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 September 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 November 1, 1997
Common Stock ($.01 par value) 39,755,321 shares
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DOUBLETREE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine
months ended September 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 8
PART II. OTHER INFORMATION:
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
ASSETS
Cash and cash equivalents $ 25,588 $ 16,277
Accounts receivable, net 46,845 59,978
Due from Red Lion MLP 4,094 3,209
Current portion of notes receivable 590 623
Other 10,545 12,152
----------- -----------
Total current assets 87,662 92,239
----------- -----------
Notes receivable, net of current portion 44,499 50,000
Due from Red Lion MLP 24,405 23,069
Investments 77,676 103,457
Property and equipment, net 635,473 632,986
Management contracts, net 459,325 448,099
Goodwill, net 378,326 371,190
Deferred costs and other assets 23,583 25,282
----------- -----------
$ 1,730,949 $ 1,746,322
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 101,105 $ 93,127
Accrued interest payable 2,213 561
Current portion of notes payable 5,490 75,270
Income taxes payable 3 3,443
----------- -----------
Total current liabilities 108,811 172,401
Deferred income taxes 264,812 261,451
Other long-term obligations 10,304 14,813
Notes payable 545,492 437,817
----------- -----------
929,419 886,482
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized 100,000,000 shares; issued and outstanding
39,565,058 and 39,692,708 shares at December 31, 1996
and September 30, 1997, respectively 396 397
Additional paid-in capital 761,273 764,021
Unrealized gain on marketable equity securities 176 166
Unearned employee compensation (141) (88)
Retained earnings 39,826 95,344
----------- -----------
801,530 859,840
----------- -----------
$ 1,730,949 $ 1,746,322
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
Revenues:
Management and franchise fees $ 9,739 $ 15,068 $ 28,258 $ 43,145
Owned hotel revenues 1,993 62,360 5,972 181,526
Leased hotel revenues 51,380 112,231 137,701 314,945
Purchasing and service fees 4,210 8,228 11,800 25,860
Other fees and income 1,261 1,382 2,233 18,890
---------- --------- --------- ---------
Total revenues 68,583 199,269 185,964 584,366
---------- --------- --------- ---------
Operating costs and expenses:
Corporate general and administrative expenses 4,170 6,238 12,811 23,996
Owned hotel expenses 1,521 35,971 4,740 112,156
Leased hotel expenses 47,415 95,312 127,153 276,203
Purchasing and service expenses 3,046 4,977 8,694 19,028
Depreciation and amortization 1,477 12,413 4,417 36,611
---------- --------- --------- ---------
Total operating costs and expenses 57,629 154,911 157,815 467,994
---------- --------- --------- ---------
Operating income 10,954 44,358 28,149 116,372
Interest expense (32) (10,820) (175) (32,655)
Interest income 1,388 3,199 3,478 8,761
---------- --------- --------- ---------
Income before income taxes and minority interest 12,310 36,737 31,452 92,478
Minority interest share of net (income) loss 28 (1,242) 6 (2,504)
---------- --------- --------- ---------
Income before income taxes 12,338 35,495 31,458 89,974
Income tax expense 4,318 13,595 11,011 34,456
---------- --------- --------- ---------
Net income $ 8,020 $ 21,900 $ 20,447 $ 55,518
========== ========= ========= =========
Earnings per share $ 0.34 $ 0.54 $ 0.88 $ 1.37
========== ========= ========= =========
Weighted average common and common equivalent
shares outstanding 23,879 40,826 23,183 40,524
========== ========= ========= =========
See accompanying notes to consolidated financial statements.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1997
---- ----
Cash flows from operating activities:
Net income $ 20,447 $ 55,518
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 4,417 36,611
Other non-cash expenses 352 8,138
Equity in (earnings) loss of partnerships 171 (1,966)
Minority interest share of net income (loss) (6) 2,504
Deferred income taxes 4,260 (3,361)
Increase in accounts receivable (7,242) (13,433)
Increase in other assets (1,796) (1,223)
Increase in current liabilities 15,310 10,264
-------- --------
Net cash provided by operations 35,913 93,052
-------- --------
Cash flows from investing activities:
Purchase of Red Lion and related costs -- (18,995)
Purchases of property and equipment (1,028) (16,244)
Investments in partnerships and ventures (32,499) (26,608)
Distributions from partnerships and ventures 1,381 574
Distributions from Red Lion MLP -- 2,221
Investments in management contracts (2,258) (253)
Proceeds from terminations of management contracts 1,317 1,558
Deposits in hotels to obtain management contracts (700) (450)
Loans to owners of managed hotels, net (8,518) (3,728)
Increase in deferred costs and other assets (2,626) (4,103)
-------- --------
Net cash used in investing activities (44,931) (66,028)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 27,372 --
Proceeds from exercise of common stock options 367 1,889
Proceeds from borrowings 5,000 45,000
Principal payments on borrowings (5,672) (83,224)
-------- --------
Net cash provided by (used in) financing activities 27,067 (36,335)
-------- --------
Net increase (decrease) in cash and cash equivalents 18,049 (9,311)
Cash and cash equivalents at beginning of period 32,652 25,588
-------- --------
Cash and cash equivalents at end of period $ 50,701 $ 16,277
======== ========
Supplemental cash flow information:
Cash paid for interest $ 190 $ 31,927
======== ========
Cash paid for income taxes $ 2,005 $ 34,377
======== ========
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 September 30, 1997, the
Company had a portfolio of 258 properties, of which 212 were managed and/or
leased and 46 were franchised. Of the managed and/or leased properties, 18 are
wholly-owned by the Company, 8 are operated pursuant to joint venture agreements
in which the Company owns 50% or more of the venture, 86 are leased and 100 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 nine month periods ended
September 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 nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
Earnings Per Share
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
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 NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
Total revenues $ 178,786 $ 505,952
Operating income 33,941 80,079
Interest, net (7,506) (23,108)
Income before income taxes 26,088 55,624
Net income 15,235 32,484
Earnings per share $ 0.38 $ 0.82
Weighted average common and common
equivalent shares outstanding 40,329 39,662
The Company is in the process of finalizing the allocation of the
purchase price paid to acquire Red Lion to the assets acquired and liabilities
assumed. Any adjustments to the original allocation will be reflected in the
fourth quarter of 1997. The Company does not believe that the adjustments will
be material to the existing asset values or liabilities.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) INVESTMENTS
As of September 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 50.0%.
Investments consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
Hotel partnerships $ 58,538 $ 84,553
RFS Hotel Investors, Inc. convertible preferred stock 18,500 18,500
RFS Hotel Investors, Inc. common stock 1,533 1,523
Candlewood (581) (805)
Other (314) (314)
--------- ---------
$ 77,676 $ 103,457
========= =========
(4) NOTES PAYABLE
Notes payable consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
Term Loan A with interest at variable rates payable quarterly
(6.9375% at September 30, 1997), principal due quarterly in
varying amounts through maturity in November 2002 $ 300,700 $ 271,776
Term Loan B with interest at variable rates payable quarterly
(8.0625% at September 30, 1997), principal due quarterly in
varying amounts through maturity in May 2004 160,900 145,856
Revolving line of credit (8.625% at September 30, 1997) -- 5,000
Mortgages and other notes 89,382 90,455
--------- ---------
550,982 513,087
Less: current portion (5,490) (75,270)
--------- ---------
$ 545,492 $ 437,817
========= =========
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. The revolving line of credit 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, as amended (the "Plan"), in which
options may be granted to key personnel to purchase shares of the Company's
common
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. 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 September 30, 1997, options for 3,484,000 shares, net of
terminations, have been granted at prices ranging from $13.00 to $44.875, of
which 737,040 are currently exercisable.
The terms of the Plan provide for vesting of options upon a "change
in control." The proposed merger with Promus Hotel Corporation (see Note 8)
will constitute a change in control under the Plan. As a result, all of the
currently unvested options outstanding will become fully vested and immediately
exercisable upon consummation of the merger.
(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 30,000
shares of restricted common stock to each of the Company's two co-chairmen. The
shares vest annually and ratably in January 1998 and 1999, with 10,000 shares
having vested upon issuance. The Company recorded $5,475,000 in expenses related
to these items, which are included in corporate general and administrative
expenses.
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DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
Basic $0.35 $0.55 $0.90 $1.40
Diluted $0.34 $0.54 $0.88 $1.37
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.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, to consolidate existing disclosure
requirements. This new standard contains no change in disclosure requirements
for the Company. It will be effective for the Company for the year ending
December 31,1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, to establish standards for reporting and display of comprehensive income
(all changes in equity during a period except those resulting from investments
by and distributions to owners) and its components in financial statements. This
new standard, which will be effective for the Company for the year ending
December 31, 1998, is not currently anticipated to have a significant impact on
the Company's consolidated financial statements based on the current financial
structure and operations of the Company.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, to establish standards for
reporting information about operating segments in annual financial statements,
selected information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the year ending
December 31, 1998, will require the Company to report financial information on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments, which may result in more
detailed information in the notes to the Company's consolidated financial
statements than is currently required and provided.
(8) PROPOSED MERGER
On September 2, 1997, the Company announced the execution of a
definitive merger agreement with Promus Hotel Corporation (Promus). This
stock-for-stock transaction is scheduled to be completed by year-end and will be
accounted for as a pooling of interests pursuant to Accounting Principles Board
Opinion No. 16. Doubletree shareholders will each receive one share of the new
company's stock in exchange for each share of Doubletree stock owned; Promus
shareholders will receive 0.925 of a share of the new company's stock in
exchange for each share of Promus stock owned.
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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.
RECENT DEVELOPMENTS
On September 2, 1997, the Company announced the execution of a
definitive merger agreement with Promus Hotel Corporation (Promus). The combined
company will be the lodging industry's third largest revenue producer with
approximately $5 billion in annual system-wide revenues under management
contract or franchise agreement. The hotel portfolio will include upscale and
mid-priced brands including Doubletree Hotels, Embassy Suites, Doubletree Guest
Suites, Homewood Suites, Club Hotels by Doubletree, Hampton Inn, Hampton Inn &
Suites and Red Lion. As of September 30, 1997, the combined company would have
approximately 1,180 hotels, approximately 177,000 rooms and more than 40,000
employees in all regions of the United States as well as selected locations in
Latin America and Asia.
This stock-for-stock transaction is scheduled to be completed by
year-end and will be accounted for as a pooling of interests pursuant to
Accounting Principles Board Opinion No. 16. Doubletree shareholders will each
receive one share of the new company's stock in exchange for each share of
Doubletree stock owned; Promus shareholders will receive 0.925 of a share of the
new company's stock in exchange for each share of Promus stock owned. The
transaction is expected to be tax-free. Refer to the Joint Proxy
Statement/Prospectus, as amended, filed with the Securities and Exchange
Commission on November 12, 1997 for additional information.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the actual results of operations for the
three and nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
PRO PRO
FORMA FORMA
1996 (a) 1997 1996 (a) 1997 (b)
-------- ---- -------- --------
Revenues:
Management and franchise fees $ 12,892 $ 15,068 $ 37,483 $ 43,145
Owned hotel revenues 59,649 62,360 171,200 181,526
Leased hotel revenues 89,864 112,231 243,686 314,945
Purchasing and service fees 15,790 8,228 51,553 25,860
Other fees and income 591 1,382 2,030 18,890
---------- ---------- ---------- ----------
Total revenues 178,786 199,269 505,952 584,366
---------- ---------- ---------- ----------
Operating costs and expenses:
Corporate general and administrative expenses 5,407 6,238 18,850 23,996
Owned hotel expenses 37,232 35,971 112,653 112,156
Leased hotel expenses 76,070 95,312 211,857 276,203
Purchasing and service expenses 14,038 4,977 46,238 19,028
Depreciation and amortization 12,098 12,413 36,275 36,611
---------- ---------- ---------- ----------
Total operating costs and expenses 144,845 154,911 425,873 467,994
---------- ---------- ---------- ----------
Operating income 33,941 44,358 80,079 116,372
Interest expense (10,505) (10,820) (31,581) (32,655)
Interest income 2,999 3,199 8,473 8,761
---------- ---------- ---------- ----------
Income before income taxes and minority interest 26,435 36,737 56,971 92,478
Minority interest share of net income (347) (1,242) (1,347) (2,504)
---------- ---------- ---------- ----------
Income before income taxes 26,088 35,495 55,624 89,974
Income tax expense 10,853 13,595 23,140 34,456
---------- ---------- ---------- ----------
Net income $ 15,235 $ 21,900 $ 32,484 $ 55,518
========== ========== ========== ==========
Earnings per share $ 0.38 $ 0.54 $ 0.82 $ 1.37
========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding 40,329 40,826 39,662 40,524
========== ========== ========== ==========
(a) 1996 third quarter and nine month 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 1997 nine month
revenues, operating income, net income, and earnings per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DOUBLETREE CORPORATION
SUMMARY OPERATING DATA
QUARTER ENDED SEPTEMBER 30, 1997
QUARTER ENDED INCREASE VERSUS
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Number of Hotels
- ----------------
Doubletree Brand Hotels 166 51
Non-Doubletree Brand Hotels 92 24
------ ------
Total Company Hotel Portfolio 258 75
====== ======
Number of Rooms
- ---------------
Doubletree Brand Hotels 44,035 13,055
Non-Doubletree Brand Hotels 15,024 3,675
------ ------
Total Company Hotel Portfolio 59,059 16,730
====== ======
INCREASE/(DECREASE)
QUARTER ENDED VERSUS
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenue Analysis (1)
- --------------------
Doubletree Brand Hotels
Occupancy Percentage 73.9% 0.2 Pts
Average Daily Rate $103.82 10.0%
Revenue Per Available Room $ 76.77 10.4%
Phase I Red Lion Hotels Converted to Doubletree
Occupancy Percentage 82.4% 2.4 Pts
Average Daily Rate $ 97.08 7.5%
Revenue Per Available Room $ 80.00 10.8%
Phase II Red Lion Hotels Converted to Doubletree
Occupancy Percentage 76.7% (2.3) Pts
Average Daily Rate $ 91.18 6.0%
Revenue Per Available Room $ 69.97 3.0%
Non-Doubletree Brand Hotels (2)
Occupancy Percentage 77.8% (2.0) Pts
Average Daily Rate $ 78.60 4.0%
Revenue Per Available Room $ 61.18 1.4% (3)
(1) Revenue statistics are for comparable hotels and include information only
for those hotels in the system as of September 30, 1997 and managed by
Doubletree since January 1, 1996.
(2) Includes results for the 16 Red Lion hotels that have not been converted to
the Doubletree brand as well as the results for comparable hotels managed
under other franchisors' brands or as independent hotels.
(3) The Atlanta area hotels experienced an unusually high REVPAR during the
third quarter of 1996 due to the effect of the Summer Olympics. Excluding
the four hotels in the Atlanta area, REVPAR growth for the quarter ended
September 30, 1997 would have been 4.4% for the non-Doubletree brand
hotels.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DOUBLETREE CORPORATION
SUMMARY OPERATING DATA
NINE MONTHS ENDED SEPTEMBER 30, 1997
INCREASE/DECREASE
NINE MONTHS ENDED VERSUS
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Number of Hotels
- ----------------
Doubletree Brand Hotels 166 56
Non-Doubletree Brand Hotels 92 (39)
------ -------
Total Company Hotel Portfolio 258 17
====== =======
Number of Rooms
- ---------------
Doubletree Brand Hotels 44,035 15,339
Non-Doubletree Brand Hotels 15,024 (12,317)
------ -------
Total Company Hotel Portfolio 59,059 3,022
====== =======
INCREASE/(DECREASE)
NINE MONTHS ENDED VERSUS
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenue Analysis (1)
- --------------------
Doubletree Brand Hotels
Occupancy Percentage 74.0% 1.2 Pts
Average Daily Rate $104.86 10.5%
Revenue Per Available Room $77.57 12.3%
Phase I Red Lion Hotels Converted to Doubletree
Occupancy Percentage 78.5% 0.6 Pts
Average Daily Rate $97.53 9.0%
Revenue Per Available Room $76.54 9.8%
Phase II Red Lion Hotels Converted to Doubletree
Occupancy Percentage 76.7% (2.3) Pts
Average Daily Rate $91.18 6.0%
Revenue Per Available Room $69.97 3.0%
Non-Doubletree Brand Hotels (2)
Occupancy Percentage 74.8% (1.8) Pts
Average Daily Rate $76.99 5.5%
Revenue Per Available Room $57.57 3.0% (3)
(1) Revenue statistics are for comparable hotels and include information only
for those hotels in the system as of September 30, 1997 and managed by
Doubletree since January 1, 1996. Revenue statistics for the Red Lion
hotels converted to the Doubletree brand are included only for the period
from the initial date of conversion (Phase I - April 1, 1997; Phase II -
July 1, 1997) through September 30, 1997.
(2) Includes results for the 16 Red Lion hotels that have not been converted to
the Doubletree brand as well as the results for comparable hotels managed
under other franchisors' brands or as independent hotels.
(3) The Atlanta area hotels experienced an unusually high REVPAR during the
third quarter of 1996 due to the effect of the Summer Olympics. Excluding
the four hotels in the Atlanta area, REVPAR growth for the nine months
ended September 30, 1997 would have been 5.1% for the non-Doubletree brand
hotels.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Three Months Ended September 30, 1997 (Actual) Compared With Three Months Ended
September 30, 1996 (Pro Forma)
Actual revenues increased $20.5 million or 11% to $199.3 million for
the three months ended September 30, 1997 compared to $178.8 million for the
three months ended September 30, 1996 on a pro forma basis.
Revenues from management and franchise fees increased $2.2 million or
17% in 1997 due to fees from new contracts (net of contracts lost) of $1.1
million, higher incentive fees of $0.7 million and increased fees from
comparable hotels of $0.4 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 $2.7 million in 1997 or 5% 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 $4.0 million from $22.4 million in 1996 to $26.4 million in
the 1997 period, reflecting an improvement in operating margins from 37.6% to
42.3%. These hotels were acquired in the Red Lion acquisition and the margin
improvement reflects the operating enhancements and cost reductions implemented
at the hotels.
Leased hotel revenues increased $22.4 million in 1997 or 25% 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
$3.1 million from $13.8 million in 1996 to $16.9 million in the 1997 period
reflecting the impact of the new property additions offset by a nominal decline
in operating margins from 15.3% in the 1996 pro forma period to 15.1% in 1997.
The third quarter was the first full quarter in which all 40 converted
Red Lion hotels operated as Doubletree hotels. A ramp-up period follows a brand
change as the Company builds customer awareness and may change the customer mix
of the hotel. The four Phase I hotels (converted in April 1997) achieved a 10.8%
increase in REVPAR to $80.00. The 36 Phase II hotels, which converted in July
1997, experienced a 3.0% year over year REVPAR increase in the third quarter to
$69.97. The Company anticipates that the growth in REVPAR will continue over the
next twelve to eighteen months.
Purchasing and service fee revenues decreased $7.6 million as compared
to the 1996 pro forma period while the net margin increased $1.5 million to $3.3
million. The improvement in profit margin resulted primarily from the
integration of the Doubletree and Red Lion purchasing programs 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 programs.
Other fees and income increased $0.8 million in 1997 as compared to the
pro forma quarter ended September 30, 1996, principally due to an increase in
equity income earned on minority interests in various hotel partnerships.
General and administrative expenses increased $0.8 million in 1997 to
$6.2 million. During 1996, Red Lion realized approximately $0.8 million of
insurance-related rebates for workers compensation and property liability
insurance. Without these rebates, general and administrative expenses would have
been comparable to 1996 for the 1997 quarter.
Depreciation and amortization increased nominally. Operating income
increased $10.4 million or 31% over the pro forma quarter ended September 30,
1996.
The Company incurred net interest expense of $7.6 million in 1997 as
compared to $7.5 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, offset by a reduction in the principal amount of
debt outstanding.
The increase of $0.9 million in the minority interest share of net
income reflects the profits allocable to third party owners of certain
consolidated hotel joint ventures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The provision for income taxes reflects a 38.3% effective tax rate for
the three months ended September 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 for the three months ended September 30, 1997 was $21.9
million which represents a 44% increase over the pro forma period of 1996 and
earnings per share were $0.54 compared to $0.38, an increase of 42%.
Nine Months Ended September 30, 1997 (Actual) Compared With Nine Months Ended
September 30, 1996 (Pro Forma)
Actual revenues increased $78.4 million or 15% to $584.4 million for
the nine months ended September 30, 1997 compared to $506.0 million for the pro
forma nine months ended September 30, 1996.
Revenues from management and franchise fees increased $5.7 million or
15% in 1997 due to higher incentive fees of $2.7 million, increased fees from
comparable hotels of $1.4 million, fees from new contracts (net of contracts
lost) which increased $1.2 million and an increase of $0.4 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 the continued growth in REVPAR from "same store hotels" and improvements
in operating performance.
Owned hotel revenues increased $10.3 million in 1997 or 6% 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 $10.8 million from $58.5 million in the pro forma 1996 period to $69.4
million in the comparable 1997 period, reflecting an improvement in operating
margins from 34.2% to 38.2%. These hotels were acquired in the Red Lion
acquisition and the margin improvement reflects the operating enhancements and
cost reductions implemented at the hotels.
Leased hotel revenues increased $71.3 million in 1997 or 29% over the
comparable pro forma period principally due to the net addition of 18 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
$6.9 million from $31.8 million in 1996 to $38.7 million in the 1997 period
reflecting the impact of the new property additions offset by a decline in
operating margins from 13.1% in the 1996 pro forma period to 12.3% in the
comparable period in 1997.
The third quarter was the first full quarter in which all 40 converted
Red Lion hotels operated as Doubletree hotels. As a result, the conversion of
the four Phase I hotels which converted in April 1997 and the 36 Phase II
hotels, which converted in July 1997, did not have a significant impact on
REVPAR for the nine months ended September 30, 1997. A ramp-up period follows a
brand change as the Company builds customer awareness and may change the
customer mix of the hotel. The Company expects that the growth in REVPAR, as
seen in the quarter ended September 30, 1997, will have a progressively more
favorable impact on results over the next twelve to eighteen months.
Purchasing and service fees decreased $25.7 million as compared to the
1996 pro forma period while the net margin increased $1.5 million to $6.8
million. The improvement in profit margin resulted primarily from the
integration of the Doubletree and Red Lion purchasing programs 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 programs.
Other fees and income increased $16.9 million in 1997 as compared to
the pro forma nine month period ended September 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 $3.0 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Corporate general and administrative expenses increased $5.1 million in
1997 to $24.0 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 $0.4 million.
Depreciation and amortization increased nominally. Operating income
increased $36.3 million, $8.5 million of which is attributable to the unusual
items noted above. Excluding these items, operating income would have increased
$27.8 million to $107.9 million or 35% in comparison to the $80.1 million
generated during the pro forma nine months ended September 30, 1996.
The Company incurred net interest expense of $23.9 million in 1997 as
compared to the $23.1 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, offset by a reduction in the
principal amount of debt outstanding.
The increase of $1.2 million in the minority interest share of net
income 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 nine months ended September 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 nine months ended September
30, 1997 were $55.5 million and $1.37, respectively, compared to $32.5 million
and $0.82, respectively, in the 1996 pro forma period. Excluding the effects of
the unusual items described above, net income for the first nine months of 1997
would have increased 55% to $50.3 million and earnings per share would have
increased 51% to $1.24 over the comparable pro forma 1996 period.
HISTORICAL RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 Compared With Three and Nine
Months Ended September 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. A comparison of
actual 1997 results to actual 1996 results follows.
Revenues increased $130.7 million to $199.3 million and $398.4 million
to $584.4 million in the three and nine month periods ended September 30, 1997,
respectively from the comparable periods of 1996 while operating costs and
expenses increased $97.3 million to $154.9 million and $310.2 million to $468.0
million over the same periods. The Company generated net interest income during
the three and nine months ended September 30, 1996 of $1.4 million and $3.3
million, respectively, as compared to net interest expense of $7.6 million and
$23.9 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 September 30, 1996 and the previously discussed
unusual items.
Net income and earnings per share for the three months ended September
30, 1997 were $21.9 million and $0.54, respectively, compared to $8.0 million
and $0.34, respectively, in the comparable 1996 period. Net income and earnings
per share for the nine months ended September 30, 1997 were $55.5 million and
$1.37, respectively, compared to $20.4 million and $0.88, respectively, in the
comparable 1996 period. Excluding the effect of the unusual items described
above, net income for the first nine months of 1997 would have been $50.3
million, an increase of 146% from $20.4 million in the comparable 1996 period
and per share earnings would have increased 41% to $1.24 from $0.88. Weighted
average shares outstanding increased 75% from the nine months ended September
30, 1996 to the nine months ended September 30, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's balance sheet reflected
negative working capital of $80.2 million, of which $45.0 million reflects
mortgage indebtedness maturing in June 1998 for one of the Company's owned
hotels. The Company anticipates refinancing such indebtedness prior to maturity.
The Company generated cash from operating activities of $93.1 million during the
nine months ended September 30, 1997 as compared to $35.9 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 September 30, 1997, the Company had capital
project commitments aggregating approximately $10.9 million.
The Company used $66.0 million of cash for investing activities in the
nine months ended September 30, 1997 of which $19.0 million represented the
funding of previously accrued costs related to the Red Lion acquisition and
$16.2 million was utilized for fixed asset additions ($10.4 million related to
the Red Lion hotel properties). Additionally, the Company invested $26.6 million
in hotel partnerships and ventures and made loans to owners of hotels in
conjunction with obtaining new management contracts of $3.7 million.
In August 1996, the Company committed to provide credit support for a
loan facility which is 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 ranges 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 September 30, 1997,
the Company has guaranteed approximately $13.5 million of the balances
outstanding under the loan facility.
As of September 30, 1997, the Company had invested approximately $23.3
million in nine joint ventures with Patriot American Hospitality, Inc.
(Patriot). The Company's joint venture interests range from 10% to 15% in nine
hotels.
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 2.000% 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 had $5.0 million drawn as of September
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
$17.1 million quarterly in 2002, at which time the term loan matures.
Term Loan B requires quarterly principal payments of approximately $0.3
million through 2002 and then increases to approximately $23.1 million quarterly
throughout maturity in May 2004.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company made voluntary prepayments on Term Loans A and B totaling $10.0
million in the first quarter of 1997 and $30.0 million in the third quarter of
1997, respectively. These voluntary prepayments reduce future principal payment
requirements pro rata between Loans A and B.
The Company enters into interest rate swap agreements in order to
reduce its exposure to interest rate fluctuations. As of September 30, 1997, the
Company had four agreements which have converted $290.0 million of debt from
floating rates of 5.66% to 5.68% at September 30, 1997 to fixed rates ranging
from 5.78% to 5.93% (prior to the applicable margin). The agreements expire
March 31, 1999 and January 2, 2002.
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. In connection with
the proposed merger, the combined companies intend to refinance and consolidate
their credit facilities.
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 $11.0 million ($1.0 million of which is collateralized by a letter
of credit). Additionally, the Company has approximately $6.5 million of bonds
outstanding as collateral for payment of claims arising out of workers'
compensation claims and has committed to provide an additional $1.3 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 nine-month
period ended September 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 2, 1997, the Company announced the execution of a
definitive merger agreement with Promus Hotel Corporation (Promus). On November
12, 1997 Doubletree and Promus filed Amendment No. 2 to the Joint Proxy
Statement/Prospectus with the Securities and Exchange Commission. The proposed
merger is subject to the approval of the stockholders of both companies. It is
anticipated that the transaction will close prior to year end.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K -
Form 8-K filed on October 9, 1997
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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
November 13, 1997 By ____________________________________
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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