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, 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
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Red Lion Hotels, Inc.
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(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)
____________________________________________________
(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 __.
---
As of October 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 September 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 Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-14
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
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 Seven
Months Ended Months Ended
September 30, 1995 September 30, 1995
------------------- -------------------
(Note 2)
REVENUES:
Rooms $ 53,332 $ 53,332
Food and beverage 26,351 26,351
Other 9,591 13,012
----------- -----------
Total revenues 89,274 92,695
----------- -----------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses-
Rooms 11,805 11,805
Food and beverage 19,791 19,791
Other 3,146 3,146
Property indirect expenses 17,241 17,241
Other costs 6,018 6,502
Depreciation and amortization 3,197 3,918
Payments due to owners of managed
hotels 9,124 9,124
Expenses resulting from the
Formation and Offering (Note 7) 14,662 14,662
----------- -----------
OPERATING INCOME 4,290 6,506
EQUITY IN EARNINGS OF UNCONSOLIDATED 271 271
JOINT VENTURES (Note 3)
OTHER EXPENSE:
Interest expense, net 3,402 4,658
----------- -----------
Total other expense 3,402 4,658
----------- -----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS 1,159 2,119
INCOME ATTRIBUTABLE TO JOINT
VENTURERS' INTERESTS (500) (1,070)
----------- -----------
INCOME BEFORE INCOME TAXES 659 1,049
INCOME TAX BENEFIT (PROVISION):
Current (2,821) (2,977)
Deferred 10,064 11,264
----------- -----------
Total income tax benefit 7,243 8,287
----------- -----------
NET INCOME $ 7,902 $ 9,336
=========== ===========
EARNINGS PER COMMON SHARE $0.38 $1.04
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 20,875,033 8,946,500
(see notes to financial statements)
3
RED LION HOTELS, INC.
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CONSOLIDATED BALANCE SHEET
(in thousands except per share data)
(unaudited)
September 30, 1995
-------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 71,166
Accounts receivable, net 20,063
Accounts receivable - affiliates 17,822
Inventories 6,173
Prepaid expenses and other current
assets 5,366
Deferred income taxes 1,292
--------
Total current assets 121,882
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PROPERTY AND EQUIPMENT:
Land 48,126
Buildings and improvements 240,158
Furnishings and equipment 35,857
Construction in progress 8,388
--------
332,529
Less--accumulated depreciation (3,695)
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328,834
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INVESTMENT IN UNCONSOLIDATED JOINT
VENTURES (Note 3) 12,899
GOODWILL, net 21,689
DEFERRED INCOME TAXES 9,972
OTHER ASSETS, net 21,637
--------
Total assets $516,913
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,488
Accrued expenses 38,394
Current portion of long-term debt 5,584
--------
Total current liabilities 61,466
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LONG-TERM DEBT, NET OF CURRENT PORTION 219,034
OTHER LONG-TERM OBLIGATIONS 10,534
JOINT VENTURERS' INTEREST 1,665
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value
31,312,500 shares issued and
outstanding 313
Additional paid-in capital and net
assets contributed 214,565
Retained earnings 9,336
--------
Total stockholders' equity 224,214
--------
Total liabilities and
stockholders' equity $516,913
========
(see notes to financial statements)
4
RED LION HOTELS, INC.
---------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the seven months ended September 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 209 30,740 -- 30,949
Issuance of common stock in
connection with the Offering and
adjustments to
the Incentive Unit Plan 104 183,825 -- 183,929
Net income -- -- 9,336 9,336
------- ------- ------ -------
Balance September 30, 1995 $313 $214,565 $9,336 $224,214
======= ======== ======= ========
(see notes to financial statements)
5
RED LION HOTELS, INC.
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CONSOLIDATED STATEMENT OF CASH FLOWS
For the seven months ended September 30, 1995
(in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,336
Adjustments to reconcile net income
to cash provided by operating activities:
Income attributable to joint
venturer's interest 1,070
Equity in earnings of
unconsolidated joint ventures (271)
Depreciation and amortization 3,918
Amortization of other assets
(principally deferred loan costs) 763
Increase in deferred tax asset (11,264)
Issuance of common stock in
connection with adjustments
to the incentive unit plan 6,650
Change in certain current assets
and liabilities 6,607
---------
Net cash provided by
operating activities 16,809
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,601)
Distributions to joint venturers (830)
Other investing activities (1,028)
---------
Net cash used in investing
activities (6,459)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from contribution of
assets 10,480
Net proceeds from common stock issued
in the Offering 177,279
Proceeds from long-term borrowings 135,000
Repayment of contributed long-term
borrowings (255,051)
Other financing activities (6,892)
---------
Net cash provided by
financing activities 60,816
---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 71,166
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD --
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 71,166
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 1,732
(see notes to financial statements)
6
Notes to Consolidated Financial Statements
September 30, 1995
(unaudited)
1. General
Red Lion Hotels, Inc. (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 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 $177 million (including the over-allotment option granted to the
underwriters which was exercised in full). After giving effect to the Offering,
Historical Red Lion owned 67% of the Company.
On March 6, 1995, Historical Red Lion contributed to the Company a 49.4%
interest in the joint venture which owns the Santa Barbara Red Lion Hotel (the
"Hotel") located in California. On August 1, 1995, prior to the closing of the
Offering, Historical Red Lion repaid certain of its outstanding indebtedness
with existing cash balances and contributed substantially all of its assets
(excluding 17 hotels, the "Leased Hotels" and certain minority joint venture
interests and cash) and certain liabilities to the Company (the "Formation").
See "Basis of Presentation." The Partnership (Historical Red Lion subsequent to
the Formation and refinancing of the Company) retained the Leased Hotels and
the related goodwill, deferred loan costs and mortgage debt, certain minority
joint venture interests and certain current assets.
On August 1, 1995, the Company refinanced or repaid substantially all of the
debt contributed pursuant to the Formation with the net proceeds of the
Offering, borrowings under a new term loan and existing cash. The Company also
entered into a long-term master lease with the Partnership for the Leased
Hotels.
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. These consolidated financial statements should be
read in connection with the Company's registration statement on Form S-1, file
No. 33-90306.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments except for recording the expenses resulting from the Formation and
Offering and the initial recording of a deferred income tax benefit) necessary
to present fairly the financial position of the Company as of September 30,
1995, and the results of operations and cash flows for the three and seven
months ended September 30, 1995, giving effect to the Formation as of August 1,
1995. Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
7
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 prior to
the Formation. In connection with the Formation, the other assets and
liabilities contributed by Historical Red Lion have been recorded in the
accompanying consolidated financial statements at Historical Red Lion's cost
effective August 1, 1995. There were no operations of the Company prior to the
contribution of the Santa Barbara Joint Venture. Therefore, the accompanying
consolidated financial statements reflect seven months rather than nine months
of the 1995 operations, consisting of the results of the Santa Barbara Joint
Venture for seven months and the results of the other hotels and operations
contributed pursuant to the Formation for two months.
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 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 Hotel or the
Hotel's working capital. These amounts were included in the financial
statements of Historical Red Lion which continued to manage the Hotel. The
right to manage the operations of the Hotel was transferred to the Company at
the completion of the Formation, and the Hotel's operating revenues, expenses
and working capital are reflected in the consolidated financial statements of
the Company as of September 30, 1995 and for the two month period ended
September 30, 1995.
The accompanying consolidated financial statements of the Company include five
of its seven partially owned joint ventures. The Company consolidates those
entities which it controls. The remaining joint ventures are accounted for on
the equity method of accounting.
On April 14, 1987, Historical Red Lion sold its interest in 10 hotels to Red
Lion Inns Limited Partnership, a publicly traded limited partnership (the
"MLP"). Red Lion Properties, Inc., 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 had an
effective 98.01 percent ownership interest in the MLP's hotels with the general
partner retaining the remaining 1.99 percent ownership interest. The Company
operates the MLP's hotels under a management agreement.
Operating revenues and expenses and the working capital of the MLP and other
management contract hotels (including the two unconsolidated joint ventures
which are also managed by 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 for managed hotels is
recorded as an expense in the accompanying consolidated statements of income.
The consolidated financial statements also include the following amounts related
to managed hotels (including the two unconsolidated joint ventures which are
also managed by the Company) current assets and current liabilities of
$9,840,000 at September 30, 1995; operating revenues of $30,408,000 for both the
three and seven months ended September 30, 1995; and operating expenses of
$19,249,000 for both the three and seven months ended September 30, 1995.
8
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 accompanying
consolidated financial statements. The mortgage is in substance a management
contract with a purchase option. Accordingly, the hotel is treated as a
management contract in the accompanying consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
3. Summary of Significant Accounting Policies:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, certificates of
deposit, time deposits and U.S. government and other short-term securities with
maturities of three months or less when purchased. The carrying amount
approximates fair value because of the short-term maturity of these instruments.
Property and Equipment
Property and equipment are stated at Historical Red Lion's net cost at the date
of contribution, plus additions, at cost, made subsequent to the contribution.
Additions and improvements are capitalized at cost, including interest costs
incurred during construction. There was no capitalized interest during the
seven months ended September 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
Investment in Unconsolidated Joint Ventures
The Company is a partner in two joint ventures which are accounted for on the
equity method of accounting. The Company's equity in and advances to these
joint ventures are shown under the caption "investment in unconsolidated joint
ventures" in the accompanying consolidated balance sheet. Because the Company
manages these joint ventures, they are accounted for as managed hotels and,
therefore, the operating working capital of the hotels is consolidated in the
accompanying consolidated balance sheet.
9
Profits and losses of these joint ventures are allocated in accordance with the
joint venture agreements. Because the hotels are accounted for as managed
hotels, the operating revenues and expenses are consolidated in the accompanying
consolidated statements of income, with the Company's share of the income or
losses of the joint ventures (after management fee income) recorded under the
caption "equity in earnings of unconsolidated joint ventures." If a joint
venture experiences operating losses which reduce the other joint venture
partners' equity to a zero balance, the loss which would otherwise be
attributable to the other joint venturers is absorbed within the Company's
consolidated operating results.
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.
Goodwill
Historical Red Lion acquired interests in certain hotels, motor inns and
supporting auxiliary enterprises on April 10, 1985. Goodwill resulted from the
acquisition and represents the excess of purchase price over the net fair value
of assets acquired. Goodwill reflected in the accompanying consolidated
financial statements relates to the hotels contributed to the Company by
Historical Red Lion and is being amortized on a straight-line basis over the
remaining period to be amortized of approximately 30 years. For the Company,
accumulated amortization was $120,000 at September 30, 1995. Management
evaluates its accounting for goodwill considering such factors as historical and
future profitability and believes that the asset is realizable and the
amortization period is appropriate.
Deferred Loan Costs
Deferred loan costs incurred in connection with the Company's indebtedness are
included in other assets, net, in the accompanying consolidated balance sheet
and are amortized over the life of the associated debt.
Insurance Reserves
The Company provides for the uninsured costs of medical, property, liability and
workers compensation claims. Such costs are estimated each year based on
historical claim data relating to operations conducted through September 30,
1995. The long-term portion of accrued claims costs relate primarily to general
liability and workers compensation claims and are reflected in other long-term
obligations in the accompanying consolidated balance sheet.
Payments Due to Owners of Managed Hotels
Payments due to owners of managed hotels is analogous to rent owed to outside
owners due to the nature of the management contracts and the control the Company
has over operations. The amounts shown on the consolidated statements of income
are net of management fee income of $2,036,000 earned for the period August 1 to
September 30, 1995.
10
Joint Venturers' Interests
The Company is a partner in seven joint ventures, each of which owns a separate
hotel. The assets and liabilities of five of the seven joint ventures are fully
consolidated in the accompanying financial statements. The other joint ventures
are accounted for on the equity method of accounting (see "Investment in
Unconsolidated Joint Ventures"). The caption "joint venturers' interests"
represents the net equity attributable to the joint venturers' interests,
including their share of income and losses and distributions and contributions.
Profits and losses of each joint venture are allocated in accordance with the
joint venture agreements. If a joint venture experiences operating losses which
reduce the other joint venture partners' equity to a zero balance, the loss
which would otherwise be attributable to other joint venturers is absorbed
within the Company's consolidated operating results.
Earnings per Share and Stock Options
Earnings per share has been computed based on the weighted average number of
common shares outstanding, which includes 10,062,500 shares issued in connection
with the Offering effective August 1, 1995, and 350,000 shares of common stock
issued in connection with the termination of an incentive unit plan of
Historical Red Lion. Pursuant to the Offering, Historical Red Lion received
20,899,900 shares of common stock for the net assets contributed on August 1.
For purposes of the calculation of earnings per share, the 20,899,900 shares
have been included from the date of issuance. In connection with the Offering,
the Company issued to certain employees and officers of the Company stock
options to acquire 2,183,333 shares of common stock at $19 per share which was
the initial public offering price of the stock. In August 1995 , the Company
issued to certain employees stock options to acquire 67,500 shares of common
stock at $21.50 per share which was the fair market value at the date of grant.
Stock options have not been included in the earnings per share calculation since
their effect is immaterial.
4. Long-Term Debt
Long-term debt at September 30, 1995, consists of the following (in
thousands):
Term loan, secured, variable rate, 7.9%,
payable through 2002 $135,000
Mortgages, secured, variable rates, 7.1% - 7.7%
payable through 1998 85,000
Note payable, fixed rate, 8.69%,
payable through 2022 4,618
-------
224,618
Current portion of long-term debt (5,584)
--------
Long-term debt, excluding current
portion $219,034
========
The Company had outstanding letters of credit of $5,428,000 at September 30,
1995. Refer to Management's Discussion and Analysis-Liquidity and Capital
Resources for discussion of the term loan and other available credit.
11
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements in order to lessen its
exposure to interest rate changes. The agreements have effectively converted
floating rate debt, which is tied to LIBOR, to fixed rates.
At September 30, 1995, the Company had three interest rate swap agreements
outstanding which have substantially converted $75 million of debt from floating
LIBOR based rates to all-in fixed rates ranging from 6.91 percent to 7.29
percent. The original terms of the agreements range from four and one half to
five years. Interest income earned by the Company relating to interest rate swap
agreements for the period August 1 to September 30, 1995, was $107,500 and is
included in interest expense, net, in the accompanying consolidated statements
of income.
These agreements are with major commercial banks and the exposure to a credit
loss in the event of nonperformance by the banks is minimal.
Disclosures About Fair Value of Financial Instruments
Based on the borrowing rates currently quoted by financial institutions for bank
loans with terms and maturities similar to the Company's long-term debt, the
carrying value of such debt approximates its fair value.
5. Related Party Transactions
As discussed in Note 1, prior to the Formation the Santa Barbara Hotel was
operated and managed by Historical Red Lion. Management fees paid to Historical
Red Lion were $90,000 and $385,000 for the three and seven months ended
September 30, 1995 and are included in other costs in the accompanying
consolidated statements of income.
At September 30, 1995, other assets, net, includes $1,816,000 of an interest
bearing note receivable from a joint venturer.
Transactions with Red Lion Inns Limited Partnership
As discussed in Note 2, Red Lion Properties, Inc. ("Properties"), a wholly owned
subsidiary of the Company, serves as general partner and owns 1.99 percent of
the MLP.
The Company manages the MLP hotels pursuant to a management agreement and
receives a base management fee equal to 3 percent of annual gross revenues plus
an incentive management fee based on adjusted gross operating profit, as defined
in the management agreement. The management agreement, which began in 1987, has
a seventy-five year term including renewal options. The Company also charges
the MLP hotels for their pro rata share of support services such as computer,
advertising, public relations, promotional and sales and central reservation
services.
All the MLP personnel are employees of the Company and its affiliates.
Additionally, the Company arranges for the purchase of operating supplies,
furnishings and equipment for the MLP. In the opinion of management, purchases
by the MLP were at prices and terms which approximate arms-length transactions.
12
Incentive management fees are subordinate to distributions by the MLP to
facilitate current payment of distributions to the limited partners. The
subordinated fees accrue without interest up to a maximum amount of $6 million.
This ceiling was reached by Historical Red Lion in 1988 and the $6 million
receivable was contributed to the Company in the Formation. Because management
does not anticipate these fees will be paid during 1995, this amount has been
classified as noncurrent under the caption other assets, net, in the
accompanying consolidated balance sheet at September 30, 1995.
At September 30, 1995, other assets, net, also includes a receivable contributed
by Historical Red Lion of $3,726,000 representing amounts advanced by Properties
to the MLP under a $4 million credit facility made available to facilitate cash
distributions to partners during the MLP's first 36 months of operations. The
amount outstanding under this facility will be repaid to the Company out of
either (i) cash flow after payment of priority distributions and incentive
management fees, or (ii) sale or refinancing proceeds prior to any distribution
to limited partners.
In addition to the incentive management fee and general partner loan discussed
above, as of September 30, 1995, the Company was due $15,336,000 from the MLP
for capital expenditures, support services, base management fees, payroll and
payroll taxes and operating supplies provided by Historical Red Lion before the
Formation and the Company after the Formation. These amounts are included in
accounts receivable-affiliates in the accompanying consolidated balance sheet,
net of working capital related to the managed MLP hotels of $1,865,000 as of
September 30, 1995.
6. Income Taxes
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 Santa
Barbara Joint Venture and on August 1, the date of contribution of substantially
all of Historical Red Lion's assets, the Company recorded net deferred income
tax assets of approximately $1.2 million and $8.5 million, respectively, which
represents the estimated tax effect of the difference in the Company's basis for
income tax and financial reporting purposes. In accordance with SFAS 109, these
amounts have been recorded as an income tax benefit in the accompanying
consolidated statements of income for the three and seven months ended September
30, 1995.
The components of the contributed net deferred income tax assets as of the date
of contribution, primarily August 1, 1995, are as follows (in thousands):
Net Deferred Income Tax Assets
------------------------------
Basis difference in joint ventures $17,359
Other 564
-------
Total Deferred Income Tax Assets 17,923
Deferred Income Tax Liabilities
-------------------------------
Basis difference in property and equipment (8,187)
-------
Net Deferred Income Tax Assets $ 9,736
=======
13
The Company's effective income tax rates for the three and seven months ended
September 30, 1995 differ from the statutory federal income tax rate of 34% due
primarily to certain expenses incurred in connection with the Formation and the
Offering, state income taxes and the initial recording of the deferred income
tax benefits discussed above.
7. Expenses Resulting from Formation and Offering
Expenses resulting from 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.
8. Commitments and Contingencies
In connection with the Formation, the Company assumed commitments relating to
capital improvement projects of approximately $12,000,000.
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 operation or
liquidity.
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
Historical Red Lion. On a historical basis, which includes the actual
operations of the Company following the August 1 Formation, the Company had net
income of $7.9 million and $9.3 million for the quarter ended and seven months
ended September 30, 1995, respectively. Each period's net income includes an
income tax benefit recorded in accordance with Statement of Financial Accounting
Standards No. 109 of approximately $8.5 million and $9.7 million, respectively,
and expenses net of income tax benefits resulting from the Formation and
Offering of approximately $9.8 million for both the quarter ended and seven
months ended September 30, 1995.
On August 1, 1995, Historical Red Lion contributed substantially all of its
assets (excluding 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
include the actual results of the Company and the results of Historical Red Lion
adjusted to give effect to the Formation, the leasing of the Leased Hotels, and
the repayment and refinancing of substantially all debt with borrowings under a
new credit facility and the net proceeds of the public offering, assuming that
such events were completed at the beginning of the respective period. The
Company 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.
14
Pro Forma Results of Operations
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(dollar amounts in thousands except per share data)
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1995 1994 1995 1994
Pro Forma(a) Pro Forma(a) Pro Forma(a) Pro Forma(a)
----------- ------------ ------------ ------------
REVENUES:
Rooms $ 79,248 $ 75,343 $ 215,166 $ 200,660
Food and beverage 38,128 37,316 118,921 114,176
Other 12,094 11,581 36,208 34,307
----------- ----------- ----------- -----------
Total revenues 129,470 124,240 370,295 349,143
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses
Rooms 17,941 17,154 51,475 47,776
Food and beverage 29,587 29,722 93,060 90,044
Other 4,578 4,508 13,738 13,198
Property indirect expenses 26,023 25,413 77,583 74,767
Other costs 8,882 8,688 25,836 25,211
Depreciation and amortization 4,646 5,016 14,530 14,611
Payments due to owners of managed 12,733 10,902 36,591 34,090
hotels
Expenses resulting from Formation
and Offering(b)(d) 14,662 -- 14,662 --
----------- ----------- ----------- -----------
OPERATING INCOME 10,418 22,837 42,820 49,446
EQUITY IN EARNINGS (LOSSES) OF
UNCONSOLIDATED JOINT VENTURES 196 (75) 1,885 1,228
OTHER EXPENSE:
Interest expense, net 4,572 4,991 14,613 14,184
----------- ----------- ----------- -----------
Total other expense 4,572 4,991 14,613 14,184
----------- ----------- ----------- -----------
INCOME BEFORE JOINT VENTURERS'
INTERESTS 6,042 17,771 30,092 36,490
INCOME ATTRIBUTABLE TO JOINT
VENTURERS' INTERESTS (304) (706) (463) (1,003)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,738 17,065 29,629 35,487
INCOME TAX BENEFIT (EXPENSE) (c) (d) 6,409 (6,826) (3,147) (14,195)
----------- ----------- ----------- -----------
NET INCOME $ 12,147 $ 10,239 $ 26,482 $ 21,292
=========== =========== =========== ===========
PRO FORMA EARNINGS PER COMMON SHARE $0.39 $0.33 $0.85 $0.68
COMMON SHARES (e) 31,312,500 31,312,500 31,312,500 31,312,500
(see notes to financial statements)
15
(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 at the beginning
of the respective periods.
(b) Includes certain formation costs of $1,314 and expenses resulting from
Offering of $11,348 and $2,000 related to the termination of an incentive
unit plan and assumption of the obligation of a supplemental income
retirement agreement, respectively.
(c) Income taxes have been provided on a pro forma basis assuming an
effective tax rate of 40%. Pro forma income taxes for the quarter and
nine months ended September 30, 1995, include a deferred income tax
benefit of $9,736 resulting from the tax effect of the differences in the
book and tax basis of the assets and liabilities transferred to the
Company.
(d) The "Expenses resulting from Formation and Offering" of $14,662 (pre-tax)
and the deferred income tax benefit of $9,736 as discussed above result
in a net negative effect on pro forma net income of $96 or less than $.01
on an earnings per share basis.
(e) Based on the number of shares of common stock outstanding after the
offering plus 350,000 shares issued in connection with the termination of
an incentive unit plan.
Results of Operations
Comparison of the Quarter and Nine Months Ended September 30, 1995
Pro forma revenues increased in the 1995 quarter, from $124.2 million in the
1994 quarter to $129.5 million, an increase of $5.3 million, or 4.2%. For the
nine months ended September 30, pro forma revenues increased from $349.1 million
in the comparable 1994 period to $370.3 million in the 1995 period, an increase
of $21.2 million, or 6.1%. The changes in specific revenue categories are
discussed below.
Pro forma room revenues in the 1995 quarter increased from $75.3 million in the
1994 quarter to $79.2 million, an increase of 5.2%. The increase in pro forma
room revenues was due to an increase in average daily room rate. Average daily
room rates increased by 5.8% to approximately $77 in the 1995 quarter. Occupancy
for the 1995 quarter remained relatively flat at approximately 81% compared to
the 1994 quarter. For the nine months ended September 30, pro forma room
revenues increased from $200.7 million in the comparable 1994 period to $215.2
million in the 1995 period, an increase of 7.2%. The increase in room revenues
for the nine months ended September 30, 1995, is due to an increase in both
occupancy and average daily room rates. For the nine months ended September 30,
occupancy increased modestly to approximately 75% and average daily room rates
increased 6.6% to approximately $76 compared to the 1994 period.
For the 1995 quarter, pro forma food and beverage revenues increased 2.2% from
the prior year quarter. For the nine months ended September 30, 1995, pro forma
food and beverage revenues increased 4.2%. The increase in pro forma food and
beverage revenues for the quarter and nine months ended September 30, 1995, is
due to an increase in banquet revenues resulting from higher meeting room
rentals and the addition of an airport restaurant facility which opened in late
1994.
Other pro forma revenues for the quarter and nine-month period increased 4.4%
and 5.5%, respectively, over the comparable period in 1994 due mainly to an
increase in meeting room rentals.
16
Operating results are affected by seasonality. The quarter pro forma results
reflect late summer and early fall in which revenues are typically higher than
in the quarter ending December 31st and in the quarter ended June 30. There can
be no assurance, however, that such trends will continue.
Pro forma departmental direct expenses for the 1995 quarter increased 1.4%. As
a percentage or revenues, pro forma departmental direct expenses remained
relatively constant. For the nine months ended September 30, pro forma
departmental direct expenses increased 4.8%. As a percentage of revenues, pro
forma departmental direct expenses remained relatively constant.
Pro forma property indirect expenses for the 1995 quarter increased 2.4%, but
decreased as a percentage of revenues from 20.5% to 20.1%. For the nine months
ended September 30, pro forma indirect expenses increased 3.8%, but decreased as
a percentage of revenues from 21.4% to 21.0%.
Pro forma other costs for the 1995 quarter increased 106%. For the nine months
ended September 30, pro forma other costs increased 38.2%. The majority of the
increase for both the quarter and nine-month period is due to the expenses
resulting from the Formation and Offering. Excluding these expenses would
result in little or no increase in pro forma other costs for both the quarter
and nine-month periods, and would remain relatively constant as a percentage of
revenues.
Pro forma payments due to owners of managed hotels for the 1995 quarter
increased 16.8%. For the nine months ended September 30, pro forma payments due
to owners of managed hotels increased 7.3%. These increases in pro forma
payments to owners of managed hotels for both the quarter and nine month periods
were primarily due to improved operating performance.
Management fees in connection with the managed hotels for the 1995 quarter
decreased 18.7% and for the nine months increased 4.3%. The majority of the
management fees are incentive fees related mainly to the MLP (see Note 5), which
are determined based on cash flows available for incentive management fees. For
the nine month period ended September 30, 1995, incentive management fees were
approximately equal to the comparable 1994 period. However, as a result of
significantly higher cash flow available for incentive management fees generated
in the first six months of 1995 compared to the prior year period, more
incentive management fees were earned earlier in the 1995 year. The decrease in
management fees for the quarter is due to the earlier recognition of incentive
management fees described above.
Pro forma operating income decreased from $22.8 million in the 1994 quarter to
$10.4 million in the 1995 quarter. For the nine months ended September 30, pro
forma operating income decreased from $49.4 million in the comparable 1994
period to $42.8 million in the 1995 period. This decrease for both the quarter
and nine month periods reflects the expenses resulting from the Formation and
Offering. Excluding these expenses would result in an increase in the 1995
quarter of $2.2 million and an increase in the 1995 nine-month period of $8.0
million.
Pro forma interest expense decreased from $5.0 million in the 1994 quarter to
$4.6 million in the 1995 quarter. This decrease is primarily due to the
interest income earned on cash equivalents. Pro forma interest expense for nine
months ended September 30, increased from $14.2 million in the comparable 1994
period to $14.6 in the 1995 period. This increase is primarily due to higher
amortization of loan costs in the current year partially offset by interest
income earned on cash equivalents.
Pro forma income taxes decreased from an income tax expense of $6.8 million in
the 1994 quarter to an income tax benefit of $6.4 million in the 1995 quarter, a
decrease of $13.2 million. This decrease resulted from a deferred income tax
benefit of $9.7 million associated with assets and liabilities contributed to
the Company and a tax deduction of $4.8 million on a portion of the expenses
resulting from the Formation and Offering. Pro forma income taxes for the nine
months ended September 30, decreased from $14.2 million in the comparable 1994
period to $3.1 million, in the 1995 period, a decrease of $11.1 million. This
decrease in pro forma income tax expense is mainly due to the deferred income
tax benefit and tax deduction described above.
17
Pro forma income attributable to joint venturers' interest decreased from $.7
million in the 1994 quarter to $.3 million in the 1995 quarter. For the nine-
month period ended September 30, pro forma income attributable to joint
venturers' interest decreased from $1.0 million in 1994 to $.5 million in 1995.
As a result of the factors described above, pro forma net income increased from
$10.2 million in the 1994 quarter to $12.1 million in the 1995 quarter, an
increase of 18.6%. For the nine months ended September 30, pro forma net income
increased from $21.3 million in the comparable 1994 period to $26.5 million in
the 1995 period, an increase of 24.4%. Excluding the expenses resulting from the
Formation and Offering of $14,662 (pre-tax) and the deferred income tax benefit
of $9,736 results in a net negative effect on pro forma net income of $.1
million for both the quarter ended and nine months ended September 30, 1995.
Liquidity and Capital Resources: In connection with the Formation, the Company
repaid the majority of the debt contributed to the Company by Historical Red
Lion debt with the proceeds of the equity offering and a new $135 million seven
year term loan. The term loan bears interest at a rate that varies based on
LIBOR (7.9% at September 30, 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 September 30, 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 and amounts available under its credit facility will be
sufficient to meet its capital and operating needs for the foreseeable future.
18
RED LION HOTELS, INC.
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
- - - ------------------------------------------
(a) Exhibits:
*3.1 Certificate of Incorporation of the Company.
*3.2 Bylaws of the Company.
*4.1 Specimen Common Stock Certificate.
4.2 Registration Rights Agreement dated August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
10.1 Master Lease, dated August 1, 1995, between RLH Partnership,
L.P., as Landlord, and the Company, as Tenant.
*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 July 31, 1995 among the Company and
Credit Lyonnais New York Branch.
10.5 Contribution Agreement dated as of August 1, 1995 between the
Company and Red Lion, a California Limited Partnership.
10.6 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.
10.10 Management Bonus Plan
10.11 Non-Qualified Stock Option Agreement with David J. Johnson
27 Article 5 Financial Data Schedule for 3rd Quarter 10-Q.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 33-90306.
19
(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 13th day of November 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
20