1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the period ended September 30, 1996.
[ ] 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: 0-24392
DOUBLETREE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 86-0762415
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
410 NORTH 44TH STREET, SUITE 700, 85008
PHOENIX, ARIZONA (Zip code)
(Address of principal executive offices)
(602) 220-6666
(Registrant's telephone number, including area code)
NONE
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the last practicable date.
Class Outstanding at October 11, 1996
- ----------------------------- -------------------------------
Common Stock ($.01 par value) 23,095,586 shares
2
DOUBLETREE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
3
ITEM 1. FINANCIAL STATEMENTS
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- -----------
ASSETS
Cash and cash equivalents $ 32,652 $ 50,701
Accounts receivable, net 17,907 25,054
Current portion of notes and other receivables 390 532
Other 2,694 4,002
----------- -----------
Total current assets 53,643 80,289
----------- -----------
Notes and other receivables, net of current portion 24,185 33,021
Investments 5,070 36,039
Hotel properties, net 10,572 10,213
Leasehold improvements and office equipment, net 3,968 3,574
Management contracts, net 49,634 47,560
Goodwill, net 15,431 15,127
Deferred costs and other assets 604 4,164
----------- -----------
$ 163,107 $ 229,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 25,072 $ 29,768
Leases payable 6,744 12,348
Accrued interest payable 23 8
Current portion of notes payable 672 --
Income taxes payable 585 5,331
----------- -----------
Total current liabilities 33,096 47,455
Deferred income taxes 15,625 19,885
----------- -----------
48,721 67,340
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized 100,000,000 shares; issued and outstanding
22,099,186 and 23,094,886 shares at December 31, 1995
and September 30, 1996, respectively 221 231
Additional paid-in capital 100,462 128,191
Unrealized gain on marketable equity securities 22 44
Unearned employee compensation (211) (158)
Retained earnings 13,892 34,339
----------- -----------
114,386 162,647
----------- -----------
$ 163,107 $ 229,987
=========== ===========
See accompanying notes to consolidated financial statements.
1
4
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
Revenues:
Management and franchise fees $ 7,695 $ 9,739 $ 22,231 $ 28,258
Owned hotel revenues 1,892 1,993 5,200 5,972
Leased hotel revenues 38,794 51,380 104,328 137,701
Purchasing and service fees 4,064 4,215 11,542 11,800
Other fees and income 448 1,261 941 2,233
--------- --------- --------- ---------
Total revenues 52,893 68,588 144,242 185,964
--------- --------- --------- ---------
Operating costs and expenses:
Corporate general and administrative
expenses 3,735 4,170 10,841 12,811
Owned hotel expenses 1,467 1,523 4,403 4,740
Leased hotel expenses 36,257 47,418 97,265 127,153
Purchasing and service expenses 3,338 3,046 9,684 8,694
Depreciation and amortization 1,196 1,477 3,252 4,417
--------- --------- --------- ---------
Total operating costs and expenses 45,993 57,634 125,445 157,815
--------- --------- --------- ---------
Operating income 6,900 10,954 18,797 28,149
Interest expense (49) (32) (181) (175)
Interest income 1,236 1,388 3,094 3,478
--------- --------- --------- ---------
Income before income taxes and minority
interest 8,087 12,310 21,710 31,452
Minority interest share of net loss 84 28 77 6
--------- --------- --------- ---------
Income before income taxes 8,171 12,338 21,787 31,458
Income tax expense (2,563) (4,318) (6,792) (11,011)
--------- --------- --------- ---------
Net income $ 5,608 $ 8,020 $ 14,995 $ 20,447
========= ========= ========= =========
Earnings per share $ 0.25 $ 0.34 $ 0.68 $ 0.88
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 22,443 23,879 22,137 23,183
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
2
5
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
-------- --------
Cash flow from operating activities:
Net income $ 14,995 $ 20,447
Adjustments to reconcile net income to
net cash provided by operations:
Provision for bad debts 126 299
Depreciation and amortization 3,252 4,417
Equity in (earnings) loss of partnerships (161) 171
Minority interest share of net loss (77) (6)
Other non-cash expenses 240 53
Deferred income taxes 3,518 4,260
Net withdrawals from restricted cash 535 --
Increase in accounts receivable (6,779) (7,242)
Increase in other assets (1,133) (1,796)
Increase in accounts payable and accrued expenses 7,012 15,310
-------- --------
Net cash provided by operations 21,528 35,913
-------- --------
Cash flow from investing activities:
Purchases of furniture and equipment (1,938) (1,028)
Investments in partnerships and ventures (801) (32,499)
Distributions from partnerships and ventures 313 1,381
Investments in management contracts (6,791) (2,258)
Proceeds from termination of management contracts 408 1,317
Loans to owners of managed hotels, net (16,899) (8,518)
Deposits in hotels to obtain management contracts -- (700)
Purchase of marketable securities (412) --
Increase in deferred costs -- (2,626)
-------- --------
Net cash used in investing activities (26,120) (44,931)
-------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of
offering costs 6,620 27,372
Proceeds from exercise of common stock options 80 367
Cash distributions to stockholders (1,305) --
Proceeds of borrowings -- 5,000
Principal payments on notes payable (826) (5,672)
-------- --------
Net cash provided by financing activities 4,569 27,067
-------- --------
Net increase (decrease) in cash and cash equivalents (23) 18,049
Cash and cash equivalents at beginning of year 23,169 32,652
-------- --------
Cash and cash equivalents at end of period $ 23,146 $ 50,701
======== ========
Supplemental cash flow information:
Cash paid for interest $ 168 $ 190
======== ========
Cash paid for income taxes $ 2,809 $ 2,005
======== ========
See accompanying notes to consolidated financial statements.
3
6
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
Doubletree Corporation (the Company) was incorporated on May 19, 1994
as a Delaware corporation to succeed to all the assets, liabilities and business
operations of Doubletree Partners (formerly Guest Quarters Hotel Partnership
(GQHP)). At September 30, 1996, the Company managed 85 hotels, leased 59 hotels,
owned one hotel and had franchise agreements with 39 hotels.
On February 27, 1996, the Company acquired a 100% interest in RFS,
Inc. (RFS Management) in a transaction accounted for as a pooling of interests.
Accordingly, the consolidated financial statements have been restated to include
RFS Management as if it had been acquired at the beginning of the earliest
period presented.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments, primarily eliminations of all significant intercompany
transactions and accounts) necessary to present fairly the financial position,
results of operations and cash flows for the periods presented. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related disclosures contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
filed with the Securities and Exchange Commission. The results of operations for
the nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
(2) RECLASSIFICATIONS
The Company is reimbursed for costs associated with providing central
reservations, sales and marketing, accounting, data processing, internal audit
and employee training services to managed hotels. The Company is also reimbursed
for central reservations and marketing services provided to franchised hotels.
Prior to the quarter ended September 30, 1996, these costs and the related
revenues were presented on a gross basis. Commencing with the quarter ended
September 30, 1996, the revenues and costs related to these activities have been
reclassified and presented on a net basis for all periods presented. In
addition, certain other amounts in the consolidated statements of operations for
the three and nine month periods ended September 30, 1995 have been reclassified
to conform with the current presentation.
(3) ACQUISITION OF RFS MANAGEMENT
On February 27, 1996, the Company issued 2,727,811 shares of its
common stock in exchange for all of the outstanding stock of RFS Management (a
privately held hotel operator that leases / manages hotel properties) in a
transaction accounted for as a pooling of interests. RFS Hotel Investors, Inc.
(REIT) is the lessor for all hotels leased by RFS Management.
Effective January 1, 1995, RFS Management was a Subchapter S
Corporation for income tax purposes and, therefore, was not generally liable for
income taxes for the year ending December 31, 1995.
4
7
\ DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents total revenues, net income, pro forma
net income and pro forma earnings per share of the merged companies for the
three and nine month periods ended September 30, 1995 and for the year ended
December 31, 1995. The 1995 pro forma adjustments exclude business combination
expenses, provide for additional tax expense due to the exclusion of the
business combination expenses and increase the provision for income taxes for
RFS Management to a 35% rate which was the Company's 1995 effective tax rate.
PRO FORMA
----------------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
SEPT. 30, 1995 SEPT. 30, 1995 1995
-------------- -------------- ------------
Total revenues
Doubletree $ 19,823 $ 53,630 $ 74,066
RFS Management 33,070 90,612 122,520
--------- --------- ---------
Total revenues, as reported $ 52,893 $ 144,242 $ 196,586
========= ========= =========
Net income
Doubletree $ 4,664 $ 12,331 $ 15,662
RFS Management 944 2,664 2,129
--------- --------- ---------
Net income, as reported 5,608 14,995 17,791
Business combination expenses -- -- 2,565
Pro forma additional income tax expense (297) (833) (1,620)
--------- --------- ---------
Pro forma net income $ 5,311 $ 14,162 $ 18,736
========= ========= =========
Pro forma earnings per share $ 0.24 $ 0.64 $ 0.84
========= ========= =========
Weighted average shares outstanding 22,443 22,137 22,219
========= ========= =========
The Company incurred pre-tax expenses in the fourth quarter of 1995
related to the business combination of $2,565,000. The costs incurred include
legal, professional and accounting fees, due diligence and certain other costs
necessary to complete the transaction.
Certain of the franchisors required the payment of an application
fee, as a result of the merger of $2,626,000 which is being amortized over the
terms of the respective franchise agreements.
(4) HOTEL PROPERTIES
As of September 30, 1996 the Company leased 59 hotels, of which 50
are leased from the REIT. Substantially all of the hotels leased from the REIT
are cross defaulted with one another. All of the Company's leases require the
payment of rent equal to the greater of fixed base rent or percentage rent based
on a percentage of gross room revenue, food revenue and beverage revenue (if the
hotel offers food and beverage service). All hotel leases are operating leases.
5
8
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) INVESTMENTS
As of September 30, 1996 the Company and its subsidiaries have
general and/or limited partnership interests (ranging from less than 1% to 50%)
in partnerships that principally own hotels. Such interests include an
investment in a partnership that is a majority owned subsidiary of the REIT.
These partnership interests are convertible into common stock of the REIT.
The Company, through RFS Management, purchased 973,684 shares of the
REIT's convertible preferred stock (the REIT Preferred Shares) for $19 per share
or $18,500,000. This investment is recorded at cost as there is no ready market
for these securities. The convertible preferred stock will pay a fixed annual
dividend of $1.45 per share and is convertible on a one-for-one share basis at
the end of seven years. Separately, the REIT granted the Company a 10-year right
of first refusal to manage and lease future hotels acquired or developed by the
REIT. The Company has committed to the REIT to maintain $15,000,000 of net worth
in RFS Management.
Investments also include 35,000 shares of REIT common stock recorded
at market value. The unrealized gain is reflected in stockholders' equity as
these securities are classified as available-for-sale.
Investments consist of the following (in thousands):
DECEMBER 31, September 30,
1995 1996
-------- --------
REIT convertible preferred stock $ -- $ 18,500
REIT common shares 538 560
Hotel partnerships 3,746 6,422
Candlewood 1,098 10,871
Other (312) (314)
-------- --------
$ 5,070 $ 36,039
======== ========
(6) NOTE PAYABLE
The Company has a credit facility, due December 16, 1999, which
allows the Company to borrow up to $30,000,000. The Company borrowed $5,000,000
against the facility in February 1996 and repaid the entire amount prior to June
30, 1996. Interest is payable monthly at LIBOR plus a variable rate between
0.675% and 1.50%. The credit facility requires the payment of a quarterly
commitment fee that ranges between 0.20% and 0.375% of the unused balance.
(7) STOCKHOLDERS' EQUITY
In January 1995, RFS Management issued 12 restricted shares of RFS
Management common stock to certain of its employees. These shares vest ratably
over a four year period from the date of issuance. The estimated fair market
value of these shares at issuance was $281,000. The shares were exchanged for
approximately 36,500 Company common shares, subject to the same restrictions, in
connection with the acquisition of RFS Management.
6
9
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In May 1996, the Company completed a public offering of 4,234,300
shares of its common stock (of which 952,300 shares were newly issued shares of
the Company) at a price to the public of $31.25 per share. The net proceeds to
the Company, after expenses of the offering and giving effect to the
underwriters' discount, were $27.4 million.
(8) STOCK OPTIONS
The Company has one stock option plan, the 1994 Equity Participation
Plan (the Plan), in which options may be granted to key personnel to purchase
shares of the Company's common stock at a price not less than the current market
price at the date of the grant. The options vest annually and ratably over the
four-year period from the date of grant and expire ten years after the grant
date. In April 1996, the Company's shareholders approved an increase in the
maximum number of shares available under the Plan from 2,000,000 to 3,300,000.
As of September 30, options for 1,790,375 shares, net of terminations, have been
granted at prices ranging from $13.00 to $27.88, of which 452,100 are currently
exercisable. The Plan also provides for the issuance of stock appreciation
rights, restrictive stock or other awards, none of which have been granted.
(9) EARNINGS PER SHARE
For each of the periods presented, earnings per share has been
calculated assuming the 2,727,811 shares issued to acquire RFS Management were
outstanding the entire period. The common equivalent shares include employee
stock options which have been deemed exercised for the purpose of computing
earnings per share, based on the average market price during the period.
(10) PROPOSED ACQUISITION OF RED LION
On September 12, 1996, Doubletree, through a subsidiary, entered into
an Agreement and Plan of Merger with Red Lion Hotels, Inc. ("Red Lion"), whereby
Doubletree would acquire all of the outstanding common stock of Red Lion in a
merger transaction ("Merger"). Red Lion is a full service hospitality company
that owns, leases and/or manages 56 hotels as of September 30, 1996 principally
in the western United States. The purchase price, which is subject to adjustment
based on the Company's stock price and includes the assumption of approximately
$213.3 million of indebtedness, is approximately $1.2 billion and is anticipated
to be funded with a combination of newly-issued shares of Doubletree common
stock, institutional debt and existing cash. Consummation of the transaction,
which will be accounted for as a purchase, is subject to certain conditions and
is expected to be completed as soon as practicable after Red Lion's special
stockholders' meeting.
The following table presents unaudited pro forma summary financial
information for the nine month periods ended September 30, 1995 and 1996 as if
the acquisition of Red Lion had occurred on January 1, 1995 and assumes the
following:
(1) The price of Doubletree's common stock, for purposes of the Merger,
is $41.00 per share;
(2) The cash consideration to be paid to the shareholders of Red Lion
is approximately $685.0 million;
(3) The stock consideration to be paid to the shareholders of Red Lion
is approximately $297.0 million or 7.2 million shares of Doubletree
common stock;
(4) The net proceeds are $315.0 million ($215.0 million of which is
assumed to be raised in a public offering) from the sale of
approximately 8.1 million shares of Doubletree common stock;
(5) Approximately $213.3 million of existing Red Lion indebtedness is
repaid; and,
(6) Approximately $572.0 million of institutional indebtedness is
incurred.
7
10
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
PRO FORMA PRO FORMA
1995 1996
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA::
Total revenues $ 446,442 $ 508,501
Total operating costs and expenses 398,176 428,340
Operating income 48,266 80,161
Interest, net (25,161) (25,380)
Income before income taxes and minority interest 23,105 54,781
Net income 21,654 31,228
Earnings per share (1) 0.58 0.81
Weighted average common and common equivalent shares (1) 37,435 38,481
OTHER DATA:
Operating Data Excluding Non-Recurring Items
Operating income $ 62,928(2) $ 80,161
Net income 20,174(3) 31,228
Earnings per share (1) 0.54(3) 0.81
EBITDA (4) $ 91,762 $ 124,597
AS OF SEPTEMBER 30, 1996
------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 58,376
Total assets 1,769,529
Long-term debt, net of current portion 567,000
Stockholders' equity 774,885
Book value per common share $ 20.18
- ---------------------
(1) Pro forma per share information assumes that the approximately 15.3
million shares to be issued in connection with the Merger were issued as
of January 1, 1995.
(2) Excludes $14.7 million of formation expenses incurred by Red Lion as a
result of its formation in August 1995.
(3) Adjusted to (a) provide for increased income tax expense on the excluded
formation expenses incurred during the nine months ended September 30,
1995, (b) exclude the deferred tax benefit of $9.7 million related to the
formation of Red Lion and provide for income taxes at the statutory rate
and (c) provide for taxes on RFS Management's earnings that were not taxed
due to its Sub-Chapter S status.
(4) EBITDA represents earnings before interest expense, income taxes, income
(loss) attributable to joint venturers' interest, and depreciation and
amortization. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles, and
such information should not be considered as an alternative to net income,
cash flow from operations or any other measure of performance prescribed
by generally accepted accounting principles. EBITDA is included herein
because management believes that certain investors find it to be a useful
tool for measuring the ability to service debt.
For the nine months ended September 30, 1995 EBITDA includes $14.7 million
of non-recurring formation expenses associated with the formation of Red
Lion. Excluding these expenses, EBITDA for the nine months ended September
30, 1995 would have been $106.4 million.
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 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 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission.
OVERVIEW
As a manager of hotels, Doubletree is typically responsible for
supervising or operating the hotel in exchange for base fees tied to revenues.
In addition, Doubletree may also earn revenues through incentive fees based on
the performance of the hotel and income from debt and equity investments in the
underlying hotel. As a franchisor, Doubletree licenses its brand name to the
hotel operator in exchange for a franchise fee based on revenues.
Hotel revenues consist of revenues from hotels owned or leased by
Doubletree. For these hotels, Doubletree includes as revenues the entire hotel's
revenues. As the lessee of hotels that Doubletree also manages, Doubletree
exercises similar control over the operation and supervision of the hotel as is
given to it as a manager, however, Doubletree recognizes all revenues and
substantially all expenses associated with the operation of the hotel.
Purchasing and service fees represent fees from purchasing agreements
with preferred vendors, sales of furniture, supplies and other frequently used
items to hotels for a profit, and fees from technical services provided to hotel
owners in connection with the construction/renovation of hotels.
Other fees and income primarily comprise contract termination fees and
equity in income/losses of hotel partnerships and similar ventures, including
gains/losses upon the sale of a hotel.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared With Three Months Ended September
30, 1995
Total revenues increased $15.7 million or 30% to $68.6 million for the
three months ended September 30, 1996 compared to $52.9 million for the three
months ended September 30, 1995.
Revenues from management and franchise fees increased $2.0 million or
27% in 1996 compared to the same period in 1995. The increase is attributable to
increased incentive fees of $0.9 million, fees from new contracts (net of
contracts lost) of $0.6 million, increased fees from comparable hotels of $0.4
million and an increase in fees of $0.1 million from renegotiated contracts and
management contracts which converted to franchise agreements.
Owned hotel revenues increased $0.1 million or 5% in the three month
period compared to the same period in 1995 reflecting an improved average daily
rate at the one owned hotel in Southfield, Michigan.
Leased hotel revenues increased $12.6 million or 32% during the quarter
reflecting improved average daily rates and occupancies and the net addition of
six leased hotels as compared with the same period in 1995. The margin on leased
hotel operating results increased 56% from $2.5 million to $4.0 million,
reflecting the net addition of these properties and an improvement in the
operating margin from 6.5% to 7.7%.
Purchasing and service fees increased by $0.2 million in 1996 compared
to the same period in 1995. The margin increased by $0.4 million to $1.2 million
reflecting a shift in mix from high volume, low margin bulk purchasing programs
(whereby Doubletree purchases goods and resells such goods to its hotel owners)
to preferred vendor programs (whereby Doubletree earns program management fees
only).
9
12
Other fees and income increased $0.8 million principally due to an
increase of $0.5 million in equity and other income, principally attributable to
the sale of the San Diego Doubletree Hotel in which the Company had an equity
interest and an increase in dividends from Doubletree's investment in the
convertible preferred stock of the REIT of $0.3 million.
General and administrative expenses increased $0.4 million or 12% over
the three months of 1995 primarily due to the addition of employees and the
formation of a franchise development team, all of which is attributable to the
Company's growth. Depreciation and amortization increased $0.3 million over the
comparable 1995 period primarily due to increased amortization associated with
investments in management contracts. Net interest income increased nominally by
$0.2 million.
The provision for income taxes reflects a 35% effective tax rate for
the three months ended September 30, 1996 compared to a 31% effective tax rate
for 1995. The lower effective tax rate for 1995 reflects the election of RFS
Management to be taxed as a Subchapter S Corporation for income tax purposes
and, therefore, it was generally not subject to federal income taxes. Had RFS
Management been included in the 1995 consolidated income tax returns of the
Company, the provision for income taxes for the three months ended September 30,
1995 would have increased by $0.3 million.
Net income and earnings per share for the three months ended September
30, 1996 were $8.0 million and $0.34, respectively, compared to $5.6 million and
$0.25, respectively, in 1995. With a normalized effective tax rate for RFS
Management in 1995 of 35%, net income would have increased from 1995 to 1996 by
51% from $5.3 million to $8.0 million and per share earnings would have
increased 42% from $0.24 to $0.34.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended September
30, 1995
Total revenues increased $41.7 million or 29% to $186.0 million for the
nine months ended September 30, 1996 compared to $144.2 million for the nine
months ended September 30, 1995.
Revenues from management and franchise fees increased $6.0 million or
27% in 1996 compared to the same period in 1995. The increase is attributable to
increased incentive fees of $2.9 million, fees from new contracts (net of
contracts lost) of $2.0 million, and increased fees from comparable hotels of
$1.1 million.
Owned hotel revenues increased $0.8 million or 15% in the first nine
months of 1996 reflecting a significantly improved occupancy rate at the one
owned hotel in Southfield, Michigan. The margin on owned hotel operating results
increased $0.4 million or 55%, reflecting an improvement in the operating margin
from 15.3% to 20.6% in the 1996 period.
Leased hotel revenues increased $33.4 million or 32% in the first nine
months of 1996 reflecting improved average daily rates and, to a lesser extent,
occupancies and the addition of leased hotels coupled with a full nine months of
revenues from hotels added in 1995 as compared with the same period in 1995. The
margin on leased hotel operating results increased 49% from $7.1 million to
$10.6 million, reflecting the net addition of these properties and an
improvement in the operating margin from 6.8% to 7.7%.
Purchasing and service fees increased by $0.3 million in the first nine
months of 1996 compared to the same period in 1995. The margin increased by $1.2
million to $3.1 million reflecting a shift in mix from high volume, low margin
bulk purchasing programs (whereby Doubletree purchases goods and resells such
goods to its hotel owners) to preferred vendor programs (whereby Doubletree
earns program management fees only).
Other fees and income increased $1.3 million principally due to an
increase in dividends from Doubletree's investment in the convertible preferred
stock of the REIT of $0.9 million and an increase in equity and other income,
principally attributable to the sale of the San Diego Doubletree Hotel in which
the Company had an equity interest.
10
13
General and administrative expenses increased $2.0 million or 18% over
the first nine months of 1995 primarily due to the addition of employees, the
formation of a franchise development team and an increase in travel and
professional fees, all of which is attributable to the Company's growth.
Depreciation and amortization increased $1.2 million over the comparable 1995
period primarily due to increased amortization associated with investments in
management contracts. Net interest income increased $0.4 million principally due
to higher invested cash balances.
The provision for income taxes reflects a 35% effective tax rate for
the first nine months of 1996 compared with a 31% effective tax rate for the
comparable 1995 period. The lower effective tax rate for 1995 reflects the
election of RFS Management to be taxed as a Subchapter S Corporation for income
tax purposes and, therefore, it was generally not subject to federal income
taxes. Had RFS management been included in the 1995 consolidated income tax
returns of the Company, the income tax provision for the first nine months of
1995 would have increased by $0.8 million.
Net income and earnings per share for the nine months ended September
30, 1996 were $20.4 million and $0.88, respectively, compared to $15.0 million
and $0.68, respectively, in 1995. With a normalized effective tax rate for RFS
Management in 1995 of 35%, net income would have increased from 1995 to 1996 by
44% from $14.2 million to $20.4 million and per share earnings would have
increased 38% from $0.64 to $0.88.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's balance sheet reflected $32.8
million of working capital which represents an increase of $12.3 million from
December 31, 1995. The increase is principally attributable to $27.4 million of
net proceeds generated by the Company's May public offering of common stock and
cash generated from operations. The Company generated cash from operating
activities of $35.9 million during the nine months ended September 1996 as
compared to $21.5 million during the same period of 1995. The increase was due
to increases in net income, expenses not requiring the use of cash, and an
increase in current liabilities principally due to the timing of hotel lease and
income tax payments.
The Company requires capital primarily for making selective investments
in the underlying hotels that it manages as a means of obtaining and enhancing
the profitability of management contracts. The Company used $44.9 million of
cash for investing activities in the first nine months of 1996 of which $18.5
million was contributed to RFS Management and subsequently invested in the REIT
Preferred Shares. Additionally, the Company made loans to owners of hotels in
conjunction with obtaining new management contracts of $8.5 million and invested
$14.0 million in hotel partnerships and ventures, of which $10.3 million was
contributed to Candlewood. The Company has committed to contribute up to $15
million to Candlewood, of which $11.5 million had been funded as of September
30, 1996. The balance of $3.5 million is anticipated to be contributed during
the next three months. Such contributions will be used for general corporate
purposes as well as funding a portion of the development/construction costs of
certain hotels. In September 1996, Candlewood Hotel Company, Inc. filed a
registration statement with the Securities and Exchange Commission to register
its common stock. Upon consummation of the offering, Doubletree's interest in
Candlewood will be converted into an equivalent interest in Candlewood Hotel
Company, Inc. and the equity advances made through such date will be converted
to an interest bearing note receivable.
In addition, in August 1996 Doubletree committed to provide credit
support for a loan facility that will be utilized by Candlewood to arrange to
provide construction and permanent financing to Candlewood franchisees on terms
that, in most cases, are much more attractive than those which the franchisees
could obtain on their own. The source of the loan facility will be General
Motors Acceptance Corporation Mortgage Group. In providing such credit support,
Doubletree's maximum exposure on any one Candlewood franchise will be
approximately $1.0 million , with the aggregate amount of exposure to Doubletree
for all such credit support capped at between $20.0 and $30.0 million, assuming
that the aggregate amount of loans made under the loan facility is between
$100.0 and $150.0 million.
11
14
In August 1996, Doubletree and Patriot American Hospitality, Inc.
(Patriot), one of the nations leading hotel real estate investment trusts,
announced the formation of a joint venture strategic alliance. Pursuant to the
strategic alliance, Doubletree and Patriot will work together to identify hotels
potentially suitable for acquisition by Patriot, which will then be operated as
Doubletree brand hotels or luxury non-Doubletree brand hotels, in each case to
be leased and managed by Doubletree. Patriot and Doubletree have committed to
invest an aggregate of $200.0 million and $20.0 million, respectively, into the
purchase of hotels as part of the strategic alliance. Through September 30,
1996, four hotels have been acquired, all of which will be Doubletree branded,
and the Company has funded approximately $3.0 million.
The Company has guaranteed certain mortgages, leases and construction
bonds up to $6.5 million ($2.9 million of which is collateralized by letters of
credit).
The Company has committed to lend up to $6.9 million, $6.6 million of
which is to the owner of the Doubletree Hotel in Somerset, New Jersey, of which
$0.3 million is for renovations and $6.3 million is to provide bridge financing,
if needed. The remaining loan commitments are to two other hotels for
renovations.
The Company is committed, subject to certain conditions, to
contributing an additional $2.8 million to an investment partnership formed for
the purposes of acquiring hotels. The Company through its corporate subsidiaries
serves as the general partner of certain limited partnerships which own hotels.
Debt of these partnerships is typically secured by first mortgages on the
properties and generally is nonrecourse to the partners. However, such corporate
subsidiaries are liable, as a general partner, for the recourse obligations of
the partnerships they manage. No assurance can be given that the Company will
not be required to fund additional commitments.
Certain hotel management contracts provide that if a hotel does not
achieve agreed-upon performance levels, the Company may elect or may be required
to fund any performance shortfalls for a specified period of time. In general,
if the Company elects not to fund the shortfall, the hotel owner may elect to
terminate the management contract. If the Company elects to fund the shortfall,
but performance standards are not achieved at the expiration of the funding
period, the owner may elect to terminate the management contract at that time.
The Company funded $0.5 million in June 1996 in connection with a shortfall at
one hotel. There were no shortfall funding payments in 1995 or 1994.
In connection with the acquisition of RFS, the credit facility was
amended allowing the Company to maintain borrowings outstanding under the credit
facility of up to $30.0 million through December 1997, and up to $12.5 million
from December 1997 until scheduled maturity in December 1998. Annually, the
Company can request an extension of the maturity date by one year. In May 1996,
the Company requested an extension which was granted by the Lender. Accordingly,
the initial reduction in the commitment has been extended to 1998 and the
maturity date is December 1999. In February 1996, the Company borrowed $5.0
million under the credit facility and repaid the entire amount by June 30, 1996.
The credit facility provides for automatic reductions in the amount of the
facility by 100% of the net proceeds from the sale or other disposition of
certain types of loans or investments or the issuance of certain debt
obligations and by 50% of the new proceeds from the issuance of certain equity
securities. The Lender has waived this required reduction with respect to each
of the Company's public offerings of common stock.
The agreement governing the credit facility contains numerous
affirmative and negative covenants with which the Company must comply and
includes restrictions on the types of business in which the Company may engage,
the payment of dividends, investments, the incurrence of debt and liens, mergers
and consolidations and the disposition of assets. Such agreement also contains
covenants which require the Company to maintain certain financial ratios and
meet other criteria. The obligations of the Company under the credit facility
are secured by all notes receivable and the stock of certain significant
subsidiaries. The Lender waived any restrictions imposed by such covenants with
respect to the transactions with RFS Management and the REIT.
12
15
It is currently anticipated that upon consummation of the acquisition
of Red Lion, Doubletree's existing credit facility described above will be
terminated and replaced with a $736.0 million term loan and revolving credit
facility (New Credit Facility), of which $36.0 million will be available only in
certain circumstances.
The agreement governing the New Credit Facility will contain numerous
affirmative and negative covenants with which the Company must comply including,
without limitation, restrictions with respect to investments, dividends and the
incurrence of indebtedness. Additionally, the Company must maintain certain
financial ratios and meet other criteria. The obligations of the Company under
the New Credit Facility will be secured by the stock of certain significant
subsidiaries and pledges of significant notes receivable and other assets.
Doubletree intends to borrow such amount under the New Credit Facility
which, when coupled with the net proceeds received from sales of the Company's
common stock and existing cash balances, will provide sufficient cash proceeds
to consummate the Merger. In the event that the public offering of common stock
is not consummated prior to the Merger, the Company currently intends to finance
the Merger, to the extent necessary, through additional borrowings under the New
Credit Facility and bridge financing of up to $150.0 million for which the
Company has received written commitments from various institutions. In each
instance, management believes that a combination of its existing cash and cash
equivalents, net cash to be provided from operations and its remaining borrowing
ability under the New Credit Facility will be sufficient to fund its current
operations and capital expenditures after the Merger.
13
16
CERTAIN FINANCIAL AND OPERATING DATA
Set forth below is certain financial and operating data of the Company
as of and for each of the periods ended:
AS OF AS OF AS OF
SEPTEMBER 30, 1995 DECEMBER 31. 1995 SEPTEMBER 30, 1996
------------------ ----------------- ------------------
SUMMARY OPERATING DATA:
NUMBER OF HOTELS
Doubletree Full-Service Hotels 55 56 62
Doubletree Guest Suite Hotels 34 36 37
Doubletree Club Hotels 13 13 16
--- --- ---
Total Doubletree Brand Hotels 102 105 115
Non-Doubletree Brand Hotels 12 11 69
--- --- ---
Total Company Hotel Portfolio 114 116 184
=== === ===
Management Contracts 79 81 85
Lease Agreements (1) 5 5 60
Franchise Agreements 30 30 39
--- --- ---
Total Company Hotel Portfolio 114 116 184
=== === ===
AS OF AS OF AS OF
SEPTEMBER 30, 1995 DECEMBER 31. 1995 SEPTEMBER 30, 1996
------------------ ----------------- ------------------
NUMBER OF ROOMS
Doubletree Full-Service Hotels 17,973 18,422 19,614
Doubletree Guest Suite Hotels 7,378 7,693 8,033
Doubletree Club Hotels 2,347 2,386 3,333
------ ------ ------
Total Doubletree Brand Hotels 27,698 28,501 30,980
Non-Doubletree Brand Hotels 2,435 2,114 11,456
------ ------ ------
Total Company Hotel Portfolio 30,133 30,615 42,436
====== ====== ======
Management Contracts 22,351 22,957 24,137
Lease Agreements (1) 1,017 1,017 9,129
Franchise Agreements 6,765 6,641 9,170
------ ------ ------
Total Company Hotel Portfolio 30,133 30,615 42,436
====== ====== ======
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
REVPAR Analysis (2)
Doubletree Full-Service Hotels $ 58.67 $ 65.03
Doubletree Guest Suite Hotels 78.24 86.94
Doubletree Club Hotels 46.19 48.90
------- -------
Total Doubletree Brand Hotels $ 64.32 $ 71.28
Non-Doubletree Brand Hotels 53.58 58.03
------- -------
Total Company Hotel Portfolio $ 61.14 $ 67.37
------- -------
EBITDA $25,143 $36,044
======= =======
(1) Includes one owned hotel (239 rooms).
(2) REVPAR is occupancy percentage multiplied by average daily rate. Includes
information for hotels managed by Doubletree (including RFS Management)
during both periods.
14
17
DOUBLETREE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 1, 1996, Starwood Lodging Trust (Starwood) informed the
Company that it intends to convert four of the nine Doubletree brand franchise
agreements for Doubletree brand hotels owned by Starwood, which are located in
Atlanta, Los Angeles (airport), Tampa and San Diego, to other brands during the
fourth quarter of 1996. In the event that the Doubletree brand franchise
agreements for the Los Angeles and/or San Diego hotels are not so converted to
other brands, the Company anticipates that it would terminate such franchise
agreements as a result of the Red Lion acquisition discussed above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a current report on form 8-K dated September 12, 1996
that described the Merger, whereby Doubletree would acquire all of the
outstanding common stock of Red Lion. Red Lion is a full service hospitality
company that owns, leases and/or manages hotels principally in the Western
United States. The purchase price, which is subject to adjustment, and includes
the assumption of approximately $213.3 million of indebtedness, is approximately
$1.2 billion and is anticipated to be funded with a combination of newly-issued
shares of Doubletree common stock, institutional debt and existing cash.
Consummation of the transaction is subject to certain conditions and is expected
to be completed prior to December 31, 1996.
The Company also filed a current report on form 8-K dated October 16,
1996 regarding, among other things, the consolidated operating results of the
Company for the three and nine month periods ended September 30, 1996 and the
consolidated operating results of Red Lion for the same period.
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.
Doubletree Corporation
November 4, 1996
BY s/
------------------------------------
William L. Perocchi
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
15