UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 1-13700
RED LION HOTELS, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1634199
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 Main Street, Vancouver, Washington 98663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 696-0001
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 statement incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / X /
As of March 25, 1996, there were issued and outstanding 31,312,500
shares of the Registrant's Common Stock. The aggregate market value of
Common Stock held by nonaffiliates of the Registrant at March 25, 1996
was $192,631,250.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which incorporated
- - - -------- ----------------------
Proxy Statement for 1996 Annual Meeting of Shareholders Part III
TABLE OF CONTENTS
Item of Form 10-K Page
- - - ----------------- ----
PART I................................................................... 1
Item 1 - Business.................................................. 1
Item 2 - Properties................................................ 9
Item 3 - Legal Proceedings......................................... 12
Item 4 - Submission of Matters to a Vote
of Security Holders....................................... 12
Item 4(a) - Executive Officers of the Registrant...................... 13
PART II.................................................................. 14
Item 5 - Market for the Registrant's Common
Equity and Related Stockholder Matters.................... 14
Item 6 - Selected Financial Data................................... 15
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................ 17
Item 8 - Financial Statements and Supplementary Data............... 24
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 69
PART III................................................................. 70
Item 10 - Directors and Executive Officers of
the Registrant............................................ 70
Item 11 - Executive Compensation.................................... 70
Item 12 - Security Ownership of Certain Beneficial
Owners and Management..................................... 70
Item 13 - Certain Relationships and Related
Transactions.............................................. 70
PART IV.................................................................. 71
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 71
SIGNATURES .............................................................. 73
PART I
ITEM 1. BUSINESS
ON AUGUST 1, 1995, IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE
INITIAL PUBLIC OFFERING OF RED LION HOTELS, INC. ("RED LION" OR THE
"COMPANY"), THE COMPANY SUCCEEDED TO THE BUSINESS OF RED LION, A CALIFORNIA
LIMITED PARTNERSHIP ("HISTORICAL RED LION"). UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES HEREIN TO (I) "RED LION" OR THE "COMPANY" INCLUDE RED
LION HOTELS, INC. AND, FOR PERIODS PRIOR TO AUGUST 1, 1995, INCLUDE THE
OPERATIONS OF HISTORICAL RED LION AND HISTORICAL RED LION'S SUBSIDIARIES,
AFFILIATES AND JOINT VENTURES, AND (II) THE "PARTNERSHIP" MEANS RED LION, A
CALIFORNIA LIMITED PARTNERSHIP, AND ITS SUBSIDIARIES, SUBSEQUENT TO
AUGUST 1, 1995.
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY INCLUDE FORWARD-LOOKING STATEMENTS THAT INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. MOREOVER, FROM TIME TO TIME THE COMPANY
MAY ISSUE OTHER FORWARD-LOOKING STATEMENTS. THE FOLLOWING FACTORS ARE AMONG
THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS: NATIONAL OR LOCAL ECONOMIC CONDITIONS AFFECTING
THE SUPPLY AND DEMAND FOR HOTEL SPACE; COMPETITION IN HOTEL OPERATIONS,
INCLUDING ADDITIONAL OR IMPROVED SERVICES OR FACILITIES OF COMPETITORS AND
PRICE PRESSURES; COMPETITION FOR ACQUISITION AND OTHER EXPANSION
OPPORTUNITIES WHICH COULD LIMIT THE COMPANY'S ABILITY TO IMPLEMENT ITS
EXTERNAL GROWTH STRATEGY; AND AVAILABILITY OF FINANCING TO FUND EXPANSION
OPPORTUNITIES. THE FORWARD-LOOKING STATEMENTS SHOULD BE CONSIDERED IN
LIGHT OF THESE FACTORS.
GENERAL
Red Lion is a leading full service hospitality company operating 54
hotels containing approximately 14,250 rooms in the western United States.
A typical Red Lion property is a full service hotel located in close
proximity to a business or commercial center, airport, major highway or
tourist destination. Red Lion hotels target the business traveler (both
individual and group) and compete primarily in the upscale segment of the
lodging industry with national chains, including Marriott, Hilton and
Sheraton. In 1995, Red Lion's average room and occupancy rates were $75.14
and 72.7%, respectively.
Red Lion is a fully integrated hospitality company that has operating
control over each of its 54 hotels. This operating control allows Red Lion
to implement consistent standards and programs at the hotels and has
enabled Red Lion to develop a brand name that it believes is associated
with both value and quality. As the exclusive operator of its hotels, Red
Lion believes that it is able to manage its hotels more effectively than
many of its franchised competitors.
Red Lion's operating strengths have translated into strong financial
performance. Red Lion has significantly outperformed the full service
segment of the lodging industry in periods of industry weakness as well as
periods of industry growth, as measured by gross operating margins. For the
three years ended December 31, 1994, Red Lion's gross operating margins
ranged from 32.6% to 34.0%, compared to the average for the full service
segment during this time period of 26.5% to 30.8%. For 1995, Red Lion's
gross operating margins were 35.3%, which is again expected to be above the
full service segment average. Management attributes these higher margins to
an operating strategy that has resulted in high labor productivity, well
trained employees and effective cost controls and to the efficiencies
generated through its centralized support services.
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OPERATING STRATEGY
The Company's operating strategy emphasizes a commitment to service
and customer value, reinvestment in facilities, quality food and beverage
services, maintenance of a strong base of group business and direct sales
and marketing. Red Lion is dedicated to providing exceptional service and
value to its customers. Its extensive training programs and tracking of
customer comments allow reinvestment in service and amenities where they
are most appreciated. In addition, during the last five years, an average
of approximately 6.2% of revenues has been invested annually in room and
facilities refurbishments, renovations and furniture and equipment
replacements. This investment has resulted in attractive, newly appointed
accommodations, updated restaurants and modern equipment, all of which
enhance the Company's brand image and competitive position. Red Lion's
focus on operations has enabled it to generate strong operating margins and
attract group business. Red Lion's strong base of group business, supported
by national and local sales and marketing efforts, generates significant
room and catering revenues.
GROWTH STRATEGY
Red Lion's operating strategy is designed to achieve internal growth
through improvements in the performance of existing hotels. In addition to
its internal growth strategy, the Company has developed an external growth
strategy focused on adding new Red Lion hotels to its system. This strategy
is intended to capitalize on Red Lion's strong record as a hotel operator,
its name recognition and its ability to deliver a strong base of loyal
customers. The strategy encompasses a full range of expansion options,
including acquisitions, joint venture investments, leases, management
contracts and new construction.
In December 1995, the 369-room former Sheraton Hotel in downtown
Spokane, Washington was added to the Red Lion system through the
acquisition of the hotel by a joint venture in which the Company currently
has a 10% interest. The Company now manages the hotel, renamed the Red Lion
Hotel, Spokane City Center, under a long-term management contract. The
joint venture acquired the hotel for a total investment of approximately
$19 million including a $10 million secured financing with a third-party
lender, a $3.4 million closing investment by the Company and the Company's
commitment to finance a planned $5.8 million renovation project as a
secured subordinated loan.
Red Lion has substantial capital for growth available from existing
cash balances and a $130 million revolving credit facility (the "Revolving
Credit Facility"). Under the Revolving Credit Facility, $80 million
initially is available to make joint venture investments, pursue
acquisitions and make capital investments in connection with long-term
leases or management contracts. These capital commitments are often
necessary to renovate or convert a hotel to Red Lion's high standards. Red
Lion believes that its ability to make such investments allows it to
compete effectively for hotel acquisitions and makes it attractive to hotel
owners, landlords and joint venture partners. In addition, Red Lion
believes that its superior operating margins and strong reputation for
delivering high quality guest services will make it attractive to owners of
underperforming hotels seeking to improve performance through new
management and brand affiliation.
HOTEL OWNERSHIP AND MANAGEMENT
Red Lion has long-term operating control over substantially all of its
properties. Red Lion owns or leases, under a long-term lease, 38 of its 54
hotels. The Company's remaining 16 hotels are operated
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pursuant to management contracts. Owned hotels consist of 100% owned
properties (14 hotels) and properties in which Red Lion holds a 49.9%
interest through joint venture agreements (seven hotels). See "Joint
Ventures." Leased properties (17 hotels) are operated pursuant to a lease,
which has a 15 year initial term and is renewable, at the option of the
Company, for five additional five year periods on the same terms (the
"Lease"). See "Item 2. Properties--The Lease." Ten of the managed hotels
are owned by Red Lion Inns Limited Partnership, a publicly traded master
limited partnership (the "MLP"), and operated by the Company pursuant to a
management contract, expiring in 2062, including all renewals. The general
partner of the MLP is a wholly-owned subsidiary of the Company. See
"Management Contracts."
HOTELS
The Company's properties are high quality, primarily full service
hotels. In addition to restaurants, lounges, banquet and meeting space,
these hotels generally offer premium television channel and movie
availability, complimentary airport shuttle service, swimming pools, room
service and valet services. Other guest amenities may include health and
fitness facilities, tennis courts, spas, gift shops, car rental desks, free
parking, hair styling salons, valet parking, concierge services, business
centers, honor bars, in-room two-line telephones and guest memberships at
health clubs, tennis courts and golf courses. Eight Red Lion hotels
containing fewer than 5% of Red Lion's total hotel rooms are limited
service hotels, reflecting the smaller communities where these hotels are
located.
The Company's full service hotels have in excess of 660,000 aggregate
square feet of meeting and convention space. These extensive meeting and
convention facilities attract numerous national, regional and local
associations and major corporate groups to the Company's hotels for
business conventions, conferences, banquets, receptions, sales meetings,
training sessions, seminars and private celebrations. Red Lion believes
that the significant size of, and amenities provided at, its facilities
attract repeat business from these associations and groups. Thirteen of the
hotels have ballrooms that can accommodate groups of over 1,000 people.
The Company's restaurants, lounges and banquet services are committed
to providing high quality food and beverage services. Food and beverage
revenues constituted 33.6%, 34.4% and 35.5% of Red Lion's revenues in 1995,
1994 and 1993, respectively. The Company constantly updates and enhances
its product offerings, catering services and restaurant formats, focusing
on high quality fresh ingredients, attractive and interesting menu designs
and training programs designed to introduce Red Lion chefs to innovative
preparation techniques. Management believes that a significant portion of
its restaurant and lounge business comes from local communities and that
this patronage increases Red Lion's name recognition and repeat business
potential in the local community. Red Lion renovated or reformatted
substantially all of its restaurants during the last six years in response
to customers' desires for a casual dining format and lighter fare.
More detailed information about the Red Lion hotels is included in
"Item 2. Properties."
CUSTOMERS AND MARKETING
CUSTOMERS, MARKETING AND SALES
Red Lion's customer mix consists of business travelers, leisure
travelers, groups and contract accounts. These customer segments accounted
for an estimated 46%, 11%, 33% and 10%, respectively,
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of total room nights in 1995. The Company's marketing and sales program
consists of a centrally coordinated national marketing team operating
through sales offices in Sacramento, Los Angeles, San Francisco, Portland,
Seattle, Chicago and Washington, D.C. and over 300 trained sales and
catering managers located at individual properties. A key objective of the
Company's national sales force is to acquire and maintain national group,
association and major corporate accounts and provide chain-wide business.
Property sales personnel participate in local and regional trade shows,
design local promotional and advertising campaigns and use direct
solicitation to increase room and catering sales to national and local
groups and associations.
The combined national and local sales force works to expand Red Lion's
base of profitable group business. As a result of its efforts, the number
of room nights attributable to groups has increased from 1.0 million in
1990 to approximately 1.2 million in 1995 ($93.4 million in revenues in
1995), or 33.2% of Red Lion's total room nights and 19.0% of total revenues
during 1995. In addition, catering sales personnel assisted in generating
$95.6 million in banquet-related revenues in 1995 (19.4% of total Red Lion
revenues for that period).
In addition to its own frequent guest program described below, Red
Lion is allied with other companies servicing business and leisure
travelers, including American Airlines and Alaska Airlines. Red Lion
believes these alliances provide the Company with opportunities to increase
name recognition throughout the United States and to target business
travelers with attractive national promotional programs. Members of these
programs receive miles for each qualifying stay at a Red Lion hotel. In
addition, the Company has cooperative marketing agreements with American
Express, Hertz and Southwest Airlines which allow the Company to reach a
broad cross-section of business travelers.
Red Lion's advertisements primarily target the business traveler and
are designed to enhance the consumer's awareness of the Red Lion system as
a full service, upscale hotel chain. Red Lion advertises in the regions
where its hotels are located and in certain other major metropolitan areas
where the Company believes its business customers travel frequently. Its
advertisements can be found in USA Today, US News & World Report and
industry journals.
The Company's Frequent Guest Dividends program, implemented in 1989,
distributes to participating guests upon check-out certificates redeemable
for discounts on future stays. Participation in this program has grown from
62,000 members in 1992 to 120,000 members in 1995, a 93.5% increase. In
1993, this program was supplemented with a new Frequent Guest Dividends
Gold level, which rewards the most frequent guests (limited to 5 percent of
members) with an increased level of membership benefits, including room
upgrades, conversion of awards to Alaska Airlines miles, discounts on food
purchases and rapid awards of free rooms. The improvements in this program
were recognized by InsideFlyer Magazine, a respected hospitality industry
publication, which gave the Frequent Guest Dividends program its "Rising
Star Award" in 1994.
CENTRAL RESERVATIONS SYSTEM
In 1995, Red Lion's central reservations system accounted for
approximately 32% of the Company's total business and leisure traveler room
nights. The toll-free reservation system is available to customers
throughout the United States and Canada. The reservation system provides
Red Lion's reservation agents with information about hotel locations,
available rooms and prices in order to assist customers in booking rooms.
In 1995, the Company's reservation center processed over 990,000 calls,
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contributing 722,000 reservations to the Red Lion system with a 65%
conversion ratio of calls to reservations.
In 1993, Red Lion commenced development of a new central reservations
system that will include, among other enhanced features, a direct interface
with airlines, increases in marketing database capabilities and improved
revenue management tools, including real time room inventory. Red Lion
anticipates completion and implementation of this new reservations system
in 1996 at a total cost of approximately $11 million, approximately $7.8
million of which had been spent as of December 31, 1995. Red Lion believes
that the enhancements to its central reservations system will allow the
Company to manage its room inventory more efficiently and to provide
enhanced customer service. The new system will be expandable in order to
meet the Company's increased reservations needs as it grows.
In addition, Red Lion participates in four major airline reservation
systems, American Airlines' "SABRE," United Airlines' "APOLLO," Trans World
Airlines/Delta's "WORLDSPAN" and Continental's "AMADEUS/SYSTEM ONE." These
airline reservation systems have an aggregate of approximately 385,000
computer terminals on line at approximately 111,000 locations, allowing
travel agents to book Red Lion hotel reservations when guests are making
other travel arrangements. Red Lion's system includes a direct
communications interface with major airline systems that allows immediate
confirmation numbers for reservations.
HOTEL MANAGEMENT AND CENTRALIZED SUPPORT SERVICES
Red Lion's corporate management structure and centralized support
services are designed to allow the Company to control costs and allocate
resources efficiently.
HOTEL MANAGEMENT
Each Red Lion hotel is managed by a general manager and supported by a
regional and corporate management organization. The size of each management
team and its hourly staff varies by hotel, based on the size and business
volume of a particular hotel. Management carefully monitors staffing levels
to ensure labor productivity.
Red Lion's hotel general managers have an average of over 16 years of
experience in the lodging industry, and over 90% of the managers have been
promoted from an existing position with Red Lion. Red Lion's general
managers report directly to one of four regional vice presidents. The four
regional vice presidents have an average of 19 years experience in the
lodging industry and an average of eight years of experience in their
current positions with the Company. A regional sales director and a
regional controller complete the regional support team. The regional
management teams provide management support and direction to the general
managers and their staff, coordinate communications between the properties
and the centralized support organization and assist in establishing and
administering corporate policies, procedures and standards. The Company
believes its regional management structure is a key component in Red Lion's
ability to deliver uniform product quality and service at each of its
hotels.
CORPORATE AND CENTRALIZED SUPPORT SERVICES
The Company provides each Red Lion hotel with the benefits of its
management services which are delivered by a network of experienced
executives, corporate personnel and regional managers. The Company also
provides technical assistance and training to each hotel's employees for
administrative
5
operations, room and guest services, reservations, maintenance and
engineering, retail services, and human resources and benefits. Other
services provided by the Company include treasury, internal audit, credit
services, accounting, payroll, tax, legal and risk management. The Company
has several auxiliary divisions including: (i) a centralized procurement
division that allows the Company to maintain uniform quality and control
costs; (ii) a centralized systems department that supports all property and
corporate computer systems and applications, including a standardized
proprietary property management system and the Company's central
reservations system; and (iii) a construction and design department that
administers the Company's capital expenditure programs, provides design and
product expertise in selecting materials and equipment, and provides
project administration on major renovation and new construction projects.
MANAGEMENT CONTRACTS
Red Lion operates 16 hotels pursuant to management agreements under
which it is responsible for the day-to-day operations of the hotels. Ten of
the hotels are owned by the MLP and operated by the Company pursuant to a
management agreement, 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. Red Lion has
received incentive management fees in each year since 1989. Those fees
totaled $4.4 million and $5.4 million in 1994 and 1995, respectively.
The other six management contracts have remaining terms ranging from
two to 40 years, and an average remaining term of 16 years, including
renewal options, as of December 31, 1995. The Company's compensation under
these agreements is comprised of a base management fee (ranging from 3-4%
of gross revenues) and an incentive management fee (based on a percentage
of cash flow or operating profit). The incentive fees under these
management contracts totaled $317,000 and $309,000 in 1994 and 1995,
respectively.
JOINT VENTURES
Red Lion owns a 49.9% percentage interest in seven joint ventures,
each of which owns a Red Lion hotel. When combined with the joint venture
interests retained by the Partnership, the Company and the Partnership own
at least 50% of each of these joint ventures. Pursuant to an agreement
between the Partnership and the Company, the Company generally has the
power, in its sole discretion, to determine and prescribe the Partnership's
conduct with respect to any joint venture interests held by the
Partnership. The Company has agreed to advance the Partnership any funds
required to pay its obligations arising from the joint venture interests
held by the Partnership, which shall be repaid out of the first funds
distributed by the respective joint venture to the Partnership. The Company
and the Partnership have agreed that for a period of 60 days commencing
August 2, 1996, the Partnership will have the right to sell to the Company
those interests, excluding a 0.1% interest in one of the joint ventures,
for an aggregate of $1.3 million and cancellation of any advances made by
the Company to the Partnership with respect to such interests. If the
Partnership's joint venture interests are not sold pursuant to such right,
commencing October 10, 1996, the Company shall have the right for 60 days
to purchase such joint venture interests for the same consideration. The
Partnership has agreed not to sell or otherwise transfer such joint venture
interests, other than pursuant to the rights described above, until after
the expiration of the Company's right to purchase such interests. In
addition to the above, in December 1995 Red Lion acquired a 10% interest in
the joint venture which owns the Red Lion Hotel, Spokane City Center.
6
In addition to its ownership interest in the joint ventures, Red Lion
is responsible for the day-to-day operations of the hotels owned by the
joint ventures and receives management fees for operating the hotels. Under
each joint venture agreement or separate management agreement with respect
to the joint venture, the Company's compensation is comprised of either an
annual base management fee (ranging from 3-4% of gross revenues), 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 of those joint ventures.
COMPETITION
Red Lion competes in the upscale and mid-priced sectors of the
hospitality market, depending on the communities in which its hotels are
located. In each locality there are other limited and full service
establishments that compete with the Company's hotels. Red Lion's food and
beverage operations also compete with local free standing restaurants and
lounges. There is no single competitor or small number of competitors of
Red Lion that is or are dominant in the Company's markets. However, some of
the Company's competitors have a larger network of locations and greater
financial resources than the Company. Competition in the United States
lodging industry is based generally on convenience of location, price,
range of services and guest amenities offered and quality of customer
service and overall product. Red Lion considers the location of its hotels
and the services and guest amenities provided by it to be among the most
important factors in its business. The present sites of the Company's
hotels were chosen for their convenient access to airports, major traffic
arteries, commercial centers and tourist destinations.
As part of its external growth strategy, the Company intends to pursue
a full range of expansion options, including acquisitions, joint venture
investments, leases, management contracts and new construction. The
Company's ability to make joint venture investments and acquisitions and
enter into leases is dependent upon the Company's ability to compete
successfully with other hotel operating companies and investors for
available opportunities. The Company competes for management contracts,
acquisitions and other expansion opportunities with national and regional
hospitality companies, some of which have greater name recognition,
marketing support, reservation system capacity and financial resources than
the Company, and with a variety of hotel investors, some of which have
greater resources and flexibility than the Company. The Company's failure
to compete successfully for investment opportunities or management
contracts or to attract or maintain relationships with hotel owners and
major hotel investors could adversely affect the Company's ability to
expand its portfolio of hotels. The Company's inability to implement its
external growth strategy would limit the Company's ability to grow its
revenue base.
ENVIRONMENTAL MATTERS
While many of the Company's properties have been subject to Phase I
environmental assessments (which generally provide a physical inspection
and database search but not soil or groundwater analyses), most of the
managed properties and the joint venture properties have not. Historically,
the Company has engaged consulting firms to perform Phase I environmental
assessments in connection with acquisitions or secured financings or
refinancings of properties. The Company intends to continue this practice
in the future.
Most of the Company's properties have been inspected to determine the
presence of asbestos. While asbestos-containing materials are present in
certain of the Company's properties, Red Lion believes
7
that these materials have been adequately contained. The Company has
developed and implemented an operations and maintenance program that
establishes operating procedures with respect to asbestos-containing
materials at such properties.
The Company operates a service station located in Vancouver,
Washington. In addition, some of the Red Lion properties 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. Several of the
Red Lion properties have been contaminated with petroleum products from
former on-site or nearby service stations. Monitoring wells have been
installed at some of these sites. In addition, certain of the Red Lion
properties 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 Company's hotels is located on property that was
used as a landfill. The Company is aware of some contamination in the
groundwater underlying some adjacent properties which may have resulted
from the landfill. 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. In addition, 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 Red Lion properties, including
the service station, has not been or will not be affected by the historical
or current uses of such properties or the activities in the vicinity of the
Red Lion properties. Management does not believe any liability resulting
from non-compliance or other claims relating to environmental matters will
have a material adverse effect on the Company.
Pursuant to the Lease, the Company will be required to indemnify the
Partnership and its affiliates for any matter arising by reason of or in
connection with the leasing, use, non-use, occupancy, management or
operation of each of the Leased Hotels prior to or during the term of the
Lease, including violations of Environmental Laws, discharges, disposals or
releases of Hazardous Materials, presence of Hazardous Materials, including
any which are the result of off-site migration onto the Leased Hotels, and
certain exposures to Hazardous Materials (as such terms are defined in the
Lease) which exist at or are released from any of the Leased Hotels prior
to or during the term of the Lease. Such indemnities will survive the
termination of the Lease. See "Item 2. Properties--The Lease." In addition,
the Company has agreed to indemnify the Partnership and its affiliates 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 to
the Company.
EMPLOYEES
As of December 31, 1995, Red Lion employed 11,171 persons, of whom
approximately 90% were nonmanagement employees. Approximately 380 of these
employees work at the corporate headquarters. Red Lion has a career
development program managed by its Human Resources division through which
Red Lion's approximately 1,200 property level management staff receive
training to enhance opportunities for promotion within the Red Lion
organization.
Employees at two of the Company's hotels currently are represented by
a labor union. Management believes its ongoing labor relations are good.
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TRADEMARKS AND SERVICE MARKS
Red Lion, Red Lion Inn and Red Lion Hotel are each registered
trademarks of the Company, which the Company considers important to its
business. Red Lion monitors use of similar names and takes appropriate
action when possible infringements occur.
In connection with the sale of Red Lion in 1985, Red Lion licensed the
use of the Red Lion trademark and central reservations system to one of the
founders of the Company for the operation of certain Red Lion hotels in
Nevada. Under the terms of the current license agreement, Red Lion licenses
its name and central reservation system for two hotels in Nevada and a
hotel in Wyoming (which are not included in the 54 hotels Red Lion
operates) for which Red Lion 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 the Company opens a hotel 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
the Company.
GOVERNMENT REGULATION
General. A number of states regulate the licensing of hotels and
restaurants, including liquor license grants, by requiring registration,
disclosure statements and compliance with specific standards of conduct.
The Company believes that each of its hotels has the necessary permits and
approvals to operate its respective business.
Americans With Disabilities Act. Under the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. These requirements became effective in
1992. Although Red Lion has invested significant amounts in ADA upgrades to
its properties and continues to dedicate substantial capital to these
projects, a determination that the Company is not in compliance with the
ADA could result in a judicial order requiring compliance, an imposition of
fines or an award of damages to private litigants. Red Lion is likely to
incur additional costs of complying with the ADA. The costs of compliance
are not expected to have a material effect on the Company.
ITEM 2. PROPERTIES
The following table sets forth, as of December 31, 1995, certain
information with respect to each of the hotels operated by Red Lion.
NUMBER OF
OWNERSHIP(1) GUEST MEETING SPACE
LOCATION INTEREST ROOMS (SQ. FT.) AMENITIES(2)
-------- -------- ----- --------- ------------
ARIZONA
Scottsdale, La Posada Resort................... JV 262 16,700 a, b, c, d, e, f, g
CALIFORNIA
Bakersfield.................................... JV 262 10,820 b, c, d, e, f, g
Costa Mesa, Orange County Airport.............. JV 484 21,448 a, b, c, d, e, f, g
9
NUMBER OF
OWNERSHIP(1) GUEST MEETING SPACE
LOCATION INTEREST ROOMS (SQ. FT.) AMENITIES(2)
-------- -------- ----- --------- ------------
Eureka......................................... Owned 178 4,890 b, c, e, f, g
Glendale....................................... JV 348 13,000 a, b, c, d, f
Los Angeles, Los Angeles Airport............. Managed 371 20,050 b, c, d, e, f, g
Modesto........................................ Managed 258 7,000 b, c, d, e, f, g
Ontario........................................ JV 339 22,938 b, c, d, e, f, g
Redding........................................ Owned 194 7,433 b, c, e, f, g
Rohnert Park, Sonoma County.................... Leased 245 11,115 b, c, d, e, f, g
Sacramento..................................... Managed/MLP 448 31,844 b, c, d, e, f, g
Sacramento, Sacramento Inn.................... Leased 376 19,644 b, c, d, e, f, g
San Diego...................................... Leased 300 13,048 a, b, c, d, e, f, g
San Jose....................................... Owned 505 29,575 a, b, c, d, e, f, g
Santa Barbara, Fess Parker's Red
Lion Resort.................................. JV 360 18,000 a, b, d, e, f, g
COLORADO
Colorado Springs............................... Managed/MLP 299 16,838 b, c, d, e, f, g
Denver......................................... Managed 573 26,000 b, c, d, e, f, g
Durango........................................ Leased 159 5,047 b, c, d, e, f, g
IDAHO
Boise, Boise Downtowner........................ Leased 182 8,607 b, c, d, e, f, g
Boise, Boise Riverside......................... Managed/MLP 304 19,627 b, c, d, e, f, g
MONTANA
Kalispell...................................... Owned 64 0 f, g
Missoula....................................... Leased 76 0 b, c, e, f, g
Missoula Village............................... JV 172 8,152 b, c, e, f, g
NEBRASKA
Omaha.......................................... Managed/MLP 413 21,160 b, c, d, e, g
OREGON
Astoria........................................ Leased 124 8,480 b, c, e, g
Bend, Bend North............................... Leased 75 0 b, c, f, g
Bend, Bend South............................... Owned 75 0 c, f, g
Coos Bay....................................... Leased 143 5,272 b, c, e, f, g
Eugene......................................... Leased 138 4,566 b, c, e, f, g
Eugene/Springfield............................. Managed/MLP 234 10,000 b, c, d, e, f, g
Klamath Falls.................................. Owned 108 0 b, e, f, g
Medford........................................ Leased 186 9,552 b, c, e, f, g
Pendleton...................................... Leased 168 9,769 b, c, e, f, g
Portland, Coliseum............................. Managed 212 3,876 b, c, e, f, g
Portland, Columbia River....................... Owned 351 21,428 b, c, e, f, g
Portland, Downtown............................. Managed/MLP 235 6,200 b, c, d, e, f, g
Portland, Jantzen Beach........................ Owned 320 34,113 b, c, d, e, f, g
Portland/Lloyd Center.......................... Managed/MLP 476 21,384 a, b, c, d, e, f
TEXAS
Austin, Austin Airport(3)...................... Managed 300 12,000 b, c, d, e, f, g
UTAH
Salt Lake City................................. Leased 495 22,000 a, b, c, d, e, f
WASHINGTON
Aberdeen....................................... Owned 67 0 g
Bellevue....................................... Owned 353 17,355 a, b, c, d, f, g
Bellevue, Bellevue Center...................... Managed/MLP 208 3,179 b, c, d, e, f, g
Kelso.......................................... Leased 163 8,670 b, c, f, g
10
NUMBER OF
OWNERSHIP(1) GUEST MEETING SPACE
LOCATION INTEREST ROOMS (SQ. FT.) AMENITIES(2)
-------- -------- ----- --------- ------------
Pasco.......................................... Owned 279 17,240 b, c, d, e, f, g
Port Angeles................................... Owned 187 0 b, f, g
Richland, Richland/Hanford House............... Owned 149 8,156 b, c, e, f, g
Seattle, Seattle Airport....................... Leased 850 34,000 a, b, c, d, e, f
Spokane Valley................................. Managed/MLP 237 12,629 b, c, d, e, f, g
Spokane City Center............................ JV 369 13,000 b, c, d, e, f, g
Vancouver...................................... Leased 160 16,700 b, c, e, f, g
Wenatchee...................................... Leased 149 7,678 b, c, e, f, g
Yakima......................................... Owned 58 0 f, g
Yakima, Yakima Valley.......................... Managed/MLP 209 7,148 b, c, e, f, g
------ -------
Total 14,250 667,331
====== =======
- - - ----------
<FN>
(1) Ownership Interest Key:
Owned = Wholly owned (100%)
Leased = Long-term lease (the term of the Lease is 15 years, subject to five five-year renewal options)
JV = Joint Ventures (Red Lion owns a 49.9 percent interest in each joint venture other than Spokane
City Center, in which it owns a 10 percent interest).
Managed = Operated under management contracts
MLP = Owned by Red Lion Inns Limited Partnership
(2) Amenities Key:
a = Concierge/executive level d = Exercise room g = Free parking
b = Dining e = Free airport courtesy car
c = Entertainment lounge f = Swimming pool
(3) Property owned subject to a non-recourse, cash flow mortgage.
</FN>
THE LEASE
On August 1, 1995, the Leased Hotels were leased by the Partnership to
the Company pursuant to the Lease. The initial term of the Lease is 15
years, subject to earlier termination by the Partnership upon the
occurrence of one or more Events of Default (as defined in the Lease). In
addition, the Company has the option to extend the Lease on a
hotel-by-hotel basis for five additional five year periods on the same
terms. The Partnership's ownership interest in the Leased Hotels is subject
to the Lease.
Rental payments under the Lease consist of base rent (the "Base
Rent"), payable quarterly, and additional rent (the "Additional Rent"),
payable annually, based on growth in revenues at the Leased Hotels. The
Base Rent for all of the Leased Hotels is $15 million per year. The
Additional Rent for the Leased Hotels will be equal to 7.5% of the amount,
if any, by which the aggregate Operating Revenues (as defined in the Lease)
for all of the Leased Hotels under the Lease for the given year exceeds the
aggregate Operating Revenues at all such Leased Hotels for the twelve month
period commencing October 1, 1995. 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 Lease, subject to the payment
of Additional Rent.
The Partnership has retained the right to sell one or more of the
Leased Hotels to third parties, subject to the terms of the Lease. Upon any
sale of a Leased Hotel by the Partnership, the Leased 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 of
that Leased Hotel alone.
11
The Lease is a triple net lease which requires the Company to maintain
the Leased Hotels in good condition and repair and in conformity with all
applicable legal requirements and to make or cause to be made all items of
maintenance, repair, replacement and alteration to the Leased Hotels as
necessary for such purposes. In addition, the Company is required to pay
substantially all expenses associated with the operation of the Leased
Hotels, including all ground lease expense, real estate taxes, insurance,
utilities and services. If in any year the Company fails to spend at least
3% of the aggregate annual Operating Revenues from all of the Leased Hotels
under the Lease on capital expenditures, including without limitation
renovations, at one or more of the Leased Hotels, it will be required to
deposit any shortfall into a reserve account. Any fixtures, furniture or
equipment installed and used in the Leased Hotels that are replaced during
the term of the Lease will become the property of the Company, subject to a
security interest therein granted to the Partnership. At the end of the
Lease, the Partnership will have the option to purchase any such fixtures,
furniture or equipment from the Company at their then fair market value.
The Lease provides that each of the following constitutes an Event of
Default: (i) failure to pay any monetary obligation, including Base Rent
and Additional Rent, subject to certain limited cure periods, (ii) failure
by the Company after notice to comply with any material term, covenant or
condition of the Lease, (iii) certain events of bankruptcy or insolvency
with respect to the Company, (iv) the liquidation or dissolution of the
Company or commencement of proceedings therefor, (v) failure by the
Company, after notice or passage of time, to vacate or discharge any levy
or attachment upon the estate or interest of the Company in any Leased
Hotel, (vi) voluntary cessation by the Company of operation of any Leased
Hotel for a certain period, except as a result of damage, destruction or a
partial or complete condemnation, (vii) default by the Company of its
obligations under the Credit Facilities and (viii) an assignment or
subletting by the Company without obtaining from the Partnership any
required consent. In addition, the Company's and the Partnership's lenders
will have, pursuant to the terms of their respective credit facilities,
certain rights to consent to any changes to the Lease, and the
Partnership's lenders will have certain rights to consent to assignments or
sublettings by the Company to third parties of hotels that are subject to
the Lease.
The Company will fully indemnify the Partnership and its affiliates
for any matter arising by reason of or in connection with the leasing, use,
non-use, occupancy, management or operation of each of the Leased Hotels
prior to or during the term of the Lease, including violations of
Environmental Laws, discharges, disposals or releases of Hazardous
Materials, presence of Hazardous Materials, including any which are the
result of off-site migration onto the Leased Hotels, and certain exposures
to Hazardous Materials (as such terms are defined in the Lease) which exist
at or are released from any of the Leased Hotels prior to or during the
term of the Lease. Such indemnities will survive the termination of the
Lease.
While Red Lion believes the terms of the Lease are fair to both
parties, those terms were not negotiated on an arms-length basis.
ITEM 3. LEGAL PROCEEDINGS
Red Lion is involved in various lawsuits arising in the normal course
of business. Red Lion believes that the ultimate outcome of these lawsuits
will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are appointed by and hold office
at the discretion of the directors. The following table sets forth as of
December 31, 1995 certain information regarding the Company's executive
officers.
Name Age Position
---- --- --------
David J. Johnson 49 President, Chief Executive Officer and Chairman of
the Board
C. Michael Vernon 48 Chief Financial Officer
Thomas W. Henry 48 Senior Vice President, Design and Construction
Steven L. Hubbard 51 Senior Vice President, Human Resources
Beth A. Ugoretz 40 Senior Vice President and General Counsel
Jeffrey G. Angus 39 Vice President, Sales and Marketing
Clifford D. Barry 40 Vice President, Systems
Michael J. Crowley 41 Regional Vice President (Oregon/Idaho)
Bruce T. Fery 35 Vice President, Rooms
Bradley E. Hutton 45 Regional Vice President (California)
Dan R. Jackson 42 Vice President, Controller
Anupam Narayan 42 Vice President, Treasurer
Jack G. Reiss 45 Regional Vice President (Frontier)
Paul R. Ryan 45 Vice President, Food & Beverage
George H. Schweitzer 40 Regional Vice President (Washington)
All of the executive officers have been employed by Red Lion in their
present positions for at least the last five years except as follows:
DAVID J. JOHNSON. Mr. Johnson has been President and Chief Executive
Officer of Red Lion since September 1991. From 1989 to September 1991, Mr.
Johnson was a general partner with Hellman & Friedman, a San
Francisco-based investment firm.
C. MICHAEL VERNON. Mr. Vernon has been Chief Financial Officer of the
Company since August 1995. From 1990 to 1995, Mr. Vernon was Chief
Executive Officer of the Port of Sacramento.
BETH A. UGORETZ. Ms. Ugoretz has been Senior Vice President and
General Counsel of Red Lion since June 1993. From 1983 to June 1993, Ms.
Ugoretz was an associate and then a partner at the law firm of Stoel Rives
Boley Jones & Grey.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's initial public offering of common stock (the "Offering")
commenced July 26, 1995 at a stock price of $19 per share. The common stock
is listed on the New York Stock Exchange under the symbol "RL". The
following table sets forth the high and low sales prices for the Company's
common stock as reported by the New York Stock Exchange for the periods
indicated.
1995
---------------------------
High Low
---- ---
3rd Quarter $24.375 $19.00
4th Quarter 21.125 15.75
At March 1, 1996, there were 31,312,500 shares of common stock
outstanding held by approximately 95 shareholders of record.
The Company intends to retain future earnings for use in its
operations and the expansion of its business and does not currently
anticipate paying any dividends on common stock. The Company's bank credit
agreement, providing for borrowings of up to $265,000,000 and expiring in
August 2002 prohibits the payment of dividends on common stock.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED PRO FORMA FINANCIAL, HISTORICAL FINANCIAL AND OTHER DATA
(in thousands, except share and statistical data)
On August 1, 1995, immediately prior to the closing of its initial
public offering (the "Offering"), the Company succeeded to the business of
Historical Red Lion through the transfer by Historical Red Lion of
substantially all of its assets (other than 17 hotels (the "Leased Hotels"),
certain minority joint venture interests and certain current assets) and
certain liabilities to the Company (the "Formation"). Immediately
thereafter, the Company repaid or refinanced substantially all of its
indebtedness with proceeds of the Offering and new borrowings (the
"Refinancing"). The pro forma financial information provided below
generally gives effect to the Formation and the Refinancing as if they had
occurred on January 1, 1994 (see Note a below) and, in particular, combines
the results of operations of Historical Red Lion for the portion of 1995
prior to the Formation with the Company's results of operations for the
portion of 1995 after the Formation to show the results of the business for
the entire year. The information set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes of the
Company and of Historical Red Lion, and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Company
and Historical Red Lion, as well as the Pro Forma Consolidated Statements
of Income included elsewhere in this report.
The Company Historical Red Lion
-------------------------------- -------------------------------------------------------
Ten Seven
Years Ended December 31, Months Months
--------------------- Ended Ended Years Ended December 31,
Pro Forma Pro Forma Dec. 31, July 31, -----------------------------------------
1995(a) 1994(a) 1995(b) 1995 1994 1993 1992 1991
--------- --------- ------- ---------- -------- -------- -------- --------
OPERATING STATEMENT DATA:
Revenues........................... $492,369 $462,888 $214,769 $282,206 $462,888 $440,017 $413,489 $412,574
Gross operating profit(c).......... 173,928 157,438 80,201 98,333 157,438 143,661 135,373 128,309
Depreciation and amortization (d).. 19,327 19,813 8,715 17,054 31,313 31,144 34,630 36,612
Operating income (a)............... 56,599 60,564 20,285 38,420 63,714 52,449 42,307 35,009
Interest expense, net.............. 18,062 19,363 8,107 20,316 32,737 30,065 32,055 45,418
Income (loss) before income
taxes and cumulative effect
of accounting change............. 40,078 41,536 11,498 20,129 30,983 21,573 12,793 (9,827)
Cumulative effect of
accounting change (e)............ -- -- -- -- -- (29,878) -- --
Income tax (benefit) expense (f)... 7,327 16,614 (4,107) -- -- -- -- --
Net income (loss).................. 32,751 24,922 15,605 20,129 30,983 (8,305) 12,793 (9,827)
Earnings per common share.......... $ 1.05 $ 0.80 $ 1.00 -- -- -- -- --
BALANCE SHEET DATA:
Cash and cash equivalents and
short term debt securities....... $ -- $ -- $ 68,355 $ -- $ 68,695 $ 1,278 $ 1,404 $ 2,500
Property and equipment, net........ -- -- 336,269 -- 514,807 519,632 563,385 569,900
Total assets....................... -- -- 526,920 -- 693,344 626,961 667,181 674,231
Long-term debt, including
current portion.................. -- -- 223,367 -- 497,302 468,843 504,753 529,803
Partners'/Stockholders' equity..... -- -- 230,279 -- 135,158 104,175 112,480 99,687
OTHER DATA:
Gross operating margin (c)......... 35.3% 34.0% 37.3% 34.8% 34.0% 32.6% 32.7% 31.1%
Occupancy percentage (g)........... 72.7% 72.1% 71.9% 73.2% 72.1% 70.9% 70.7% 70.4%
Average daily room rate (h)........ $ 75.14 $ 70.52 $ 75.13 $ 75.14 $ 70.52 $ 67.88 $ 66.11 $ 66.39
- - - ---------------
<FN>
(a) The pro forma financial information gives effect to the Formation and
the Refinancing as if they had occurred on January 1, 1994, except
that certain expenses resulting from the Formation and Offering
totaling $14,662 and the initial recording of estimated deferred
income tax benefits of $9,736 resulting from the Formation, all of
which were included in the Company's actual financial results for the
10 months ended December 31, 1995, are included in the 1995 pro forma
presentation. The expenses resulting from the Formation and Offering
include $13,348 for obligations under an incentive unit plan and a
supplemental income retirement agreement which were contingent upon
the completion of the Offering. The expenses resulting from the
Formation and Offering
15
also include the write-off of previously recorded financing costs,
debt discount and prepayment penalties and expenses of $1,314
associated with the transfer of assets to the Company. Excluding the
nonrecurring expenses resulting from the Formation and Offering,
pro forma 1995 operating income would have been $71,261.
Excluding the impact of the nonrecurring Formation costs of $1,314,
obligations under an incentive unit plan and a supplemental
retirement agreement aggregating $13,348, and deferred income tax
benefits of $9,736, pro forma net income would have been $32,847 or
$1.05 per common share for 1995.
(b) Results of operations include five months of actual operations
subsequent to the August 1, 1995 Formation date as well as operations
of one joint venture for the period from March 1, 1995 through July
31, 1995.
(c) "Gross operating profit" represents revenues less departmental direct
and property indirect expenses. "Gross operating margin" represents
gross operating profit as a percentage of revenues. Gross operating
profit and gross operating margin are included herein because
management uses them as a measure of hotel operating performance and
because management believes these items are useful in making industry
comparisons.
(d) Effective January 1, 1993, Historical Red Lion prospectively changed
the estimated useful lives of its hotels to 40 years from lives
averaging 32 years. The effect of this change decreased depreciation
expense in 1993 by approximately $2,600. In addition, the 17 Leased
Hotels were retained by the Partnership in the Formation.
Accordingly, the pro forma data and the Company's results of
operations for the ten months ended December 31, 1995 do not include
depreciation on the Leased Hotels.
(e) Effective January 1, 1993, Historical Red Lion changed its accounting
method for measuring impairment of individual hotel properties from
using undiscounted future cash flows to discounted future cash flows.
As a result of this change, 1993 net income includes a reduction in
the carrying value of one hotel of $29,878, which is reflected in the
1993 financial statements as the cumulative effect of an accounting
change.
(f) Historical Red Lion made no provision for income taxes since taxes on
income were the responsibility of the individual partners. Pro forma
and Company income taxes are calculated at an estimated tax rate of
40%. Income taxes for 1995 pro forma and the Company's ten-month
period ended December 31, 1995 include a deferred income tax benefit
of $9,736 resulting from the tax effect of the differences between
the book and tax bases of the assets and liabilities transferred to
the Company by Historical Red Lion.
(g) Calculated on a per available room per year basis.
(h) Based on rooms occupied.
</FN>
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this document. The
Company believes the comparison of pro forma results below provides a more
meaningful presentation than historical operations given the relatively
short period of time since the Company's operations commenced.
UNAUDITED
PRO FORMA(A)
YEAR ENDED DEC. 31,
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
REVENUES:
Rooms $ 277,204 $ 257,699
Food and beverage 165,281 159,154
Other 49,884 46,035
---------- ----------
Total revenues 492,369 462,888
---------- ----------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 68,393 64,121
Food and beverage 127,450 124,070
Other 18,588 17,586
Property indirect expenses 104,010 99,673
Other costs(b) 36,445 34,220
Depreciation and amortization(c) 19,327 19,813
Payments due to owners of managed hotels 46,895 42,841
Expenses resulting from Formation and Offering(d)(g) 14,662 --
---------- ----------
OPERATING INCOME 56,599 60,564
EQUITY IN EARNINGS OF
UNCONSOLIDATED JOINT VENTURES 2,299 1,327
OTHER INCOME (EXPENSE):
Interest income 3,697 1,405
Interest expense(e) (21,759) (20,768)
---------- ----------
Total other expense (18,062) (19,363)
---------- ----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS 40,836 42,528
JOINT VENTURERS' INTERESTS (758) (992)
---------- ----------
INCOME BEFORE INCOME TAXES 40,078 41,536
INCOME TAX EXPENSE (f) (g) (7,327) (16,614)
---------- ----------
NET INCOME $ 32,751 $ 24,922
========== ==========
PRO FORMA EARNINGS PER COMMON SHARE $ 1.05 $ 0.80
COMMON SHARES (h) 31,312,500 31,312,500
OTHER STATISTICS:
Gross Operating Profit $ 173,928 $ 157,438
Gross Operating Margin 35.3% 34.0%
17
<FN>
(a) On August 1, 1995, Historical Red Lion contributed substantially all
of its assets (excluding the Leased Hotels, certain minority joint
venture interests and certain current assets) and certain liabilities
to the Company in the Formation. Also effective August 1, 1995, the
Company entered into a long-term master lease with the Partnership for
the Leased Hotels. Pro forma results in the accompanying pro forma
information include the actual results of the Company and the results
of Historical Red Lion adjusted to give effect to the Formation, the
leasing of the Leased Hotels, and the repayment and refinancing of
substantially all debt with borrowings under a new credit facility and
the net proceeds of the public offering, assuming that such events
were completed on January 1, 1994, except that certain nonrecurring
expenses and tax benefits recorded in connection with the Formation
are included in the 1995 pro forma presentation.
(b) Pro forma other costs include annual lease expense of $15,000,000
associated with the Leased Hotels, offset by annual administrative
costs of $350,000 for which the Company is reimbursed by the
Partnership.
(c) Pro forma depreciation and amortization is $6.4 million and $11.5
million lower than that recorded by Historical Red Lion for the seven
months ended July 31, 1995 and the year ended December 31, 1994,
respectively, due primarily to the depreciation and amortization
associated with the Leased Hotels.
(d) The 1995 pro forma results include nonrecurring Formation costs of
$1,314,000 as well as obligations under an incentive unit plan and a
supplemental income retirement agreement aggregating $13,348,000.
These amounts were recorded by the Company subsequent to completion of
the Offering.
(e) Pro forma interest expense for the years ended December 31, 1995 and
1994 reflects the effects of the Formation and Refinancing as if those
events had occurred on January 1, 1994. Accordingly, pro forma
interest expense does not include interest on debt associated with the
Leased Hotels or repaid with the proceeds of the Offering.
(f) Pro forma income tax expense for the year ended December 31, 1995,
includes tax benefits of $9,736,000 associated with the net assets
contributed to the Company by Historical Red Lion. No such benefits
were recognized for the year ended December 31, 1994.
(g) Excluding the impact of the expenses resulting from the Formation and
Offering aggregating $14,662,000 and the tax benefits recorded in
connection with the net assets contributed to the Company by
Historical Red Lion, pro forma net income for the year ended December
31, 1995 would be $32,847,000 or $1.05 per share.
(h) Based on the number of common shares issued in the Offering, as if the
Offering occurred on January 1, 1994.
</FN>
Pro Forma 1995 Compared to Pro Forma 1994
Pro forma net income increased from $24.9 million, or $.80 per share,
in 1994, to $32.8 million, or $1.05 per share in 1995, an increase of
31.4%. Net income for 1995 reflected pre-tax expenses resulting from the
Formation and Offering totaling $14,662,000, the effects of which were
substantially offset by a deferred income tax benefit of $9,736,000. The
net negative effect of these factors on pro forma income for 1995 was
$96,000, or less than $.01 per share.
REVENUES. Pro forma revenues rose from $462.9 million in 1994 to
$492.4 million in 1995, an increase of $29.5 million, or 6.4%. The changes
in specific revenue categories are discussed below.
18
Pro forma room revenues increased 7.6% to $277.2 million in 1995,
compared to $257.7 million in 1994. The increase in pro forma room revenues
was due primarily to a 6.6% increase in average daily room rate, which rose
to $75.14. Occupancy for 1995 increased from 72.1% to 72.7%.
Pro forma food and beverage revenues for 1995 increased 3.8% from
1994. The increase in pro forma food and beverage revenues was primarily
due to an increase in banquet revenues and the addition of an airport
restaurant facility which opened in late 1994.
Other pro forma revenues for 1995 rose 8.4% over 1994 due mainly to an
increase in meeting room rentals and telephone sales.
EXPENSES. Pro forma departmental direct expenses (expenses related to
a specific function such as rooms or food and beverage) increased 4.2% in
1995. However, as a percentage of revenues, pro forma departmental direct
expenses decreased from 44.5% to 43.6% primarily due to effective control
of food costs.
Pro forma property indirect expenses increased 4.4% in 1995 but
decreased modestly as a percentage of revenues. Indirect costs include
expenses related to a hotel's general operation, such as utilities, repairs
and maintenance, promotional expenses and administrative costs.
Pro forma gross operating profit (revenues less departmental direct
and property indirect expenses) rose from $157.4 million in 1994 to $173.9
million in 1995, a 10.5% increase. Pro forma gross operating profit margins
improved from 34.0% in 1994 to 35.3% in 1995, primarily due to the decrease
in departmental direct expenses as a percentage of revenues.
Pro forma other costs, which include corporate administrative and
general expenses, property taxes, insurance, leases and other miscellaneous
costs, increased 6.5% due primarily to increases in corporate
administrative and general expenses and insurance, while depreciation and
amortization fell 2.5% from 1994 to 1995.
The Company's revenues and expenses include operating revenues and
expenses of unconsolidated managed properties since the operating
responsibilities associated with those hotels are substantially the same as
those for owned hotels. Payments to owners of those hotels, net of the
Company's management fees, increased 9.5% from 1994 to 1995, primarily due
to improved operating performance of the managed properties.
Management fees in connection with the managed hotels for 1995
increased 6.7% from $10.3 million to $10.9 million. The majority of the
management fees are incentive fees related mainly to Red Lion Inns Limited
Partnership (the "MLP") (see Note 6 to the Company's financial statements),
which are determined, in part, on the basis of available cash flows. For
1995, incentive management fees increased $1.0 million.
The pro forma results for 1995 include $14.7 million of nonrecurring
costs associated with the Formation and Offering (see Note 8 to the
Company's financial statements). Such costs include approximately $13.4
million expensed in conjunction with an incentive unit plan and a
supplemental income retirement agreement. As the obligations under the plan
and the agreement were contingent upon completion of the Company's initial
public offering, no liability or related expense had been recorded by
19
Historical Red Lion. In addition, the Company recognized $1.3 million of
expense in connection with refinancing the assumed debt and transferring
Historical Red Lion's assets to the Company.
Pro forma operating income decreased from $60.6 million in 1994 to
$56.6 million in 1995 due primarily to the expenses resulting from the
Formation and Offering. Excluding those expenses, pro forma operating
income would have increased $10.7 million, or 17.7%, in 1995.
Pro forma interest expense increased from $20.8 million in 1994 to
$21.8 million in 1995, an increase of 4.8%, due primarily to interest rate
increases on debt not refinanced. Interest income increased $2.3 million as
a result of interest earned on short-term investments acquired with
proceeds from the initial public offering.
Pro forma income tax expense decreased from $16.6 million in 1994 to
$7.3 million in 1995, a decrease of $9.3 million. The decrease resulted
largely from $9.7 million of deferred tax benefits recognized as a result
of a change in tax status at the Formation date as Historical Red Lion was
a partnership whose partners were responsible for its taxes. The decrease
also reflects $4.9 million of tax benefits associated with the $14.7
million in expenses resulting from the Formation and Offering. Excluding
the tax benefits resulting from the Formation and Offering and the
resultant change in tax status, the effective tax rate for 1995 would have
been 40.0%, the same effective rate as 1994.
Company for the Ten Months Ended December 31, 1995
The only operations of the Company prior to the Formation related to a
joint venture interest in one Red Lion hotel that was contributed to the
Company by Historical Red Lion in March 1995. On a historical basis, which
includes the actual operations of the Company following the August 1, 1995
Formation, the Company had net income of $15.6 million for the ten months
ended December 31, 1995. The period's net income included an income tax
benefit of approximately $9.7 million, recorded in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," and expenses, net of income tax benefits, of approximately $9.8
million resulting from the Formation and Offering.
Historical Red Lion 1994 Compared to Historical Red Lion 1993
The comparison of operating results of Historical Red Lion for the
years ended December 31, 1994 and 1993 is based on the actual results of
operations of Historical Red Lion as reflected in its statements of income.
Such results do not include the effects of the Formation and Refinancing.
Income before cumulative effect of accounting change increased from
$21.6 million in 1993 to $31.0 million in 1994, an increase of $9.4
million, or 43.6%.
In 1993, Historical Red Lion changed its method of measuring
impairment of individual hotel properties from using undiscounted future
cash flows to discounted cash flows, resulting in a reduction of net income
of $29.9 million, which is reflected as a cumulative effect of an
accounting change.
REVENUES. Revenues increased 5.2% from $440.0 million in 1993 to
$462.9 million in 1994. Room revenues rose $15.5 million in 1994, an
increase of 6.4%. The increase in room revenues was due to improvements in
occupancy and average daily room rate at existing hotels and an increase in
the number of available room nights. Average daily room rates rose from $67.94
in 1993 to $70.52 in 1994,
20
a 3.8% increase. Occupancy improved from 70.9% in 1993 to 72.1% in 1994,
while available room nights increased 0.8% from 5,027,000 to 5,068,000.
Revenues from group business increased $5.4 million, or 6.8%, primarily due
to a 4.9% increase in group room nights. Food and beverage revenues
increased 1.9% from $156.2 million in 1993 to $159.2 million in 1994, a
year in which Historical Red Lion completed a program to reformat its
restaurants to respond to customer preferences for more casual dining and
lighter fare. Other revenues grew from $41.6 million in 1993 to $46.0
million in 1994, an increase of 10.6%. This increase was due primarily to
higher banquet-related revenues. The results for 1994 include the first
full year of operations of a managed hotel that was added to the Red Lion
system in May of 1993.
EXPENSES. Departmental direct expenses increased from $201.2 million
in 1993 to $205.8 million in 1994, an increase of 2.3%, but decreased as a
percentage of revenues from 45.7% to 44.5%. This decrease as a percentage
of revenues was due primarily to reduced labor costs resulting from higher
labor productivity and to lower food costs resulting from more centralized
purchasing.
Property indirect expenses increased 4.8% from $95.1 million in 1993
to $99.7 million in 1994. As a percentage of revenues, property indirect
expenses remained relatively constant.
Gross operating profit rose from $143.7 million in 1993 to $157.4
million in 1994, an increase of 9.6%. Gross operating margins improved from
32.6% in 1993 to 34.0% in 1994.
Other costs increased from $18.3 million in 1993 to $19.6 million in
1994, but remained relatively constant as a percentage of revenues. The
increase in other costs was attributable largely to increases in property
taxes, insurance costs and administrative expenses.
Payments due to owners of managed hotels increased $1.1 million, or
2.7% to $42.8 million in 1994. Management fees received in connection with
the managed hotels increased from $6.1 million in 1993 to $10.3 million in
1994, an increase of 67.8%. These increases were primarily due to an
increase of $3.3 million in incentive management fees due to improved
operating performance of the managed hotels.
Operating income climbed from $52.4 million in 1993 to $63.7 million
in 1994, an improvement of 21.5%, and increased as a percentage of revenues
from 11.9% to 13.8%. The increase in operating income resulted primarily
from the improvement in gross operating profit, offset by increases in
other costs, depreciation and amortization, and payments due to owners of
managed hotels.
Equity in earnings of unconsolidated joint ventures increased from
$1.2 million in 1993 to $1.3 million in 1994.
Interest expense, net, increased 8.9% from $30.1 million in 1993 to
$32.7 million in 1994. This increase reflects higher interest rates in
1994, partially offset by a reduction of $4.4 million in average
outstanding debt balances, an increase in average combined cash and cash
equivalents balances of $22.6 million and an increase of $9.3 million in
average short-term debt securities balances. Average combined cash and cash
equivalents balances and short-term average debt securities balances
increased as a result of borrowings under Historical Red Lion's revolving
credit line.
Losses on sale of property reflects a sale of excess land in 1993,
resulting in a $1.7 million loss.
21
Income attributable to joint venturers' interests increased from $.3
million in 1993 to $1.3 million in 1994. This item reflects earnings
attributable to the interests of the joint venture partners in the five
consolidated joint venture hotels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash is hotel operations. The
Company and Historical Red Lion historically have generated internal cash
flow to meet operating needs, make capital expenditures and reduce
outstanding debt. The Company's future debt levels may vary depending on,
among other factors, financing required to fund external growth
opportunities, the amount of cash provided by operations and debt
maturities.
The Company and Historical Red Lion have made extensive capital
expenditures over the last three years, investing $17.4 million, $22.3
million and $31.3 million in owned and joint venture properties in 1993,
1994 and 1995, respectively, excluding amounts for acquisitions and new
construction. These expenditures included guest room, lounge and restaurant
renovations, public area refurbishments, telephone and computer system
upgrades, and corporate expenditures and were funded from operating cash
flows. The Company expects 1996 capital expenditures to remain relatively
constant as a percentage of net revenues with 1995. At December 31, 1995,
commitments relating to capital improvement projects were approximately
$8.6 million. Management believes this level of capital investment will
give the company a significant competitive advantage and position it to
take advantage of the lodging industry's improving performance. As part of
its capital expenditure program, the Company budgets for costs incurred in
connection with environmental compliance at its properties. These costs
historically have not been material, and the Company does not anticipate
incurring material costs for environmental compliance in the future.
In connection with the Formation, the Company repaid the majority of
the debt contributed to the Company by Historical Red Lion with the
proceeds of the equity offering and a new $135 million seven year term
loan. The term loan bears interest at a rate that varies based on the
London Interbank Offering Rate ("LIBOR") plus 2% (8.0% at December 31,
1995). The term loan matures in 2002 and requires quarterly mandatory
prepayments totaling $5 million in the first year, $13.5 million in the
second year, $17.5 million in the third year, $20 million in each of the
fourth and fifth years, and $29.5 million in each of the sixth and seventh
years. The term loan balance at December 31, 1995 was $133.75 million. In
addition, on August 1, 1995, the Company obtained a $130 million credit
line facility of which $80 million is available for acquisitions and $50
million is available for working capital requirements. The credit line
facility has a seven year term and an interest rate that varies based on
LIBOR. As of December 31, 1995 the interest rate was 8.0% and there was no
outstanding balance. The credit facility matures in 2002 and will be
reduced by quarterly commitment reductions totaling $12.5 million per year
beginning in 1998. The $80 million available for acquisitions is
anticipated to be utilized by the Company to finance the addition of hotels
to the Red Lion chain through acquisitions, management contracts, joint
ventures or leases.
The Company believes that a combination of its existing cash and cash
equivalents, internally generated cash flows and its borrowing ability
under the credit facility will be sufficient to fund its operations and
capital outlays.
22
SEASONALITY
The lodging industry is affected by normally recurring seasonal
patterns. At most Red Lion hotels, demand is higher in the summer and early
fall (May through October) than during the balance of the year. Demand also
changes on different days of the week, with Sunday generally having the
lowest occupancy.
INFLATION
The effect of inflation, as measured by fluctuations in the Consumer
Price Index, has not had a material impact on the Company's revenue or net
income during the periods under review.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
RED LION HOTELS, INC.
Report of Management.................................................... 25
Independent Auditors' Report............................................ 26
Consolidated Balance Sheet at December 31, 1995......................... 27
Consolidated Statement of Income for the Ten Months Ended
December 31, 1995.................................................... 28
Consolidated Statement of Stockholders' Equity for the Ten Months Ended
December 31, 1995.................................................... 29
Consolidated Statement of Cash Flows for the Ten Months Ended
December 31, 1995.................................................... 30
Notes to Consolidated Financial Statements.............................. 31
HISTORICAL RED LION
Independent Auditors' Reports........................................... 45
Consolidated Balance Sheet at December 31, 1994......................... 47
Consolidated Statements of Operations for the Years Ended
December 31, 1994 and 1993 and the Seven Months Ended
July 31, 1995........................................................ 48
Consolidated Statements of Partners' Equity for the Years Ended
December 31, 1994 and 1993 and the Seven Months Ended July 31, 1995.. 49
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994 and 1993 and the Seven Months Ended July 31, 1995.. 50
Notes to Consolidated Financial Statements.............................. 52
PRO FORMA FINANCIAL STATEMENTS............................................ 64
Pro Forma Consolidated Statements of Income for the Year
Ended December 31, 1995.............................................. 65
Pro Forma Consolidated Statements of Income for the Year
Ended December 31, 1994.............................................. 66
Notes to Pro Forma Statements of Income................................. 67
24
REPORT OF MANAGEMENT
The consolidated financial statements and other financial information
of Red Lion Hotels, Inc. in this report were prepared by management, which
is responsible for their contents. They reflect amounts based upon
management's best estimates and informed judgments. In management's
opinion, the financial statements present fairly the financial position,
results of operations and cash flows of the Company in conformity with
generally accepted accounting principles.
The Company maintains a system of internal accounting controls and
procedures which is designed to provide reasonable assurance that
transactions are executed as authorized, that they are properly recorded to
produce reliable financial records, and that accountability for assets is
maintained.
The consolidated financial statements for the ten months ended
December 31, 1995 have been audited to the extent required by generally
accepted auditing standards by Deloitte & Touche LLP, independent auditors.
In connection therewith, management has considered the recommendations made
by the independent auditors in connection with their audit and has
responded in an appropriate, cost effective manner.
The Board of Directors has appointed an Audit Committee composed
entirely of directors who are not employees of the Company. The Audit
Committee meets with representatives of management, and the independent
auditors, both separately and jointly. The Committee reports to the Board
on its activities and findings.
David J. Johnson Michael Vernon
President Chief Financial Officer
Chief Executive Officer
Chairman of the Board
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Red Lion Hotels, Inc.:
We have audited the accompanying consolidated balance sheet of Red
Lion Hotels, Inc. and subsidiaries (the "Company") as of December 31, 1995,
and the related consolidated statements of income, stockholders' equity,
and cash flows for the ten month period ended December 31, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Red Lion Hotels, Inc.
and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the ten month period ended December 31,
1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Portland, Oregon
February 24, 1996
26
RED LION HOTELS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
DECEMBER 31, 1995
-----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,355
Accounts receivable, net 19,709
Accounts receivable - affiliates 12,096
Inventories 6,339
Prepaid expenses and other current assets 5,461
Deferred income taxes 2,306
--------
Total current assets 114,266
--------
PROPERTY AND EQUIPMENT, net 336,269
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED JOINT VENTURES 16,429
GOODWILL, net 21,508
DEFERRED INCOME TAXES 6,571
DUE FROM AFFILIATE 20,828
OTHER ASSETS, net 11,049
--------
Total assets $ 526,920
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,618
Accrued expenses 37,197
Current portion of long-term debt 7,759
--------
Total current liabilities 68,574
--------
LONG-TERM DEBT, NET OF CURRENT PORTION 215,608
OTHER LONG-TERM OBLIGATIONS 11,169
JOINT VENTURERS' INTEREST 1,290
COMMITMENTS AND CONTINGENCIES (Notes 4 and 9)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares
authorized; 31,312,500 shares issued and outstanding 313
Additional paid-in capital and net assets contributed 214,361
Retained earnings 15,605
--------
Total stockholders' equity 230,279
--------
Total liabilities and stockholders' equity $ 526,920
========
See notes to consolidated financial statements.
27
RED LION HOTELS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except share data)
TEN
MONTHS ENDED
DECEMBER 31, 1995
-----------------
REVENUES:
Rooms $ 115,370
Food and beverage 72,711
Other 26,688
--------
Total revenues 214,769
--------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 28,723
Food and beverage 54,181
Other 7,996
Property indirect expenses 43,668
Other costs 17,111
Depreciation and amortization 8,715
Payments due to owners of managed hotels 19,428
Expenses resulting from the Formation and Offering 14,662
--------
OPERATING INCOME 20,285
EQUITY IN EARNINGS OF UNCONSOLIDATED 685
JOINT VENTURES
OTHER INCOME (EXPENSE):
Interest income 1,600
Interest expense (9,707)
--------
Total other expense (8,107)
--------
INCOME BEFORE JOINT VENTURERS' INTERESTS 12,863
JOINT VENTURERS' INTERESTS (1,365)
--------
INCOME BEFORE INCOME TAXES 11,498
INCOME TAX BENEFIT 4,107
--------
NET INCOME $ 15,605
========
EARNINGS PER COMMON SHARE $1.00
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,656,300
See notes to consolidated financial statements.
28
RED LION HOTELS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the ten months ended December 31, 1995
(in thousands)
Additional
Paid-in
Common Stock Capital and
--------------------- Net Assets Retained
Shares Amount Contributed Earnings Total
------ -------- ----------- -------- -----
Balance, February 28, 1995 -- $ -- $ -- $ -- $ --
Net assets contributed 20,900 209 34,427 -- 34,636
Net proceeds from initial public
offering 10,063 101 173,287 -- 173,388
Issuance of shares in conjunction with
termination of an incentive unit plan 350 3 6,647 -- 6,650
Net income -- -- -- 15,605 15,605
------ -------- -------- ------- --------
Balance, December 31, 1995 31,313 $ 313 $214,361 $15,605 $230,279
====== ======== ======== ======= ========
See notes to consolidated financial statements.
29
RED LION HOTELS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the ten months ended December 31, 1995
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,605
Adjustments to reconcile net income to cash
provided by operating activities:
Income attributable to joint venturer's interest 1,365
Equity in earnings of unconsolidated joint ventures (685)
Depreciation and amortization 8,715
Amortization of other assets 1,092
Deferred income taxes (8,877)
Issuance of common stock in connection with termination
of the incentive unit plan 6,650
Changes in assets and liabilities:
Accounts receivable (1,097)
Accounts receivable - affiliates (2,015)
Inventories (413)
Prepaid expenses and other current assets (427)
Accounts payable and accrued expenses 17,683
--------
Net cash provided by operating activities 37,596
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,499)
Distributions to joint venturers (1,702)
Net increase in due from affiliates (8,017)
Advances to and investments in unconsolidated joint ventures (3,509)
Other investing activities 661
--------
Net cash used in investing activities (29,066)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from contribution of assets 10,480
Net proceeds from common stock issued in the Offering 173,388
Proceeds from long-term borrowings 135,000
Repayment of long-term borrowings (256,302)
Other financing activities (2,741)
--------
Net cash provided by financing activities 59,825
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 68,355
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,355
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 8,133
Income taxes 2,945
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets (other than cash) contributed by Historical Red Lion (Note 1), including
property and equipment of $327,928, long-term debt of $344,500, investments in
and advances to unconsolidated joint ventures of $12,790, other assets and
amounts receivable from affiliates of $54,644, other long-term obligations of
$7,396, joint venturers' interests of $1,742, and current assets and current
liabilities of $29,572 and $47,140, respectively. $ 24,156
See notes to consolidated financial statements.
30
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
Red Lion Hotels, Inc. and subsidiaries ("Red Lion" or the "Company")
is a full service hospitality company operating 54 hotels in 10 western
states. A typical Red Lion property is a full service hotel located in
close proximity to a business or commercial center, airport, major highway,
or tourist destination. Red Lion hotels target the business traveler (both
individual and group) and compete primarily in the upscale segment of the
lodging industry.
The Company was incorporated in Delaware in March 1994 as a wholly
owned subsidiary of Red Lion, a California Limited Partnership ("Historical
Red Lion"). The Company's operations commenced in March 1995 when
Historical Red Lion contributed to the Company a 49.4% interest in a joint
venture (the "Santa Barbara Joint Venture") which owns the Santa Barbara
Red Lion Hotel (the "Santa Barbara Hotel") located in Santa Barbara,
California.
The Company initiated an initial public offering of a portion of its
common stock on July 26, 1995 (the "Offering"), which closed August 1,
1995, raising net proceeds of approximately $173 million. After giving
effect to the Offering, Historical Red Lion owns approximately 67% of the
Company.
On August 1, 1995, prior to the closing of the Offering, Historical
Red Lion repaid certain of its outstanding indebtedness with existing cash
balances and contributed substantially all of its assets (excluding 17
hotels (the "Leased Hotels"), certain minority joint venture interests and
certain current assets) and certain liabilities to the Company (the
"Formation"). The Partnership (Historical Red Lion subsequent to the
Formation and refinancing of the Company) retained the Leased Hotels and
the related goodwill, deferred loan costs and mortgage debt, certain
minority joint venture interests and certain current assets.
On August 1, 1995, the Company refinanced or repaid substantially all
of the debt contributed pursuant to the Formation with the net proceeds of
the Offering, borrowings under a new term loan and existing cash (the
"Refinancing"). The Company also entered into a long-term master lease with
the Partnership for the Leased Hotels.
BASIS OF PRESENTATION
The accompanying financial statements reflect the contribution, at
Historical Red Lion's net book value, of the interest in the Santa Barbara
Joint Venture. Accordingly, the Santa Barbara Joint Venture has been
consolidated with the Company in the accompanying financial statements
prior to the Formation. In connection with the Formation, the other assets
and liabilities contributed by Historical Red Lion have been recorded in
the accompanying consolidated financial statements at Historical Red Lion's
net book value as of August 1, 1995. There were no operations of the
Company prior to the contribution of the Santa Barbara Joint Venture.
Therefore, the accompanying consolidated financial statements reflect ten
months rather than twelve months of 1995 operations, consisting of the
results of the Santa Barbara Joint Venture for ten months and the results
of the other hotels and operations contributed pursuant to the Formation
for five months.
31
The Santa Barbara Joint Venture contribution did not transfer the
right to manage the operations of the Hotel to the Company. Since the right
to manage the Santa Barbara Hotel had not been transferred to the Company,
the financial statements of the Company prior to the Formation do not
include the operating revenues and expenses of the Santa Barbara Hotel or
that hotel's current assets and current liabilities. These amounts were
included in the financial statements of Historical Red Lion, which
continued to manage the Santa Barbara Hotel. The right to manage the
operations of the Santa Barbara Hotel was transferred to the Company at
Formation, and that hotel's operating revenues, expenses and current assets
and current liabilities are reflected in the consolidated financial
statements of the Company for the period from August 1, 1995 through
December 31, 1995.
The consolidated financial statements include seven joint ventures in which
the Company holds a 49.9% interest. When combined with the interests
retained by the Partnership, the Company and the Partnership own at least
50% of these joint ventures. Pursuant to an agreement between the Company
and the Partnership, the Company has the power, in its sole discretion, to
prescribe the Partnership's conduct with respect to the joint venture
interests held by the Partnership. Accordingly, the Company consolidates
the four joint ventures in which the combined interests of the Partnership
and the Company exceed 50%. The Company consolidates one of its 50% owned
joint ventures because the Company controls the joint venture through
contractual arrangements, has the majority of capital at risk through its
significant ownership percentage and has guaranteed 100% of the joint
venture's third party debt. The unconsolidated joint ventures, including
one other 10% owned joint venture, are accounted for on the equity method
of accounting.
In 1987, Historical Red Lion sold its interest in 10 hotels to Red
Lion Inns Limited Partnership, a publicly traded limited partnership (the
"MLP"). Red Lion Properties, Inc., the general partner of the MLP, was
contributed to the Company in connection with the Formation and is a wholly
owned subsidiary of the Company. The MLP's public limited partners have an
effective 98.01% ownership interest in the MLP's hotels with the general
partner retaining the remaining 1.99 % ownership interest. The Company
operates the MLP's hotels under a management agreement.
Operating revenues and expenses and the current assets and current
liabilities of the MLP and other management contract hotels (including the
three unconsolidated joint ventures which are also managed by the Company)
are included in the accompanying consolidated financial statements because
the operating responsibilities associated with these hotels are
substantially the same as those for owned hotels. The operating profit, net
of management fee income earned by the Company for managed hotels, is
recorded as an expense in the accompanying consolidated statements of
income. The consolidated financial statements include current assets and
current liabilities of $9,933,000 at December 31, 1995 and operating
revenues of $73,685,000 and operating expenses of $49,263,000 for the ten
months ended December 31, 1995 related to the operation of the MLP and
other management contract hotels.
One wholly owned hotel was acquired by Historical Red Lion in 1989
subject to a nonrecourse cash flow mortgage which requires interest
payments contingent on achieving certain levels of performance. Because of
the nonrecourse and cash flow nature of the loan, the mortgage has not been
recorded as an obligation and the property and equipment of the hotel are
excluded from the consolidated financial statements. The mortgage is in
substance a management contract with a purchase option. Accordingly, the
hotel is treated as a management contract in the accompanying consolidated
financial statements.
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
32
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.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks, time
deposits, commercial paper and U.S. government and other short-term
securities with maturities of three months or less when purchased. The
carrying amount approximates fair value because of the short-term maturity
of these instruments. The balance at December 31, 1995 includes commercial
paper of $6,991,000 and government obligations of $58,443,000.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowances for doubtful accounts
of $361,000 at December 31, 1995.
INVENTORIES
Inventories consist primarily of consumable supplies as well as food
and beverage products held for sale. Inventories are valued at the lower of
cost, determined on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995
(in thousands):
Land $ 48,126
Buildings and improvements 321,940
Furnishings and equipment 122,351
Construction in progress 14,834
---------
507,251
Accumulated depreciation (170,982)
---------
$ 336,269
=========
Property and equipment are stated at Historical Red Lion's carrying
value at the date of contribution, plus additions, at cost, made subsequent
to the contribution. Additions and improvements are capitalized at cost,
including interest costs incurred during construction. Normal repairs and
maintenance are charged to expense as incurred. Upon the sale or retirement
of property and equipment, the cost and related accumulated depreciation
and amortization are removed from the respective accounts and the resulting
gain or loss, if any, is included in income.
Base stock (linens, china, silverware and glassware) is depreciated to
50% of its initial cost on a straight-line basis over three years.
Subsequent replacements are expensed when placed in service. The carrying
value of base stock is included in furnishings and equipment.
33
Depreciation was computed on a straight-line basis using the following
estimated useful lives:
Building and improvements........................10 to 40 years
Furnishings and equipment........................ 5 to 15 years
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company is a partner in three joint ventures which are accounted
for on the equity method of accounting. The Company's equity in and
advances to these joint ventures are shown under the caption "investment in
and advances to unconsolidated joint ventures" in the consolidated balance
sheet. Because the Company manages these joint ventures, they are accounted
for as managed hotels and, therefore, the operating revenues, expenses, and
current assets and current liabilities of the hotels are included in the
consolidated financial statements.
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 (after management fee income) is recorded
under the caption "equity in earnings of unconsolidated joint ventures." 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.
Summarized financial information for the unconsolidated joint
ventures, excluding the current assets and current liabilities and
operating revenues and expenses consolidated in the Company's consolidated
financial statements, is as follows as of and for the ten months ended
December 31, 1995 (in thousands and unaudited):
ASSETS
Property and equipment, net $ 35,263
Goodwill, net 678
Deferred loan costs 541
--------
$ 36,482
========
LIABILITIES AND PARTNERS' DEFICIT
Net working capital $ 1,741
Long-term debt, excluding current portion 21,841
Company advances 27,384
Partners' deficit (14,484)
--------
$ 36,482
========
Revenues (payments from the Company
representing gross operating profit,
net of management fees) $ 2,729
Expenses (principally depreciation and
interest on outside debt and Company
advances) 3,276
--------
Net loss $ (547)
========
34
GOODWILL
Historical Red Lion acquired interests in certain hotels, motor inns
and supporting auxiliary enterprises in 1985. Goodwill resulted from the
acquisition and represents the excess of purchase price over the fair value
of net assets acquired. Goodwill relates primarily to the hotels
contributed to the Company by Historical Red Lion and is being amortized on
a straight-line basis over its estimated useful life of approximately 40
years. Amortization expense was $301,000 for the ten months ended December
31, 1995. Accumulated amortization aggregated $7,219,000 at December 31,
1995.
DEFERRED LOAN COSTS
Deferred loan costs incurred in connection with the Company's
indebtedness are included in other assets, net, and are amortized over the
life of the associated debt.
ACCRUED EXPENSES
Accrued expenses include the following items at December 31, 1995 (in
thousands):
Accrued payroll and related costs $ 22,253
Accrued interest 2,311
Other 12,633
--------
$ 37,197
========
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 and is reflected in other long-term obligations.
The Company's retirement savings plan includes a non-qualified
Supplemental Employee Retirement Plan ("SERP") designed to supplement key
employees whose benefits would otherwise be reduced due to certain
statutory limits of a 401(k) plan. In addition, the Chief Executive Officer
of the Company has entered into a separate supplemental income retirement
agreement with the Company. Both of these obligations are reflected in
long-term obligations.
INCOME TAXES
The Company utilizes the liability method to account for income taxes.
Under the liability method, deferred taxes are provided for the effects of
temporary differences between the financial statement and tax bases of
assets and liabilities.
PROPERTY INDIRECT EXPENSES
Property indirect expenses include undistributed property expenses for
selling, general and administrative, utilities, repairs and maintenance,
and an allocation of certain corporate services (such as marketing, legal,
tax and accounting services) related to the operation of the properties.
35
OTHER COSTS
Other costs include corporate administrative and general expenses,
property taxes, insurance, leases and other miscellaneous costs.
PAYMENTS DUE TO OWNERS OF MANAGED HOTELS
Payments due to owners of managed hotels is analogous to rent owed to
outside owners due to the nature of the management contracts and the
control the Company has over operations. The amounts shown in the
consolidated statement of income are net of management fee income of
$4,994,000 earned by the Company for the ten months ended December 31,
1995.
JOINT VENTURERS' INTERESTS
The Company is a partner in eight joint ventures, each of which owns a
separate hotel. The assets and liabilities of five of the eight joint
ventures are fully consolidated due to the Company's control of the
ventures. The other joint ventures are accounted for on the equity method
of accounting (see "Investment in Unconsolidated Joint Ventures"). The
caption "joint venturers' interests" represents the net equity attributable
to the joint venturers' interests, including their share of income, losses,
distributions and contributions.
Profits and losses of each joint venture are allocated in accordance
with the joint venture agreement. 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.
EARNINGS PER SHARE AND STOCK OPTIONS
Earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Common stock equivalents have
not been included in the earnings per share calculation since their effect
is immaterial.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." The Statement establishes an alternative to the
Company's current accounting for compensation associated with stock issued
to employees and others. Management does not intend to adopt the
alternative method of measuring compensation expense related to stock
options allowed by SFAS 123. Accordingly, adoption of this statement in
1996 will only require the Company to include additional footnote
disclosure relevant to stock-based compensation in its financial
statements.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Management evaluates its ability to recover the recorded value of
long-lived assets such as property and equipment, goodwill, investments in
and advances to unconsolidated joint ventures, and deferred loan costs at
least annually, unless events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If the sum of
projected undiscounted future cash flows is less than the carrying amount
of the asset, an impairment loss would be recognized to the extent that
the carrying amount of the asset differs from its
36
fair value measured on a discounted cash flow basis. No impairment losses
were recorded for the ten months ended December 31, 1995.
3. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt at December 31, 1995, consists of the following (in
thousands):
Term loan, LIBOR plus 2%, 8.0% at December 31, 1995,
payable through 2002 $133,750
Mortgages, variable rates, 7.0% - 8.3% at
December 31, 1995, payable through 1998 84,900
Note payable, imputed fixed rate, 8.69%, payable through 2022 4,717
-------
223,367
Current portion of long-term debt (7,759)
-------
Long-term debt, net of current portion $215,608
=======
The annual principal requirements for the five years subsequent to
December 31, 1995 are as follows (in thousands):
1996 $ 7,759
1997 53,766
1998 63,232
1999 20,114
2000 22,496
Thereafter 56,000
--------
$ 223,367
========
The Company has available a $130 million revolving credit facility
from the term loan lender which provides for a working capital line of up
to $50 million and an acquisition line of up to $80 million. The credit
facility carries a variable interest rate based on the London Interbank
Offering Rate ("LIBOR") plus 2% (8.0% at December 31, 1995). At December
31, 1995, no amounts were outstanding under this credit facility. All debt
and credit facilities are secured by the hotels owned by the Company or by
its joint venture interests.
The Company's credit facilities contain covenants which, among other
things, prohibit the payment of cash dividends, require certain levels of
tangible net worth, and require the maintenance of debt coverage, interest
coverage, leverage, and debt-to-equity ratios. As of December 31, 1995, the
Company was in compliance with these covenants.
The Company had outstanding letters of credit totaling $5,816,000 at
December 31, 1995. These letters of credit expire at various dates ranging
from June to October, 1996.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements in order to
reduce its exposure to interest rate fluctuations. The agreements have
effectively converted floating rate debt, which is tied to LIBOR,
37
to fixed rates. Accordingly, the net interest received or paid on the
interest rate swap is recorded as an adjustment to interest expense.
At December 31, 1995, the Company had three interest rate swap
agreements outstanding which have substantially converted $75 million of
debt from floating LIBOR based rates to fixed rates ranging from 5.19% to
5.57%. The agreements expire from September 1997 to March 1998. Interest
income earned by the Company relating to interest rate swap agreements for
the ten months ended December 31, 1995, was $214,684 and is included as an
adjustment to interest expense.
These agreements are with major commercial banks and management does
not anticipate a credit loss due to nonperformance.
4. LEASES
Certain hotels are located on leased land. Certain leases contain
rental provisions and renewal options which are based on a percentage of
revenues, changes in the Consumer Price Index or changes in property
values. All land leases extend over the remaining estimated useful lives of
the buildings situated thereon. The Company also leases certain office
space and equipment under operating leases. The Company leases 17 hotels
(Leased Hotels) from the Partnership. The Leased Hotels are leased for an
initial term of 15 years. The Company may extend the lease on a hotel-
by-hotel basis for five additional five-year periods at comparable terms.
Total land, office and equipment and Leased Hotels rent expense was
$6,676,000 for the ten months ended December 31, 1995. Future minimum
rental payments required under land, office and equipment leases and Leased
Hotels are as follows (in thousands):
1996 $ 16,163
1997 16,108
1998 15,825
1999 15,749
2000 15,765
Thereafter 160,781
--------
$ 240,391
========
5. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) retirement plan for all
full time, non-union employees who have completed one year of service and
who have attained the age of 21 years. Under the 401(k) plan, the Company
contributes amounts equal to each participant's elected contributions up to
6% of eligible compensation. Pension expense under this plan was $723,000
for the ten months ended December 31, 1995.
The Company also has a non-qualified supplemental employee retirement
plan ("SERP"). The SERP was designed to complement the 401(k) plan by
restoring benefits otherwise lost by certain employees due to the statutory
limits in the 401(k) plan. The pension expense under the SERP was $80,000
for the ten months ended December 31, 1995.
In July 1995, the Company adopted the 1995 Equity Participation Plan
(the "Incentive Plan") which provides for the issuance of incentive or
nonqualified stock options, stock appreciation rights, and other awards to
key employees, officers, consultants and non-employee directors at the
discretion of the
38
Compensation Committee. The vesting period is determined at the date of
grant and generally ranges from zero to five years beginning on the date of
grant. The following table summarizes stock option transactions during the
ten months ended December 31, 1995.
Shares Under Option Price
Option Per Share
------ ---------
Options granted, at fair market
value on date of grant 2,250,833 $19.00 to $21.50
Options forfeited (15,000) $19.00
----------
Options outstanding 2,235,833 $19.00 to $21.50
==========
At December 31, 1995, there were 696,667 options exercisable and
1,064,157 shares available for grant under the Incentive Plan.
6. RELATED PARTY TRANSACTIONS
Prior to the Formation the Santa Barbara Hotel was operated and
managed by Historical Red Lion. Management fees paid to Historical Red Lion
were $385,000 for the five months ended July 31, 1995 and are included in
other costs.
At December 31, 1995, investments in and advances to unconsolidated
joint ventures includes two notes receivable from one joint venture in the
amount of $1,500,000 and $2,009,000 which bear interest at a fixed rate of
10.0% and prime plus 1.0% (9.5% at December 31, 1995), respectively. The
$1,500,000 note matures on November 21, 2003. The $2,009,000 note has an
unspecified term and is to be repaid based on cash flow available for
distribution, as defined. In addition, other assets, net, includes a note
receivable from a joint venture partner in the amount of $1,628,000. The
note bears interest at prime plus .25% times 120% (10.5% at December 31,
1995) and has an unspecified term with repayment amounts based on cash flow
available for distribution, as defined. In addition, accounts
receivable-affiliates includes $4,120,000 receivable from the management
contract hotels and other related parties other than Red Lion Inns Limited
Partnership (the "MLP").
The Company leases the Leased Hotels from the Partnership. Annual
lease payments aggregate $15,000,000. Lease expense for the period from the
Formation through December 31, 1995 totaled $6,250,000.
TRANSACTIONS WITH RED LION INNS LIMITED PARTNERSHIP
A wholly owned subsidiary of the Company serves as general partner and
owns 1.99 percent of the MLP. The general partner is responsible for
management and administration of the MLP. In accordance with the
partnership agreement, the MLP reimburses the Company for related
administrative costs.
Under a management agreement, the MLP pays base and incentive
management fees to the Company. Base management fees payable to the Company
are equal to 3% of the annual gross revenues of the MLP hotels. Incentive
management fees payable to the Company are equal to the sum of 15% of
adjusted gross operating profit up to $36 million (operating profit target)
and 25% of adjusted gross operating profit in excess of the operating
profit target. Adjusted gross operating profit is gross operating profit
less base management fees.
39
Incentive management fees are only payable to the extent that cash
flow available for distributions and incentive management fees exceeds the
amount required to pay the annual priority distribution to the MLP's
limited partners. Cash flow is defined as net income (or loss) before
noncash charges (primarily depreciation and amortization) and incentive
management fees, but after the reserve for capital improvements and
principal payments on mortgage debt.
The Company also charges the MLP hotels for their pro rata share of
support services such as computer, advertising, public relations,
promotional and sales and central reservation services.
All MLP personnel are employees of the Company. All costs for services
of such employees are reimbursed to the Company by the MLP. These costs
include salaries, wages, payroll taxes and other employee benefits.
Additionally, auxiliary enterprises owned by the Company sell operating
supplies, furnishings and equipment to the MLP.
The aggregate amounts, excluding personnel related expenses, charged
by the Company to the MLP for the ten months ended December 31, 1995, under
the arrangements described above are as follows (in thousands):
Management fees $3,614
Support services 1,732
Purchases from auxiliary enterprises 6,064
General Partner administrative expenses 197
Included in the accounts receivable-affiliates and due from affiliate
is $19,078,000 at December 31, 1995, representing amounts receivable from
the MLP primarily for capital improvements funded by the Company and
Historical Red Lion which exceeded the 3% reserve established in accordance
with the provisions of the management agreement. Such amounts are presented
net of working capital related to the managed MLP hotels of $2,194,000 as
of December 31, 1995. The current balance of $2,823,000 is included in
accounts receivable-affiliates. The remaining balance of $16,255,000 is
classified as due from affiliate. Amounts receivable from the MLP earn
interest at the rate of prime plus 0.5% (9.0% at December 31, 1995).
Accounts receivable-affiliates and due from affiliate also include
advances to and deferred incentive management fees receivable from the MLP.
A total of $3,726,000 was advanced to the MLP to fund distributions during
the first 36 months of the MLP's operations. The advance is non-interest
bearing, has an unspecified term and is to be repaid out of available cash
flow or refinancing proceeds. Additionally, non-interest bearing deferred
incentive management fees receivable of $6,000,000 were contributed to the
Company in the Formation. Based on the MLP's cash flows for the year ended
December 31, 1995, $353,000 of such fees will be received by the Company
during 1996 and is reflected as a portion of accounts
receivable-affiliates. Additionally, it is anticipated that approximately
$4,800,000 will be repaid to the Company in April 1996 out of the planned
refinancing of MLP long-term debt, and this amount is also reflected in
accounts receivable-affiliates. The remaining balance is classified as due
from affiliate. Accordingly, due from affiliate includes total non-interest
bearing receivables from the MLP of $4,573,000.
Summarized income statement information for the MLP from August 1
through December 31, 1995, is as follows (in thousands and unaudited):
40
Revenues $ 16,884
=======
Net income $ 2,364
=======
Revenues of the MLP represent the gross operating profit (operating
revenues less operating expenses) of the MLP hotels as this amount is
similar to gross rent received from the Company to manage the hotels. As
discussed in Note 1, the operating revenues and expenses of the MLP hotels
are consolidated. Consolidation of the operating revenues and expenses of
the MLP does not affect the Company's cash flow or net income except to the
extent that management fees were earned.
Summarized balance sheet information for the MLP, not included in the
accompanying consolidated balance sheets (including amounts due to the
Company) is as follows (in thousands):
December 31, 1995
-----------------
Cash $ 229
Noncurrent assets, primarily property and equipment 166,038
Current liabilities 29,094
Long-term obligations, net of current portion 117,266
Deferred income taxes 1,673
Partners' equity 18,234
7. INCOME TAXES
Income tax benefit for the ten months ended December 31, 1995 consists
of the following (in thousands):
Current
Federal $ 3,928
State 842
Deferred
Federal (7,767)
State (1,110)
------
Total tax expense (benefit) $(4,107)
======
The effective tax rate varies from the statutory rate due to the
following (in thousands):
Ten Months Ended
December 31, 1995
-----------------
Expected tax expense at federal statutory rates $ 4,007
Deferred income tax benefit due to the
difference between the book and tax bases of
net assets contributed (9,736)
Nondeductible Formation and Offering Costs 879
State income taxes 586
Other 157
-------
Total tax benefit $ (4,107)
=======
41
Since Historical Red Lion was a partnership, no deferred tax benefits
had been provided on the net assets contributed to the Company. In
accordance with SFAS No. 109, "Accounting for Income Taxes," the Company
recorded net deferred tax assets of $1.2 million and $8.5 million related
to the contribution of the Santa Barbara Joint Venture and the Formation,
respectively.
The components of the net deferred income tax assets as of December
31, 1995, are as follows (in thousands):
Deferred tax assets:
-------------------
Basis difference in joint ventures $ 9,720
Accrued expenses 5,851
Payroll related costs and other 1,734
-------
Total deferred tax assets 17,305
Deferred tax liabilities:
------------------------
Basis difference in property and equipment (8,428)
-------
Net deferred tax asset $ 8,877
=======
The net deferred tax assets are presented as follows (in thousands):
Current deferred tax asset $ 2,306
Noncurrent deferred tax asset 6,571
-------
Net deferred tax asset $ 8,877
=======
8. EXPENSES RESULTING FROM THE FORMATION AND OFFERING
Expenses resulting from the Formation and Offering include certain
Formation costs of $1,314,000 and expenses resulting from the Offering of
$11,348,000 and $2,000,000 related to the termination of an incentive unit
plan and assumption of the obligation of a supplemental income retirement
agreement, respectively.
9. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company had commitments relating to capital
improvement projects aggregating approximately $8,517,000.
In connection with the Formation, the Company agreed to indemnify the
Partnership with respect to any potential obligations arising out of the
transfer to the Company of certain assets and the assumption of certain
liabilities. Management is not aware of any such obligations.
Beginning August 2, 1996, for a period of 60 days, the Partnership has
the option to require the Company to purchase its retained joint venture
interests for $1,290,000.
42
The Company is party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company's financial position,
results of operations or liquidity.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, and
the methods and assumptions used to estimate such fair values, are as
follows (in thousands):
Carrying Estimated
Amount Fair Value
------ ----------
Accounts receivable-affiliate (Note 6) $ 12,096 $ 11,990
Due from affiliate (Note 6) 20,828 20,080
Long-term debt (223,367) (223,367)
Interest rate swaps -- 24
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, and other long-term obligations is a
reasonable approximation of their fair value.
The carrying value of accounts receivable-affiliate approximates fair
value due to the short-term nature of the receivable. The carrying value of
due from affiliate includes non-interest bearing receivables aggregating
$4,573,000, as discussed in Note 6. The fair value of due from affiliate is
determined using estimated rates for similar notes, based on anticipated
repayment dates. Based on borrowing rates currently quoted by financial
institutions for debt with similar terms and remaining maturities, the
carrying value of long-term debt approximates fair value.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results of the Company are not comparable since the
quarter ended June 30, 1995 only includes the operations of one joint
venture contributed by Historical Red Lion in March 1995. The quarter ended
September 30, 1995 includes the operations of that joint venture for the
quarter as well as the results of the Company subsequent to the Formation.
The quarter ended December 31, 1995 was the first full quarter of
operations subsequent to the Formation. Summarized quarterly financial data
are as follows (in thousands, except share amounts, room and occupancy
statistics):
43
1995 Quarter Ended
------------------------------------------------
June 30, September 30, December 31,
-------- ------------- ------------
Revenues $ 2,764 $89,274 $122,074
Operating income 1,800 4,290 13,779
Net income 220 7,902 6,269
Earnings per share 2,200 0.38 0.20
Weighted average common shares
outstanding 100 20,875,033 31,312,500
Occupancy percentage -- 80.7% 65.5%
Average room rate $ -- $ 76.93 $ 73.51
12. SUBSEQUENT EVENT
On February 8, 1996, three of the Company's hotels were evacuated due
to flooding in northwestern Oregon and southwestern Washington. Two of the
hotels were damaged by flood waters, have reopened and are undergoing
repair. As the Company maintains flood and business interruption insurance,
management does not believe the ultimate outcome will have a material
adverse effect on the results of operations or financial position of the
Company.
44
INDEPENDENT AUDITORS' REPORT
To the Partners of Red Lion, a California Limited Partnership:
We have audited the accompanying consolidated statements of
operations, partners' equity and cash flows of Red Lion, a California
Limited Partnership ("Historical Red Lion"), and subsidiaries for the seven
month period ended July 31, 1995. These financial statements are the
responsibility of Historical Red Lion's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations
and cash flows of Historical Red Lion and subsidiaries for the seven month
period ended July 31, 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Portland, Oregon
February 24, 1996
45
INDEPENDENT AUDITORS' REPORT
To the Partners of Red Lion, a California Limited Partnership:
We have audited the accompanying consolidated balance sheet of Red
Lion, a California Limited Partnership ("Historical Red Lion"), and
subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, partners' equity and cash flows for each of the
two years in the period ended December 31, 1994. These financial statements
are the responsibility of Historical Red Lion's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Historical Red Lion and subsidiaries as of December 31, 1994, and the
results of their operations and their cash flows for each of the two years
in the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements,
Historical Red Lion has given retroactive effect to the changes in
accounting for their investment in two joint ventures and its accounting
for joint venturers' interests. Also, as discussed in Note 1 to the
consolidated financial statements, effective January 1, 1993, Historical
Red Lion changed their accounting method for measuring impairment of hotel
properties.
Arthur Andersen LLP
Portland, Oregon
February 7, 1995
46
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
December 31,
1994
----------
CURRENT ASSETS:
Cash and cash equivalents $ 27,804
Short-term debt securities 40,891
Accounts receivable, net 17,486
Accounts receivable, affiliates 13,138
Inventories 6,361
Prepaid expenses and other current assets 3,729
---------
Total current assets 109,409
---------
PROPERTY AND EQUIPMENT, NET 514,807
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 14,281
OTHER ASSETS:
Goodwill, net 36,453
Other, net 18,394
---------
Total assets $ 693,344
=========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,290
Accrued expenses 33,007
Current portion of long-term debt 108,358
---------
Total current liabilities 160,655
---------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 388,944
OTHER LONG-TERM OBLIGATIONS 7,682
JOINT VENTURERS' INTEREST 905
COMMITMENTS AND CONTINGENCIES (Notes 2,3,4 & 5)
PARTNERS' EQUITY 135,158
---------
Total liabilities and partners' equity $ 693,344
=========
The accompanying notes are an integral part of these consolidated financial statements.
47
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Seven Months Years Ended December 31,
Ended July 31, -----------------------------
1995 1994 1993
------- ------- --------
REVENUES:
Rooms $161,834 $257,699 $242,193
Food and beverage 92,570 159,154 156,242
Other 27,802 46,035 41,582
------- ------- -------
Total revenues 282,206 462,888 440,017
------- ------- -------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses:
Rooms 39,670 64,121 60,785
Food and beverage 73,269 124,070 123,518
Other 10,592 17,586 16,935
Property indirect expenses 60,342 99,673 95,118
Other costs 10,787 19,570 18,346
Depreciation and amortization 17,053 31,313 31,144
Payments due to owners of managed hotels 32,073 42,841 41,722
------- ------- -------
OPERATING INCOME 38,420 63,714 52,449
EQUITY IN EARNINGS OF
UNCONSOLIDATED JOINT VENTURES 1,614 1,327 1,213
OTHER EXPENSE:
Interest expense, net (20,316) (32,737) (30,065)
Loss on sale of property -- -- (1,701)
------- ------- --------
Total other expense (20,316) (32,737) (31,766)
------- ------- --------
INCOME BEFORE JOINT VENTURERS' INTERESTS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 19,718 32,304 21,896
JOINT VENTURERS' INTERESTS 411 (1,321) (323)
------- ------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 20,129 30,983 21,573
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 1) -- -- (29,878)
------- - ------- -------
NET INCOME (LOSS) $ 20,129 $ 30,983 $ (8,305)
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
48
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND SEVEN MONTHS ENDED JULY 31, 1995
(In thousands)
PARTNERS' ACCUMULATED
CAPITAL DEFICIT TOTAL
------- ------- -------
BALANCE, December 31, 1992 $180,000 $(67,520) $112,480
Net loss -- (8,305) (8,305)
------- ------- -------
BALANCE, December 31, 1993 180,000 (75,825) 104,175
Net income -- 30,983 30,983
------- ------- -------
BALANCE, December 31, 1994 180,000 (44,842) 135,158
Net income -- 20,129 20,129
------- ------- -------
Balance, July 31, 1995 $180,000 $(24,713) $155,287
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
49
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Seven Months
Ended Years Ended December 31,
July 31, ------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $20,129 $30,983 $(8,305)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change -- -- 29,878
Loss on sale of property -- -- 1,701
Income attributable to joint venturers' interests (411) 1,321 323
Equity in earnings of unconsolidated joint ventures (1,614) (1,327) (1,213)
Depreciation and amortization 16,316 31,313 31,144
Amortization of other assets (principally deferred loan costs) 737 1,927 1,612
Decrease (increase) in accounts receivable, net (1,185) (2,217) 72
Increase in accounts receivable, affiliates (1,441) (1,545) (6,253)
Decrease (increase) in inventories 435 (520) 714
Decrease (increase) in prepaid expenses and other current assets (1,305) 89 (249)
Increase (decrease) in accounts payable, accrued expenses and
other long-term obligations (4,548) 4,920 5,139
------- ------- -------
Total adjustments 6,984 33,961 62,868
------- ------- -------
Net cash provided by operating activities 27,113 64,944 54,563
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,858) (23,959) (20,002)
Proceeds from sale of property and equipment -- -- 1,190
Distributions to joint venturers (252) (1,241) (467)
Purchase of short-term debt securities (19,694) (44,307) --
Proceeds from sales of short-term debt securities 60,585 3,416 --
Other investing activities, net 1,751 72 1,911
------- ------- -------
Net cash (used in) provided by investing activities 26,532 (66,019) (17,368)
------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
50
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
Seven Months
Ended Years Ended December 31,
July 31, --------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings $ 1,223 $ 1,892 $ 50,430
Net increase (decrease) in revolving lines of credit -- 72,000 (14,148)
Repayment of long-term debt (13,839) (45,523) (71,550)
Other financing activities -- (768) (2,053)
------- ------- -------
Net cash (used in) provided by financing activities (12,616) 27,601 (37,321)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 41,029 26,526 (126)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,804 1,278 1,404
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $68,833 $ 27,804 $ 1,278
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of capitalized portion $23,633 $ 28,368 $ 26,738
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property for noncash consideration $ -- $ -- $ 1,500
Contribution of net obligation in joint venture, including property
and equipment of $45,006, long-term debt of $45,000, other assets of
$859, accrued expenses of $546, and joint venturers' interests of $412 93 -- --
The accompanying notes are an integral part of these consolidated financial statements.
51
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Red Lion, a California Limited Partnership ("Historical Red Lion"),
acquired interests in certain hotels, motor inns and supporting auxiliary
enterprises on April 10, 1985, which were previously operating as Red Lion
Inns and Thunderbird Motor Inns. One of the previous principal owners
contributed his ownership interests in exchange for a limited partnership
interest in Historical Red Lion.
On April 14, 1987, Historical Red Lion sold its interest in 10 hotels
to Red Lion Inns Limited Partnership, a publicly traded limited partnership
(the "MLP"). Red Lion Properties, Inc., a wholly-owned subsidiary of
Historical Red Lion, is the general partner of the MLP. Since completion of
this sale, the MLP's limited partners have had an effective 98.01%
ownership interest in the hotels with the general partner retaining the
remaining 1.99% ownership interest. Historical Red Lion operates the MLP's
hotels under a management agreement.
Basis of Presentation
The accompanying consolidated financial statements include Historical
Red Lion, its wholly-owned subsidiaries and five of its seven partially
owned joint ventures. Historical Red Lion consolidates those entities which
it controls. Historical Red Lion is the managing general partner, controls
and owns 75 percent, 66.67 percent, 66.67 percent, 51 percent and 50
percent of the joint venture interests of the five consolidated joint
ventures. Through February 1995, Historical Red Lion consolidated one
of its 50 percent owned joint ventures because Historical Red Lion
controlled the joint venture through contractual arrangements, had the
majority of capital at risk through its significant ownership percentage
and had guaranteed 100 percent of the joint venture's third party debt.
That joint venture interest was contributed to Red Lion Hotels, Inc. in
March 1995. The remaining two joint ventures are accounted for using the
equity method of accounting. Each of the seven joint ventures is a single
purpose venture whose only business is the operation of one Red Lion hotel.
Operating revenues and expenses and the working capital of the MLP and
other management contract hotels (including the two unconsolidated joint
ventures which are also managed by Historical Red Lion) are included in the
accompanying consolidated financial statements because the operating
responsibilities associated with these hotels are substantially the same as
those for owned hotels. The operating profit net of management fee income
for managed hotels is recorded as an expense in the accompanying
consolidated statements of operations. The consolidated financial
statements also include the following amounts related to managed hotels
(including the two unconsolidated joint ventures which are also managed by
Historical Red Lion): current assets and current liabilities of $8,121,000
at December 31, 1994; operating revenues of $155,668,000, $166,283,000 and
$110,684,000 for the years ended December 31, 1993 and 1994 and for the
seven month period ended July 31, 1995, respectively; and operating
expenses of $107,801,000, $113,131,000 and $72,216,000 for the years ended
December 31, 1993 and 1994 and for the seven month period ended July 31,
1995, respectively.
52
One wholly-owned hotel was acquired in 1989 subject to a non-recourse
cash-flow mortgage which requires interest payments contingent on achieving
certain levels of performance. Because of the non-recourse and cash flow
nature of the loan, the mortgage has not been recorded as an obligation and
the property and equipment of the hotel are excluded from the accompanying
consolidated financial statements. The mortgage is in substance a
management contract with a purchase option. Accordingly, the hotel is
treated as a management contract in the accompanying consolidated financial
statements.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks,
certificates of deposit, time deposits and U.S. government and other
short-term securities with maturities of three months or less when
purchased. The carrying amount approximates fair value because of the short
term maturity of these instruments.
Short-Term Debt Securities
Short-term debt securities include treasury bills, commercial paper
and other short-term debt securities with maturities greater than three
months when purchased. All of these securities mature within ten months
from December 31, 1994. As the securities are actively traded, Historical
Red Lion has classified these investments as trading securities and these
securities are recorded at market which approximated cost at December 31,
1994.
Accounts Receivable
Accounts receivable are shown net of allowances for doubtful accounts
of $357,000 at December 31, 1994 and approximate fair value.
Inventories
Inventories consist primarily of consumable supplies as well as food
and beverage products held for sale. Inventories are valued at the lower of
cost, determined on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment consist of the following at December 31, 1994
(in thousands):
Land $ 70,579
Buildings and improvements 500,922
Furnishings and equipment 183,506
Construction in progress 7,878
-------
762,885
Less allowance for depreciation
and amortization (248,078)
-------
$514,807
=======
Additions and improvements are capitalized at cost, including interest
costs incurred during construction. There was no capitalized interest
during the seven month period ended July 31, 1995, or
53
during each of the two years ended December 31, 1994. Normal repairs and
maintenance are charged to expense as incurred. Upon the sale or retirement
of property and equipment, the cost and related accumulated depreciation
and amortization are removed from the respective accounts and the resulting
gain or loss, if any, is included in income.
Base stock (linens, china, silverware and glassware) is depreciated to
50% of its initial cost on a straight-line basis over three years.
Subsequent replacements are expensed when placed in service. The carrying
value of base stock is included in furnishings and equipment as noted
above.
Depreciation and amortization of property and equipment were computed
on a straight-line basis using the following estimated useful lives:
Buildings 40 years
Improvements 10-15 years
Furnishings and equipment 3-15 years
Effective January 1, 1993, Historical Red Lion prospectively changed
the estimated useful lives of its buildings to 40 years from lives
averaging 32 years. The change was made to align building lives with actual
experience and common industry practice. The effect of the change was to
decrease depreciation expense for 1993 by approximately $2,600,000.
Effective January 1, 1993, Historical Red Lion changed its accounting
method for measuring impairment of hotel properties from using undiscounted
future cash flows to discounted future cash flows. Historical Red Lion made
this change as they believe this is a preferable method of measuring
impairment of hotel properties. As a result of this change, the 1993
consolidated financial statements include a reduction in the carrying value
of one hotel of $29,878,000 reflected as a cumulative effect of accounting
change in the accompanying consolidated statements of operations for the
year ended December 31, 1993. The reduction in depreciation expense as a
result of this change was $994,000 in 1993.
Investment in Unconsolidated Joint Venture
Historical Red Lion is a partner in two joint ventures which are
accounted for on the equity method of accounting. Historical Red Lion's
equity in and advances to these joint ventures are shown under the caption
"investment in unconsolidated joint ventures" in the accompanying
consolidated balance sheets. Because Historical Red Lion manages these
joint ventures, they are accounted for as managed hotels and therefore the
operating working capital of the hotels are consolidated in the
accompanying consolidated balance sheets.
Profits and losses of these joint ventures are allocated in accordance
with the joint venture agreements. Because the hotels are accounted for as
managed hotels, the operating revenues and expenses are consolidated in the
accompanying statements of operations with Historical Red Lion's share of
the income or losses of the joint ventures (after management fee income)
recorded under the caption "equity in earnings of unconsolidated joint
ventures." 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 venturers is absorbed
within Historical Red Lion's consolidated operating results.
54
Summarized financial information for the unconsolidated joint
ventures, excluding the working capital and operating revenues and expenses
which are consolidated in Historical Red Lion's consolidated financial
statements, is as follows (in thousands and unaudited):
ASSETS December 31,
1994
--------
Total current assets $ 470
Property and equipment, net 24,161
Goodwill, net 701
Other assets 68
--------
$ 25,400
========
LIABILITIES AND PARTNERS' DEFICIT
Total current liabilities $ 1,076
Long-term debt, excluding current portion 8,913
Historical Red Lion advances 26,973
Partners' deficit (11,562)
--------
$ 25,400
========
Seven Months
Ended Years ended December 31,
July 31, ------------------------
1995 1994 1993
---- ---- ----
Revenues (payments from Historical Red Lion
representing gross operating profit) $ 4,533 $ 6,642 $ 5,831
Expenses (principally depreciation and
interest on outside debt and Historical
Red Lion advances) 4,484 6,850 5,817
-------- ------- -------
Net income (loss) $ 49 $ (208) $ 14
======== ======== =======
Goodwill
Goodwill resulted from the April 10, 1985 acquisition and represents
the excess of purchase price over the net fair value of assets acquired and
is being amortized on a straight-line basis over 40 years. Accumulated
amortization was $11,177,000 at December 31, 1994. Management evaluates its
accounting for goodwill impairment, considering such factors as historical
and future profitability, annually, or more frequently when events or
changes in circumstances indicate that the carrying amount of goodwill may
not be recoverable. To perform that review, the Company estimates the sum
of expected future discounted cash flows from operating activities. If the
estimated net cash flows are less than the carrying amount of goodwill, the
Company will recognize an impairment loss in an amount necessary to write
down goodwill to a fair value as determined from expected future discounted
cash flows. Management believes that the goodwill at December 31, 1994 is
realizable and the amortization period is appropriate.
Deferred Loan Costs
Deferred loan costs are included in other assets, net and represent
prepaid mortgage financing fees which are amortized over the life of the
associated mortgages.
55
Other Assets
Other assets include approximately $2.7 million of costs incurred
through December 31, 1994 related to the initial public offering. This
amount was contributed to Red Lion Hotels, Inc. and netted against the
proceeds of such initial public offering.
Accrued Expenses
Accrued expenses include the following items at December 31, 1994 (in
thousands):
Accrued payroll and related costs $ 20,682
Accrued interest 2,676
Other 9,649
-------
$ 33,007
=======
Insurance Reserves
Historical Red Lion provides for the uninsured costs of medical,
property, liability and workers compensation claims. Such costs are
estimated each year based on historical claim data relating to operations
conducted through December 31, 1994. The long-term portion of accrued
claims costs relate primarily to general liability and workers compensation
claims and are reflected in other long-term obligations in the accompanying
consolidated balance sheets.
Income Taxes
Historical Red Lion is a limited partnership. Accordingly, no
provision is made for income taxes as taxes on income are the
responsibility of the partners. The allocation of taxable income or loss
and depreciation expense to each partner is based on the terms of the
partnership agreement.
Property Indirect Expenses
Property indirect expenses include undistributed property expenses for
selling, general and administrative, utilities, repairs and maintenance,
and an allocation of certain corporate services (such as marketing, legal,
tax and accounting services) related to the operation of the properties.
Other Costs
Other costs include corporate administrative and general expenses,
property taxes, insurance, leases and other miscellaneous costs.
Payments Due to Owners of Managed Hotels
"Payments due to owners of managed hotels" is analogous to rent owed
to outside owners due to the nature of the management contracts and the
control Historical Red Lion has over operations. The amounts shown on the
statements of operations are net of management fee income of $6,145,000 and
$10,311,000 for 1993 and 1994, respectively, and $6,395,000 for the seven
month period ended July 31, 1995.
56
Joint Venturers' Interests
Historical Red Lion is a partner in seven joint ventures, each of
which owns a separate hotel. The assets and liabilities of five of the
seven joint ventures are fully consolidated in the accompanying financial
statements. The other joint ventures are accounted for on the equity method
of accounting (see Investment in Unconsolidated Joint Ventures above). The
assets and liabilities attributable to joint venturers' interests existing
at the date of the April 10, 1985 acquisition were valued at historical
amounts and were not revalued to reflect appraised values at that date. The
caption "joint venturers' interests" represents the net equity attributable
to the joint venturers' interests, including their share of income, losses,
distributions and contributions.
Profits and losses of each joint venture are allocated in accordance
with the joint venture agreement. 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 Historical Red Lion's consolidated operating
results.
Prior Year Restatements
In 1994, Historical Red Lion retroactively changed two of its
accounting principles for all years presented in the accompanying
consolidated financial statements as follows:
- In prior years, Historical Red Lion generally absorbed losses
attributable to other joint venturers' interests once the equity of the
other joint venturer was reduced to zero. However, certain distributions
and losses attributable to other joint venturers' interests were not
absorbed by Historical Red Lion if such amounts were deemed recoverable
from the fair value of the joint ventures' assets. Accordingly, these
distributions and losses were reflected as joint ventures' interests in the
consolidated balance sheets. In 1994, Historical Red Lion has changed its
accounting policy to absorb all losses and distributions to outside joint
venturers once the partners' equity has been reduced to zero. Historical
Red Lion changed its accounting policy for joint ventures' interest to more
closely align with the accounting treatment discussed in Emerging Issues
Task Force No. 94-2 issued in 1994. This change decreased income before
cumulative effect of accounting change by $515,000 for the year ended
December 31, 1993. The change also increased accumulated deficit at
December 31, 1991 by approximately $11.8 million.
- - - - Two of Historical Red Lion's 50 percent owned joint ventures, which
had been previously consolidated, are now accounted for on the equity
method. Historical Red Lion's five other joint ventures continue to be
consolidated in the accompanying financial statements. There was no
effect of this change on net income or partners' equity in any year.
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform to
current year presentation.
57
2. LONG-TERM DEBT:
Long-term debt at December 31, 1994 consists of the following (in
thousands):
Mortgages, secured by hotel properties, variable rates, 7.13% to 10%, payable
in varying installments through 1999 $390,750
Mortgages, secured by hotel properties, fixed rates, 8.75% to 11%, payable in varying
installments through 2008 4,211
Note payable, fixed rate, 8.69%, payable through 2022 4,341
Bank revolving credit lines, unsecured --
Term loan, unsecured, variable rate, 8.06%, payable through 1997 98,000
-------
497,302
Current portion of long-term debt (108,358)
-------
Long-term debt, excluding current portion $388,944
=======
The annual principal requirements for the five years subsequent to
December 31, 1994 are as follows (in thousands):
1995 $108,358
1996 110,328
1997 215,120
1998 46,992
1999 15,298
Thereafter 1,206
-------
$497,302
=======
The current portion of long-term debt at December 31, 1994 includes
$87 million related to balloon payments on four mortgages which are due in
1995. Management believes that these maturities can be satisfied from
existing or future financing resources.
Loan Extension Options
The above presentation of principal payments due for each of the five
years subsequent to December 31, 1994 and thereafter reflects Historical
Red Lion's plan to exercise certain options under the existing loan
agreements to extend the due dates of various loans.
Revolving Credit Lines and Term Loan
At December 31, 1993, Historical Red Lion had two revolving credit
line facilities, with a combined total amount available of $105 million, of
which $32,218,000 was outstanding, including amounts due under the cash
management system.
Historical Red Lion's primary credit agreement provided a $100 million
three-year revolving credit line with variable interest rates that varied,
at Historical Red Lion's option, on the bank's prime rate, certificate of
deposit rate or the London Interbank Offering Rate (LIBOR). The weighted
average interest rate for 1993 was 5.4%, with the rate at December 31,
1993, equal to 5.3%. At December 31, 1993, $26 million was outstanding
under this line.
58
The credit agreement, with the same interest rate options, converted
to a three-year term loan on September 1, 1994. At December 31, 1994, $98
million was outstanding under this term loan. Quarterly principal payments,
equal to 2% of the term loan balance as of September 1, 1994, will be
required through 1997 at which time the remaining principal balance will be
due and payable. The weighted average interest rate for 1994 was 6.92% with
the rate at December 31, 1994 equal to 8.06%. Historical Red Lion must
maintain, among other things, certain financial covenants over the term of
the loan. As of December 31, 1994, Historical Red Lion was in compliance
with these covenants.
Historical Red Lion also had a $5 million line of credit which was
terminated in 1994.
Historical Red Lion had outstanding letters of credit of $10,762,000
at December 31, 1994. These letters of credit are unsecured.
Interest Rate Swap Agreements
Historical Red Lion enters into interest rate swap agreements in order
to lessen its exposure to interest rate changes. The agreements have
effectively converted floating rate debt, which is tied to LIBOR, to fixed
rates. The interest cost relating to interest rate swap agreements for the
years ended December 31, 1993 and 1994 was $1,345,000 and $743,000,
respectively, and interest income for the seven months ended July 31, 1995
was $353,000.
At December 31, 1994, Historical Red Lion had three interest rate swap
agreements outstanding which have substantially converted $75 million of
debt from floating LIBOR based rates to all-in fixed rates ranging from
7.01% to 7.39% in 1994. The terms of the agreements range from four and one
half to five years.
These agreements are with major commercial banks and the exposure to a
credit loss in the event of non-performance by the banks is minimal.
Disclosures About Fair Value of Financial Instruments
Based on the borrowing rates currently quoted by financial
institutions for bank loans with terms and maturities similar to Historical
Red Lion's long-term debt, the carrying value of such debt approximates its
fair value. Based on quotes obtained from dealers, Historical Red Lion
would have had a gain of approximately $5,375,000 to settle the interest
rate swap agreements at December 31, 1994.
3. LEASES:
Certain Historical Red Lion hotels are located on leased land. Two of
these leases contain rental provisions which are based on a percentage of
revenues. All land leases extend over the remaining useful lives of the
buildings situated thereon. Historical Red Lion also leases certain office
space and equipment under operating leases. Total land, office and
equipment rent expense was $1,252,000 and $1,350,000 for the years ended
December 31, 1993 and 1994, respectively and $961,000 for the seven months
ended July 31, 1995.
59
Future minimum rental payments subsequent to December 31, 1994
required under land, office and equipment leases are as follows (in
thousands).
1995 $ 975
1996 945
1997 898
1998 721
1999 668
Thereafter 12,786
-------
$ 16,993
=======
4. EMPLOYEE BENEFIT PLANS:
Historical Red Lion has a defined contribution 401(k) retirement plan
for all full time, non-union employees who have completed one year of
service and who have attained the age of 21 years.
Under the 401(k) plan, Historical Red Lion contributes amounts equal
to each participants' elected contributions up to 6% of eligible
compensation. Pension expense under this plan was $1,670,000 and $1,758,000
for the years ended December 31, 1993 and 1994, respectively, and
$1,338,000 for the seven months ended July 31, 1995.
Historical Red Lion also has a non-qualified supplemental employee
retirement plan ("SERP"). The SERP was designed to complement the 401(k)
plan by restoring participants' benefits otherwise lost by certain
employees due to the statutory limits in the 401(k) plan. The pension
expense under the SERP was $287,000 and $322,000 for the years ended
December 31, 1993 and 1994, respectively and $126,000 for the seven months
ended July 31, 1995.
Certain management employees are participants in an incentive unit
plan. Participation units are awarded at the discretion of Historical Red
Lion's general partner. No units have been awarded since 1991. Awarded
units vest five years after the award date and are payable five years after
vesting, and earlier under certain circumstances. Unit values are
determined by various formulas tied to cash flow, as defined, and
appreciation in value of Historical Red Lion and partners' equity. No
accrual for this plan was required for the years ended December 31, 1993 or
1994, or the seven month period ended July 31, 1995.
The Chief Executive Officer of Historical Red Lion has an incentive
compensation agreement, the value of which is tied to the increase, if any,
in the value of Historical Red Lion's partners' equity. No accrual for this
agreement was required for the years ended December 31, 1993 or 1994, or
the seven month period ended July 31, 1995.
5. COMMITMENTS AND CONTINGENCIES:
At December 31, 1994, Historical Red Lion had commitments, relating to
capital improvement projects, of $7,994,000.
Historical Red Lion is party to litigation arising in the ordinary
course of business. In the opinion of management, these actions will not
have a material adverse effect, if any, on Historical Red Lion's financial
position, results of operations or liquidity.
60
6. RELATED PARTY TRANSACTIONS:
At December 31, 1994 other assets, net, include $1,483,000 of interest
bearing notes receivable from a joint venturer.
Other significant related party transactions are discussed in Notes 1
and 7.
7. TRANSACTIONS WITH RED LION INNS LIMITED PARTNERSHIP:
As discussed in Note 1, Red Lion Properties, Inc. ("Properties"), a
wholly-owned subsidiary of Historical Red Lion, serves as general partner
and owns 1.99% of the MLP.
Historical Red Lion manages the MLP hotels pursuant to a management
agreement and receives a base management fee equal to 3% of annual gross
revenues plus an incentive management fee based on adjusted gross operating
profit, as defined in the management agreement. The management agreement,
which began in 1987, has a seventy-five year term including renewal
options. Historical Red Lion also charges the MLP hotels for their pro rata
share of support services such as computer, advertising, public relations,
promotional and sales and central reservation services.
All the MLP personnel are employees of Historical Red Lion and its
affiliates. Additionally, auxiliary enterprises owned by Historical Red
Lion sell operating supplies, furnishings and equipment to the MLP. In the
opinion of management, sales to the MLP by the auxiliary enterprises were
made at prices and terms which approximate arms-length transactions.
The aggregate amounts, excluding personnel related expenses, charged
to the MLP under the arrangements described above were as follows (in
thousands):
Seven Months
ended Years ended December 31,
July 31, ------------------------
1995 1994 1993
---- ---- ----
Management fees $4,956 $7,456 $4,029
Support services 2,409 3,778 3,653
Purchase from auxiliary enterprises 5,184 9,513 9,409
Incentive management fees are subordinate to distributions by the MLP
to facilitate current payment of distributions to the limited partners. The
subordinated fees accrue without interest up to a maximum amount of $6
million. This ceiling was reached in 1988 and, because management does not
anticipate it will be paid during 1995, such amount has been classified as
non-current under the caption other assets, net, in the consolidated
balance sheet at December 31, 1994.
At December 31, 1994, other assets, net, include $3,726,000 which
Properties advanced to the MLP under a $4 million credit facility made
available to facilitate cash distributions to partners during the MLP's
first 36 months of operations. The amount outstanding under this facility
will be repaid to Historical Red Lion out of either (i) cash flow after
payment of priority distributions and incentive management fees, or (ii)
sale or refinancing proceeds prior to any distribution to limited partners.
In addition to the incentive management fee and general partner loan
discussed above, Historical Red Lion was due $13,482,000 from the MLP for
services, payroll funding and capital expenditure
61
funding provided as of December 31, 1994. These amounts are included in
accounts receivable, affiliates in the consolidated balance sheet, net of
working capital related to the managed MLP hotels of $1,160,000 at December
31, 1994.
Summarized income statement information for MLP is as follows (in
thousands):
Seven Months
ended Years ended December 31,
July 31, ------------------------
1995 1994 1993
---- ---- ----
Revenues $22,258 $35,620 $32,511
======= ======= =======
Income before cumulative effect
of change in accounting principle 2,153 2,929 3,206
Cumulative effect of change in
accounting for income taxes -- -- (1,351)
------- ------- -------
Net income $ 2,153 $ 2,929 $ 1,855
======= ======= =======
Revenues of the MLP represent the gross operating profit (operating
revenues less operating expenses) of the MLP hotels as this amount is
similar to gross rent received from Historical Red Lion to manage the
hotels. As discussed in Note 1, the operating revenues and expenses of the
MLP hotels are consolidated in Historical Red Lion's consolidated financial
statements.
Consolidation of the operating revenues and expenses of the MLP does
not affect Historical Red Lion's cash flow or net income except to the
extent that management fees were paid.
Summarized balance sheet information for the MLP, not included in the
accompanying consolidated balance sheet (including amounts due from and
owed to Historical Red Lion) is as follows (in thousands):
December 31,
1994
------------
Cash $ --
Noncurrent assets, primarily property and equipment 165,205
Current liabilities 17,343
Long-term obligations, net of current portion 123,430
Deferred income taxes 1,401
Partners' equity 23,031
8. LOSS ON SALE OF PROPERTY
During 1993, Historical Red Lion recorded a loss of $1,701,000 which
resulted from the sale of excess land and other assets.
62
9. SUBSEQUENT EVENTS (UNAUDITED)
On August 1, 1995, Historical Red Lion contributed substantially all
of its assets (excluding 17 hotels (the "Leased Hotels"), certain minority
joint venture interests and certain current assets) and certain liabilities
to Red Lion Hotels, Inc. ("RLHI") in exchange for 20,899,900 shares of
RLHI's common stock. An additional 10,062,500 shares of RLHI's common stock
were sold to the public at the August 1, 1995 closing of RLHI's initial public
offering, raising net proceeds of $173,388,000.
Also on August 1, 1995, Historical Red Lion paid $50,052,000 of the
remaining indebtedness and contributed the Leased Hotels and the remaining
related debt to a new partnership wholly-owned by Historical Red Lion. Such
debt, aggregating approximately $91,136,000, was repaid with proceeds from
a $97,500,000 refinancing of the Leased Hotels.
63
PRO FORMA FINANCIAL STATEMENTS
The unaudited Pro Forma Consolidated Statements of Income for the
years ended December 31, 1995 and 1994 present in the "The Company Pro
Forma" columns the results of operations of the Company as if the Formation
and Refinancing had been completed on January 1, 1994, except that certain
expenses resulting from the Formation and Offering totaling $14,662,000 and
the initial recording of estimated deferred income tax benefits of $9,736,000
resulting from the Formation, all of which were included in the Company's
actual financial results for the 10 months ended December 31, 1995, are
included in the 1995 pro forma presentation. The adjustments required to
reflect the Formation and Refinancing are set forth in the "Pro Forma
Adjustments" columns and are discussed in the accompanying notes. The pro
forma financial data of the Company are presented for informational
purposes only and may not reflect what would have been the Company's future
results of operations had such transactions occurred as of the dates
indicated.
The Pro Forma Consolidated Statement of Income for the year ended
December 31, 1995 presents the results of Historical Red Lion for the seven
months ended July 31, 1995 and the results of the Company for the ten
months ended December 31, 1995, adjusted for the effects of the Formation
and Refinancing. Ten months of Company operations are included as those
operations reflect an interest in a joint venture contributed by Historical
Red Lion in March 1995 (and thereby excluded from Historical Red Lion's
operating results for the seven months ended July 31, 1995), as well as
results of the Company subsequent to the Formation and Refinancing. The Pro
Forma Consolidated Statement of Income for the year ended December 31,
1994, presents the results of Historical Red Lion for the year ended
December 31, 1994, adjusted for the effects of the Formation and
Refinancing.
The unaudited Pro Forma Consolidated Statements of Income and the
related notes should be read in conjunction with the financial statements
of the Company as of December 31, 1995 and for the ten months then ended
and of Historical Red Lion for the seven months ended July 31, 1995 and the
year ended December 31, 1994.
64
RED LION HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(unaudited)
Historical The
Red Lion The Company Company
Seven Months Ten Months Pro Forma
Ended Ended Pro Forma Year Ended
July 31, 1995 Dec. 31, 1995 Adjustments Dec. 31, 1995
--------------- ------------- ----------- -------------
REVENUES:
Rooms $161,834 $115,370 $ -- $ 277,204
Food and beverage 92,570 72,711 -- 165,281
Other 27,802 26,688 (4,606)(a) 49,884
-------- -------- ------- --------
Total revenues 282,206 214,769 (4,606) 492,369
-------- -------- ------- ----------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 39,670 28,723 -- 68,393
Food and beverage 73,269 54,181 -- 127,450
Other 10,592 7,996 -- 18,588
Property indirect expenses 60,342 43,668 -- 104,010
Other costs 10,787 17,111 8,547 (b) 36,445
Depreciation and amortization 17,053 8,715 (6,441)(c) 19,327
Payments due to owners of managed hotels 32,073 19,428 (4,606)(a) 46,895
Expenses resulting from the Formation
and Offering -- 14,662 -- 14,662
----------- -------- ---------- ----------
OPERATING INCOME 38,420 20,285 (2,106) 56,599
EQUITY IN EARNINGS OF
UNCONSOLIDATED JOINT VENTURES 1,614 685 -- 2,299
OTHER INCOME (EXPENSE):
Interest income 2,097 1,600 -- 3,697
Interest expense (22,413) (9,707) 10,361(d) (21,759)
-------- --------- ------- ----------
Total Other Expense (20,316) (8,107) 10,361 (18,062)
-------- --------- ------- ----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS AND INCOME TAXES 19,718 12,863 8,255 40,836
JOINT VENTURERS' INTERESTS 411 (1,365) 196(e) (758)
--------- ---------- ------- ----------
INCOME BEFORE INCOME TAXES 20,129 11,498 8,451 40,078
INCOME TAX BENEFIT (EXPENSE) -- 4,107 (11,434)(f) (7,327)
----------- --------- ------- ----------
NET INCOME (LOSS) $ 20,129 $ 15,605 $ (2,983) $ 32,751
======== ======== ========= ==========
PRO FORMA EARNINGS PER SHARE $ 1.05(g)
COMMON SHARES 31,312,500(g)
See notes to pro forma consolidated statements of income.
65
RED LION HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(unaudited)
Year Ended December 31, 1994
---------------------------------------------------
The
Historical Pro Forma Company
Red Lion Adjustments Pro Forma
-------- ----------- ---------
REVENUES:
Rooms $257,699 $ -- $ 257,699
Food and beverage 159,154 -- 159,154
Other 46,035 -- 46,035
-------- ------------ ----------
Total revenues 462,888 -- 462,888
------- ------------ ----------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 64,121 -- 64,121
Food and beverage 124,070 -- 124,070
Other 17,586 -- 17,586
Property indirect expenses 99,673 -- 99,673
Other costs 19,570 14,650 (b) 34,220
Depreciation and amortization 31,313 (11,500) (c) 19,813
Payments due to owners of managed hotels 42,841 -- 42,841
-------- ------------ ----------
OPERATING INCOME 63,714 (3,150) 60,564
EQUITY IN EARNINGS OF
UNCONSOLIDATED JOINT VENTURES 1,327 -- 1,327
OTHER INCOME (EXPENSE):
Interest income 1,405 -- 1,405
Interest expense (34,142) 13,374 (d) (20,768)
-------- -------- ----------
Total Other Expense (32,737) 13,374 (19,363)
-------- --------- ----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS AND INCOME TAXES 32,304 10,224 42,528
JOINT VENTURERS' INTERESTS (1,321) 329 (e) (992)
--------- ---------- ----------
INCOME BEFORE INCOME TAXES 30,983 10,553 41,536
PROVISION FOR INCOME TAXES -- (16,614) (f) (16,614)
----------- --------- ----------
NET INCOME $ 30,983 $ (6,061) $24,922
======== ========= ==========
PRO FORMA EARNINGS PER COMMON SHARE -- -- $ 0.80 (g)
COMMON SHARES -- -- 31,312,500 (g)
See notes to pro forma consolidated statements of income.
66
RED LION HOTELS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
1. BASIS OF PRESENTATION (IN THOUSANDS)
The Pro Forma Consolidated Statements of Income for the year ended
December 31, 1995 present the results of Historical Red Lion for the seven
months ended July 31, 1995 and the actual results of operations of the
Company for the ten months ended December 31, 1995, adjusted for the
effects of the Formation and Refinancing. Ten months of Company operations
are included as those operations reflect an interest in a joint venture
property contributed by Historical Red Lion in March 1995 (and thereby
excluded from Historical Red Lion's operating results for the seven months
ended July 31, 1995), as well as the results of the Company subsequent to
the Formation and Refinancing. The amounts are presented as if the
Formation and Refinancing had occurred on January 1, 1994, except that
certain expenses resulting from the Formation and Offering totaling
$14,662 and the initial recording of estimated deferred income tax benefits
of $9,736 resulting from the Formation, all of which were included in the
Company's actual financial results for the 10 months ended December 31,
1995, are included in the 1995 pro forma presentation.
The 1995 pro forma financial data includes amounts for obligations
under the incentive unit plan and supplemental income retirement agreement
which were contingent upon the completion of the Company's initial public
offering ("the Offering"). These amounts were $13,348 in the aggregate and
were recorded as operating expenses by the Company after the closing of the
Offering. The 1995 pro forma financial data also includes the initial
recording of estimated deferred income tax benefits of $9,736 associated
with the change in tax status, and the write-off of previously recorded
financing costs, debt discount and prepayment penalties and expenses
associated with the transfer of assets to the Company of $1,314. These
amounts were also recorded by the Company subsequent to the closing of the
Offering.
Excluding the effect of the nonrecurring Formation costs of $1,314 and
the obligations under an incentive unit plan and a supplemental retirement
agreement aggregating $13,348, pro forma operating income and income before
income taxes for the year ended December 31, 1995 would have increased by
$14,662, resulting in pro forma operating income and income before income
taxes of $71,261 and $54,740, respectively. As a result, pro forma net
income would have been $42,583, an increase of $9,832, or $0.31 per share.
Excluding the estimated deferred income tax benefits of $9,736, pro forma
net income would have decreased by $9,736, or $0.31 per share. When
combined with the amounts related to Formation costs and the obligations
under the incentive unit plan and supplemental income retirement agreement,
income would have been $32,847, resulting in pro forma earnings per common
share of $1.05.
The 1994 pro forma financial data does not include amounts related to
Formation costs of $1,314, the aggregate obligations under the incentive
unit plan and supplemental income retirement agreement of $13,348, or the
estimated deferred income tax benefits of $9,736, which were recorded by
the Company subsequent to completion of the Offering.
The unaudited pro forma consolidated statements of income for the
years ended December 31, 1995 and 1994 are presented for informational
purposes only and may not reflect the Company's future results of
operations or what the results of operations would have been had such
transactions occurred as of the dates indicated.
67
All significant intercompany accounts and transactions have been
eliminated. A pro forma balance sheet as of December 31, 1995 is not
presented as it would be identical to the Company's consolidated balance
sheet as of December 31, 1995.
Capitalized terms have the same meaning as defined in the Company's
financial statements as of and for the ten months ended December 31, 1995.
2. FORMATION AND REFINANCING
Historical Red Lion contributed substantially all of its assets
(excluding 17 Leased Hotels, certain minority joint venture interests and
certain current assets), and certain liabilities to the Company pursuant to
a contribution agreement (the "Formation"). The Company leases the Leased
Hotels from the Partnership. Immediately subsequent to the initial public
offering, the Company refinanced or repaid substantially all of its
indebtedness and certain indebtedness of joint venture properties with the
net proceeds of the offering, borrowings under a term loan facility, and
existing cash (the "Refinancing").
3. PRO FORMA ADJUSTMENTS
The pro forma adjustments to the consolidated statements of income are
detailed below:
(a) Reflects the only operations of the Company prior to the Formation,
which were related to earnings from a joint venture interest in one
Red Lion Hotel that was contributed to the Company by Historical Red
Lion in March 1995. The operating revenue and expenses of the joint
venture were included in the operating results of Historical Red Lion
for the seven months ended July 31, 1995, as Historical Red Lion
retained management of the joint venture during that same period.
Accordingly, the operating profit from the joint venture was reflected
as "Payments due to owners of managed hotels" in the consolidated
statement of income of Historical Red Lion for the seven months ended
July 31, 1995, and as other revenues in the Company's consolidated
statement of income for the ten months ended December 31, 1995. The
pro forma adjustment eliminates the operating profit remitted to the
Company by Historical Red Lion.
(b) Net adjustment to reflect the following (in thousands):
Seven Months
Ended Year Ended
July 31, December 31,
1995 1994
---- ----
Lease expense on the Leased Hotels $ 8,750 $ 15,000
Fee paid by the Partnership for administrative
services provided by the Company (203) (350)
------- --------
Net adjustment $ 8,547 $ 14,650
======= ========
(c) Adjustment to reflect a $6.4 million and a $11.5 million decrease in
depreciation and amortization for the seven months ended July 31,
1995, and the year ended December 31, 1994, respectively, associated
with the Leased Hotels and the elimination of debt discount
amortization associated
68
with repayment of debt contributed. These items would not have been
incurred if the Formation had taken place at the beginning of the
applicable period.
(d) Pro forma interest expense consists of the following (in thousands):
Years Ended December 31,
--------------------------
1995 1994
---- ----
Interest expense prior to Formation:
Interest expense on debt not refinanced $ 3,882 $ 6,651
Interest expense on term loan 6,101 10,460
Historical interest expense on debt repaid during the period 689 1,107
Other financing costs 717 1,276
Amortization of deferred loan costs 663 1,274
--------- --------
Total prior to Formation 12,052 20,768
Interest expense subsequent to Formation 9,707 --
--------- --------
Total pro forma interest expense $ 21,759 $ 20,768
========= ========
Pro forma adjustments consist of:
Historical Red Lion interest $ 22,413 $ 34,142
Company interest subsequent to Formation 9,707 --
less: Pro forma interest expense (21,759) (20,768)
-------- --------
Net adjustment $ 10,361 $ 13,374
======== ========
Pro forma interest on the term loan was calculated using an assumed
7.75% interest rate. This assumed interest rate was based on the one month
London Interbank Offering Rate as of May 31, 1995 plus 2% (8.08%), adjusted
by existing interest rate swap agreements with a notional amount of $75.0
million contributed to the Company.
(e) Adjustment reflects loss attributable to the interest in consolidated
joint ventures retained by the Partnership.
(f) Adjustment to record the income tax expense associated with operating
as a corporation using an income tax rate of approximately 40%.
(g) Based on 31,312,500 shares of common stock issued in the offering. A
separate supplemental earnings per common share giving effect to the
number of shares of common stock which would be required to be issued
to replace the equity of the net assets retained by the Partnership,
instead of the number of shares to be issued in the Offering, has not
been presented since it is not materially different from the pro forma
earnings per share as shown.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is included under
"Election of Directors" in the Company's definitive proxy statement for its
1996 Annual Meeting of Shareholders filed or to be filed not later than 120
days after the end of the fiscal year covered by this Report and is
incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this
Report. Information with respect to compliance with Section 16(a) of the
Securities Exchange Act is included under "Compliance with Section 16(a) of
the Exchange Act" in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Proposal 1: Election of Directors--Compensation of Directors," "Executive
Compensation," "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" in the Company's definitive proxy
statement for its 1996 Annual Meeting of Shareholders filed or to be filed
not later than 120 days after the end of the fiscal year covered by this
Report and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is included under "Voting Securities and Principal
Shareholders" in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management is included under "Certain Transactions" in
the Company's definitive proxy statement for its 1996 Annual Meeting of
Shareholders filed or to be filed not later than 120 days after the end of
the fiscal year covered by this Report and is incorporated herein by
reference.
70
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The financial statements filed as part of this report are listed in
the Index to Financial Statements on the first page of Item 8 of this
report.
(a)(2) Financial Statement Schedules
No schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
(a)(3) Exhibits
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, File Number 33-90306 (the "1995 S-1").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2
to the 1995 S-1.
4.1 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to the 1995 S-1.
4.2 Registration Rights Agreement dated August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995, File Number 1-13700 (the "September 30, 1995
Form 10-Q").
10.1 Master Lease dated August 1, 1995 between RLH Partnership, L.P.,
as Landlord, and the Company, as Tenant. Incorporated by
reference to Exhibit 10.1 to the September 30, 1995 Form 10-Q.
*10.2 Form of Indemnification Agreement among the Company and its
directors and officers. Incorporated by reference to Exhibit 10.2
to the 1995 S-1.
10.3 Management Agreement dated April 6, 1987 between Red Lion Inns
Operating L.P. and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 10.3 to the 1995 S-1.
10.4 Credit Agreement dated as of July 31, 1995 among the Company and
Credit Lyonnais New York Branch. Incorporated by reference to
Exhibit 10.4 to the September 30, 1995 Form 10-Q.
10.5 Contribution Agreement dated as of August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 10.5 to the September 30,
1995 Form 10-Q.
71
*10.6 1995 Equity Participation Plan. Incorporated by reference to
Exhibit 10.6 to the September 30, 1995 Form 10-Q.
*10.7 Supplemental Employee Retirement Plan.
*10.8 Incentive Unit Plan, as amended. Incorporated by reference to
Exhibit 10.8 to the 1995 S-1.
*10.9 Supplemental Income Retirement Agreement with David J. Johnson.
Incorporated by reference to Exhibit 10.9 to the September 30,
1995 Form 10-Q.
*10.10 Management Bonus Plan. Incorporated by reference to Exhibit
10.10 to the September 30, 1995 Form 10-Q.
*10.11 Non-Qualified Stock Option Agreement with David J. Johnson.
Incorporated by reference to Exhibit 10.11 to the September 30,
1995 Form 10-Q.
21.1 List of Subsidiaries of the Company. Incorporated by reference to
Exhibit 21 to the 1995 S-1.
27.1 Financial Data Schedule.
- - - -------------------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. Two reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year ended December
31, 1995. A Form 8-K dated December 1, 1995 reported under Item 5
the issuance of a press release announcing the acquisition of a
hotel in Spokane, Washington. A Form 8-K dated December 22, 1995
reported under Item 4 a change in the Company's public
accountants.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RED LION HOTELS, INC.
Date: April 1, 1996 By DAVID J. JOHNSON
---------------------------------------
David J. Johnson,
President, Chief Executive Officer and
Chairman of the Board
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 indicated on April 1, 1996.
Signature Title
DAVID J. JOHNSON
- - - ---------------------------------- President, Chief Executive Officer
David J. Johnson and Chairman of the Board (Principal
Executive Officer)
C. MICHAEL VERNON
- - - ---------------------------------- Chief Financial Officer
C. Michael Vernon (Principal Financial and
Accounting Officer)
MICHAEL W. MICHELSON
- - - ---------------------------------- Director
Michael W. Michelson
EDWARD W. GILHULY
- - - ---------------------------------- Director
Edward A. Gilhuly
TODD A. FISHER
- - - ---------------------------------- Director
Todd A. Fisher
73
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, File Number 33-90306 (the "1995 S-1").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2
to the 1995 S-1.
4.1 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to the 1995 S-1.
4.2 Registration Rights Agreement dated August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995 File Number 1-13700 (the "September 30, 1995
Form 10-Q").
10.1 Master Lease dated August 1, 1995 between RLH Partnership, L.P.,
as Landlord, and the Company, as Tenant. Incorporated by
reference to Exhibit 10.1 to the September 30, 1995 Form 10-Q.
10.2 Form of Indemnification Agreement among the Company and its
directors and officers. Incorporated by reference to Exhibit 10.2
to the 1995 S-1.
10.3 Management Agreement dated April 6, 1987 between Red Lion Inns
Operating L.P. and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 10.3 to the 1995 S-1.
10.4 Credit Agreement dated as of July 31, 1995 among the Company and
Credit Lyonnais New York Branch. Incorporated by reference to
Exhibit 10.4 to the September 30, 1995 Form 10-Q.
10.5 Contribution Agreement dated as of August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
Incorporated by reference to Exhibit 10.5 to the September 30,
1995 Form 10-Q.
10.6 1995 Equity Participation Plan. Incorporated by reference to
Exhibit 10.6 to the September 30, 1995 Form 10-Q.
10.7 Supplemental Employee Retirement Plan.
10.8 Incentive Unit Plan, as amended. Incorporated by reference to
Exhibit 10.8 to the 1995 S-1.
10.9 Supplemental Income Retirement Agreement with David J. Johnson.
Incorporated by reference to Exhibit 10.9 to the September 30,
1995 Form 10-Q.
10.10 Management Bonus Plan. Incorporated by reference to Exhibit
10.10 to the September 30, 1995 Form 10-Q.
10.11 Non-Qualified Stock Option Agreement with David J. Johnson.
Incorporated by reference to Exhibit 10.11 to the September 30,
1995 Form 10-Q.
21.1 List of Subsidiaries of the Company. Incorporated by reference to
Exhibit 21 to the 1995 S-1.
27.1 Financial Data Schedule.