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 March 31, 1997.
[ ] 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
incorporation or organization) Number)
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 April 15, 1997
- ----------------------------- -----------------------------
Common Stock ($.01 par value) 39,568,308 shares
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DOUBLETREE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31,1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996.................................... 1
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996..................... 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996..................... 3
Notes to Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
PART II. OTHER INFORMATION:......................................... 13
Item 5. Other Information.......................................... 13
Item 6. Exhibits and Reports on Form 8-K........................... 13
SIGNATURES.......................................................... 13
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(UNAUDITED)
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
ASSETS
Cash and cash equivalents $ 25,588 $ 30,718
Accounts receivable, net 46,845 46,260
Due from Red Lion MLP 4,094 4,276
Current portion of notes receivable 590 615
Other 10,545 9,143
----------- -----------
Total current assets 87,662 91,012
----------- -----------
Notes receivable, net of current portion 44,499 45,633
Due from Red Lion MLP 24,405 25,664
Investments 77,676 89,189
Property and equipment, net 635,473 634,497
Management contracts, net 459,325 454,641
Goodwill, net 378,326 375,948
Deferred costs and other assets 23,583 23,770
----------- -----------
$ 1,730,949 $ 1,740,354
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 101,105 $ 95,442
Accrued interest payable 2,213 864
Current portion of notes payable 5,490 14,141
Income taxes payable 3 10,422
----------- -----------
Total current liabilities 108,811 120,869
Deferred income taxes 264,812 263,381
Other long-term obligations 10,304 13,691
Notes payable 545,492 524,883
----------- -----------
929,419 922,824
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized 100,000,000 shares; issued and outstanding
39,565,058 and 39,568,308 shares at December 31, 1996
and March 31, 1997, respectively 396 396
Additional paid-in capital 761,273 762,153
Unrealized gain on marketable equity securities 176 96
Unearned employee compensation (141) (123)
Retained earnings 39,826 55,008
----------- -----------
801,530 817,530
----------- -----------
$ 1,730,949 $ 1,740,354
=========== ===========
See accompanying notes to consolidated financial statements.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
-------- ---------
Revenues:
Management and franchise fees $ 8,294 $ 12,487
Owned hotel revenues 1,892 56,592
Leased hotel revenues 39,961 94,833
Purchasing and service fees 3,385 10,573
Other fees and income 303 15,686
-------- ---------
Total revenues 53,835 190,171
-------- ---------
Operating costs and expenses:
General and administrative expenses 4,381 11,518
Owned hotel expenses 1,636 37,595
Leased hotel expenses 37,212 86,696
Purchasing and service expenses 2,520 9,045
Depreciation and amortization 1,467 12,020
-------- ---------
Total operating costs and expenses 47,216 156,874
-------- ---------
Operating income 6,619 33,297
Interest expense (81) (10,948)
Interest income 1,007 2,747
-------- ---------
Income before income taxes and minority interest 7,545 25,096
Minority interest share of net income (41) (498)
-------- ---------
Income before income taxes 7,504 24,598
Income tax expense 2,626 9,416
-------- ---------
Net income $ 4,878 $ 15,182
======== =========
Earnings per share $ 0.22 $ 0.38
======== =========
Weighted average common and common
equivalent shares outstanding 22,584 40,460
======== =========
See accompanying notes to consolidated financial statements.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
-------- --------
Cash flow from operating activities:
Net income $ 4,878 $ 15,182
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 1,467 12,020
Other non-cash expenses 114 5,807
Equity in (earnings) loss of partnerships 36 (958)
Minority interest share of net income 41 498
Deferred income taxes 1,016 (1,409)
Decrease in accounts receivable 1,317 302
(Increase) decrease in other assets (486) 1,553
Increase in current liabilities 514 13,157
-------- --------
Net cash provided by operations 8,897 46,152
-------- --------
Cash flow from investing activities:
Purchase of Red Lion and related costs -- (10,999)
Purchases of property and equipment (287) (5,071)
Investments in partnerships and ventures (18,819) (11,016)
Distributions from partnerships and ventures 113 178
Advances to Red Lion MLP -- (1,259)
Investments in management contracts (665) (21)
Proceeds from termination of management contracts -- 1,379
Deposits in hotels to obtain management contracts (250) (170)
Loans to owners of managed hotels (4,455) (1,159)
Increase in deferred costs and other assets (2,626) (838)
-------- --------
Net cash used in investing activities (26,989) (28,976)
-------- --------
Cash flow from financing activities:
Proceeds from exercise of common stock options 136 20
Proceeds from borrowings 5,000 --
Principal payments on borrowings (672) (12,066)
-------- --------
Net cash provided (used) by financing activities 4,464 (12,046)
-------- --------
Net increase (decrease) in cash and cash equivalents (13,628) 5,130
Cash and cash equivalents at beginning of year 32,652 25,588
-------- --------
Cash and cash equivalents at end of period $ 19,024 $ 30,718
======== ========
Supplemental cash flow information:
Cash paid for interest $ 77 $ 11,504
======== ========
Cash paid for income taxes $ 125 $ 406
======== ========
See accompanying notes to consolidated financial statements.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
Doubletree Corporation (the Company) is a hotel management company and
is the exclusive franchisor of Doubletree Hotels, Doubletree Guest Suites, Club
Hotels by Doubletree and Red Lion hotel brands. At March 31, 1997, the Company
had a portfolio of 247 properties, of which 209 were managed and/or leased and
38 were franchised. Of the managed and/or leased properties, 18 are wholly-owned
by the Company, eight are operated pursuant to joint venture agreements (in
which the Company owns 50% or more of the venture), 82 are leased and 101 are
managed for third party owners.
On November 8, 1996, the Company acquired Red Lion Hotels, Inc. (Red
Lion) in a business combination accounted for as a purchase. Accordingly, the
consolidated statement of operations for the quarter ended March 31, 1996 does
not include any of the operating results of Red Lion.
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, 1996, as
filed with the Securities and Exchange Commission. The results of operations for
the three months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the full year.
(2) ACQUISITION OF RED LION HOTELS, INC.
The following unaudited pro forma summary presents the condensed
consolidated results of operations of the Company for the three months ended
March 31, 1996 as if Red Lion had been acquired at the beginning of 1996 with
pro forma adjustments to give effect to (a) amortization of goodwill, (b)
additional depreciation expense resulting from the step-up in the basis of
properties and equipment and investments in unconsolidated joint ventures, (c)
interest expense on acquisition debt and (d) the operating results of three
hotels acquired in 1996 and related tax effects. The pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of operations that would actually have resulted had the combination
been in effect as of January 1, 1996 (in thousands):
Three Months Ended
March 31, 1996
(unaudited)
------------------
Total revenues $153,158
Operating income 16,581
Interest, net (7,844)
Income before taxes 8,093
Net income 4,726
Earnings per share $ 0.12
Weighted average common and
common equivalent shares outstanding 39,034
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) INVESTMENTS
As of March 31, 1997 the Company and its subsidiaries have general
and/or limited partnership interests in numerous partnerships which principally
own hotels. The Company's percentage of ownership in such partnerships ranges
from less than 1% to 50%.
Investments consist of the following (in thousands):
DECEMBER 31, MARCH 31,
1996 1997
---- ----
Hotel partnerships $ 58,538 $ 70,187
RFS Hotel Investors, Inc. convertible preferred stock 18,500 18,500
RFS Hotel Investors, Inc. common stock 1,533 1,454
Candlewood (581) (638)
Other (314) (314)
-------- --------
$ 77,676 $ 89,189
======== ========
(4) NOTES PAYABLE
DECEMBER 31, MARCH 31,
1996 1997
---- ----
Term Loan A with interest at variable rates payable quarterly
(6.93% at March 31, 1997), principal due quarterly in
varying amounts through maturity in November 2002 $300,700 $293,189
Term Loan B with interest at variable rates payable quarterly
(7.81% at March 31, 1997), principal due quarterly in
varying amounts through maturity in May 2004 160,900 157,038
Mortgages and other notes 89,382 88,797
-------- --------
550,982 539,024
Less: current portion (5,490) (14,141)
-------- --------
$545,492 $524,883
======== ========
The Company's credit facility consists of two term loans, provides for
a $100.0 million revolving line of credit, and makes available additional
borrowings of up to $40.0 million under Term Loan A to refinance an existing
hotel mortgage, the commitment for which expires June 30, 1997. At the option of
the Company, interest rates may be based on either (a) the higher of the federal
funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus a margin
which ranges from 1.125% to 2.000% with respect to Term Loan A and the revolving
line of credit and 2.25% to 2.50% with respect to Term Loan B. The interest
margins applicable at any time are related to the financial condition and
performance of the Company. During the quarter ended March 31, 1997, the Company
made a voluntary prepayment of $10.0 million that was applied to reduce the
balances outstanding under Term Loans A and B. There were no borrowings during
the quarter on the revolving line of credit. The facility requires the payment
of a quarterly commitment fee of 0.375% of the unutilized commitments.
5
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) STOCK OPTIONS
The Company's stock based compensation plan is a fixed 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 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.
As of March 31, 1997, options for 2,848,375 shares, net of
terminations, have been granted at prices ranging from $13.00 to $40.75, of
which 631,065 are currently exercisable. Subsequent to March 31, 1997, the
Company's shareholders approved an increase in the maximum number of shares
available under the Plan from 3,300,000 to 4,500,000.
(6) UNUSUAL ITEMS
During the quarter, the Company realized three unusual items that
contributed $8,450,000 to operating income ($5,214,000 after-tax) as follows
(in thousands):
Renaissance Hotel Group break-up fee, net of costs $ 10,925
Sale of management rights 3,000
Establishment of long-term compensation plans (5,475)
--------
$ 8,450
========
On January 5, 1997, the Company entered into a memorandum of
understanding for the proposed acquisition of Renaissance Hotel Group N.V.
(Renaissance). The memorandum of understanding contained a provision that in the
event Renaissance entered into a merger or acquisition agreement with a party
other than the Company within four months, Doubletree would receive a break-up
fee of $15.0 million. In February 1997, Renaissance entered into a merger
agreement with another company and on February 20, 1997, Doubletree received
$15.0 million in cash. After expenses incurred by the Company for professional
and legal services, the Company realized $10.9 million which is included in
other fees and income.
During 1993, the Company entered into a joint venture agreement with
Caesar's and a private developer and obtained the rights to manage a hotel to be
built in Atlantic City. With the subsequent acquisition of Caesar's by ITT
Sheraton, the Company sold its rights to manage the hotel for $3.0 million,
which is included in other fees and income.
During the quarter ended March 31, 1997, the Company established a
supplemental executive retirement plan for senior management and issued 10,000
shares of restricted common stock to each of the Company's two co-chairmen.
Corporate general and administrative expenses includes $5,475,000 related to
these items.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS), and supersedes APB Opinion No. 15. SFAS No. 128
replaces primary EPS with basic EPS and requires dual presentation of basic and
diluted EPS. The statement is effective for periods ending after December 15,
1997. Basic and diluted EPS, as calculated under SFAS No. 128, would not have
differed from the amounts reported of $0.22 and $0.38, for the three months
ended March 31, 1996 and 1997, respectively.
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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.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the actual results of operations for the
three months ended March 31, 1997 in comparison to the pro forma results for the
same period of 1996, assuming that the November 8, 1996 acquisition of Red Lion,
and related transactions, occurred as of January 1, 1996. The Company believes
that this information provides a more meaningful basis for comparison than the
historical results of the Company and includes all necessary adjustments for a
fair presentation of such pro forma quarterly information. The pro forma results
of operations are not necessarily indicative of the results of operations as
they might have been had the combination been consummated at the beginning of
1996.
Three Months Ended
March 31,
--------------------------
Pro Forma
1996(a) 1997(b)
--------- ---------
(In thousands)
(unaudited)
Revenues:
Management and franchise fees $ 10,014 $ 12,487
Owned hotel revenues 53,660 56,592
Leased hotel revenues 71,032 94,833
Purchasing and service fees 17,913 10,573
Other fees and income 539 15,686
--------- ---------
Total revenues 153,158 190,171
--------- ---------
Operating costs and expenses:
General and administrative expenses 6,592 11,518
Owned hotel expenses 36,798 37,595
Leased hotel expenses 64,791 86,696
Purchasing and service expenses 16,311 9,045
Depreciation and amortization 12,085 12,020
--------- ---------
Total operating costs and expenses 136,577 156,874
--------- ---------
Operating income 16,581 33,297
Interest expense (10,561) (10,948)
Interest income 2,717 2,747
--------- ---------
Income before income taxes and minority interest 8,737 25,096
Minority interest share of net income (644) (498)
--------- ---------
Income before income taxes 8,093 24,598
Income tax expense 3,367 9,416
--------- ---------
Net Income $ 4,726 $ 15,182
========= =========
Earnings per share $ 0.12 $ 0.38
========= =========
Weighted average common and common
equivalent shares outstanding 39,034 40,460
========= =========
(a) The 1996 first quarter results are presented on a pro forma basis to give
effect to the November 8, 1996 acquisition of Red Lion Hotels, Inc. (Red Lion),
and related transactions, as if they had occurred on January 1, 1996.
(b) Includes a break-up fee of $10.9 million (net of expenses) related to the
terminated Renaissance Hotel Group transaction, a $3.0 million gain from the
sale of the Company's management rights for a hotel under development in
Atlantic City, and $5.5 million of expenses for the establishment of long-term
compensation plans for senior management. These items contributed $13.9 million,
$8.5 million, $5.2 million, and 13 cents, respectively, to 1997 first quarter
revenues, operating income, net income, and earnings per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
HOTEL STATISTICAL DATA:
Number of Hotels Number of Rooms
--------------------------- --------------------------------
As of March 31, Change from As of March 31, Change from
1997 Year end 1997 Year end
--------------- ----------- --------------- --------------
Doubletree full-service hotels 63 5 19,317 1,727
Doubletree Guest Suite hotels 42 6 8,987 1,214
Club Hotels by Doubletree 16 -- 3,385 52
--- -- ------ ------
Total Doubletree brand hotels 121 11 31,689 2,993
Red Lion hotels 52 (4) 13,520 (1,339)
Non-Doubletree brand hotels 74 (1) 12,136 (346)
--- -- ------ ------
Total Company hotel portfolio 247 6 57,345 1,308
=== == ====== ======
Three Months Change
Ended From
March 31, 1997 March 31, 1996
-------------- --------------
Hotel Revenue Analysis (a):
Doubletree full-service hotels
Occupancy percentage 69.2% 1.5 pts
Average daily rate $ 97.52 10.7%
Revenue per available room $ 67.47 13.0%
Doubletree Guest Suite hotels
Occupancy percentage 74.4% 2.2 pts
Average daily rate $120.08 10.7%
Revenue per available room $ 89.37 14.2%
Club Hotels by Doubletree (b)
Occupancy percentage 69.6% (3.7) pts
Average daily rate $ 74.41 1.4%
Revenue per available room $ 51.83 (3.6)%
Total Doubletree brand hotels
Occupancy percentage 70.8% 1.6 pts
Average daily rate $104.47 10.7%
Revenue per available room $ 73.98 13.2%
Red Lion hotels
Occupancy percentage 64.4% (1.1) pts
Average daily rate $ 86.43 9.6%
Revenue per available room $ 55.62 7.7%
Non-Doubletree brand hotels
Occupancy percentage 70.9% (1.8) pts
Average daily rate $ 75.21 5.6%
Revenue per available room $ 53.31 3.0%
Total Company hotel portfolio
Occupancy percentage 68.5% (0.1) pts
Average daily rate $ 92.50 9.7%
Revenue per available room $ 63.37 9.6%
(a) Revenue statistics are for comparable hotels and includes only information
for those hotels in the system as of March 31, 1997 and managed by Doubletree
or Red Lion since January 1, 1996.
(b) Includes the results for only two properties.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Three Months Ended March 31, 1997 (Actual) Compared With Three Months Ended
March 31, 1996 (Pro Forma)
Revenues increased $37.0 million or 24% to $190.2 million for the three
months ended March 31, 1997 compared to $153.2 million for the pro forma three
month period ended March 31, 1996.
Revenues from management and franchise fees increased $2.5 million or
25% in 1997 due to higher incentive fees of $1.7 million, increased fees from
comparable hotels of $0.6 million and an increase of $0.2 million in fees from
renegotiated contracts and management contracts which converted to franchise
agreements. The increases in incentive fees and fees from comparable hotels
reflect (a) the strong growth in REVPAR from "same store hotels", (b) continued
improvements in operating performance and (c) the fact that the first quarter
1996 incentive fee earned from the Red Lion MLP hotels was not recorded until
the second quarter of 1996.
Owned hotel revenues increased $2.9 million in 1997 or 5% over the
comparable pro forma period principally due to an increase in REVPAR of nearly
8% partially offset by lower growth in food and beverage revenues. The margin on
hotel results increased $2.1 million from $16.9 million in 1996 to $19.0 million
in the 1997 period reflecting an improvement in operating margins from 31.4% to
33.6%.
Leased hotel revenues increased $23.8 million in 1997 or 34% over the
comparable pro forma period principally due to the addition of 16 new properties
under lease and an increase in REVPAR of nearly 8.0%. The margin on leased hotel
operating results increased $1.9 million from $6.2 million in 1996 to $8.1
million in the 1997 period reflecting the impact of the new property additions
offset by a slight decline in operating margins from 8.8% in the 1996 pro forma
period to 8.6% in 1997.
Purchasing and service fees decreased $7.3 million as compared to the
1996 pro forma period while the net margin was essentially flat at $1.5 million.
The decline in revenues resulted principally from a decline in project
management fees attributable to reduced capital spending for renovation
projects and a continued shift by the Company away from high volume, low margin
purchase and resale of goods and services to the hotels toward preferred vendor
programs whereby the Company earns a fee for administering the program.
Other fees and income increased $15.1 million in 1997 as compared to
the quarter ended March 31, 1996. The increase was principally attributable to
$10.9 million of income (net of expenses) resulting from the break-up fee for
the terminated Renaissance transaction and $3.0 million from the sale of the
Company's management rights for a hotel to be built in Atlantic City. Excluding
these items, other fees and income would have increased $1.2 million resulting
principally from an increase in equity income earned on minority interests in
various hotel partnerships and to a lesser degree, increases in franchise
application fees.
General and administrative expenses increased $4.9 million in 1997 to
$11.5 million. Excluding the $5.5 million of expenses incurred for (a) the
establishment of a supplemental executive retirement plan for senior management
and (b) the compensation expense attributable to the granting of restricted
stock to the Company's two co-chairmen, general and administrative expenses
would have decreased by $0.5 million. The Company expects to realize savings
resulting from the consolidation of the formerly separate operations of Red Lion
and Doubletree. The first quarter decrease represents a portion of the
anticipated savings.
Depreciation and amortization decreased nominally. Operating income
increased $16.7 million, $8.5 million of which is attributable to the unusual
items noted above. Excluding these items, operating income would have increased
$8.3 million to $24.8 million or 50% in comparison to the $16.6 million
generated during the pro forma quarter ended March 31, 1996.
9
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The Company incurred net interest expense of $8.2 million in 1997 as
compared to the $7.8 million incurred on a pro forma basis in the 1996 period.
The increase reflects a slightly higher interest rate on the outstanding
borrowings in 1997 vs 1996.
The increase of $0.1 million in minority interest expense reflects the
profits allocable to third party owners of certain consolidated hotel joint
ventures.
The provision for income taxes reflects a 38.3% effective tax rate for
the three months ended March 31, 1997 compared to a 41.6% effective tax rate
utilized in the preparation of the 1996 pro forma results. The higher effective
tax rate for 1996 reflects the assumption that the Company would not be able to
utilize certain of its existing tax attributes to reduce its taxes.
Net income and earnings per share for the three months ended March 31,
1997 were $15.2 million and $0.38, respectively, compared to $4.7 million and
$0.12, respectively, in the 1996 pro forma period. Excluding the unusual items
described above, net income would have been $10.0 million an increase of 111%
from $4.7 million in the 1996 period and per share earnings would have
increased 108% to $0.25 from $0.12.
Three Months Ended March 31, 1997 (Actual) Compared With Three Months Ended
March 31, 1996 (Actual)
The Company believes, due to the significant increase in its operations
resulting from the Red Lion acquisition, that the most meaningful comparison is
between the actual 1997 quarterly results and the 1996 pro forma results.
Revenues increased from $53.8 million to $190.2 million and operating
expenses increased from $47.2 million to $156.9 from the first quarter of 1996
to the first quarter of 1997. The Company had net interest income of $0.9
million in the comparable 1996 quarter compared to net interest expense of $8.2
million. The changes are attributable to the Company's November 1996 acquisition
of Red Lion Hotels, Inc., leased hotels added subsequent to March 31, 1996 and
the previously discussed unusual items.
Net income and earnings per share for the three months ended March 31,
1997 were $15.2 million and $0.38, respectively, compared to $4.9 million and
$0.22, respectively, in the 1996 period. Excluding the unusual items described
above, net income would have been $10.0 million an increase of 104% from $4.9
million in the 1996 period and per share earnings would have increased 14% to
$0.25 from $0.22. Weighted average shares increased 79% from 1996 to 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's balance sheet reflected negative
working capital of $29.9 million. The Company generated cash from operating
activities of $46.2 million during the three months ended March 31, 1997 as
compared to $8.9 million of cash from operations during the same period of 1996.
The increase was primarily due to increases in earnings, expenses not requiring
the use of cash and taxes payable.
Historically, the Company required 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. With the
acquisition of the 34 Red Lion owned and leased hotels, the Company will be
investing in the renovation and general upkeep of these hotel properties.
Accordingly, investments in property and equipment will increase substantially
as compared to historical levels of capital expenditures made when the Company
principally managed hotel properties. As of March 31, 1997 the Company had
capital improvement project commitments aggregating approximately $26.4 million
[including $9.0 million related to the expansion of and upgrade to the financial
management and reservation systems].
The Company used $29.0 million of cash for investing activities in the
1997 quarter of which $11.0 million represented the funding of previously
accrued costs related to the Red Lion acquisition and $5.1 million was utilized
for fixed asset additions ($4.5 million related to Red Lion hotel properties).
Additionally, during the quarter, the Company invested $11.0 million in hotel
partnerships and ventures and made loans to owners of hotels in conjunction with
obtaining new management contracts of $1.2 million. The Company has committed to
contribute up to $15.0 million to Candlewood, of which $12.7 million had been
funded as of March 31, 1997. The balance of $2.3 million is anticipated to be
contributed
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during the next twelve 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 August 1996, the Company 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 and/or its franchisees on
terms that, in most cases, are much more attractive than those which could be
obtained on their own. The source of the loan facility is General Motors
Acceptance Corporation Mortgage Group. In providing such credit support, the
Company's maximum exposure on any one loan will be range from approximately $1.0
to $2.0 million, with the aggregate amount of exposure for all such credit
support capped at between $20 and $30 million, assuming that the aggregate
amount of loans made under the loan facility is between $100 and $150 million.
As of March 31, 1997, no amounts were outstanding under the loan facility.
In August 1996, the Company and Patriot American Hospitality, Inc.
("Patriot") formed a joint venture wherein the Company will invest up to $20
million of capital ($12.6 million of which had been invested at March 31, 1997)
to be combined with up to $180 million of capital from Patriot to be used for
the acquisition of hotels. The Company has a 10% interest in the venture.
In connection with the Red Lion Acquisition, the Company terminated its
existing credit facility and entered into a new $633.2 million credit facility
("New Credit Facility"). The New Credit Facility has three components: (1) a
$100.0 million revolving credit facility, (2) a $362.2 million term loan (Term
Loan A), and (3) a $171.0 million term loan (Term Loan B). At the option of
the Company, interest rates may be based on either (a) the higher of the federal
funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus an
interest rate margin which ranges from 1.125% to 2.0% with respect to the
revolving line of credit and Term Loan A and 2.25% to 2.50% with respect to Term
Loan B. The interest margins at any time are related to the financial condition
and performance of the Company.
The $100.0 million revolving credit facility can be used for general
corporate purposes, matures in 2002 and was undrawn as of March 31, 1997. Term
Loan A is a fully amortizing loan and makes available additional borrowings of
up to $40.0 million to refinance an existing hotel mortgage (the commitment for
which expires June 30, 1997). Principal payments are due quarterly, increasing
from approximately $1.0 million per quarter in 1997 to $18.4 million quarterly
in 2002, at which time the term loan matures.
Term Loan B requires quarterly principal payments of approximately
$368,000 through 2002 and then increases to approximately $24.8 million
quarterly throughout maturity in May 2004.
During the quarter, the Company made a voluntary $10.0 million
prepayment of its long term notes payable.
The Company entered into interest rate swap agreements in order to
reduce its exposure to interest rate fluctuations. As of March 31, 1997, the
Company had three agreements which have converted $250.0 million of debt from
floating rates (5.75%) at March 31, 1997 to a fixed rate of 5.92% (prior to
the applicable margin). The agreements expire March 31, 1999.
The New Credit Facility contains numerous covenants which place
restrictions on additional indebtedness, mergers, acquisitions, the payment of
dividends and investments and requires the Company to maintain certain financial
ratios. Additionally, the Company is required to make mandatory principal
repayments with the proceeds from excess cash flow from operations (as defined)
or equity offerings and the sale of assets or refinancing of certain
indebtedness. All obligations are guaranteed and secured by substantially all of
the assets of the Company and its significant subsidiaries.
Depending on the timing and magnitude of the Company's future
investments (either in the form of debt or equity), the working capital
necessary to satisfy current obligations is anticipated to be generated from
operations. To the extent the Company identifies significant acquisition and/or
investment opportunities in excess of its available cash, the Company may borrow
under the New Credit Facility or may seek additional sources of capital to fund
such investments. Management believes that a combination of its existing cash
and cash equivalents, net cash provided from operations, and its borrowing
ability under the New Credit Facility will be sufficient to fund its operations,
capital outlays and commitments.
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The Company has guaranteed certain mortgages, leases and construction
bonds up to $12.3 million ($1.0 million of which is collateralized by a letter
of credit). Additionally, the Company has approximately $5.9 million of bonds
outstanding as collateral for payment of claims arising out of workers'
compensation claims and has committed to provide an additional $1.7 million to
an investment partnership for hotel property acquisitions. The Company has a
4.35% limited partnership interest in the venture.
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 has not been required to fund any shortfalls during the three month
period ended March 31, 1997.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On March 19, 1997, the Company filed a Registration Statement on Form
S-3 (the "Registration Statement") with the Securities and Exchange Commission
(the "Commission") registering 870,173 shares of the Company's Common Stock (the
"Shares") for sale by certain selling stockholders. The Registration Statement
was declared effective by the Commission on March 28, 1997. Pursuant to the plan
of distribution set forth in the Registration Statement, the selling
stockholders may not offer or sell any Shares after April 29, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
[None]
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
May 14, 1997 By s/______________________________________
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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