UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 MAIN STREET, VANCOUVER, WASHINGTON 98663
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(360) 696-0001
--------------
(Registrant's telephone number, including area code)
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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 _ No X.
-
As of July 31, 1995 there were issued and outstanding 31,312,500 shares of the
registrant's common stock.
1
RED LION HOTELS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income 3
Consolidated Balance Sheet 4
Consolidated Statement of Stockholder's Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 14
2
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
-------------------------------------------
RED LION HOTELS, INC.
---------------------
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
(unaudited)
THREE FOUR
MONTHS ENDED MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- -------------
REVENUES $ 2,764 $ 3,421
OPERATING COSTS AND EXPENSES:
Base management fee 233 295
Depreciation and amortization 541 721
Other 190 189
------ -------
Total operating costs and expenses 964 1,205
------ -------
OPERATING INCOME 1,800 2,216
Interest expense 932 1,256
------ -------
Income before joint venturer's interest 868 960
and income taxes
Income attributable to joint venturer's (502) (570)
interest ------ -------
Income before income taxes 366 390
Income tax benefit (expense) (146) 1,044
------ -------
NET INCOME $ 220 $ 1,434
====== =======
Earnings per common share $2,200 $14,340
Common shares 100 100
(SEE NOTES TO FINANCIAL STATEMENTS)
3
RED LION HOTELS, INC.
---------------------
CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
JUNE 30,
1995
----
ASSETS
CURRENT ASSETS:
Due from affiliate $ 1,091
------
Total current assets 1,091
------
PROPERTY AND EQUIPMENT:
Land 6,000
Buildings and improvements 35,499
Furnishings and equipment 3,775
Construction in progress 62
------
45,336
Less -- accumulated depreciation (721)
------
44,615
DEFERRED INCOME TAXES 1,200
OTHER ASSETS, net 859
------
Total assets $47,765
======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 442
------
Total current liabilities 442
------
LONG-TERM DEBT 45,000
JOINT VENTURER'S INTEREST 982
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value
100 shares authorized,
100 shares issued and outstanding --
Additional paid-in capital and net assets contributed (93)
Retained earnings 1,434
------
Total stockholder's equity 1,341
------
Total liabilities and stockholder's equity $47,765
======
(SEE NOTES TO FINANCIAL STATEMENTS)
4
RED LION HOTELS, INC.
---------------------
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the four months ended June 30, 1995
(in thousands)
(unaudited)
ADDITIONAL
PAID IN
CAPITAL AND
COMMON NET ASSETS RETAINED
STOCK CONTRIBUTED EARNINGS TOTAL
----- ----------- -------- -----
Balance, February 28, 1995 $ -- $ -- $ -- $ --
Net assets contributed -- (93) -- (93)
Net income -- -- 1,434 1,434
----- ------- ------ -----
Balance, June 30, 1995 $ -- $ (93) $ 1,434 $1,341
===== ======= ====== =====
(SEE NOTES TO FINANCIAL STATEMENTS)
5
RED LION HOTELS, INC.
---------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the four months ended June 30, 1995
(in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,434
Adjustments to reconcile net income to cash
provided by operating activities:
Income attributable to joint venturer's interest 570
Depreciation 721
Amortization of deferred loan costs 83
Increase in deferred tax asset (1,200)
Change in working capital items (1,278)
------
Net cash provided by operating activities 330
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (330)
------
Net cash used in investing activities (330)
------
NET INCREASE (DECREASE) IN CASH --
CASH, BEGINNING OF PERIOD --
------
CASH, END OF PERIOD $ --
======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,252
(SEE NOTES TO FINANCIAL STATEMENTS)
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. GENERAL
Red Lion Hotels, Inc. (the "Company") was incorporated in Delaware in March 1994
and, as of the date hereof, is a wholly owned subsidiary of Red Lion, a
California Limited Partnership ("Historical Red Lion").
The Company subsequently initiated an initial public offering of its common
stock on July 26, 1995 (the "Offering") which was closed August 1, 1995, raising
net proceeds of approximately $172 million (including the over-allotment option
granted to the underwriters which was exercised in full).
On March 6, 1995, Historical Red Lion contributed to the Company a majority of
its 50% ownership interest in the joint venture which owns the Santa Barbara Red
Lion Hotel (the "Hotel") located in California. See "Basis of Presentation."
Prior to the consummation of the Offering, Historical Red Lion will repay
certain of its outstanding indebtedness with existing cash balances and
contribute substantially all of its assets (excluding 17 hotels, certain
minority joint venture interests and cash) and certain liabilities to the
Company (the "Formation"). The Partnership (Historical Red Lion subsequent to
the Formation and refinancing of the Company) will retain the 17 hotels and the
related goodwill, deferred loan costs and mortgage debt, certain minority joint
venture interests and certain current assets.
The Company will refinance or repay substantially all of the debt contributed
pursuant to the Formation with the net proceeds of the Offering, borrowings
under a new term loan, existing cash and, to the extent necessary, borrowings
under a new revolving credit facility.
The accompanying consolidated financial statements of the Company have been
prepared by the Company without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the information
presented not misleading.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of June 30, 1995 and the results of operations and cash flows for the three
and four months ended June 30, 1995. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations. The accompanying unaudited financial statements do not
reflect the Formation, the refinancing or consummation of the Offering.
2. BASIS OF PRESENTATION
On March 6, 1995, Historical Red Lion assigned to the Company, as a contribution
to capital, a 49.4% interest in the joint venture (the "Santa Barbara Joint
Venture") which owns the Hotel located in Santa Barbara, California (the "Santa
Barbara Assignment"). The accompanying financial statements reflect the
contribution, at Historical Red Lion's cost, 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. There
were no operations of the Company prior to the contribution of the Santa Barbara
Joint Venture. Therefore, the presentation reflects four months rather than six
months of the 1995 operations.
7
The Santa Barbara Assignment did not transfer the right to manage the operations
of the Hotel to the Company. Since the right to manage the Hotel has not been
transferred to the Company, the accompanying financial statements do not include
the operating revenues and expenses of the Hotel or the Hotel's working capital.
These amounts are included in the financial statements of Historical Red Lion
which continues to manage the Hotel. The right to manage the operations of the
Hotel will be transferred to the Company at the completion of the Formation, at
which time the Hotel's operating revenues, expenses and working capital will be
reflected in the consolidated financial statements of the Company.
Revenues reported in the statement of income represent the gross operating
profit of the Hotel which has been credited to the Company as payments received
from Historical Red Lion. Operating costs and expenses consist primarily of
property taxes, depreciation and management fees.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment is stated at Historical Red Lion's net cost at the date
of contribution plus additions, at cost, made subsequent to the contribution of
the joint venture interest. Additions and improvements are capitalized at cost,
including interest costs incurred during construction. There was no capitalized
interest during the four months ended June 30, 1995. 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.
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
Deferred Loan Costs
Deferred loan costs are included in other assets, net, and represent prepaid
financing fees which are amortized over the life of the debt.
8
Income Taxes
The Company utilizes the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years the
differences are expected to reverse.
Historical Red Lion is a limited partnership and income taxes are the
responsibility of the individual partners. Accordingly, no deferred income
taxes were recorded by Historical Red Lion. The Company is a corporation and
will be subject to income taxes. At the date of contribution of the interest in
the Santa Barbara Joint Venture the Company recorded a deferred income tax asset
of approximately $1.2 million which represents the estimated tax effect of the
difference in the joint venture's basis for income tax and financial reporting
purposes. In accordance with SFAS 109 this amount has been recorded as an
income tax benefit in the accompanying statement of income for the four months
ended June 30, 1995.
Earnings per Share
Earnings per share has been computed based on 100 shares outstanding during the
period. Subsequent to the completion of the Offering the number of shares
outstanding will be approximately 31,312,500 which includes the over allotment
option granted to the underwriters and approximately 350,000 shares of common
stock issuable in connection with adjustments to be made to the incentive unit
plan of Historical Red Lion.
4. LONG-TERM DEBT
Long-term debt consists of a $45 million loan with a bank which is
collateralized by a first trust deed on the Hotel. The loan payments are
interest only at a rate that varies, at the Company's option, with the bank's
prime or LIBOR rate. The rate as of June 30, 1995 was 7.65%. The loan matures
on June 29, 1998.
5. RELATED PARTY TRANSACTIONS
The Hotel is operated and managed by Historical Red Lion. Management fees are
paid to Historical Red Lion and were $233,000 and $295,000 for the three and
four months ended June 30, 1995.
The amount shown in current assets as due from affiliate consists of amounts
related to the operating activities of the Hotel subsequent to the contribution
of the joint venture interest to the Company and the Hotel's net working capital
items which consist of accounts receivable, inventories, prepaid expenses, hotel
accounts payable and accrued expenses and certain taxes other than property and
income taxes. These balances are due in the normal course of business. The net
working capital is shown in the due from affiliate since the working capital of
the Hotel is reflected in Historical Red Lion's financial statements.
9
6. SUBSEQUENT EVENT
The other joint venturer in the Santa Barbara Joint Venture previously asserted
that its consent was required prior to making the Santa Barbara Assignment and
that it might seek, in judicial proceedings, to set aside the Santa Barbara
Assignment or to assert a right of first refusal. Subsequent to the quarter
ended June 30, 1995, a settlement was reached whereby the other joint venturer
has consented to the Santa Barbara Assignment. The settlement had no material
effect on the financial position and results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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
the Partnership. On a historical basis, the Company had net income of $0.2
million and $1.4 million for the quarter ended and four months ended June 30,
1995, respectively (the four-month net income includes an approximately $1.2
million income tax benefit recorded in accordance with Statement of Financial
Accounting Standards No. 109).
On August 1, 1995, Historical Red Lion, contributed substantially all of its
assets (excluding 17 hotels, the "Leased Hotels" and certain other 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 on the accompanying pro forma statements
represent 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. Red Lion Hotels believes that a comparison of pro forma
results provides a more meaningful presentation than the historical operations.
The following discussion of the results of operations and financial condition
should be read in conjunction with the accompanying financial statements and
notes thereto and the Company's Registration Statement on Form S-1 (No. 33-
90306), as amended, as filed with the Securities and Exchange Commission and the
pro forma results of operations included herein.
10
PRO FORMA RESULTS OF OPERATIONS
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(dollar amounts in thousands except per share data)
(unaudited)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1995 1994 1995 1994
PRO FORMA(A) PRO FORMA(A) PRO FORMA(A) PRO FORMA(A)
------------ ------------ ------------ ------------
REVENUES:
Rooms $ 72,996 $ 67,076 $135,918 $125,317
Food and beverage 41,717 39,838 80,793 76,860
Other 12,412 11,552 24,114 22,726
-------- -------- -------- --------
Total revenues 127,125 118,466 240,825 224,903
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 17,437 15,847 33,534 30,622
Food and beverage 32,395 30,852 63,473 60,322
Other 4,625 4,416 9,160 8,690
Property indirect expenses 26,118 24,813 51,560 49,354
Other costs 8,457 8,213 16,954 16,523
Depreciation and amortization 4,942 4,962 9,884 9,595
Payments due to owners of managed hotels 12,349 12,139 23,858 23,188
-------- -------- -------- --------
OPERATING INCOME 20,802 17,224 32,402 26,609
EQUITY IN EARNINGS OF UNCONSOLIDATED
JOINT VENTURES 727 287 1,689 1,303
OTHER EXPENSE:
Interest expense 5,014 4,645 10,041 9,193
-------- -------- -------- --------
Total other expense 5,014 4,645 10,041 9,193
-------- -------- -------- --------
INCOME BEFORE JOINT VENTURERS'
INTERESTS 16,515 12,866 24,050 18,719
INCOME ATTRIBUTABLE TO JOINT
VENTURERS' INTERESTS (350) (365) (159) (297)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 16,165 12,501 23,891 18,422
INCOME TAX (6,466)(b) (5,000)(b) (9,556)(b) (7,369)(b)
-------- ------------ ----------- -----------
NET INCOME $ 9,699 $ 7,501 $ 14,335 $ 11,053
======== ======== ======== ========
PRO FORMA EARNINGS PER COMMON SHARE $0.31 $0.24 $0.46 $0.35
COMMON SHARES 31,312,500(c) 31,312,500(c) 31,312,500(c) 31,312,500(c)
(SEE NOTES TO FINANCIAL STATEMENTS)
11
a) The pro forma results give effect to the Formation, leasing of the Leased
Hotels and the repayment and refinancing of substantially all of the
Company debt as if each of these events were completed on January 1, 1994.
b) Income taxes have been provided on a pro forma basis assuming an effective
tax rate of 40%.
c) Based on the number of shares of common stock outstanding after the
offering (including 1,312,500 shares issued to cover over allotments) plus
350,000 shares issuable in connection with adjustments to an incentive unit
plan.
The pro forma statements do not include the effects of certain pre-tax incentive
compensation charges of approximately $13,000 or the effects of estimated
deferred income tax benefits of approximately $9,900 and certain pre-tax
expenses associated with the Formation and refinancing of approximately $1,608.
These items will be recorded in the Company's quarter ending September 30, 1995.
The estimated effects of these items are a reduction in pro forma net income of
$308 and in pro forma earnings per common share of $0.01.
COMPARISON OF THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1995
PRO FORMA REVENUES: For the quarter, pro forma revenues increased to $127.1
million from $118.5 million in the comparable 1994 quarter, an increase of $8.6
million, or 7.3%. For the six months ended June 30, 1995, pro forma revenues
increased to $240.8 million from $224.9 million in the comparable 1994 period,
an increase of $15.9 million or 7.1%. The changes in specific revenue
categories are discussed below.
For the quarter, pro forma room revenues increased to $73.0 million from $67.1
million, an increase of $5.9 million, or 8.8% from the prior year quarter. For
the six months ended June 30, 1995, pro forma room revenues increased to $135.9
million from $125.3 million, an increase of $10.6 million or 8.5%. The increase
in room revenues for the quarter and six months ended June 30, 1995, is due to
an increase in occupancy and higher room rates.
A summary of occupancy and room rates follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1995 1994 1995 1994
---- ---- ---- ----
Occupancy Percentage 76.6% 75.4% 72.2% 71.4%
Average Room Rate $75.42 $70.46 $74.88 $69.88
For the quarter 1995, pro forma food and beverage revenues increased to $41.7
million from $39.8 million, an increase of $1.9 million, or 4.7% from the prior
year quarter. For the six months ended June 30, 1995, pro forma food and
beverage revenues increased to $80.8 million from $76.9 million, an increase of
$3.9 million or 5.1%. The increase in pro forma food and beverage revenues for
the quarter and six months ended June 30, 1995, is due to an increase in banquet
revenues and the addition of a restaurant facility which opened in late 1994.
12
Other pro forma revenues for the quarter and six-month period increased by $.9
million (7.4%) and $1.4 million (6.1%), respectively, over the comparable period
in 1994 due to the increase in occupancy and higher meeting room and equipment
rentals.
Operating results are affected by seasonality. The quarter pro forma results
reflect spring and early summer in which revenues are typically lower than in
the quarter ending September 30th, but higher than in the quarter ended March
31. There can be no assurance, however, that such trends will continue.
OPERATING COSTS AND EXPENSES: For the quarter, pro forma operating costs and
expenses increased to $106.3 million from $101.2 million in the 1994 quarter, an
increase of $5.1 million, or 5%. For the six months ended June 30, 1995, pro
forma operating costs and expenses increased to $208.4 million from the
comparable prior year period amount of $198.3 million, an increase of $10.1
million, or 5.1%..
OPERATING INCOME: For the quarter ended June 30, 1995, pro forma operating
income increased to $20.8 million from $17.2 million in the 1994 quarter, an
increase of $3.6 million, or 20.8%. For the six months ended June 30, 1995,
operating income increased to $32.4 million from the comparable prior year
period amount of $26.6 million, an increase of $5.8 million, or 21.8%. These
increases reflect the improvement in revenues discussed above and improved
departmental operating margins.
NET INCOME: For the quarter 1995, pro forma net income was $9.7 million ($.31
per share) compared to the prior year quarter's $7.5 million ($.24 per share).
For the six months ended June 30, 1995, pro forma net income was $14.3 million
($.46 per share) compared to the comparable prior year period amount of $11.1
million ($.35 per share).
LIQUIDITY AND CAPITAL RESOURCES: In connection with the Formation, the Company
repaid the majority of Historical Red Lion debt with the proceeds of the equity
offering and a new $135 million seven year term loan. The term loan carries an
interest rate that varies based on LIBOR (7.9% at August 1, 1995). 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 August
1, 1995 the interest rate was 7.9% and there was no outstanding balance.
In connection with the Formation, the Company assumed capital commitments of
approximately $12 million. The Company believes that its operating cash flows
along with existing cash will be sufficient to meet its capital and operating
needs for the foreseeable future.
13
RED LION HOTELS, INC.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Exhibits: Exhibit 27 - Article 5 Financial Data Schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
for which this report is being filed.
SIGNATURES
Pursuant to the requirements 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 in the City of Vancouver, Washington, on
the 8th day of September 1995.
RED LION HOTELS, INC.
---------------------
(Registrant)
By: /S/DAVID J. JOHNSON
-------------------
David J. Johnson
President and Chief Executive Officer
By: /S/C. MICHAEL VERNON
---------------------
C. Michael Vernon
Chief Financial Officer
14
INDEX OF EXHIBITS
Exhibit
Number
------
*3.1 Certificate of Incorporation of the Company.
*3.2 Bylaws of the Company.
*4.1 Specimen Common Stock Certificate.
*4.2 Form of Registration Rights Agreement dated , 1995 between the
Company and Red Lion, a California Limited Partnership.
*10.1 Form of Lease.
*10.2 Form of Indemnification Agreement among the Company and its
directors and officers.
*10.3 Management Agreement dated April 6, 1987 between Red Lion Inns
Operating L.P. and Red Lion, a California Limited Partnership.
*10.4 Credit Agreement dated as of , 1995 among the Company and
Credit Lyonnais New York Branch.
*10.5 Form of Contribution Agreement dated as of , 1995 between the
Company and Red Lion, a California Limited Partnership.
*10.6 Form of 1995 Equity Participation Plan.
*10.7 Supplemental Employee Retirement Plan.
*10.8 Incentive Unit Plan, as amended.
*10.9 Supplemental Income Retirement Agreement with David J. Johnson.
27 Article 5 Financial Data Schedule.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 33-90306.
15