net income............. $ 17,791 $ 32,750 $ (26,216) $ 24,325 $ 25,934 $ 36,228 $ (20,902) $ 41,260
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share..... $ 0.80 $ 0.63 $ 1.01 $ 1.04
======== ======== ======== ========
Weighted average shares
outstanding.......... 22,219 38,669 25,776 39,834
======== ======== ======== ========
- ---------------
(1) Includes the results of operations of Red Lion for the period commencing
November 8, 1996 through December 31, 1996.
(2) Reflects the results of operations of Red Lion for the period January 1,
1996 through the date of acquisition by Doubletree on November 8, 1996.
26
28
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
1. ASSUMPTIONS
On November 8, 1996, the Company acquired all of the outstanding common
stock of Red Lion in a transaction valued at approximately $1.2 billion. The
Company paid $695 million in cash, repaid $124 million of existing Red Lion
indebtedness, issued 7.4 million shares of common stock to the shareholders of
Red Lion with a fair value at the date of closing of $292 million and assumed
net liabilities of $90 million. The acquisition has been accounted for as a
purchase and the results of operations of Red Lion have been included in the
consolidated financial statements since November 8. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values. The excess of the purchase price over the estimated fair value of the
net assets acquired of $365 million was recorded as goodwill to be amortized
over a 40 year life.
2. RECLASSIFICATIONS
Reclassifications have been made to the previously issued financial
statements of Red Lion to conform with the financial statement presentation used
by Doubletree.
3. PRO FORMA ADJUSTMENTS
The following adjustments have been made to the Unaudited Pro Forma
Consolidated Statements of Operations:
(a) Red Lion acquired three hotels in April 1996, July 1996 and
September 1996. The pro forma results of operations include the operating
results of these hotels as if they were all acquired on January 1, 1995.
Hotel management fees from the hotel acquired in September 1996 (which was
previously managed) have been eliminated.
(b) To reflect the increase in depreciation and amortization resulting
from the application of purchase accounting.
(c) To exclude $2.6 million of business combination expenses incurred
by Doubletree related to the RFS Acquisition and $14.7 million of formation
expenses incurred by Red Lion related to the 1995 restructuring and initial
public offering of Red Lion.
(d) To reflect increased interest expense associated with the New
Credit Facility, including agency and commitment fees and the amortization
of loan fees. An interest rate of 7.05% was assumed for all periods on
borrowings under the New Credit Facility. The annual effect of a 1/8
percent change in the interest rate would be approximately $0.6 million.
(e) To reflect an effective tax rate of 40% on all pro forma
adjustments except for amortization of goodwill.
(f) To exclude $8.4 million of business combination expenses
(principally investment banking, accounting and legal fees) incurred by Red
Lion in connection with the acquisition by Doubletree.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is filed as a separate part of this Report (see
page 30).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1 Election of Directors" and under the caption
"Executive Officers of the Company" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed
with the Securities and Exchange Commission on or before April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors'
Report are filed as part of this Report (see page 30).
2. Financial Statement Schedules
None.
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 53).
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1996: (i) on October 16, 1996, the Company reported the
issuance of a press release regarding, among other things, the consolidated
financial conditions of the Company and its subsidiaries as of September 30,
1996 and the results of operations thereof for the period then ended; and (ii)
on November 21, 1996, the Company reported (A) the completion of its acquisition
of Red Lion Hotels, Inc., (B) the appointment of Richard M. Kelleher as
President and Chief Executive Officer of the Company, (C) the announcement of
the appointment of William L. Perocchi as a director of the Company and (D) on
November 21, 1996, the Company announced the appointment of Edward A. Gilhuly
and Michael W. Michelson as directors of the Company.
28
30
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, thereunder duly authorized, on March 28, 1997.
DOUBLETREE CORPORATION
By /s/ RICHARD M. KELLEHER
------------------------------------
Richard M. Kelleher
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------- --------------------------------------- ---------------
* Co-Chairman of the Board and Director March 28, 1997
- --------------------------------- (Principal Executive Officer)
Richard J. Ferris
* Co-Chairman of the Board and Director March 28, 1997
- --------------------------------- (Principal Executive Officer)
Peter V. Ueberroth
/s/ RICHARD M. KELLEHER President and Chief Executive Officer March 28, 1997
- --------------------------------- and Director
Richard M. Kelleher (Principal Executive Officer)
/s/ WILLIAM L. PEROCCHI Executive Vice President and Chief March 28, 1997
- --------------------------------- Financial Officer and Director
William L. Perocchi (Principal Financial and Accounting
Officer)
* Director March 28, 1997
- ---------------------------------
William R. Fatt
* Director March 28, 1997
- ---------------------------------
Dale F. Frey
* Director March 28, 1997
- ---------------------------------
Ronald K. Gamey
* Director March 28, 1997
- ---------------------------------
Edward A. Gilhuly
* Director March 28, 1997
- ---------------------------------
Norman B. Leventhal
* Director March 28, 1997
- ---------------------------------
Michael W. Michelson
* Director March 28, 1997
- ---------------------------------
John H. Myers
*By /s/ DAVID L. STIVERS
- ---------------------------------
David L. Stivers
Attorney-in-Fact
29
31
DOUBLETREE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Independent Auditors' Report.......................................................... 31
Consolidated Financial Statements:
Balance Sheets as of December 31, 1996 and 1995..................................... 32
Statements of Operations for the years ended December 31, 1994, 1995 and 1996....... 33
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996....... 34
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995, and
1996............................................................................. 35
Notes to Consolidated Financial Statements............................................ 36
Financial Statement Schedules
All financial statement schedules have been omitted as the information is either
included in the consolidated financial statements and notes thereto, is not
applicable or is not required.
30
32
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doubletree Corporation:
We have audited the consolidated financial statements of Doubletree
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of Doubletree
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
March 17, 1997
31
33
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER
DECEMBER 31, 31,
1995 1996
------------ ----------
ASSETS
Cash and cash equivalents.......................................... $ 32,652 $ 25,588
Accounts receivable, net of allowance for doubtful accounts of $295
and $557, respectively........................................... 17,907 46,845
Due from Red Lion MLP.............................................. -- 4,094
Current portion of notes receivable including amounts due from
affiliates of $500 in 1996....................................... 390 590
Other.............................................................. 2,694 10,545
------------ ----------
Total current assets.......................................... 53,643 87,662
------------ ----------
Notes receivable, including amounts due from affiliates of $10,775
and $25,935, respectively........................................ 24,185 44,499
Due from Red Lion MLP.............................................. -- 24,405
Investments........................................................ 5,070 77,676
Property and equipment, net........................................ 14,540 635,473
Management contracts, net.......................................... 49,634 459,325
Goodwill, net...................................................... 15,431 378,326
Deferred costs and other assets.................................... 604 23,583
------------ ----------
$163,107 $1,730,949
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.............................. $ 29,710 $ 101,105
Accrued interest payable........................................... 23 2,213
Current portion of notes payable................................... 672 44,747
Income taxes payable............................................... 585 3
------------ ----------
Total current liabilities..................................... 30,990 148,068
------------ ----------
Deferred income taxes.............................................. 15,625 264,812
Other long-term obligations........................................ 2,106 10,304
Notes payable...................................................... -- 506,235
------------ ----------
48,721 929,419
------------ ----------
Commitments and contingencies (Notes 3, 5, 6, 7 and 14)
Stockholders' equity:
Common stock, $.01 par value. Authorized 100,000,000 shares;
issued and outstanding 22,099,186 and 39,565,058 shares,
respectively.................................................. 221 396
Additional paid-in capital....................................... 100,462 761,273
Unrealized gain on marketable equity securities.................. 22 176
Unearned employee compensation................................... (211) (141)
Retained earnings................................................ 13,892 39,826
------------ ----------
114,386 801,530
------------ ----------
$163,107 $1,730,949
========== =========
See accompanying notes to consolidated financial statements.
32
34
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
Revenues:
Management and franchise fees............................ $ 26,330 $ 30,082 $ 38,621
Owned hotel revenues..................................... 92 7,081 38,350
Leased hotel revenues.................................... 73,769 141,942 205,163
Purchasing and service fees.............................. 10,746 16,487 19,848
Other fees and income.................................... 1,545 994 2,953
-------- -------- --------
Total revenues........................................ 112,482 196,586 304,935
-------- -------- --------
Operating costs and expenses:
Corporate general and administrative expenses............ 11,879 14,901 18,079
Owned hotel expenses..................................... 101 6,049 27,889
Leased hotel expenses.................................... 68,981 132,644 190,797
Purchasing and service expenses.......................... 9,807 13,437 14,796
Depreciation and amortization............................ 2,943 4,686 12,018
Business combination expenses............................ -- 2,565 --
-------- -------- --------
Total operating costs and expenses.................... 93,711 174,282 263,579
-------- -------- --------
Operating income...................................... 18,771 22,304 41,356
-------- -------- --------
Interest expense......................................... (831) (227) (6,648)
Interest income.......................................... 1,630 4,147 5,561
-------- -------- --------
Income before income taxes and minority interest...... 19,570 26,224 40,269
Minority interest share of net (income) loss............... -- 35 (373)
-------- -------- --------
Income before income taxes................................. 19,570 26,259 39,896
Income tax expense....................................... (6,335) (8,468) (13,962)
-------- -------- --------
Net income....................................... $ 13,235 $ 17,791 $ 25,934
======== ======== ========
Earnings per share......................................... $ 0.66 $ 0.80 $ 1.01
======== ======== ========
Weighted average common and common equivalent shares
outstanding.............................................. 20,071 22,219 25,766
======== ======== ========
See accompanying notes to consolidated financial statements.
33
35
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
Cash flow from operating activities:
Net income.............................................. $ 13,235 $ 17,791 $ 25,934
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization........................ 3,013 4,686 12,018
Equity in (earnings) loss of partnerships............ (373) 91 671
Gain on termination of management contracts.......... (500) -- --
Minority interest share of net loss.................. -- (35) (2)
Other non-cash expenses.............................. 189 281 607
Deferred income taxes................................ 3,394 3,375 6,337
Net withdrawals from restricted cash................. 1,179 535 --
Increase in accounts receivable...................... (3,407) (6,187) (5,499)
Increase in other current assets..................... (648) (1,234) (442)
Increase in accounts payable and accrued expenses.... 6,680 5,225 3,040
-------- -------- ---------
Net cash provided by operations................. 22,762 24,528 42,664
-------- -------- ---------
Cash flow from investing activities:
Cash acquired at purchase of Red Lion................... -- -- 17,126
Purchase of Red Lion and related costs.................. -- -- (836,151)
Purchases of property and equipment..................... (13,006) (2,708) (3,976)
Investments in partnerships and ventures................ (1,021) (2,531) (31,717)
Distributions from partnerships and ventures............ 603 514 1,576
Advances to Red Lion MLP................................ -- -- (2,471)
Investments in management contracts..................... (6,607) (7,181) (2,511)
Proceeds from terminations of management contracts...... 2,188 562 1,377
Loans to owners of managed hotels and Candlewood........ (4,935) (7,367) (20,054)
Deposits in hotels to obtain management contracts....... (280) 250 (150)
Purchase of marketable securities....................... -- (516) --
Increase in deferred costs and other assets............. 76 (43) (2,626)
-------- -------- ---------
Net cash used in investing activities........... (22,982) (19,020) (879,577)
-------- -------- ---------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of costs.... 40,261 6,620 368,144
Proceeds from exercise of common stock options.......... -- 249 815
Cash distributions to stockholders...................... (34) (2,055) --
Purchase of common and redeemable preferred stock....... (182) -- --
Proceeds from borrowings................................ -- -- 498,200
Principal payments on notes payable..................... (25,414) (839) (37,310)
-------- -------- ---------
Net cash provided by financing activities....... 14,631 3,975 829,849
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 14,411 9,483 (7,064)
Cash and cash equivalents at beginning of year............ 8,758 23,169 32,652
-------- -------- ---------
Cash and cash equivalents at end of year.................. $ 23,169 $ 32,652 $ 25,588
======== ======== =========
See accompanying notes to consolidated financial statements.
34
36
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
UNREALIZED
GAIN ON RETAINED
ADDITIONAL UNEARNED MARKETABLE EARNINGS
COMMON PAID-IN TREASURY EMPLOYEE EQUITY (ACCUMULATED
STOCK CAPITAL STOCK COMPENSATION SECURITIES DEFICIT) TOTAL
------ ---------- -------- ------------ ---------- ------------ --------
Balances at December 31, 1993.............. $ 27 $ 27,938 $ (452) $ -- $ -- $(14,952) $ 12,561
Issuance of 15,500,000 shares of common
stock to the partners of Doubletree
Partners in exchange for their
interests in Doubletree Partners and
Samantha............................... 155 25,051 -- -- -- -- 25,206
Proceeds from sale of 3,450,000 shares of
common stock to the public, net of
offering costs of $4,589............... 35 40,226 -- -- -- -- 40,261
Preferred stock dividends................ -- -- -- -- -- (34) (34)
Preferred stock conversion............... -- 440 -- -- -- -- 440
Purchase of allocated ESOP shares........ -- -- (82) -- -- -- (82)
Retirement of treasury shares............ (1) (440) 534 -- -- (93) --
Net income............................... -- -- -- -- -- 13,235 13,235
---- -------- ---- ---- ---- -------- --------
Balances at December 31, 1994.............. 216 93,215 -- -- -- (1,844) 91,587
Proceeds from sale of 400,000 shares of
common stock to the public, net of
offering costs of $980................. 4 6,616 -- -- -- -- 6,620
Exercise of common stock options and
other grants........................... -- 289 -- -- -- -- 289
Tax benefits attributable to common stock
options exercised...................... -- 62 -- -- -- -- 62
Common stock issued to employees......... 1 280 -- (281) -- -- --
Amortization of unearned employee
compensation........................... -- -- -- 70 -- -- 70
Marketable equity securities unrealized
gain................................... -- -- -- -- 22 -- 22
Distributions to stockholders............ -- -- -- -- -- (2,055) (2,055)
Net income............................... -- -- -- -- -- 17,791 17,791
---- -------- ---- ---- ---- -------- --------
Balances at December 31, 1995.............. 221 100,462 -- (211) 22 13,892 114,386
Proceeds from sale of 952,300 shares of
common stock to the public, net of
offering costs of $1,045............... 10 27,362 -- -- -- -- 27,372
Proceeds from sale of 9,067,534 shares of
common stock, net of offering costs of
$1,500................................. 91 340,681 -- -- -- -- 340,772
Issuance of 7,381,588 shares to the
shareholders of Red Lion............... 74 291,499 -- -- -- -- 291,573
Exercise of common stock options......... -- 815 -- -- -- -- 815
Tax benefits attributable to common stock
options exercised...................... -- 454 -- -- -- -- 454
Amortization of unearned employee
compensation........................... -- -- -- 70 -- -- 70
Marketable equity securities unrealized
gain................................... -- -- -- -- 154 -- 154
Net income............................... -- -- -- -- -- 25,934 25,934
---- -------- ---- ---- ---- -------- --------
Balances at December 31, 1996.............. $396 $761,273 $ -- $ (141) $176 $ 39,826 $801,530
==== ======== ==== ==== ==== ======== ========
See accompanying notes to consolidated financial statements.
35
37
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Doubletree Corporation was incorporated on May 19, 1994 as a Delaware
corporation to succeed to all the assets, liabilities and business operations of
Doubletree Partners, formerly Guest Quarters Hotel Partnership ("GQHP").
Doubletree Corporation and its majority-owned subsidiaries are collectively
referred to as the "Company." At December 31, 1996, the Company had a portfolio
of 241 properties, of which 204 were managed and/or leased and 37 were
franchised. Of the managed and/or leased properties, 18 are wholly-owned by the
Company, eight are operated pursuant to joint venture agreements (in which the
Company owns 50% or more of the venture), 82 are leased and 96 are managed for
third party owners.
On December 16, 1993, Doubletree Partners and Doubletree Hotels Corporation
("DHC") were combined through the transfer of the ownership interests of DHC to
Doubletree Partners in exchange for cash and partnership interests in Doubletree
Partners. On June 30, 1994 (immediately prior to the Company's initial public
offering), the owners of Doubletree Partners (Samantha Hotel Corporation
("Samantha"), Canadian Pacific Hotels (U.S.) Inc. ("CPHUS") and MetPark Funding
Inc. ("MET")) contributed their ownership interests to the Company and the
Samantha owners contributed Samantha to the Company. In consideration for such
transfer, each of the owners were issued shares of common stock (15,500,000
shares in the aggregate) of the Company in proportion to their direct or
indirect ownership interests in Doubletree Partners prior to such transfer. The
June 1994 transaction has been accounted for as if it were a pooling-of-
interests. Accordingly, the 1994 consolidated financial statements combine the
previously separate minority interests of CPHUS and MET with the financial
statements of Samantha as if the transaction occurred at the beginning of 1994.
On February 27, 1996, Doubletree Corporation acquired a 100% interest in
RFS, Inc. ("RFS Management") in a transaction accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements have
been restated to include RFS Management as if it had been acquired at the
beginning of the earliest period presented.
On November 8, 1996, the Company acquired Red Lion Hotels, Inc. (Red Lion)
in a business combination accounted for as a purchase. Accordingly, the accounts
of Red Lion and its subsidiaries are only included from the date of the
acquisition, November 8, 1996.
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. While management endeavors to make accurate estimates,
actual results could differ from estimates. Certain financial statement items
from prior years have been reclassified to be consistent with the current year
financial statement presentation. All significant inter-entity accounts and
transactions have been eliminated.
(a) Revenue Recognition
Management fees, franchise fees, purchasing and service fees, and hotel
revenues are recognized when earned.
36
38
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Property and Equipment
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
------- --------
Land and improvements........................... $ 556 $ 91,163
Buildings and improvements...................... 7,791 460,407
Furnishings and equipment....................... 9,524 87,907
Construction in progress........................ -- 3,916
------- --------
17,871 643,393
Accumulated depreciation........................ (3,331) (7,920)
------- --------
$14,540 $635,473
======= ========
Property and equipment are stated at cost. Buildings are being depreciated
over 39 years using the straight-line method. Furniture, fixtures and equipment
are depreciated using the straight-line method over 7 years. Leasehold
improvements are amortized over the shorter of the lives of the assets (15
years) or the terms of the related leases. Office furniture and equipment is
depreciated over 3 to 10 years.
Repairs and maintenance are charged to operations as incurred.
(c) Investments
Investments in partnerships and ventures are accounted for using the equity
method of accounting when the Company has a general partnership interest or its
limited partnership interest exceeds 5% and the Company does not exercise
control over the venture. Profits and losses of these joint ventures are
allocated in accordance with the joint venture agreements. The Company's share
of the income or losses of the joint ventures is included in other fees and
income. All other investments are accounted for using the cost method with the
exception of five joint ventures which are consolidated as the Company exercises
control over the venture. If a joint venture experiences operating losses which
reduce the other joint venture partner's equity to a zero balance, the loss
which would otherwise be attributable to the other joint venturer is absorbed
within the Company's consolidated operating results.
(d) Management Contracts and Goodwill
Management contracts acquired in the acquisitions of DHC and Red Lion
represent the estimated present value of net cash flows expected to be received
over the estimated lives of the contracts and are being amortized using the
straight-line method over the estimated weighted average contract life which
ranges from 25 years to 41 years. Costs incurred to acquire individual
management contracts are being amortized using the straight-line method over the
life of the respective contract. Management contracts are carried net of
accumulated amortization of $4,554,000 and $7,655,000 at December 31, 1995 and
1996, respectively.
Goodwill arose in connection with the acquisitions of DHC and Red Lion and
is amortized using the straight-line method over 40 years. Goodwill is carried
net of accumulated amortization of $835,000 and $2,559,000 at December 31, 1995
and 1996, respectively.
(e) Deferred Costs and Other Assets
Deferred costs and other assets primarily consist of debt issuance costs
and franchise application fees paid. The costs related to the issuance of debt
are capitalized and amortized to interest expense using the effective interest
method over the lives of the related debt. Accumulated amortization at December
31, 1996 is $395,000. Franchise application fees paid in connection with the
acquisition of RFS Management are
37
39
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over the lives of the franchise agreements. The initial cost of
obtaining franchise licenses for hotels leased by RFS management are paid by the
owner. Accumulated amortization at December 31, 1996 is $153,000.
(f) Statements of Cash Flows
All short-term, highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents for
purposes of the statement of cash flows.
Cash paid for interest amounted to $892,000, $215,000 and $4,063,000 for
the years ended December 31, 1994, 1995 and 1996, respectively. Cash paid for
income taxes amounted to $3,020,000, $4,631,000 and $12,163,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
(g) Income Taxes
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets, including net operating loss carryforwards,
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Earnings Per Share
Earnings per share is determined by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year. Common equivalent shares include employee stock options and warrants which
have been deemed exercised for the purpose of computing earnings per share. The
Company has no other potentially dilutive securities.
(i) Notes Receivable
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure, on January 1, 1995. There was no financial statement
impact as a result of such adoption. Management considers a note to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective interest rate.
Impairment losses are charged to expense. Generally, cash receipts will first be
applied to reduce accrued interest and then to reduce principal.
(j) Long-Lived Assets
The recoverability of management contract costs, goodwill and hotel
investments are periodically evaluated to determine whether such costs will be
recovered from future operations. Evaluations of goodwill are based on projected
earnings, exclusive of goodwill amortization, on an undiscounted basis.
Management contracts are individually evaluated based on the projected
management fee stream on an undiscounted basis. If the undiscounted earnings or
fee streams are insufficient to recover the recorded assets, then the projected
earnings or fee stream is discounted to determine the revised carrying value and
a write down for the difference is recorded.
38
40
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(k) Other Long-Term Obligations
The Company provides for the uninsured portions of medical, property,
liability and workers' compensation claims. Such costs are estimated each year
based on historical claims data relating to operations. While actual results may
vary from estimates, the Company maintains stop-loss insurance to minimize the
effect of large claims on financial results. The long-term portion of accrued
claims costs relates primarily to general liability and workers' compensation
claims which are not expected to be paid within one year. Additionally, the
Company provides a non-qualified Supplemental Employee Retirement Plan ("SERP")
designed to supplement key employees whose benefits would otherwise be reduced
or lost due to the statutory limits of 401(k) plans. Both of these obligations
are reflected in long-term obligations.
(2) ACQUISITIONS
Acquisition of Red Lion Hotels, Inc.
On November 8, 1996, the Company acquired all of the outstanding common
stock of Red Lion in a transaction valued at approximately $1.2 billion. The
Company paid $695 million in cash, repaid $124 million of existing Red Lion
indebtedness, issued 7.4 million shares of common stock to the shareholders of
Red Lion with a fair value at the date of closing of $292 million and assumed
net liabilities of $90 million. The acquisition has been accounted for as a
purchase and the results of operations of Red Lion have been included in the
consolidated financial statements since November 8. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values. The excess of the purchase price over the estimated fair value of the
net assets acquired of $365 million was recorded as goodwill to be amortized
over a 40 year life.
Acquisition of RFS, Inc.
On February 27, 1996, the Company issued 2.7 million shares of its common
stock in exchange for all of the outstanding stock of RFS Management (a
privately held hotel operator) in a transaction accounted for as a
pooling-of-interests. Effective January 1, 1995, RFS Management was a Subchapter
S Corporation for income tax purposes and, therefore, was not generally liable
for income taxes for the year ending December 31, 1995. For the years ended
December 31, 1994, 1995 and 1996, total revenues and net income of RFS (included
in the Company's results) were $62.6 million and $0.7 million, $122.5 million
and $2.1 million and $151.0 million and $6.1 million, respectively. In addition,
as a result of the merger, certain of the franchisors required the payment of an
application fee of $2,626,000 which is being amortized over the terms of the
respective franchise agreements.
Pro Forma Results
The following unaudited pro forma summary presents the consolidated results
of operations of the Company (including RFS) as if Red Lion had been acquired at
the beginning of 1995 with pro forma adjustments to give effect to (a)
amortization of goodwill, (b) additional depreciation expense as a result of a
step-up in the basis of properties and equipment and investments in
unconsolidated joint ventures, (c) increased interest expense on acquisition
debt and (d) the operating results of three hotels acquired in 1996 and related
tax effects. Additionally, pro forma adjustments have been made to exclude $2.6
million of business combination expenses related to the RFS transaction and
business combination expenses incurred by Red Lion prior to its acquisition by
the Company and formation expenses related to the 1995 restructuring of Red
Lion. The pro forma results have been prepared for comparative purposes only and
do not purport to be
39
41
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indicative of the results of operations that would actually have resulted had
the combination been in effect on the date indicated (in thousands):
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996
-------- --------
(UNAUDITED)
Total revenues......................................... $597,740 $670,822
Operating income....................................... 77,799 103,556
Interest, net.......................................... (33,324) (31,177)
Income before taxes.................................... 43,751 70,653
Net income............................................. 24,325 41,260
Net income per share................................... $ 0.63 $ 1.04
(3) LEASED HOTEL PROPERTIES
As of December 31, 1994, 1995 and 1996, the Company leased 44, 52 and 82
hotels, respectively. As of December 31, 1996, 57 of these hotels are leased
from RFS Hotel Investors, Inc. ("REIT") and 17 are leased from RLH Partnership.
All of the Company's leases require the payment of rent equal to the greater of
fixed base rent or percentage rent based on a percentage of gross room revenue,
beverage revenue and food revenue (if the hotel offers food and beverage
service). Substantially all of the hotels leased from the REIT are cross
defaulted with one another. All hotel leases are operating leases. Base and
percentage rents were $24,617,000, $52,757,000 and $72,006,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. Percentage rents included
in total rental expense amounted to $10,961,000, $25,254,000 and $38,134,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable hotel operating leases (in thousands) as of
December 31, 1996:
YEAR ENDING
DECEMBER 31,
------------------------------------------
1997...................................... $ 43,134
1998...................................... 43,039
1999...................................... 43,001
2000...................................... 43,000
2001...................................... 42,963
Thereafter................................ 351,945
--------
Total future minimum lease
payments........................... $567,082
========
40
42
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES RECEIVABLE
Notes receivable, consisting primarily of loans to owners of managed
hotels, are as follows (in thousands):
DECEMBER 31,
INTEREST REPAYMENT TERMS -----------------
RATE INTEREST/PRINCIPAL MATURITY 1995 1996
- ------------------ --------------------------------------------- ---------- ------- -------
SECURED:
12.0% Monthly/monthly to the extent of cash flow... 2006 $ 4,000 $ 4,500
10.0% Monthly/monthly to the extent of cash flow... 2005 2,850 2,850
8.0 - 10.0% Monthly/at maturity.......................... 2001 2,800 2,500
10.0% Quarterly/quarterly to the extent of cash
flow......................................... 2003 2,600 2,575
9.0% Monthly/at maturity.......................... 2015 1,625 2,000
Prime - 1.5% Monthly/at maturity.......................... 2010 1,300 1,300
8.0% Monthly/monthly to the extent of cash flow... 2014 1,000 1,000
8.0 - 10.0% Various...................................... Upon sale 1,153 2,213
Notes repaid in full......................... 1,000 --
------- -------
18,328 18,938
======= =======
UNSECURED:
7.0 - 10.0% Quarterly/at maturity........................ 2001 -- 12,065
7.5% Monthly/at maturity.......................... 2000 3,500 4,000
7.4% Monthly/at maturity.......................... 2000 1,250 3,000
10.0% Monthly/annually............................. 2000 -- 3,000
8.0% Monthly/at maturity.......................... 2001 -- 1,000
LIBOR + 2.65% Monthly/at maturity.......................... 2006 -- 1,000
10.0% Quarterly/quarterly.......................... 2002 720 625
5.75% - 10% Various...................................... Upon sale 777 1,461
------- -------
6,247 26,151
------- -------
Total notes and other receivables............ 24,575 45,089
Less: current portion........................ 390 590
------- -------
Non-current portion.......................... $24,185 $44,499
======= =======
Repayment of notes receivable are generally due upon the earlier of
termination of the management contract or sale of the hotel. At December 31,
1996, the Company does not consider any of its notes receivable to be impaired.
(5) INVESTMENTS
Investments consist of the following (in thousands):
DECEMBER 31,
------------------
1995 1996
------ -------
Hotel partnerships........................................ $3,746 $58,538
REIT convertible preferred stock.......................... -- 18,500
REIT common shares........................................ 538 1,533
Candlewood................................................ 1,098 (581)
Other..................................................... (312) (314)
------ -------
$5,070 $77,676
====== =======
41
43
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the Company and its subsidiaries have
non-controlling general and/or limited partnership interests in 16 partnerships.
Eleven of the partnerships own hotels while the others own retail or industrial
properties. Six of the partnership interests were acquired in the acquisition of
RFS and three were acquired in the acquisition of Red Lion. The company's
percentage of ownership in such partnerships ranges from less than 1% to 50.0%.
The partnership investments include an investment in a partnership that is a
majority owned subsidiary of the REIT. This investment is convertible into
common stock of the REIT.
The aggregate carrying value of the partnership interests as of December
31, 1996 exceeds the proportionate share of aggregate net assets of such
partnerships by approximately $20.0 million reflecting the allocation of a
portion of the purchase price of Red Lion to the fair value of the partnership
interests acquired. The increase in the Company's investment is being amortized
over 30 years.
In October 1995, the Company acquired a 50% interest in Candlewood Hotel
Company, L.L.C. ("Candlewood"). Candlewood is competing in the extended-stay
market of the lodging industry and will design, develop and manage and/or
franchise hotels under the Candlewood brand. The Company committed to provide
$15,000,000 of capital to the venture, of which, $12,265,000 has been funded as
of December 31, 1996 ($1,200,000 at December 31, 1995). Prior to Candlewood's
initial public offering, the investment was structured as an equity contribution
with the Company earning a preferred return. In connection with the initial
public offering of Candlewood in November 1996, the Company's contributions in
excess of $200,000 and its preferred return were converted to an interest
bearing note receivable in the amount of $12,065,000. The Company's remaining
investment consists of 2,587,500 shares of Candlewood's common stock, the fair
value of which (based on the quoted market price as of December 31, 1996) was
$24,905,000.
The Company, through RFS Management, purchased 973,684 shares of the REIT's
convertible preferred stock for $19 per share or approximately $18,500,000. This
investment is recorded at cost as there is no ready market for these securities.
The convertible preferred stock will pay a fixed annual dividend of $1.45 per
share and is convertible on a one-for-one share basis at the end of seven years.
Separately, the REIT granted the Company a 10-year right of first refusal to
manage and lease future hotels acquired or developed by the REIT. The Company
has committed to the REIT to maintain $15,000,000 of net worth in RFS
Management.
The Company, through the acquisition of Red Lion, is the general partner of
Red Lion Inns Limited Partnership, a publicly-traded limited partnership (Red
Lion MLP). The Company manages 10 hotels under a long-term management agreement
with Red Lion MLP.
(6) OPERATING LEASES
The Company occupies administrative offices under operating leases which
provide for minimum annual rental charges plus a share of maintenance expenses
and real estate taxes. Total rent expense for operating leases of office space
for the years ended December 31, 1994, 1995 and 1996 amounted to approximately
$1,402,000, $1,597,000 and $1,803,000.
42
44
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases for administrative office space
(in thousands) as of December 31, 1996:
YEAR ENDING
DECEMBER 31,
--------------------------------------------
1997........................................ $2,220
1998........................................ 1,390
1999........................................ 1,112
2000........................................ 1,115
2001........................................ 1,141
Thereafter.................................. 2,105
------
Total future minimum lease payments.... $9,083
======
(7) NOTES PAYABLE
Notes payable consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
------- --------
Term Loan A with interest at variable rates payable quarterly (7.0% at
December 31, 1996), principal due quarterly in varying amounts through
maturity in November 2002............................................. $ -- $300,700
Term Loan B with interest at variable rates payable quarterly (7.875% at
December 31, 1996), principal due in equal quarterly amounts of
$376,374 through November 2002 and quarterly thereafter in equal
amounts to fully amortize the balance at maturity in May 2004......... -- 160,900
Mortgages with variable interest rates ranging from 6.56% to 7.18%
payable through 1998.................................................. -- 84,257
Note payable with an imputed rate of 8.69%, payable through 2022........ -- 5,125
Other notes............................................................. 672 --
-------- --------
672 550,982
Less: current portion................................................... (672) (44,747)
-------- --------
$ -- $506,235
======== ========
Annual maturities of notes payable are as follows (in thousands):
1997................................................. $ 44,747
1998................................................. 86,463
1999................................................. 53,092
2000................................................. 60,571
2001................................................. 73,031
Thereafter........................................... 233,078
--------
$550,982
========
To finance a portion of the cost of the acquisition of Red Lion, the
Company executed a new senior credit agreement ("New Credit Facility") in
November 1996 and borrowed $493.2 million of which $31.6 million was repaid on
November 13 with certain of the proceeds from the Company's sale of common
stock.
The New Credit Facility consists of two term loans, provides for a $100.0
million revolving line of credit, and makes available additional borrowings of
up to $40.0 million under Term Loan A to refinance an existing
43
45
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hotel mortgage, the commitment for which expires June 30, 1997. At the option of
the Company, interest rates may be based on either (a) the higher of the federal
funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus a margin
which ranges from 1.125% to 2.000% with respect to Term Loan A and the revolving
line of credit and 2.25% to 2.50% with respect to Term Loan B. The interest
margins applicable at any time are related to the financial condition and
performance of the Company.
The credit agreement requires the payment of a quarterly commitment fee of
0.375% of the unutilized commitments. The credit agreement has various covenants
which place restrictions on additional indebtedness, mergers and acquisitions,
the payment of dividends and investments based on the financial condition of the
Company. All obligations are guaranteed and secured by substantially all of the
assets of the Company and its significant subsidiaries.
The Company entered into interest rate swap agreements in order to reduce
its exposure to interest rate fluctuations. As of December 31, 1996, the Company
had three interest rate swap agreements outstanding which have converted $250.0
million of debt from floating rates (5.625% at December 31,1996) to a fixed rate
of 5.92% (prior to the applicable margin). The agreements expire March 31, 1999.
Additional interest expense for the year ended December 31, 1996 was
approximately $31,000. These agreements are with major commercial banks and
management does not anticipate a credit loss due to nonperformance.
(8) STOCKHOLDERS' EQUITY
On July 8, 1994, the Company completed its initial public offering of
3,450,000 shares of its common stock at a price to the public of $13 per share.
The net proceeds to the Company, after expenses of the offering and giving
effect to the underwriter's discount, were $40,261,000. The proceeds of the
offering were primarily used for the repayment of debt outstanding and for
general corporate purposes.
In March 1995, the Company issued 2,000 shares of common stock with a fair
value at the date of issuance of $40,000 to certain non-executive employees.
In June 1995, the Company completed an offering of 4,600,000 shares of its
common stock (of which 400,000 shares were newly issued shares of the Company)
at a price to the public of $19 per share. The net proceeds to the Company,
after expenses of the offering and giving effect to the underwriter's discount,
were $6,620,000.
In January 1995, RFS Management issued 12 restricted shares of RFS
Management common stock to certain of its employees. These shares vest ratably
over a four year period from the date of issuance. The estimated fair market
value of these shares at issuance was $281,000. The shares were exchanged for
approximately 36,500 shares of Company common stock, subject to the same
restrictions, in connection with the acquisition of RFS Management.
In February 1996, the Company issued 2,727,811 shares (including the 36,500
restricted shares) of its common stock to acquire all of the outstanding common
stock of RFS Management.
In May 1996, the Company completed an offering of 4,234,300 shares of its
common stock (of which 952,300 shares were newly issued shares of the Company)
at a price to the public of $31.25 per share. The net proceeds to the Company,
after expenses of the offering and giving effect to the underwriter's discount,
were $27,372,000.
In connection with the acquisition of Red Lion, the Company issued
6,440,000 shares and 2,627,534 shares to the public and to a subsidiary of
General Electric Pension Trust (GEPT), respectively. Additionally, GEPT was
granted 262,753 warrants to acquire common stock of the Company at an exercise
price of $38.06, which approximated the fair value at the date of the agreement.
The net cash proceeds to the Company, after expenses and giving effect to the
underwriters discount, were $340,772,000. Additionally, the Company issued
7,381,588 shares to the shareholders of Red Lion as part of the consideration
paid for Red Lion.
44
46
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTIONS
At December 31, 1996, the Company had one stock based compensation plan
which is described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. No compensation cost has been
recognized for its stock based compensation plan (which is a fixed stock option
plan). Had compensation cost for the Company's stock based compensation plan
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER
31,
-------------------
1995 1996
------- -------
Net income................................................. As reported $17,791 $25,934
Pro forma 17,719 25,076
Primary earnings per share................................. As reported $ 0.80 $ 1.01
Pro forma $ 0.80 $ 0.97
The Company's stock based compensation plan is a fixed stock option plan,
the 1994 Equity Participation Plan (the "Plan"), in which options may be granted
to key personnel to purchase shares of the Company's common stock at a price not
less than the current market price at the date of grant. The options vest
annually and ratably over the four-year period from the date of grant and expire
ten years after the grant date. An aggregate of 3,300,000 shares have been
authorized for issuance. The Plan also provides for the issuance of stock
appreciation rights, restricted stock or other awards. Activity in the stock
option plan is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Options outstanding, beginning
of year..................... -- -- 967,500 $ 13.69 1,103,500 $ 14.81
Granted....................... 1,099,500 $ 13.61 193,000 $ 19.89 1,590,000 $ 34.45
Exercised..................... -- -- (19,375) $ 13.00 (61,250) $ 13.90
Canceled...................... (132,000) $ 13.00 (37,625) $ 13.00 (67,500) $ 18.73
--------- ------ --------- ------ --------- ------
Options outstanding, end of
year........................ 967,500 $ 13.69 1,103,500 $ 14.81 2,564,750 $ 26.91
========= ====== ========= ====== ========= ======
Number of options
exercisable................. -- 243,750 445,500
Number of shares available for
future issuance............. 1,032,500 877,125 654,625
Weighted average fair value of
options granted............. $ 4.01 $ 5.89 $ 10.26
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1994, 1995 and 1996, respectively: risk-free interest rates of 6 percent for all
years; dividend yield of 0 percent for all years, expected lives of four years
for all options prior to being exercised, and a 40 percent volatility factor for
all years.
45
47
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
----------- ---------------- ---------------- ----------- ----------------
$13.00-$18.75......... 921,900 7.55 $14.07 426,900 13.94
$19.13-$23.50......... 77,600 8.53 $21.56 18,600 21.65
$25.50-$37.88......... 690,250 9.18 $27.64 -- N/A
$40.31-$40.75......... 875,000 9.86 $40.33 -- N/A
--------- ---- ------ ------- -----
$13.00-$40.75......... 2,564,750 8.81 $26.91 445,500 14.27
========= ==== ====== ======= =====
(10) EARNINGS PER SHARE
For the year ended December 31, 1994, earnings per share has been
calculated assuming the 15,500,000 shares issued immediately prior to the
initial public offering were outstanding since January 1, 1994. Additionally,
the 2,727,811 shares issued to acquire RFS Management are assumed to be
outstanding for the entire years of 1994, 1995 and 1996. Shares issued in
connection with the acquisition of Red Lion are outstanding from November 8,
1996. The common equivalent shares include employee stock options and warrants
which have been deemed exercised using the treasury stock method for the purpose
of computing earnings per share. The Company has no outstanding securities or
agreements which would result in the issuance of common shares other than common
stock equivalents.
(11) TRANSACTIONS WITH RELATED PARTIES
Revenues and expenses include amounts derived from or paid to entities in
which affiliates of the Company own interests and, in general, exercise
operational control. A summary of these transactions is as follows (in
thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
REVENUES
Management fees and franchise fees.......................... $15,051 $15,241 $20,617
Share of partnership income................................. 243 388 671
Interest income............................................. 847 1,674 1,987
Purchasing and service fees................................. 4,436 6,288 5,390
EXPENSES
Hotel rent.................................................. -- 2,031 7,975
Administrative office rent.................................. 312 73 64
Additionally, the Company was reimbursed for costs incurred in providing
centralized services to its managed and/or franchised hotels related to
marketing, central reservations, accounting, data processing, internal audit and
training as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
Marketing and central reservations............................ $11,129 $11,020 $10,861
Accounting, data processing, internal audit and training...... 2,084 1,781 2,706
------- ------- -------
$13,213 $12,801 $13,567
======= ======= =======
46
48
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due from affiliates included in accounts receivable at December 31,
1995 and 1996 are $4,318,000 and $7,849,000, respectively. Non-current amounts
due from affiliates included in other assets at December 31, 1995 and 1996 are
$147,000 and $321,000, respectively.
Amounts due to affiliates included in accounts payable at December 31, 1995
and 1996 amounted to $105,000 and $24,000, respectively.
During 1995 RFS Management, under terms of a consulting agreement, made
payments of $780,000 to Hospitality Advisory Services, Inc. ("HAS"). The
consulting agreement terminated on February 27, 1996 and $75,000 was paid prior
to termination. Subsequently, two of the former HAS shareholders entered into
new consulting agreements, that terminate February 27, 1997, with RFS Management
and were paid $175,000 in total through December 31, 1996.
(12) EMPLOYEE BENEFIT PLANS
The Company maintains three 401(k) retirement savings plans. Employees who
are over 21 years of age and have completed one year of service are eligible to
participate in the plans. Depending on the plan, the Company matches employee
contributions up to 6% of an employee's eligible compensation. The aggregate
expense under the plans amounted to $218,000, $563,000 and $855,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
The Company maintains a self-insured group health plan through a Voluntary
Employee Benefit Association. This plan is funded to the limits provided in the
Internal Revenue Code. RFS Management maintains a self-insured group health
plan. Liabilities are recorded for estimated incurred but unreported claims.
Aggregate and stop loss insurance exists at amounts which limit the exposure to
the Company, including RFS Management. Red Lion provides group health benefits
through a fully-insured medical plan.
The Company also has a non-qualified supplemental employee retirement plan
("SERP"). The SERP was designed to complement the 401(k) plan for employees of
Red Lion by restoring benefits otherwise lost by certain employees due to the
statutory limits in the 401(k) plan. Expense under the SERP amounted to $47,000
for the period from November 8, 1996 to December 31, 1996.
(13) INCOME TAXES
The components of income tax expense consist of the following (in
thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
FEDERAL:
Current............................................... $1,559 $3,561 $ 4,982
Deferred.............................................. 3,476 2,832 5,544
------ ------ -------
5,035 6,393 10,526
------ ------ -------
STATE:
Current............................................... 1,382 1,532 2,643
Deferred.............................................. (82) 543 793
------ ------ -------
1,300 2,075 3,436
------ ------ -------
$6,335 $8,468 $13,962
====== ====== =======
47
49
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual income tax expense differs from the expected tax expense
computed by applying the Federal statutory income tax rate as a result of the
following:
YEARS ENDED DECEMBER
31,
----------------------
1994 1995 1996
---- ---- ----
Income tax expense at Federal statutory rate................... 34.0% 34.0% 35.0%
Goodwill and permanent differences............................. 1.1 0.7 2.0
State income taxes............................................. 4.3 5.5 4.7
RFS, Inc. S Corp. earnings not taxed........................... -- (2.8) --
Decrease in valuation allowance................................ (8.3) (5.2) (6.3)
Other.......................................................... 1.3 -- (0.4)
---- ---- ----
32.4% 32.2% 35.0%
==== ==== ====
The income tax benefit attributable to the use of net operating loss
carryforwards ("NOLs") in the year ended 1994 was $47,000.
As a result of the acquisition of the common stock of Red Lion, the
allocation of the purchase price to the assets and liabilities for book purposes
significantly exceeds the tax basis carried over from Red Lion. Accordingly, the
acquisition created substantial temporary differences. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and liabilities are as follows (in thousands):
DECEMBER 31,
----------------------
1995 1996
-------- ---------
Deferred tax assets:
Net operating loss carryforwards............................ $ 15,288 $ 7,551
Passive activity loss carryforwards......................... 834 --
Reserves.................................................... 3,335 1,560
Accruals and other liabilities.............................. 3,979 16,998
Valuation allowance......................................... (22,605) (19,647)
-------- ---------
Total deferred tax assets................................ 831 6,462
-------- ---------
Deferred tax liabilities:
Management contracts........................................ (13,982) (180,280)
Real estate................................................. -- (75,860)
Investments................................................. (2,474) (10,897)
Other....................................................... -- (4,237)
-------- ---------
Total deferred tax liabilities........................... (16,456) (271,274)
-------- ---------
Net deferred tax liability.................................... $(15,625) $(264,812)
======== =========
The Company estimates that, more likely than not, it will not realize a
substantial portion of the benefits of its deferred tax assets. Accordingly, it
has established a valuation allowance to reflect this uncertainty. A portion of
the valuation allowance was established upon the combination of Doubletree
Partners and DHC. In accordance with purchase accounting methodology, to the
extent the tax benefits to which this allowance relates are recognized, the
reduction in the valuation allowance will be applied to reduce goodwill. As of
December 31, 1996, the amount of the valuation allowance subject to this
treatment is approximately $6,000,000. During 1995 and 1996, $1,530,000 and
$458,000 was used and credited to goodwill, respectively. None of this NOL was
recognized in 1994.
48
50
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's federal NOLs of $18,611,000 expire as follows (in thousands):
YEAR OF AMOUNT OF
EXPIRATION FEDERAL NOLS
-------------------------------------------------------- ------------
2008.................................................... $ 6,128
2009.................................................... 12,483
-------
$ 18,611
=======
Total NOLs for state purposes are less than the amounts stated above due
primarily to shorter carryforward periods.
(14) COMMITMENTS AND CONTINGENCIES
On January 5, 1997, the Company entered into a memorandum of understanding
for the proposed acquisition of Renaissance Hotel Group N.V. (Renaissance) in a
transaction valued at approximately $890.0 million, including the assumption of
$70.0 million in debt. The memorandum of understanding contained a provision
that in the event Renaissance entered into a merger or acquisition agreement
with a party other than the Company within four months, Doubletree would receive
a break-up fee of $15.0 million. In February 1997, Renaissance pursued
discussions with another company and on February 20, 1997, Doubletree received
$15 million.
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, the Company may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if the
Company elects not to fund the shortfall, the hotel owner may elect to terminate
the management contract. If the Company elects to fund the shortfall, but
performance standards are not achieved at the expiration of the funding period,
the owner may elect to terminate the management contract at that time. The
Company funded $487,000 in June 1996 in connection with a shortfall at one
hotel. There were no shortfall funding payments in 1995 or 1994.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $4,900,000 ($1,000,000 of which is collateralized by a letter of credit).
Additionally, the Company has approximately $5,500,000 of bonds outstanding as
collateral for payment of claims arising out of workers' compensation claims.
The Company also had commitments relating to capital improvement projects
aggregating approximately $3,912,000 at December 31, 1996.
In August 1996, Doubletree committed to provide credit support for a loan
facility that will be utilized by Candlewood to arrange construction and
permanent financing for Candlewood franchisees on terms that, in most cases, are
much more attractive than that which the franchisees could obtain on their own.
The source of the loan facility is General Motors Acceptance Corporation
Mortgage Group. In providing such credit support, Doubletree's maximum exposure
on any one Candlewood franchise will be approximately $1.0 million, with the
aggregate amount of exposure for all such credit support capped at between $20.0
to $30.0 million. As of December 31, 1996, the facility has not been used.
In August 1996, Doubletree and Patriot American Hospitality, Inc. (Patriot)
formed a joint venture wherein Doubletree will invest up to $20.0 million of
capital ($10.7 million of which had been invested as of December 31, 1996) to be
combined with up to $180.0 million of capital from Patriot to be used for the
acquisition of hotels. Doubletree will have a 10% interest in the venture.
The Company has a commitment to contribute an additional $2.0 million to an
investment partnership formed for the purpose of acquiring hotel properties. The
Company has a 4.35% limited partnership interest and it is anticipated that at
least 50% of the properties acquired will be either managed and/or franchised by
the Company.
49
51
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is a defendant in various litigation matters arising from the
normal course of its operations. While it is not feasible to predict or
determine the ultimate outcome of these matters, it is the opinion of management
that their ultimate outcome is not likely to have a material adverse effect on
the results of operations and the financial position of the Company.
Four of the hotels leased by the Company are managed by others under
agreements with terms of ten to twenty years. Management fees are based on a
percentage of each hotel's revenues.
(15) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
--------------------
1995 1996
------- --------
Payroll and related..................................... $ 5,544 $ 29,842
Business combination accruals........................... 2,756 21,791
Accounts payable........................................ 5,793 11,213
Lease payable........................................... 6,743 8,305
Insurance............................................... 1,401 5,555
Sales taxes............................................. 1,331 4,614
Advance deposits........................................ 208 3,382
Utilities............................................... 649 1,753
Property taxes.......................................... 521 1,716
Marketing costs......................................... 2,340 1,572
Other................................................... 2,424 11,362
------- --------
$29,710 $101,105
======= ========
(16) REIMBURSABLE COSTS
The Company is reimbursed for costs associated with providing central
reservations, sales and marketing, advertising, accounting, data processing,
internal audit and employee training services to managed hotels. The Company is
also reimbursed for central reservations and marketing services provided to
franchised hotels. Such costs primarily consist of personnel and related fringe
benefits, advertising, promotional fees and reservation service costs.
50
52
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) MANAGEMENT CONTRACTS
An analysis of management contract activity follows (in thousands):
Balance at December 31, 1993...................................... $ 42,288
Contracts acquired.............................................. 6,607
Contract conversions and terminations........................... (1,718)
Amortization.................................................... (1,805)
--------
Balance at December 31, 1994...................................... 45,372
Contracts acquired.............................................. 7,181
Contract conversions and terminations........................... (562)
Amortization.................................................... (2,357)
--------
Balance at December 31, 1995...................................... 49,634
Contracts acquired at acquisition of Red Lion................... 418,000
Contracts acquired.............................................. 2,511
Contract conversions and terminations........................... (6,005)
Amortization.................................................... (4,815)
--------
Balance at December 31, 1996...................................... $459,325
========
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes receivable, investments, accounts
payable and accrued expenses, accrued interest payable, notes payable and income
taxes payable, each as included in the consolidated balance sheets under such
captions. With the exception of notes receivable, notes payable, interest rate
swap agreements and the investment in RFS Partnership L.P. units, the carrying
amounts of all other classes of financial instruments approximate fair value due
to the short maturity of those instruments or, in the case of marketable equity
securities they are carried at their estimated fair value. The Company has
determined that the fair value of its notes receivable and notes payable is not
significantly different from their carrying value based on interest rate and
payment terms the Company would currently offer on notes with similar security
to borrowers of similar creditworthiness. The fair value of the Company's
interest rate swap agreements is approximately $315,000. RFS Partnership L.P.
units, which are convertible into REIT common shares, have a carrying value of
$841,000 and an estimated fair value of approximately $1.5 million at December
31, 1996.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1995 and
1996, restated to reflect the acquisition of RFS Management, is presented below
(in thousands except per share data). Additionally, pro forma information is
presented to (a) give effect to the acquisition of Red Lion and related
transactions as if they had occurred on January 1, 1995, and (b) exclude $2.6
million of business combination expenses related to the RFS transaction in
December 1995, business combination expenses incurred by Red Lion prior to its
acquisition by the Company and formation expenses related to the 1995
restructuring of Red Lion. The sum of the individual quarterly data may not
equal the annual data due to rounding.
51
53
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------
ACTUAL
Total revenues.............................. $ 40,580 $ 50,771 $ 52,891 $ 52,344
Net income.................................. 3,645 5,742 5,606 2,798
Earnings per share.......................... $ 0.17 $ 0.26 $ 0.25 $ 0.12
Weighted average common and common
equivalent shares outstanding............. 21,910 22,057 22,443 22,472
PRO FORMA
Total revenues.............................. $130,100 $ 155,985 $157,835 $ 153,820
Net income.................................. 1,953 8,144 10,330 3,898
Earnings per share.......................... 0.05 $ 0.21 $ 0.27 $ 0.10
Weighted average common and common
equivalent shares outstanding............. 38,360 38,507 38,893 38,922
1996
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------
ACTUAL
Total revenues.............................. $ 53,835 $ 63,546 $ 68,582 $ 118,972
Net income.................................. 4,878 7,549 8,021 5,486
Earnings per share.......................... $ 0.22 $ 0.33 $ 0.34 $ 0.16
Weighted average common and common
equivalent shares outstanding............. 22,584 23,173 23,879 33,516
PRO FORMA
Total revenues.............................. $153,158 $ 174,008 $178,786 $ 164,870
Net income.................................. 4,726 12,523 15,235 8,776
Earnings per share.......................... $ 0.12 $ 0.32 $ 0.38 $ 0.22
Weighted average common and common
equivalent shares outstanding............. 39,034 39,623 40,329 40,489
52
54
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
2.1(4) Agreement and Plan of Merger, dated as of February 1, 1996, by and among
Doubletree Corporation, RFS, Inc., Seedling Merger Subsidiary, Inc., Robert M.
Solmson, H. Lance Forsdick, Sr., William Lovelace and Michael J. Pascal.
2.2(5) Agreement and Plan of Merger dated as of September 12, 1996, by and among
Doubletree Corporation, RLH Acquisition Corp. and Red Lion Hotels, Inc.
3.1(1) Certificate of Incorporation of Doubletree Corporation.
3.2(1) By-Laws of Doubletree Corporation.
3.3(3) First Amendment of By-Laws of Doubletree Corporation, dated as of June 30, 1994.
9.1(3) Stockholders Agreement dated as of June 30, 1994, among Doubletree Corporation, GQ
Owners, L.P., Canadian Pacific Hotels (U.S.) Inc., MetPark Funding, Inc., The
Ueberroth Family Trust, The Ueberroth Investment Trust, Ridge Partners, L.P. and
GEHOP.
10.1(1) Incorporation and Registration Rights Agreement, dated as of December 16, 1993,
among Doubletree Partners, GQ Owners, L.P., Canadian Pacific Hotels (U.S.) Inc.,
MetPark Funding, Inc., The Ueberroth Family Trust and Mr. Richard J. Ferris.
10.2(1) Tax Matters Agreement, dated as of December 16, 1993, among Canadian Pacific
Limited, Canadian Pacific Hotels (U.S.) Inc. and GQ Owners, L.P.
10.3(1) Acquisition Agreement, dated as of November 15, 1990, among Metropolitan Life
Insurance Company, MetHotels, Inc., Canadian Pacific Hotels Corporation and CP
Hotels Merger Co.
10.4(1) Assignment, Assumption and Modification Agreement, dated as of December 16, 1993,
among Metropolitan Life Insurance Company, Canadian Pacific Hotels Corporation,
Doubletree Hotels Corporation and Doubletree Partners.
10.5(3) Employment Agreement of Richard M. Kelleher, dated as of January 13, 1995.
10.6(2) 1994 Equity Participation Plan of Doubletree Corporation.
10.7(2) Hotel Chain Combination Agreement, dated as of December 8, 1993, among Canadian
Pacific Hotels (U.S.) Inc., MetPark Funding, Inc. and GQ Owners, L.P.
10.8(2) Amendment to the Hotel Chain Combination Agreement, dated as of June 30, 1994.
10.9(2) Amendment to the Incorporation and Registration Rights Agreement, dated as of June
30, 1994.
10.10(2) Amendment to the Tax Matters Agreement, dated as of June 30, 1994.
10.11(1) Form of Indemnification Agreement.
10.12(1) Form of Management Agreement between Metropolitan Life Insurance Company and the
Company.
10.13(1) Promissory Note, dated January 1, 1993, in principal amount of $4.0 million by
Boston HSR Limited Partnership in favor of Guest Quarters Hotels Partnership.
10.14 Modification of Promissory Note dated February 29, 1996.
10.15(3) Agreement Regarding Liquidation of GQ Owners, L.P., dated as of November 30, 1994,
among GEHOP, Ridge Partners, L.P., The Ueberroth Family Trust, The Ueberroth
Investment Trust and GQ Equities Limited.
10.16(3) Form of First Amendment to the 1994 Equity Participation Plan of Doubletree
Corporation.
10.17(3) Amended and Restated Agreement of Limited Partnership of Thayer Hotel Investors II
L.P., dated as of December 9, 1994, by and among Thayer Hotel Investments L.P.,
Doubletree Hotels Corporation and other Limited Partners.
53
55
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
10.18(3) First Amendment to Amended and Restated Agreement of Limited Partnership of Thayer
Hotel Investors II L.P., dated as of February 2, 1995, by and among Thayer Hotel
Investments L.P., Doubletree Hotels Corporation and other Limited Partners.
10.19(4) Master Agreement, dated as of February 1, 1996, by and among RFS Partnership,
L.P., Doubletree Corporation, RFS Hotel Investors, Inc., Seedling Merger
Subsidiary, Inc. and RFS, Inc.
10.20 First Amendment to Master Agreement dated November 21, 1996.
10.21(4) Preferred Stock Purchase Agreement, dated as of February 1, 1996, by and among RFS
Hotel Investors, Inc., Seedling Merger Subsidiary, Inc. and Doubletree
Corporation.
10.22(4) Second Amendment to Incorporation and Registration Rights Agreement, dated as of
February 27, 1996, by and among Doubletree Corporation, Robert M. Solmson,
individually and in his capacity as representative of others, H. Lance Forsdick,
Sr., William Lovelace and Michael J. Pascal.
10.23(4) Consolidated Lease Amendment, dated as of February 27, 1996, by and between RFS,
Inc. and RFS Partnership, L.P.
10.24(6) Securities Purchase Agreement dated as of October 31, 1996 by and between the
Company and the Trustees of General Electric Pension Trust.
10.25(6) Warrants to purchase 262,753 shares of Common Stock of Doubletree Corporation.
10.26(6) Credit Agreement dated as of November 8, 1996 by and among the Company, Morgan
Stanley Senior Funding, Inc., as syndication agent and arranger thereunder, The
Bank of Nova Scotia, as administrative agent thereunder, and the lenders
identified therein.
10.27(6) Amendment No. 3 to the Incorporation and Registration Rights Agreement dated as of
November 8, 1996 by and among Doubletree Corporation, GE Investment Hotel Partners
I, Limited Partnership, Metpark Funding Inc., The Ueberroth Family Trust,
Ueberroth Investment Trust, Richard J. Ferris, Ridge Partners, L.P., Robert M.
Solmson (for himself and as attorney-in-fact for the RFS Shareholders, as defined
therein), Canadian Pacific Hotel Holdings (U.S.) Inc. and Red Lion, a California
Limited Partnership.
10.28(6) Partnership Services Agreement dated as of November 8, 1996 by and among
Doubletree Corporation, Red Lion Hotels, Inc., Red Lion, a California Limited
Partnership and the affiliates thereof identified therein.
10.29(6) Guaranty of Lease Obligations dated as of November 8, 1996 by and among Doubletree
Corporation, Red Lion Hotels, Inc. and RLH Partnership, L.P.
10.30(6) Master Lease dated August 1, 1995 between RLH Partnership, L.P. and Red Lion
Hotels, Inc.
10.31(7) Note Purchase Agreement dated as of November 8, 1996 by and among the Company,
Morgan Stanley Group, Inc., The Bank of Nova Scotia, First Union Corporation and
Societe Generale Investment Corporation.
10.32 Management Agreement dated April 6, 1987 between Red Lion Inn Operating L.P. and
Red Lion, a California Limited Partnership.
10.33 Assignment and Assumption Agreement dated August 1, 1995 between Red Lion, a
California Limited Partnership and Red Lion Hotels, Inc.
10.34 Red Lion Supplemental Employee Retirement Plan.
10.35 Second Amendment to the 1994 Equity Participation Plan.
10.36 Stockholders Agreement dated as of September 30, 1996 between the Company, Jack
Deboer, the Alexander John DeBoer Trust dated March 14, 1995, the Christopher
Scott DeBoer Trust dated March 14, 1995 and the Warren D. Fix Family Partnership,
L.P.
10.37 Credit Facility Agreement dated November 11, 1996 between the Company and
Candlewood Hotel Company, Inc.
54
56
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
10.38 Subordinated Promissory Note dated November 11, 1996 by Candlewood Hotel Company,
Inc. in favor of the Company.
10.39 Guaranty Agreement, dated December 31, 1996, by Doubletree Corporation in favor of
GMAC Commercial Mortgage Corporation.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Doubletree Corporation.
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
99.1 Agreement to Furnish Exhibits and Schedules.
- ---------------
(1) Previously filed as exhibit to the Registrant's Registration Statement No.
33-79188 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, dated February 27, 1996 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated September 12, 1996 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated November 21, 1996 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-4 (File No. 333-13159) and incorporated herein by reference.
55