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 March 31, 1996
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13700
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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
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(360) 696-0001
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(Registrant's telephone number, including area code)
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(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 X No .
--- ---
Number of shares of registrant's common stock outstanding at May 6, 1996:
31,312,500
RED LION HOTELS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
2
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
RED LION HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,751 $ 68,355
Accounts receivable, net 21,943 19,709
Accounts receivable - affiliates 12,344 12,096
Inventories 6,205 6,339
Prepaid expenses and other current 5,695 5,461
assets
Deferred income taxes 2,809 2,306
-------- --------
Total current assets 100,747 114,266
PROPERTY AND EQUIPMENT, net 344,090 336,269
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED JOINT VENTURES 16,681 16,429
GOODWILL, net 21,328 21,508
DEFERRED INCOME TAXES 5,905 6,571
DUE FROM AFFILIATE 23,340 20,828
OTHER ASSETS, net 11,462 11,049
-------- --------
Total assets $523,553 $526,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,943 $ 23,618
Accrued expenses 35,527 37,197
Current portion of long-term debt 9,833 7,759
-------- --------
Total current liabilities 61,303 68,574
LONG-TERM DEBT, NET OF CURRENT PORTION 212,540 215,608
OTHER LONG-TERM OBLIGATIONS 11,693 11,169
JOINT VENTURERS' INTEREST 1,290 1,290
-------- --------
Total liabilities 286,826 296,641
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
100,000,000 shares authorized;
31,312,500 shares issued and
outstanding 313 313
Additional paid-in capital and net
assets contributed 214,361 214,361
Retained earnings 22,053 15,605
-------- --------
Total stockholders' equity 236,727 230,279
-------- --------
Total liabilities and
stockholders' equity $523,553 $526,920
======== ========
See notes to consolidated financial statements.
3
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
THREE ONE
MONTHS ENDED MONTH ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------- ---------------
REVENUES:
Rooms $ 67,029 $ --
Food and beverage 39,105 --
Other 14,516 657
----------- ----------
Total revenues 120,650 657
OPERATING COSTS AND EXPENSES:
Departmental direct expenses:
Rooms 17,870 --
Food and beverage 30,940 --
Other 4,924 --
Property indirect expenses 27,315 --
Other costs 8,509 61
Depreciation and amortization 4,396 180
Payments due to owners of managed 12,312 --
hotels ----------- ----------
OPERATING INCOME 14,384 416
EQUITY IN EARNINGS OF UNCONSOLIDATED 847 --
JOINT VENTURES
OTHER INCOME (EXPENSE):
Interest income 736 --
Interest expense (4,618) (324)
----------- ----------
Total other expense (3,882) (324)
----------- ----------
INCOME BEFORE JOINT VENTURERS' INTERESTS 11,349 92
JOINT VENTURERS' INTERESTS (603) (68)
----------- ----------
INCOME BEFORE INCOME TAXES 10,746 24
INCOME TAX BENEFIT (EXPENSE) (4,298) 1,190
----------- ----------
NET INCOME $ 6,448 $ 1,214
=========== ==========
EARNINGS PER COMMON SHARE $.21 $12,140.00
=========== ==========
WEIGHTED AVERAGE COMMON SHARES 31,312,500 100
OUTSTANDING =========== ==========
See notes to consolidated financial statements.
4
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
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
Net income -- -- -- 6,448 6,448
------ ------ ----------- -------- --------
Balance, March 31, 1996 31,313 $313 $214,361 $22,053 $236,727
====== ====== =========== ======== ========
See notes to consolidated financial statements.
5
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE ONE
MONTHS ENDED MONTH ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,448 $ 1,214
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Income attributable to joint venturers' interest 603 68
Equity in earnings of unconsolidated joint ventures (847) --
Depreciation and amortization 4,396 180
Amortization of other assets 329 21
Deferred income tax provision 163 (1,200)
Changes in assets and liabilities:
Accounts receivable (2,234) --
Accounts receivable - affiliates (248) --
Inventories 134 --
Prepaid expenses and other current assets (234) --
Accounts payable, accrued expenses and other long-term
obligations (8,821) (216)
-------- -------
Net cash (used in) provided by operating activities (311) 67
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (12,354) (16)
Distributions to joint venturers (182) --
Net increase in due from affiliates (2,512) --
Net increase in other assets (425) --
Distributions from unconsolidated joint ventures 49 --
Other investing activities 125 (51)
-------- -------
Net cash used in investing activities (15,299) (67)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 9,000 --
Repayments of long-term borrowings (10,092) --
Other financing activities 98 --
-------- -------
Net cash used in financing activities (994) --
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (16,604) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 68,355 --
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,751 $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 3,921 $ 254
Income taxes 3,100 --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net liabilities (other than cash) contributed by Historical
Red Lion (Note 1), including property and equipment of $45,006,
long-term debt of $45,000, other assets of $859, joint
venture interests of $412 and current liabilities of $546. $ -- $ 93
See notes to consolidated financial statements.
6
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 55 hotels in 10 western
states. 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 in 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 and certain related obligations (the "Leased Hotels"), certain
minority joint venture interests and certain current assets) and certain
liabilities to the Company (the "Formation"). Historical Red Lion
subsequent to the Formation and refinancing of the Company (the
"Partnership") 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. 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.
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 March 31, 1996.
7
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 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 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
the 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 $9,409,000 and
$9,933,000 at March 31, 1996 and December 31, 1995, respectively, and
operating revenues of $44,998,000 and $0 and operating expenses of
$30,971,000 and $0 for the three months ended March 31, 1996 and one
month ended March 31, 1995, respectively, 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 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.
The unaudited consolidated financial statements reflect, in the opinion
of the management, all adjustments, all of which are of a normal
recurring nature, necessary to present fairly the financial position of
the Company at March 31, 1996 and the results of operations and cash
flows for the three month period ended March 31, 1996 and for the one
month period ended March 31, 1995. Interim results are not necessarily
indicative of results to be expected for a full fiscal year.
The unaudited consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements
and notes thereto.
8
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," effective
January 1, 1996. SFAS No. 123 defines a fair value based method of
accounting for employee stock options or similar instruments and permits
companies to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows a company to continue
to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees." The Company has
elected to continue to measure compensation cost in conformity with APB
No. 25 and to make pro forma disclosures of net income and earnings per
share in its annual report on Form 10-K for the year ended December 31,
1996, as if the fair value based method of accounting defined in SFAS No.
123 had been applied.
3. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following (in thousands):
March 31, December 31,
1996 1995
---------- -------------
Term loan, LIBOR plus 2%, 7.5% at March 31,
1996, payable through 2002 $123,869 $133,750
Bank revolving credit line, LIBOR plus 2%,
7.5% at March 31, 1996 9,000 --
Mortgages, variable rates, 6.5% -7.0% at
March 31, 1996, payable through 1998 84,689 84,900
Note payable, imputed fixed rate, 8.69%,
payable through 2022 4,815 4,717
-------- --------
222,373 223,367
Current portion of long-term debt (9,833) (7,759)
-------- --------
Long-term debt, net of current portion $212,540 $215,608
======== ========
4. RELATED PARTY TRANSACTIONS
Investments in and advances to unconsolidated joint ventures includes two
notes receivable from one joint venture in the amounts of $1,444,000 and
$2,009,000 at March 31, 1996 and $1,500,000 and $2,009,000 at December
31, 1995 and bear interest at a fixed rate of 10% and a rate based on
prime plus 1.0% (9.25% at March 31, 1996 and 9.5% at December 31, 1995),
respectively. In addition, other assets, net, includes a note receivable
from a joint venture in the amount of $1,671,000 and $1,628,000
outstanding at March 31, 1996 and December 31, 1995, respectively, which
bears interest at a rate based on prime plus .25% times 120% (10.2% at
March 31, 1996 and 10.5% at December 31, 1995).
9
Transactions with the MLP
Included in accounts receivable-affiliates and due from affiliate is
$23,057,000 and $19,078,000 at March 31, 1996 and December 31, 1995,
respectively, 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 current
assets and current liabilities related to the managed MLP hotels of
$3,044,000 and $2,194,000 at March 31, 1996 and December 31, 1995,
respectively. The current balance of $4,144,000 and $2,823,000 at March
31, 1996 and December 31, 1995, respectively, is included in accounts
receivable-affiliates. The remaining balance of $18,913,000 and
$16,255,000 at March 31, 1996 and December 31, 1995, respectively, is
classified as due from affiliate. Amounts receivable from the MLP earn
interest at the rate of prime plus 0.5% (8.75% and 9.0% at March 31,
1996 and December 31, 1995, respectively).
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 were
received by the Company during the first quarter of 1996 reducing the
outstanding balance to $5,647,000 at March 31, 1996. Additionally,
$4,946,000 was repaid to the Company in April 1996 out of the refinancing
of MLP long-term debt and this amount is reflected in accounts
receivable-affiliates at March 31, 1996. The remaining balance is
classified as due from affiliate. Accordingly, due from affiliate
includes total non-interest bearing receivables from the MLP of
$4,427,000 and $4,573,000 at March 31, 1996 and December 31, 1995,
respectively.
5. INCOME TAXES
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 Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," the Company recorded net deferred tax
assets of $1.2 million in March 1995 related to the contribution of the
Santa Barbara Joint Venture. Except for the tax benefit associated with
the contribution of the Santa Barbara Joint Venture, income taxes have
been provided at an estimated effective income tax rate of 40%.
6. INSURANCE PROCEEDS
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. Management currently anticipates that renovations to such hotels
will be completed in the second quarter of 1996. As the Company
maintains flood and business interruption insurance, management does not
believe that the ultimate outcome will have a material adverse effect on
the results of operations or financial position of the Company.
Moreover, as the Company's flood insurance policy covers the replacement
cost of the damaged property, insurance proceeds will likely exceed the
net book value of the underlying property, resulting in the recognition
of gains when such proceeds are received.
10
7. COMMITMENTS AND CONTINGENCIES
At March 31, 1996, the Company had commitments relating to capital
improvement projects aggregating approximately $14,250,000.
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.
8. SUBSEQUENT EVENT
During April 1996, the Company acquired a 290 room hotel in San Antonio,
Texas for $26 million.
11
ITEM 2 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 actual results for the three months ended
March 31, 1996 to pro forma results for the three months ended March 31,
1995 provides a more meaningful presentation than a comparison to actual
1995 operations which represent the results of one hotel and a relatively
short time period since the Company's operations commenced.
PRO FORMA (A)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------- ---------------
REVENUES:
Rooms $ 67,029 $ 62,922
Food and beverage 39,105 39,076
Other 14,516 11,702
----------- -----------
Total revenues 120,650 113,700
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 17,870 16,097
Food and beverage 30,940 31,078
Other 4,924 4,535
Property indirect expenses 27,315 25,442
Other costs 8,509 8,497(b)
Depreciation and amortization 4,396 4,942
Payments due to owners of managed hotels 12,312 11,509
----------- -----------
OPERATING INCOME 14,384 11,600
EQUITY IN EARNINGS OF
UNCONSOLIDATED JOINT VENTURES 847 962
INTEREST EXPENSE, net (3,882) (5,027)(c)
----------- -----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS 11,349 7,535
JOINT VENTURERS' INTERESTS (603) 191
----------- -----------
INCOME BEFORE INCOME TAXES 10,746 7,726
INCOME TAX EXPENSE (4,298) (3,090)
----------- -----------
NET INCOME $ 6,448 $ 4,636
=========== ===========
PRO FORMA EARNINGS PER COMMON SHARE $ 0.21 $ 0.15
=========== ===========
COMMON SHARES 31,312,500 31,312,500(d)
=========== ===========
OTHER STATISTICS:
Gross Operating Profit $ 39,601 $ 36,548
Gross Operating Profit Margin 32.8% 32.1%
12
(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. The accompanying consolidated
statement of income includes the pro forma results of Historical Red
Lion for the three months ended March 31, 1995 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,
1995.
(b) Pro forma other costs includes quarterly lease expense of $3,750,000
associated with the Leased Hotels, offset by quarterly
administrative costs of $89,000 for which the Company is reimbursed
by the Partnership.
(c) Pro forma interest expense for the quarter ended March 31, 1995
reflects the effects of the Formation and Refinancing as if those
events had occurred on January 1, 1995. Accordingly, pro forma
interest expense does not include interest on debt associated with
the Leased Hotels or repaid with the proceeds of the Offering.
(d) Based on the number of common shares issued in the Offering, as if
the Offering occurred on January 1, 1995.
Comparison of Three Months Ended March 31, 1996 and Pro Forma Three
-------------------------------------------------------------------
Months Ended March 31, 1995
---------------------------
The Company's net income increased 39% to $6.4 million ($.21 per share)
for the quarter ended March 31, 1996 from pro forma net income of $4.6
million ($.15 per share) for the quarter ended March 31, 1995.
Revenues. The Company's operating revenues for the quarter ended March
---------
31, 1996 were $120.7 million, an increase of $7 million or 6% from pro
forma operating revenues of $113.7 for the quarter ended March 31, 1995.
The changes in specific revenue categories are discussed below.
Room revenues increased 7% to $67 million for the quarter ended March 31,
1996 as compared to pro forma room revenues of $62.9 million for the
quarter ended March 31, 1995. This increase was primarily due to a 5%
rise in average daily room rates to $78.16. Actual occupancy of 67%
during the quarter ended March 31, 1996 decreased 1% as compared to the
pro forma occupancy rate for the quarter ended March 31, 1995. An
additional component of the increase in room revenues was the acquisition
of a 369 room hotel during December 1995 in Spokane, Washington ("Spokane
City Center"). Spokane City Center contributed room revenues of $1.2
million during the quarter ended March 31, 1996.
Other revenues increased 24% to $14.5 million for the quarter ended March
31, 1996 as compared to pro forma other revenues of $11.7 million for the
quarter ended March 31, 1995 due primarily to increased banquet rentals,
ancillary banquet services and insurance proceeds relating to two hotels
which were affected by the February 1996 flood in the Portland, Oregon
area.
Expenses. Departmental direct expenses (expenses related to a specific
---------
function, such as rooms or food and beverage) for the quarter ended March
31, 1996 increased 4% over pro forma departmental direct expenses for the
quarter ended March 31, 1995. As a percentage of revenues and pro forma
revenues, departmental direct expenses and pro forma departmental direct
expenses were 45% for the quarter ended March 31, 1996 and 1995,
respectively.
13
Property indirect expenses for the quarter ended March 31, 1996 increased
7% over pro forma property indirect expenses for the quarter ended March
31, 1995, which represents a modest increase 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.
The Company's gross operating profit for the quarter ended March 31, 1996
was $39.6 million, an increase of $3.1 million or 8% from pro forma gross
operating profit of $36.5 million for the quarter ended March 31, 1995.
The increase is primarily attributable to the higher revenues discussed
above. Gross operating profit margin for the quarter ended March 31,
1996 improved to 33% from pro forma gross operating profit margin of 32%
for the quarter ended March 31, 1995.
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 approximately $803,000 for the quarter ended
March 31, 1996 as compared to the pro forma payments to owners of managed
hotels for the quarter ended March 31, 1995. The increase in payments
due to owners of managed hotels is primarily attributable to improved
operating performance at the managed hotels.
Management fees in connection with the managed hotels increased
moderately to $1.7 million for the quarter ended March 31, 1996 as
compared to pro forma management fees of $1.5 million for the quarter
ended March 31, 1995.
The Company's operating income for the quarter ended March 31, 1996 was
$14.4 million, an increase of $2.8 million or 24% from pro forma
operating income of $11.6 million for the quarter ended March 31, 1995.
The increase is primarily attributable to the rise in room revenues
discussed above.
Interest expense, net, decreased $1.1 million to $3.9 million for the
quarter ended March 31,1996 as compared to pro forma interest expense of
$5 million for the quarter ended March 31, 1995. The decrease is
primarily due to interest income earned during the first quarter of 1996
of approximately $736,000 and repayments of borrowings.
Income tax expense increased $1.2 million to $4.3 million for the quarter
ended March 31,1996 as compared to pro forma income tax expense of $3.1
million for the quarter ended March 31, 1995. The Company's estimated
effective tax rate is 40% for both quarters.
LIQUIDITY AND CAPITAL RESOURCES: Cash decreased to $51.8 million at
March 31, 1996 from $68.4 million at December 31, 1995 primarily as a
result of the investment in capital expenditures during the first quarter
of 1996, the payment of accounts payable and accrued expenses and
seasonal fluctuations. 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.
At March 31, 1996, commitments relating to capital improvement projects
were approximately $14.3 million. 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.
14
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. 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 term of seven years. The term loan and credit line
facility (collectively the "Credit Facility") carry a variable interest
rate based on LIBOR plus 2% (7.5% at March 31, 1996). Quarterly mandatory
prepayments which increase over the term of the Credit Facility are
required. In addition, in March of each year a mandatory prepayment of
the Credit Facility is required in an amount equal to 50% of annual
excess cash flow (as defined in the credit agreement) for the prior
fiscal year. During March 1996, $9 million was drawn down on the working
capital portion of the credit line facility in order to fund the
mandatory prepayment of $8,631,000 on the seven year term loan. At March
31, 1996, the outstanding balance on the credit line facility totaled $9
million at an interest rate of 7.5% and at December 31, 1995 there was no
outstanding balance. 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.
**************
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 those 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, price pressures and continuing
availability of capital to fund growth and improvements. The forward-
looking statements should be considered in light of these factors.
15
PART II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------
(a) Exhibits: The following document is filed herewith and made a
--------
part of this report:
Exhibit 27 - Article 5 Financial Data Schedule for
1st Quarter 10-Q.
(b) Reports on Form 8-K : None
--------------------
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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.
RED LION HOTELS, INC.
Date: May 14, 1996 By /s/DAVID J. JOHNSON
-------------------
David J. Johnson
President, Chief Executive Officer and
Chairman of the Board
Date: May 14, 1996 By /s/MICHAEL VERNON
-----------------
Michael Vernon
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17