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 quarterly period ended June 30, 1997.
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: 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
common stock, as of the latest practicable date.
Class Outstanding at July 15, 1997
----------------------------- ----------------------------
Common Stock ($.01 par value) 39,655,983 shares
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DOUBLETREE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 1
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 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:
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(UNAUDITED)
DECEMBER 31, JUNE 30,
1996 1997
----------- -----------
ASSETS
Cash and cash equivalents $ 25,588 $ 23,264
Accounts receivable, net 46,845 53,743
Due from Red Lion MLP 4,094 3,783
Current portion of notes receivable 590 640
Other 10,545 8,102
----------- -----------
Total current assets 87,662 89,532
----------- -----------
Notes receivable, net of current portion 44,499 48,393
Due from Red Lion MLP 24,405 28,505
Investments 77,676 94,333
Property and equipment, net 635,473 633,534
Management contracts, net 459,325 451,181
Goodwill, net 378,326 373,568
Deferred costs and other assets 23,583 23,401
----------- -----------
$ 1,730,949 $ 1,742,447
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 101,105 $ 89,787
Accrued interest payable 2,213 486
Current portion of notes payable 5,490 22,914
Income taxes payable 3 --
----------- -----------
Total current liabilities 108,811 113,187
Deferred income taxes 264,812 264,130
Other long-term obligations 10,304 13,619
Notes payable 545,492 514,551
----------- -----------
929,419 905,487
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized 100,000,000 shares; issued and outstanding
39,565,058 and 39,641,658 shares at December 31, 1996
and June 30, 1997, respectively 396 396
Additional paid-in capital 761,273 763,089
Unrealized gain on marketable equity securities 176 136
Unearned employee compensation (141) (105)
Retained earnings 39,826 73,444
----------- -----------
801,530 836,960
----------- -----------
$ 1,730,949 $ 1,742,447
=========== ===========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1996 1997 1996 1997
-------- --------- --------- ---------
Revenues:
Management and franchise fees $ 10,225 $ 15,590 $ 18,519 $ 28,077
Owned hotel revenues 2,087 62,574 3,979 119,166
Leased hotel revenues 46,360 107,881 86,321 202,714
Purchasing and service fees 4,205 7,059 7,590 17,632
Other fees and income 669 1,822 972 17,508
-------- --------- --------- ---------
Total revenues 63,546 194,926 117,381 385,097
-------- --------- --------- ---------
Operating costs and expenses:
Corporate general and administrative expenses 4,260 6,240 8,641 17,758
Owned hotel expenses 1,583 38,590 3,219 76,185
Leased hotel expenses 42,526 94,195 79,738 180,891
Purchasing and service expenses 3,128 5,006 5,648 14,051
Depreciation and amortization 1,473 12,178 2,940 24,198
-------- --------- --------- ---------
Total operating costs and expenses 52,970 156,209 100,186 313,083
-------- --------- --------- ---------
Operating income 10,576 38,717 17,195 72,014
Interest expense (62) (10,887) (143) (21,835)
Interest income 1,083 2,815 2,090 5,562
-------- --------- --------- ---------
Income before income taxes and minority interest 11,597 30,645 19,142 55,741
Minority interest share of net loss (income) 19 (764) (22) (1,262)
-------- --------- --------- ---------
Income before income taxes 11,616 29,881 19,120 54,479
Income tax expense 4,067 11,445 6,693 20,861
-------- --------- --------- ---------
Net income $ 7,549 $ 18,436 $ 12,427 $ 33,618
======== ========= ========= =========
Earnings per share $ 0.33 $ 0.46 $ 0.54 $ 0.83
======== ========= ========= =========
Weighted average common and common equivalent
shares outstanding 23,173 40,427 22,849 40,417
======== ========= ========= =========
See accompanying notes to consolidated financial statements.
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5
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1996 1997
-------- --------
Cash flows from operating activities:
Net income $ 12,427 $ 33,618
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 2,940 24,198
Other non-cash expenses 202 7,017
Equity in (earnings) loss of partnerships 37 (2,254)
Minority interest share of net income 35 1,262
Deferred income taxes 2,629 (682)
Increase in accounts receivable (2,687) (7,114)
(Increase) decrease in other assets (113) 2,596
Increase in current liabilities 7,085 563
-------- --------
Net cash provided by operations 22,555 59,204
-------- --------
Cash flows from investing activities:
Purchase of Red Lion and related costs -- (15,888)
Purchases of property and equipment (656) (10,347)
Investments in partnerships and ventures (25,146) (14,933)
Distributions from partnerships and ventures 292 82
Advances to Red Lion MLP -- (3,789)
Investments in management contracts (811) (35)
Proceeds from terminations of management contracts -- 1,558
Deposits in hotels to obtain management contracts (250) (200)
Loans to owners of managed hotels, net (6,381) (3,944)
Increase in deferred costs and other assets (2,626) (1,255)
-------- --------
Net cash used in investing activities (35,578) (48,751)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 27,372 --
Proceeds from exercise of common stock options 237 956
Proceeds from borrowings 5,000 --
Principal payments on borrowings (5,672) (13,733)
-------- --------
Net cash provided by (used in) financing activities 26,937 (12,777)
-------- --------
Net increase (decrease) in cash and cash equivalents 13,914 (2,324)
Cash and cash equivalents at beginning of year 32,652 25,588
-------- --------
Cash and cash equivalents at end of period $ 46,566 $ 23,264
======== ========
Supplemental cash flow information:
Cash paid for interest $ 151 $ 21,987
======== ========
Cash paid for income taxes $ 875 $ 21,546
======== ========
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 June 30, 1997,
the Company had a portfolio of 255 properties, of which 213 were managed and/or
leased and 42 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 ), 86 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 statements of operations for the three and six month periods
ended June 30, 1996 do 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 six months ended June 30, 1997 are not necessarily indicative
of the results to be expected for the full year.
Earnings per share is determined by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares include employee stock options and
warrants which have been deemed exercised for the purpose of computing earnings
per share. The Company has no other potentially dilutive securities.
(2) ACQUISITION OF RED LION HOTELS, INC.
The following unaudited pro forma summary presents the condensed
consolidated results of operations of the Company 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) increased 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 SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
Total revenues $ 174,008 $ 327,166
Operating income 29,557 46,138
Interest, net (7,758) (15,602)
Income before income taxes 21,443 29,536
Net income 12,523 17,249
Earnings per share $ 0.32 $ 0.44
Weighted average shares outstanding 39,623 39,328
4
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) INVESTMENTS
As of June 30, 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 49.9%.
Investments consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
-------- --------
Hotel partnerships $ 58,538 $ 75,427
RFS Hotel Investors, Inc. convertible preferred stock 18,500 18,500
RFS Hotel Investors, Inc. common stock 1,533 1,493
Candlewood (581) (773)
Other (314) (314)
-------- --------
$ 77,676 $ 94,333
======== ========
(4) NOTES PAYABLE
Notes payable consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
--------- ---------
Term Loan A with interest at variable rates payable
quarterly (6.875% at June 30, 1997), principal due
quarterly in varying amounts through maturity in
November 2002 $ 300,700 $ 292,215
Term Loan B with interest at variable rates payable quarterly
(8.000% at June 30, 1997), principal due quarterly in
varying amounts through maturity in May 2004 160,900 156,670
Mortgages and other notes 89,382 88,580
--------- ---------
550,982 537,465
Less: current portion (5,490) (22,914)
--------- ---------
$ 545,492 $ 514,551
========= =========
The Company's credit facility consists of two term loans and
provides for a $100.0 million revolving line of credit. 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 2.000% 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. 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) 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
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8
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. In May, 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.
As of June 30, 1997, options for 3,530,250 shares, net of
terminations, have been granted at prices ranging from $13.00 to $41.75, of
which 755,590 are currently exercisable.
(6) UNUSUAL ITEMS
During the first quarter of 1997, the Company realized three
unusual items that contributed $8,450,000 ($5,214,000 after-tax) to operating
income in the accompanying 1997 statements of operations 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 first quarter of 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. The
Company recorded $5,475,000 in expenses related to these items, which is
included in corporate general and administrative expenses.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 established 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. SFAS No. 128 is effective for periods ending after December 15, 1997. Basic
and diluted EPS, as calculated under SFAS No. 128, would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
Basic $.33 $.47 $.55 $.85
Diluted $.33 $.46 $.54 $.83
Diluted earnings per share as calculated under SFAS No. 128 is comparable to
primary earnings per share, as reported in the accompanying statements of
operations.
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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 consolidated
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 and six months ended June 30, 1997 in comparison to the pro forma
results for the same periods 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.
in thousands (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
PRO PRO
FORMA FORMA
1996 (a) 1997 1996 (a) 1997 (b)
--------- --------- --------- ---------
Revenues:
Management and franchise fees $ 14,577 $ 15,590 $ 24,591 $ 28,077
Owned hotel revenues 57,891 62,574 111,551 119,166
Leased hotel revenues 82,790 107,881 153,822 202,714
Purchasing and service fees 17,850 7,059 35,763 17,632
Other fees and income 900 1,822 1,439 17,508
--------- --------- --------- ---------
Total revenues 174,008 194,926 327,166 385,097
--------- --------- --------- ---------
Operating costs and expenses:
Corporate general and administrative expenses 6,851 6,240 13,443 17,758
Owned hotel expenses 38,623 38,590 75,421 76,185
Leased hotel expenses 70,996 94,195 135,787 180,891
Purchasing and service expenses 15,889 5,006 32,200 14,051
Depreciation and amortization 12,092 12,178 24,177 24,198
--------- --------- --------- ---------
Total operating costs and expenses 144,451 156,209 281,028 313,083
--------- --------- --------- ---------
Operating income 29,557 38,717 46,138 72,014
Interest expense (10,515) (10,887) (21,076) (21,835)
Interest income 2,757 2,815 5,474 5,562
--------- --------- --------- ---------
Income before income taxes and minority interest 21,799 30,645 30,536 55,741
Minority interest share of net income (356) (764) (1,000) (1,262)
--------- --------- --------- ---------
Income before income taxes 21,443 29,881 29,536 54,479
Income tax expense 8,920 11,445 12,287 20,861
--------- --------- --------- ---------
Net income $ 12,523 $ 18,436 $ 17,249 $ 33,618
========= ========= ========= =========
Earnings per share $ 0.32 $ 0.46 $ 0.44 $ 0.83
========= ========= ========= =========
Weighted average common and common equivalent
shares outstanding 39,623 40,427 39,328 40,417
========= ========= ========= =========
(a) The unaudited 1996 results are presented on a pro forma basis to give effect
to the November 8, 1996 acquisition of 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 revenues, operating
income, net income, and earnings per share during the six months ended June 30,
1997.
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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 June 30, Change from As of June 30, Change from
1997 Year end 1997 Year end
-------------- ------------ -------------- -----------
Doubletree full-service hotels 101 43 (a) 30,368 12,778 (a)
Doubletree Guest Suite hotels 42 6 8,987 1,214
Club Hotels by Doubletree 19 3 3,977 644
------ ---- ---------- ---------
Total Doubletree brand hotels 162 52 43,332 14,636
Red Lion hotels 16 (40)(a) 2,902 (11,957)(a)
Non-Doubletree brand hotels 77 2 12,344 (138)
------ ---- ---------- ---------
Total Company hotel portfolio 255 14 58,578 2,541
====== ==== ========== =========
(a) Reflects conversion of 40 Red Lion Hotels to Doubletree full-service hotels.
Change Change
from from
Three Months Three Months Six Months Six Months Ended
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Hotel Revenue Analysis (a):
Doubletree full-service hotels (b)
Occupancy percentage 75.9% 1.4 pts. 72.7% 1.4 pts.
Average daily rate $ 96.83 10.2% $ 97.15 10.4%
Revenue per available room $ 73.54 12.4% $ 70.65 12.7%
Doubletree Guest Suite Hotels
Occupancy percentage 80.3% 1.8 pts 77.5% 2.1 pts
Average daily rate $125.03 11.8% $123.06 11.3%
Revenue per available room $100.45 14.4% $ 95.34 14.3%
Club Hotels by Doubletree (c)
Occupancy percentage 71.4% (2.6) pts 70.5% (3.1) pts
Average daily rate $ 72.39 1.1% $ 73.38 1.2%
Revenue per available room $ 51.72 (2.4)% $ 51.77 (3.0)%
Total Doubletree brand hotels
Occupancy percentage 77.1% 1.5 pts 74.1% 1.6pts
Average daily rate $104.90 10.7% $104.77 10.7%
Revenue per available room $ 80.91 12.9% $ 77.63 13.1%
Red Lion Hotels
Occupancy percentage 73.4% (0.7) pts 68.7% (0.9) pts
Average daily rate $ 86.16 6.4% $ 86.29 7.9%
Revenue per available room $ 63.20 5.4% $ 59.29 6.5%
Non-Doubletree brand hotels
Occupancy percentage 79.4% (1.2) pts 75.2% (1.5) pts
Average daily rate $ 79.83 6.5% $ 77.67 6.1%
Revenue per available room $ 63.40 4.9% $ 58.38 4.0%
Total Company hotel portfolio
Occupancy percentage 76.3% 0.2 pts 72.4% 0.1 pts
Average daily rate $ 93.79 8.8% $ 93.20 9.2%
Revenue per available room $ 71.58 9.1% $ 67.51 9.4%
(a) Revenue statistics are for comparable hotels and includes only information
for those hotels in the system as of June 30, 1997 and managed by Doubletree or
Red Lion since January 1, 1996.
(b) Includes results for four Red Lion properties converted to Doubletree on
March 10, 1997.
(c) Includes the results for only two properties.
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Three Months Ended June 30, 1997 (Actual) Compared With Three Months Ended June
30, 1996 (Pro Forma)
Actual revenues increased $20.9 million or 12% to $194.9 million for
the three months ended June 30, 1997 compared to $174.0 million for the three
months ended June 30, 1996 on a pro forma basis.
Revenues from management and franchise fees increased $1.0 million
or 7% in 1997 due to increased fees from comparable hotels of $0.6 million,
higher incentive fees of $0.3 million and fees from new contracts (net of
contracts lost) of $0.1 million. The increases in incentive fees and fees from
comparable hotels reflect the continued growth in REVPAR from "same store
hotels" and improvements in operating performance.
Owned hotel revenues increased $4.7 million in 1997 or 8% over the
comparable pro forma period principally due to an increase in the average daily
room rate offset by a slight decline in occupancy. The margin on hotel operating
results increased $4.7 million from $19.3 million in 1996 to $24.0 million in
the 1997 period, and the operating margins improved from 33.3% to 38.3%,
reflecting the higher room rate and cost savings resulting from the merger.
Leased hotel revenues increased $25.1 million in 1997 or 30% over
the comparable pro forma period principally due to the net addition of 15 new
properties under lease and an increase in rooms revenue attributable to higher
average daily room rates. The margin on leased hotel operating results increased
$1.9 million from $11.8 million in 1996 to $13.7 million in the 1997 period
reflecting the impact of the new property additions offset by a decline in
operating margins from 14.2% in the 1996 pro forma period to 12.7% in 1997.
On June 9, 1997, Doubletree converted 36 Red Lion properties to the
"Doubletree" brand, for a total of 40 properties converted since the acquisition
of Red Lion in November, 1996. The June conversion did not have a significant
impact on the results of operations for the three months ended June 30, 1997.
The Company believes that the rebranding should have a favorable impact on the
former Red Lion Hotels' REVPAR over time.
Purchasing and service fees decreased $10.8 million as compared to
the 1996 pro forma period while the net margin increased $0.1 million to $2.1
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 $0.9 million in 1997 as compared to
the pro forma quarter ended June 30, 1996, principally due to an increase in
equity income earned on minority interests in various hotel partnerships.
General and administrative expenses decreased $0.6 million in 1997
to $6.2 million. The Company expects to realize savings resulting from the
consolidation of the formerly separate operations of Red Lion and Doubletree.
The savings in the quarter represents a portion of the anticipated savings.
Depreciation and amortization increased nominally. Operating income
increased $9.2 million or 31% over the pro forma quarter ended June 30, 1996.
The Company incurred net interest expense of $8.1 million in 1997 as
compared to $7.8 million in the 1996 period. The increase reflects a slightly
higher interest rate on the outstanding borrowings in 1997 versus those assumed
in the 1996 pro forma period.
The increase of $0.4 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 June 30, 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.
9
12
Net income for the three months ended June 30, 1997 was $18.4
million which represents a 47% increase over the comparable pro forma period of
1996 and earnings per share were $0.46 compared to $0.32, and increase of 44%.
Six Months Ended June 30, 1997 (Actual) Compared With Six Months Ended June 30,
1996 (Pro Forma)
Actual revenues increased $57.9 million or 18% to $385.1 million for
the six months ended June 30, 1997 compared to $327.2 million for the six months
ended June 30, 1996 on a pro forma basis.
Revenues from management and franchise fees increased $3.5 million
or 14% in 1997 due to higher incentive fees of $2.0 million, increased fees from
comparable hotels of $1.1 million, an increase of $0.2 million in fees from
renegotiated contracts and management contracts which converted to franchise
agreements and fees from new contracts (net of contracts lost) which increased
$0.2 million. The increases in incentive fees and fees from comparable hotels
reflect the strong growth in REVPAR from "same store hotels" and continued
improvements in operating performance.
Owned hotel revenues increased $7.6 million in 1997 or 7% over the
comparable pro forma period principally due to an increase in the average daily
room rate offset by a slight decline in occupancy. The margin on hotel results
increased $6.9 million from $36.1 million in the pro forma 1996 period to $43.0
million in the 1997 period, and the operating margins increased from 32.3% to
36.1%, reflecting the higher room rate and cost savings from the merger.
Leased hotel revenues increased $48.9 million in 1997 or 32% over
the comparable pro forma period principally due to the net addition of 16 new
properties under lease and an increase in rooms revenue attributable to higher
average daily room rates. The margin on leased hotel operating results increased
$3.8 million from $18.0 million in 1996 to $21.8 million in the 1997 period
reflecting the impact of the new property additions offset by a slight decline
in operating margins from 11.7% in the 1996 pro forma period to 10.8% in 1997.
Purchasing and service fees decreased $18.1 million as compared to
the 1996 pro forma period while the net margin was essentially flat at $3.6
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 $16.1 million in 1997 as compared to
the pro forma six months period ended June 30, 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 $2.2 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.
Corporate general and administrative expenses increased $4.3 million
in 1997 to $17.8 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 $1.2 million. The Company expects to realize
savings resulting from the consolidation of the formerly separate operations of
Red Lion and Doubletree. The year to date savings represent a portion of the
anticipated savings.
Depreciation and amortization increased nominally. Operating income
increased $25.9 million, $8.5 million of which is attributable to the unusual
items noted above. Excluding these items, operating income would have increased
$17.4 million to $63.5 million or 38% in comparison to the $46.1 million
generated during the pro forma quarter ended June 30, 1996.
The Company incurred net interest expense of $16.3 million in 1997
as compared to $15.6 million in the 1996 pro forma period. The increase reflects
a slightly higher interest rate on the outstanding borrowings in 1997 versus
those assumed in the 1996 pro forma period.
The increase of $0.3 million in minority interest expense reflects
the profits allocable to third party owners of certain consolidated hotel joint
ventures.
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The provision for income taxes reflects a 38.3% effective tax rate
for the six months ended June 30, 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 six months ended June 30,
1997 were $33.6 million and $0.83, respectively, compared to $17.2 million and
$0.44, respectively, in the 1996 pro forma period. Excluding the effect of the
unusual items described above, net income for the first six months of 1997 would
have increased 65% to $28.4 million and earnings per share would have increased
59% to $0.70 over the comparable pro forma 1996 period.
HISTORICAL RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1997 Compared With Three and Six Months
Ended June 30, 1996
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 results and the 1996 pro forma results.
Revenues increased $131.4 million to $194.9 million and $267.7
million to $385.1 million in the three and six month periods ended June 30,
1997, respectively from the comparable periods of 1996 while operating costs and
expenses increased $103.2 million to $156.2 million and $212.9 million to $313.1
million over the same periods. The Company generated net interest income during
the three and six months ended June 30, 1996 of $1.0 million and $1.9 million,
respectively, as compared to net interest expense of $8.1 and $16.3 million
during the comparable periods of 1997. The changes are attributable to the
Company's November 1996 acquisition of Red Lion, leased hotels added subsequent
to June 30, 1996 and the previously discussed unusual items.
Net income and earnings per share for the three months ended June
30, 1997 were $18.4 million and $0.46, respectively, compared to $7.5 million
and $0.33, respectively, in the comparable 1996 period. Net income and earnings
per share for the six months ended June 30, 1997 were $33.6 million and $0.83,
respectively, compared to $12.4 million and $0.54, respectively, in the
comparable 1996 period. Excluding the effect of the unusual items described
above, net income for the first six months of 1997 would have been $28.4
million, an increase of 129% from $12.4 million in the comparable 1996 period
and per share earnings would have increased 30% to $0.70 from $0.54. Weighted
average shares outstanding increased 77% from the six months ended June 30, 1996
to the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's balance sheet reflected negative
working capital of $23.7 million. The Company generated cash from operating
activities of $59.2 million during the six months ended June 30, 1997 as
compared to $22.6 million of cash from operations during the same period of
1996. The increase was due to increases in earnings and expenses not requiring
the use of cash, offset by an increase in receivables.
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 is 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 June 30, 1997, the Company had capital project
commitments aggregating approximately $22.1 million (including $7.2 million
related to the expansion of, and upgrade to, the financial management and
reservation systems).
The Company used $48.8 million of cash for investing activities in
the six months ended June 30, 1997 of which $15.9 million represented the
funding of previously accrued costs related to the Red Lion acquisition and
$10.3 million was utilized for fixed asset additions ($8.3 million related to
the Red Lion hotel properties). Additionally, the Company invested $14.9 million
in hotel partnerships and ventures and made loans to owners of hotels in
conjunction with obtaining new management contracts of $3.9 million. The Company
committed to contribute up to $15.0 million to Candlewood, all of which had been
funded by July 1997. The contribution is being used for general corporate
purposes as well as funding a portion of the development/construction costs of
certain hotels.
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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 range from approximately $1.0
million to $2.0 million, with the aggregate amount of exposure 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. As of June 30, 1997, approximately $8.6 million was 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 $20.0
million of capital ($14.3 million of which had been invested at June 30, 1997)
to be combined with up to $180.0 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 applicable 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 June 30, 1997. Term
Loan A is a fully amortizing loan and made available additional borrowings of up
to $40.0 million to refinance an existing hotel mortgage (the commitment for
which expired 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 first quarter of 1997, the Company made a voluntary $10.0
million prepayment of its long-term notes payable.
The Company enters into interest rate swap agreements in order to
reduce its exposure to interest rate fluctuations. As of June 30, 1997, the
Company had three agreements which have converted $250.0 million of debt from
floating rates (5.81%) 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.
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
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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 six-month
period ended June 30, 1997.
**********
The statements contained in this report that are not statements of historical
fact may include forward-looking statements that involve a number of risks and
uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking statements:
national or local economic conditions affecting the supply and demand for hotel
space, competition in hotel operations, including additional or improved
services or facilities of competitors, price pressures, continuing availability
of capital to fund growth and improvements and the impact of legislation. The
forward-looking statements should be considered in light of these factors.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of Doubletree Corporation
was held on May 2, 1997. The shareholders voted on the election of eleven
directors, all of which were elected as follows:
Votes for: Votes Withheld:
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William R. Fatt 36,892,085 618,700
Richard J. Ferris 36,891,330 619,455
Dale F. Frey 36,892,085 618,700
Ronald K. Gamey 36,892,085 618,700
Edward A. Gilhuly 36,892,085 618,700
Richard M. Kelleher 36,892,057 618,728
Norman B. Leventhal 36,892,043 618,742
Michael W. Michelson 36,892,080 618,705
John H. Myers 36,082,085 618,700
William L. Perocchi 36,892,075 618,710
Peter V. Ueberroth 36,892,061 618,724
The shareholders also voted to approve certain amendments to the
Company's 1994 Equity Participation Plan (the Plan) to (a) increase the
aggregate number of shares of Common Stock subject to the Plan from 3,300,000 to
4,500,000 and (b) amend the formula grant provisions to provide for an annual
grant of $5,000 of restricted stock to the Company's non-employee directors as
follows: 23,537,657 votes for; 13,943,109 votes against; and 30,019 shares
either did not vote or abstained from voting.
The shareholders also voted to ratify the selection of KPMG Peat
Marwick LLP as the Company's independent auditors for the fiscal year ending
December 31, 1997 as follows: 37,495,894 votes for, 3,474 votes against and
11,474 shares either did not vote or abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K (none)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Doubletree Corporation
August 13, 1997 By /s/ William L. Perocchi
____________________________________
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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