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 September 30, 1996
-------------------
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 X No .
--- ---
Number of shares of registrant's common stock outstanding at October 11, 1996:
31,345,000
RED LION HOTELS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I - FINANCIAL INFORMATION PAGE
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 8
Item 2 Managemment's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
2
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
RED LION HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 18,706 $ 68,355
Accounts receivable, net 23,436 19,709
Accounts receivable - affiliates 4,662 12,096
Inventories 6,317 6,339
Prepaid expenses and other current assets 4,250 5,461
Deferred income taxes 2,616 2,306
-------- --------
Total current assets 59,987 114,266
Property and Equipment, net 401,550 336,269
Investments in and Advances to Unconsolidated
Joint Ventures 18,194 16,429
Goodwill, net 32,197 21,508
Deferred Income Taxes 2,098 6,571
Due From Affiliate 22,261 20,828
Other Assets, net 11,420 11,049
-------- --------
$547,707 $526,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 16,277 $ 23,618
Accrued expenses 42,157 37,197
Current portion of long-term debt 48,620 7,759
-------- --------
Total current liabilities 107,054 68,574
Long-Term Debt, net of current portion 164,686 215,608
Other Long-Term Obligations 11,697 11,169
Joint Venturers' Interest -- 1,290
-------- --------
Total liabilities 283,437 296,641
-------- --------
Commitments and Contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized;
0 shares issued and outstanding -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
31,315,000 and 31,312,500 shares
issued and outstanding at September 30,
1996 and December 31, 1995, respectively 313 313
Additional paid-in capital and net
assets contributed 214,408 214,361
Retained earnings 49,549 15,605
-------- --------
Total stockholders' equity 264,270 230,279
-------- --------
$547,707 $526,920
======== ========
See Notes to Consolidated Financial Statements.
3
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
THREE MONTHS ENDED NINE SEVEN
SEPTEMBER 30, MONTHS ENDED MONTHS ENDED
1996 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---- ---- ------------------- ------------------
Revenues:
Rooms $ 88,572 $ 53,332 $ 236,017 $ 53,332
Food and beverage 38,889 26,351 120,278 26,351
Other 14,377 9,591 43,510 13,012
----------- ----------- ----------- ----------
Total revenues 141,838 89,274 399,805 92,695
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 20,428 11,805 57,419 11,805
Food and beverage 30,715 19,791 94,349 19,791
Other 4,920 3,146 14,999 3,146
Property indirect expenses 28,841 17,241 84,004 17,241
Other costs 8,303 6,018 26,331 6,502
Depreciation and amortization 5,470 3,197 14,637 3,918
Payments due to owners of managed hotels 13,805 9,124 39,983 9,124
Expenses resulting from the Formation
and Offering -- 14,662 -- 14,662
----------- ----------- ----------- ----------
Operating Income 29,356 4,290 68,083 6,506
Equity in Earnings of Unconsolidated
Joint Ventures (146) 271 1,277 271
Other Income (Expense):
Interest income 355 637 1,630 637
Interest expense (4,342) (4,039) (13,396) (5,295)
----------- ----------- ----------- ----------
Total other expense (3,987) (3,402) (11,766) (4,658)
----------- ----------- ----------- ----------
Income Before Joint Venturers' Interests 25,223 1,159 57,594 2,119
Joint Venturers' Interests (376) (500) (1,354) (1,070)
----------- ----------- ----------- ----------
Income Before Income Taxes 24,847 659 56,240 1,049
Income Tax Benefit (Expense) (9,739) 7,243 (22,296) 8,287
----------- ----------- ----------- ----------
Net Income $ 15,108 $ 7,902 $ 33,944 $ 9,336
=========== =========== =========== ==========
Earnings Per Common Share $0.48 $0.38 $1.08 $1.04
=========== =========== =========== ==========
Weighted Average Common Shares Outstanding 31,312,600 20,875,000 31,312,500 8,946,500
=========== =========== =========== ==========
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 at 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 at December 31, 1995 31,313 313 214,361 15,605 230,279
Stock options exercised 2 -- 47 -- 47
Net income -- -- -- 33,944 33,944
------ ------ -------- -------- --------
Balance at September 30, 1996 31,315 $ 313 $214,408 $ 49,549 $264,270
====== ====== ======== ======== ========
See Notes to Consolidated Financial Statements.
5
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE SEVEN
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
Cash Flows from Operating Activities:
Net income $ 33,944 $ 9,336
Adjustments to reconcile net income
to cash
provided by operating activities:
Income attributable to joint
venturers' interest 1,354 1,070
Distributions to joint venturers (933) (830)
Equity in earnings of
unconsolidated joint ventures (1,277) (271)
Depreciation and amortization 14,637 3,918
Amortization of other assets 969 763
Deferred income tax provision
(benefit) 4,163 (11,264)
Issuance of common stock in
connection with adjustments
to the incentive unit plan -- 6,650
Changes in assets and liabilities:
Accounts receivable (3,727) (1,451)
Accounts receivable - affiliates 7,434 (3,591)
Inventories 22 (247)
Prepaid expenses and other current
assets 1,211 (332)
Accounts payable, accrued expenses and
other long-term obligations (3,143) 11,880
-------- ---------
Net cash provided by
operating activities 54,654 15,631
-------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment, net (80,259) (4,601)
Additions to goodwill (11,236) --
Net decrease (increase) in due from
affiliates (1,433) 348
Net increase in other assets (452) (1,449)
Net decrease (increase) in
investments in and advances to
unconsolidated joint ventures (1,118) 341
Distributions from unconsolidated
joint ventures 209 80
-------- ---------
Net cash used in investing
activities (94,289) (5,281)
-------- ---------
Cash Flows from Financing Activities:
Cash received from contribution of
assets -- 10,480
Net proceeds from common stock issued
in the Offering -- 177,279
Net proceeds from exercise of stock options 47 --
Proceeds from long-term borrowings 9,000 135,000
Repayments of long-term borrowings (19,381) (255,051)
Increase in note payable 320 65
Increase in deferred loan costs -- (6,957)
-------- ---------
Net cash provided by (used
in) financing activities (10,014) 60,816
-------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (49,649) 71,166
Cash and Cash Equivalents at Beginning
of Period 68,355 --
-------- ---------
Cash and Cash Equivalents at End of Period $ 18,706 $ 71,166
======== =========
6
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
(unaudited)
NINE SEVEN
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $11,873 $1,732
Income taxes 16,155 --
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 interest of $412 and current
liabilities of $546. $ -- $ 93
See Notes to Consolidated Financial Statements.
7
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 56 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 had 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.
Pursuant to the contribution agreement entered into between the Company and the
Partnership at the time of Formation, the Partnership exercised its right to
require the Company to purchase the Partnership's retained joint venture
interests. On September 12, 1996, the Company purchased the Partnership's joint
venture interests in seven joint ventures for approximately $1.3 million.
On September 12, 1996, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with Doubletree Corporation ("Doubletree"), pursuant to
which the Company would be acquired by Doubletree through the merger of a wholly
owned subsidiary with and into the Company. Consummation of the transaction is
subject to certain conditions and is expected to be completed during the fourth
quarter of 1996 (refer to Note 9, subsequent event).
Basis of Presentation
The accompanying consolidated 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 beginning August 1, 1995.
8
The accompanying consolidated financial statements for the three and seven
months ended September 30, 1995 reflect the results of the interest in the Santa
Barbara Joint Venture only for approximately one month and five months,
respectively. Beginning August 1, 1995, the consolidated financial statements
reflect the results of the Formation and Offering and full commencement of the
Company's operations.
The consolidated financial statements include four joint ventures in which the
interests of the Company exceed 50%. In addition, 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 two 50%
and 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 $8,638,000 and
$9,933,000 at September 30, 1996 and December 31, 1995, respectively, and
operating revenues of $48,769,000, $143,897,000 and $30,408,000 and operating
expenses of $31,512,000, $94,323,000 and $19,249,000 for the three months ended
September 30, 1996, nine months ended September 30, 1996 and both the three and
seven months ended September 30, 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 September
30, 1996 and the results of operations and cash flows for the three and nine
month periods ended September 30, 1996 and for the three and seven month periods
ended September 30, 1995. Interim results are not necessarily indicative of
results to be expected for a full fiscal year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The unaudited consolidated financial statements should be read in conjunction
with the Company's annual consolidated financial statements and notes thereto.
9
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 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. Under the
terms of the Merger Agreement with Doubletree, which is expected to be
consummated during the fourth quarter of 1996, all outstanding vested and
unvested stock options will be converted into the right to receive cash and
common stock of Doubletree and canceled.
3. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following (in thousands):
September 30, December 31,
1996 1995
---- ----
Term loan, LIBOR plus 2% (7.7% at September 30, 1996
and 8.0% at December 31, 1995), payable through 2002 $123,869 $133,750
Mortgages, variable rates (6.5% -7.0% at
September 30, 1996 and 7.0% -8.3% at
December 31, 1995), payable through 1998 84,418 84,900
Note payable, 8.69%, payable through 2022 5,019 4,717
-------- --------
213,306 223,367
Current portion of long-term debt (48,620) (7,759)
-------- --------
Long-term debt, net of current portion $164,686 $215,608
======== ========
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, to fixed rates.
Accordingly, the net interest received or paid on the interest rate swap is
recorded as an adjustment to interest expense.
At September 30, 1996, 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 of $24,000 and
$49,000 was recognized by the Company relating to interest rate swap agreements
for the three and nine months ended September 30, 1996, respectively, and is
included as an adjustment to interest expense.
4. RELATED PARTY TRANSACTIONS
Investments in and advances to unconsolidated joint ventures includes two notes
receivable from one joint venture in the amounts of $1,405,000 and $5,603,000 at
September 30, 1996 and $1,500,000 and $2,009,000 at December 31, 1995. The
notes bear interest at a fixed rate of 10% and a rate based on prime plus 1.0%
(9.25% at September 30, 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 $1,759,000 and $1,628,000 outstanding at September 30, 1996 and
December 31, 1995, respectively, which bears interest at a rate based on prime
(10.2% at September 30, 1996 and 10.5% at December 31, 1995).
10
Transactions with the MLP
Included in accounts receivable-affiliates and due from affiliate is $19,675,000
and $19,078,000 at September 30, 1996 and December 31, 1995, respectively,
representing amounts receivable from the MLP primarily for advances made by the
Company and Historical Red Lion for capital improvements 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 $2,490,000 and $2,194,000 at
September 30, 1996 and December 31, 1995, respectively. The current balance on
this receivable of $1,841,000 and $2,823,000 at September 30, 1996 and December
31, 1995, respectively, is included in accounts receivable-affiliates. The
remaining balance of $17,834,000 and $16,255,000 at September 30, 1996 and
December 31, 1995, respectively, is classified as due from affiliate. Amounts
receivable from the MLP for capital improvement advances earn interest at the
rate of prime plus 0.5% (8.75% at September 30, 1996 and 9.0% at December 31,
1995).
Accounts receivable-affiliates and due from affiliate also include certain other
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 and is classified as due from affiliate
at September 30, 1996 and December 31, 1995. 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. The Company received $5,299,000 of such fees during the nine months
ended September 30, 1996. The remaining balance of $701,000 is classified as
due from affiliate at September 30, 1996.
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 related to
the contribution of the Santa Barbara Joint Venture in March 1995 and $8.5
million related to the Formation on August 1, 1995. Except for the tax benefit
associated with the contribution of the Santa Barbara Joint Venture and the
Formation, income taxes have been provided at an estimated effective income tax
rate of approximately 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 have been repaired. The third
hotel was undamaged and reopened quickly. 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.
7. 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,
for the three and seven months ended September 30, 1995.
8. COMMITMENTS AND CONTINGENCIES
At September 30, 1996, the Company had commitments relating to capital
improvement projects aggregating approximately $10,395,000.
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.
11
9. SUBSEQUENT EVENT
On September 12, 1996, the Company entered into a Merger Agreement with
Doubletree, pursuant to which the Company would be acquired by Doubletree
through the merger of a wholly owned subsidiary with and into the Company. The
purchase price for acquisition of all of the outstanding common stock of the
Company, which is subject to adjustment, is approximately $1 billion and will be
paid in a combination of cash and Doubletree common stock. Consummation of the
transaction is subject to certain conditions, including approval by the
stockholders of both the Company and Doubletree. The Company's stockholders are
scheduled to meet on November 8, 1996 in order to vote on approval of the Merger
Agreement and acquisition of the Company by Doubletree. The Partnership owns
approximately 67% of the outstanding voting stock of the Company and, therefore,
has sufficient voting power to constitute a quorum and approve and adopt the
Merger Agreement, regardless of the vote of any other stockholder. The
transaction is expected to be approved and become effective during the fourth
quarter of 1996.
12
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 and nine months ended September
30, 1996 to pro forma results for the three and nine months ended September 30,
1995 provides a more meaningful presentation than a comparison to actual 1995
operations which represent the results of one hotel until the Formation and
Offering when the Company's operations fully commenced.
PRO FORMA (A) PRO FORMA (A)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Revenues:
Rooms $ 88,572 $ 79,248 $ 236,017 $215,166
Food and beverage 38,889 38,128 120,278 118,921
Other 14,377 12,094 43,510 36,208
----------- -------- ----------- --------
Total revenues 141,838 129,470 399,805 370,295
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 20,428 17,941 57,419 51,475
Food and beverage 30,715 29,587 94,349 93,060
Other 4,920 4,578 14,999 13,738
Property indirect expenses 28,841 26,023 84,004 77,583
Other costs 8,303 8,882 (b)/(f) 26,331 25,836 (b)/(f)
Depreciation and amortization 5,470 4,646 14,637 14,530
Payments due to owners of managed hotels 13,805 12,733 39,983 36,591
Expenses resulting from the Formation
and Offering -- 14,662 (c) -- 14,662 (c)
----------- -------- ----------- --------
Operating Income 29,356 10,418 68,083 42,820
Equity in Earnings of
Unconsolidated Joint Ventures (146) 196 1,277 1,885
Interest Expense, net (3,987) (4,572) (d) (11,766) (14,613) (d)
----------- -------- ----------- --------
Income Before Joint Venturers' Interests 25,223 6,042 57,594 30,092
Joint Venturers' Interests (376) (304) (1,354) (463)
----------- -------- ----------- --------
Income Before Income Taxes 24,847 5,738 56,240 29,629
Income Tax Benefit (Expense) (9,739) 6,409 (e)/(f) (22,296) (3,147) (e)/(f)
----------- -------- ----------- --------
Net Income $ 15,108 $ 12,147 $ 33,944 $ 26,482
=========== ======== =========== ========
Earnings Per Common Share $ 0.48 $ 0.39 $ 1.08 $ 0.85
=========== ======== =========== ========
Weighted Average Common Shares
Outstanding 31,312,600 31,312,500 (g) 31,312,500 31,312,500 (g)
=========== ============= =========== =============
Other Statistics:
Gross operating profit $ 56,934 $ 51,341 $ 149,034 $ 134,439
Gross operating profit margin 40% 40% 37% 36%
13
(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 statements of income includes the
pro forma results of Historical Red Lion for the three and nine months
ended September 30, 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 approximately $88,000 for which the Company is reimbursed by the
Partnership.
(c) Includes certain costs resulting from the Formation of $1,314,000 and
expenses resulting from 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.
(d) Pro forma interest expense for the three and nine months ended September
30, 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.
(e) Pro forma income taxes have been provided assuming an effective tax rate of
40%. Pro forma income taxes for the three and nine months ended September
30, 1995, include a deferred income tax benefit of $9,736,000 resulting
from the tax effect of the differences in the book and tax basis of the
assets and liabilities transferred to the Company.
(f) The expenses resulting from the Formation and Offering of $14,662,000 (pre-
tax) and the deferred income tax benefit of $9,736,000 as discussed above
result in a net negative effect on pro forma net income of $96,000 or less
than $.01 on an earnings per share basis.
(g) 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 September 30, 1996 and Pro Forma Three Months
- ------------------------------------------------------------------------------
Ended September 30, 1995
- ------------------------
Revenues. The Company's operating revenues for the three months ended September
- ---------
30, 1996 were $141.8 million, an increase of $12.3 million or 9% from pro forma
operating revenues of $129.5 for the three months ended September 30, 1995. The
change in operating revenues is primarily a result of increased room revenues.
Room revenues increased 12% to $88.6 million for the three months ended
September 30, 1996 as compared to pro forma room revenues of $79.2 million for
the three months ended September 30, 1995. This increase was primarily due to a
7% rise in average daily room rates to $82.39. Actual occupancy of 79.3% during
the three months ended September 30, 1996 declined 1.4 percentage points as
compared to the pro forma occupancy rate for the three months ended September
30, 1995. Another component of the increase was the acquisition of three hotels
(previously unaffiliated with the Company) since September 30, 1995, which
contributed room revenues of approximately $3.8 million during the three months
ended September 30, 1996.
A summary of occupancy and room rates for the three months ended September 30 is
as follows:
1996 1995
------- -------
Occupancy percentage 79.3% 80.7%
Average room rate $82.39 $76.93
Operating results are affected by seasonality. The current quarter results
reflect late summer and early fall seasons in which revenues are typically
higher than in the second and fourth quarters. There can be no assurance,
however, that such trends will continue.
14
Expenses. Departmental direct expenses (expenses related to a specific
- ---------
function, such as rooms or food and beverage) for the three months ended
September 30, 1996 increased 8% over pro forma departmental direct expenses for
the three months ended September 30, 1995. As a percentage of revenues and pro
forma revenues, departmental direct expenses and pro forma departmental direct
expenses remained constant at 40% for the three months ended September 30, 1996
and 1995.
Property indirect expenses for the three months ended September 30, 1996
increased 11% over pro forma property indirect expenses for the three months
ended September 30, 1995 and remained constant 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.
Gross Operating Profit. The Company's gross operating profit for the three
- -----------------------
months ended September 30, 1996 was $56.9 million, an increase of $5.6 million
or 11% from pro forma gross operating profit of $51.3 million for the three
months ended September 30, 1995. The increase is primarily attributable to the
higher revenues discussed above. Gross operating profit margin and pro forma
gross operating profit margin remained constant at 40% for the three months
ended September 30, 1996 and 1995.
Payments Due to Owners of Managed Hotels. 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 $1.1 million for the three
months ended September 30, 1996 as compared to the pro forma payments to owners
of managed hotels for the three months ended September 30, 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
$3.2 million for the three months ended September 30, 1996 as compared to pro
forma management fees of $3 million for the three months ended September 30,
1995.
Operating Income. The Company's operating income for the three months ended
- -----------------
September 30, 1996 was $29.4 million, an increase of $19 million or 183% from
pro forma operating income of $10.4 million for the three months ended September
30, 1995. The increase is primarily attributable to the higher revenues
discussed above and the $14.7 million of Formation and Offering costs incurred
in the third quarter of 1995. Excluding the Formation and Offering costs,
operating income for the three months ended September 30, 1996 would have
increased $4.3 million or 17% over pro forma operating income for the three
months ended September 30, 1995.
Interest Expense. Interest expense, net, decreased $600,000 to $4 million for
- -----------------
the three months ended September 30, 1996 as compared to pro forma interest
expense of $4.6 million for the three months ended September 30, 1995. The
decrease is primarily due to interest income earned during the third quarter of
1996 of approximately $360,000 and a lower average outstanding principal balance
on Company debt.
Income Tax Benefit (Expense). Income tax expense increased $16.1 million to $9.7
- -----------------------------
million for the three months ended September 30, 1996 as compared to pro forma
income tax benefit of $6.4 million for the three months ended September 30,
1995. The increase is due to the recognition of tax benefits in the third
quarter of 1995 resulting from the Formation and Offering. Income taxes have
been provided assuming an effective tax rate of approximately 40% for both three
month periods. In the third quarter of 1996, a benefit of $200,000 was recorded
in order to properly reflect the actual tax rate experienced in fiscal year
1995.
Net Income. The Company's net income increased 24% to $15.1 million ($.48 per
- -----------
share) for the three months ended September 30, 1996 from pro forma net income
of $12.1 million ($.39 per share) for the three months ended September 30,
1995. The increase in net income is primarily due to increased operating income
and decreased interest expense.
15
Comparison of Nine Months Ended September 30, 1996 and Pro Forma Nine Months
- ----------------------------------------------------------------------------
Ended September 30, 1995
- ------------------------
Revenues. The Company's operating revenues for the nine months ended September
- ---------
30, 1996 were $399.8 million, an increase of $29.5 million or 8% from pro forma
operating revenues of $370.3 for the nine months ended September 30, 1995. The
change in operating revenues is primarily a result of increased room and other
revenues.
Room revenues increased 10% to $236 million for the nine months ended September
30, 1996 as compared to pro forma room revenues of $215.2 million for the nine
months ended September 30, 1995. This increase was primarily due to a 7% rise
in average daily room rates to $80.72. Actual occupancy of 73.8% during the
nine months ended September 30, 1996 declined 1.3 percentage points as compared
to the pro forma occupancy rate for the nine months ended September 30, 1995.
Another component of the increase was the acquisition of three hotels
(previously unaffiliated with the Company) since September 30, 1995 which
contributed additional room revenues of approximately $8.1 million during the
nine months ended September 30, 1996.
A summary of occupancy and room rates for the nine months ended September 30 is
as follows:
1996 1995
------- -------
Occupancy percentage 73.8% 75.1%
Average room rate $80.72 $75.62
Other revenues increased 20% to $43.5 million for the nine months ended
September 30, 1996 as compared to pro forma other revenues of $36.2 million for
the nine months ended September 30, 1995 due primarily to increased telephone
income, 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 nine months ended
September 30, 1996 increased 5% over pro forma departmental direct expenses for
the nine months ended September 30, 1995. As a percentage of revenues and pro
forma revenues, departmental direct expenses and pro forma departmental direct
expenses decreased to 42% from 43% for the nine months ended September 30, 1996
and 1995, respectively, primarily due to the increase in revenues.
Property indirect expenses for the nine months ended September 30, 1996
increased 8% over pro forma property indirect expenses for the nine months ended
September 30, 1995 and remained constant 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.
Gross Operating Profit. The Company's gross operating profit for the nine
- -----------------------
months ended September 30, 1996 was $149 million, an increase of $14.6 million
or 11% from pro forma gross operating profit of $134.4 million for the nine
months ended September 30, 1995. The increase is primarily attributable to the
higher revenues discussed above. Gross operating profit margin for the nine
months ended September 30, 1996 improved to 37% from pro forma gross operating
profit margin of 36% for the nine months ended September 30, 1995.
Payments Due to Owners of Managed Hotels. 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 $3.4 million for the nine
months ended September 30, 1996 as compared to the pro forma payments to owners
of managed hotels for the nine months ended September 30, 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 to $9.3 million
for the nine months ended September 30, 1996 as compared to pro forma management
fees of $8.4 million for the nine months ended September 30, 1995.
16
Operating Income. The Company's operating income for the nine months ended
- -----------------
September 30, 1996 was $68.1 million, an increase of $25.3 million or 59% from
pro forma operating income of $42.8 million for the nine months ended September
30, 1995. The increase is primarily attributable to the higher revenues
discussed above and the $14.7 million of Formation and Offering costs incurred
in the third quarter of 1995. Excluding the Formation and Offering costs,
operating income for the nine months ended September 30, 1996 would have
increased $10.6 million or 18% over pro forma operating income for the nine
months ended September 30, 1995.
Interest Expense. Interest expense, net, decreased $2.8 million to $11.8
- -----------------
million for the nine months ended September 30, 1996 as compared to pro forma
interest expense of $14.6 million for the nine months ended September 30, 1995.
The decrease is primarily due to interest income earned during the nine months
ended September 30, 1996 of approximately $1.6 million and a lower average
outstanding principal balance on Company debt.
Income Tax Expense. Income tax expense increased $19.2 million to $22.3 million
- -------------------
for the nine months ended September 30, 1996 as compared to pro forma income tax
expense of $3.1 million for the nine months ended September 30, 1995. The
increase is due to the recognition of tax benefits in the third quarter of 1995
resulting from the Formation and Offering. Income taxes have been provided
assuming an effective tax rate of approximately 40% for both nine months
periods.
Net Income. The Company's net income increased 28% to $33.9 million ($1.08 per
- -----------
share) for the nine months ended September 30, 1996 from pro forma net income of
$26.5 million ($.85 per share) for the nine months ended September 30, 1995.
The increase in net income is primarily due to increased operating income and
decreased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $18.7 million at September 30, 1996 from $68.4 million at
December 31, 1995 primarily as a result of three acquisitions, ongoing capital
expenditures, repayment of term loan principal and seasonal working capital
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.
Absent the expected acquisition by Doubletree, the Company's future debt levels
may vary depending on, among other factors, the amount of cash provided by
operations and debt maturities.
At September 30, 1996, commitments relating to capital improvement projects were
approximately $10.4 million. Pursuant to the Merger Agreement with Doubletree,
the Company has agreed not to authorize or make any additional capital
expenditures in excess of $10 million from September 12th through December 1996
and $2.5 million during January 1997. 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. 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% (7.7% at
September 30, 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. Pursuant to the Merger Agreement with Doubletree, the Company
has agreed not to incur, assume or guarantee any new indebtedness, including
draw-downs on the existing line of credit, in an aggregate amount in excess of
$5 million. It is anticipated that the outstanding term loan will be repaid and
the credit facility will be terminated in connection with the acquisition of the
Company by Doubletree.
At September 30, 1996, the current portion of long-term debt is comprised of
$39.4 million representing the final payment on a mortgage due in July 1997 and
$9.2 million representing the current amount due on the term loan.
17
Absent the expected acquisition by Doubletree, 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, continuing availability
of capital to fund growth and improvements and the consummation of the Merger
Agreement with Doubletree. The forward-looking statements should be considered
in light of these factors.
18
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 2.1 - Agreement and Plan of Merger dated as of
September 12, 1996 by and among exhibits).
Incorporated by reference to Exhibit 2.1 to the
September 12, 1996 Form 8-K.
Exhibit 10.12 - Purchase and Sale Agreement dated as of
September 12,1996 by and between Red Lion
Hotels, Inc. and Red Lion, a California Limited
Partnership.
Exhibit 10.13 - Assignment and Assumption of Joint Venture and
Partnership Interests as of September 12, 1996
by and between Red Lion Hotels, Inc. and Red
Lion, a California Limited Partnership.
Exhibit 27 - Article 5 Financial Data Schedule for 3rd
Quarter 10-Q.
(b) REPORTS ON FORM 8-K: Two reports on Form 8-K were filed by the
Company during the third quarter of 1996. A Form
8-K, dated August 28, 1996, reported under Item
5 the issuance of a press release announcing a
possible acquisition of the Company by
Doubletree Corporation. A Form 8-K, dated
September 12, 1996, reported under Item 5 the
Agreement and Plan of Merger entered into
between the Company and Doubletree Corporation.
19
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: October 21, 1996 By /S/DAVID J. JOHNSON
-------------------
David J. Johnson
President, Chief Executive Officer and
Chairman of the Board
Date: October 21, 1996 By /S/MICHAEL VERNON
-----------------
Michael Vernon
Chief Financial Officer
(Principal Financial and Accounting Officer)
20