<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-13700
---------
RED LION HOTELS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1634199
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 Main Street, Vancouver, Washington 98663
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(360) 696-0001
--------------
(Registrants telephone number, including area code)
____________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Number of shares of registrants common stock outstanding at August 9, 1996:
31,312,500
<PAGE>
RED LION HOTELS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 17
<PAGE>
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
------ ---------------------------------
RED LION HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 36,509 $ 68,355
Accounts receivable, net 21,761 19,709
Accounts receivable - affiliates 4,572 12,096
Inventories 6,286 6,339
Prepaid expenses and other current assets 4,596 5,461
Deferred income taxes 2,796 2,306
-------- --------
Total current assets 76,520 114,266
Property and Equipment, net 375,567 336,269
Investments in and Advances to Unconsolidated
Joint Ventures 16,274 16,429
Goodwill, net 21,147 21,508
Deferred Income Taxes 4,773 6,571
Due From Affiliate 25,758 20,828
Other Assets, net 11,844 11,049
-------- --------
$531,883 $526,920
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
Current Liabilities:
Accounts payable $ 18,086 $ 23,618
Accrued expenses 38,288 37,197
Current portion of long-term debt 9,219 7,759
-------- --------
Total current liabilities 65,593 68,574
Long-Term Debt, net of current portion 204,109 215,608
Other Long-Term Obligations 11,776 11,169
Joint Venturers' Interest 1,290 1,290
-------- --------
Total liabilities 282,768 296,641
-------- --------
Commitments and Contingencies (Note 7)
Stockholders Equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 0 shares issued and outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 31,312,500 shares issued and
outstanding 313 313
Additional paid-in capital and net
assets contributed 214,361 214,361
Retained earnings 34,441 15,605
-------- --------
Total stockholders equity 249,115 230,279
-------- --------
$531,883 $526,920
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX FOUR
JUNE 30, MONTHS ENDED MONTHS ENDED
1996 1995 JUNE 30, 1996 JUNE 30, 1995
---------- ------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 80,416 $ -- $ 147,445 $ --
Food and beverage 42,284 -- 81,389 --
Other 14,617 2,764 29,133 3,421
----------- ------ ----------- -------
Total revenues 137,317 2,764 257,967 3,421
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 19,121 -- 36,991 --
Food and beverage 32,694 -- 63,634 --
Other 5,155 -- 10,079 --
Property indirect expenses 27,848 -- 55,163 --
Other costs 9,519 190 18,028 189
Depreciation and amortization 4,771 541 9,167 721
Payments due to owners of managed
hotels 13,866 233 26,178 295
----------- ------ ----------- -------
Operating Income 24,343 1,800 38,727 2,216
Equity in Earnings of Unconsolidated
Joint Ventures 576 -- 1,423 --
Other Income (Expense):
Interest income 539 -- 1,275 --
Interest expense (4,436) (932) (9,054) (1,256)
----------- ------ ----------- -------
Total other expense (3,897) (932) (7,779) (1,256)
----------- ------ ----------- -------
Income Before Joint Venturers' Interests 21,022 868 32,371 960
Joint Venturers' Interests (375) (502) (978) (570)
----------- ------ ----------- -------
Income Before Income Taxes 20,647 366 31,393 390
Income Tax Benefit (Expense) (8,259) (146) (12,557) 1,044
----------- ------ ----------- -------
Net Income $ 12,388 $ 220 $ 18,836 $ 1,434
=========== ====== =========== =======
Earnings Per Common Share $ 0.40 $2,200 $ 0.60 $14,340
=========== ====== =========== =======
Weighted Average Common Shares
Outstanding 31,312,500 100 31,312,500 100
=========== ====== =========== =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
COMMON STOCK CAPITAL AND
-------------- NET ASSETS RETAINED
SHARES AMOUNT CONTRIBUTED EARNINGS TOTAL
------ ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1995 -- $ -- $ -- $ -- $ --
Net assets contributed 20,900 209 34,427 -- 34,636
Net proceeds from initial public offering 10,063 101 173,287 -- 173,388
Issuance of shares in conjunction with
termination of an incentive unit plan 350 3 6,647 -- 6,650
Net income -- -- -- 15,605 15,605
------ ---- -------- ------- --------
Balance at December 31, 1995 31,313 313 214,361 15,605 230,279
Net income -- -- -- 18,836 18,836
------ ---- -------- ------- --------
Balance at June 30, 1996 31,313 $313 $214,361 $34,441 $249,115
====== ==== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX FOUR
MONTHS ENDED MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 18,836 $ 1,434
Adjustments to reconcile net income to cash
provided by operating activities:
Income attributable to joint venturers' interest 978 570
Distributions to joint venturers (557) --
Equity in earnings of
unconsolidated joint ventures (1,423) --
Depreciation and amortization 9,167 721
Amortization of other assets 656 83
Deferred income tax provision 1,308 (1,200)
Changes in assets and liabilities:
Accounts receivable (2,052) (1,278)
Accounts receivable - affiliates 7,524 --
Inventories 53 --
Prepaid expenses and other current assets 865 --
Accounts payable, accrued expenses and
other long-term obligations (4,255) --
-------- -------
Net cash provided by operating activities 31,100 330
-------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment, net (48,735) (330)
Net increase in due from affiliates (4,930) --
Net increase in other assets (820) --
Net decrease in investments in and advances to
unconsolidated joint ventures 1,451 --
Distributions from unconsolidated joint ventures 127 --
-------- -------
Net cash used in investing activities (52,907) (330)
-------- -------
Cash Flows from Financing Activities:
Proceeds from long-term borrowings 9,000 --
Repayments of long-term borrowings (19,237) --
Increase in note payable 198 --
-------- -------
Net cash used in financing activities (10,039) --
-------- -------
Decrease in Cash and Cash Equivalents (31,846) --
Cash and Cash Equivalents at Beginning of Period 68,355 --
--------
Cash and Cash Equivalents at End of Period $ 36,509 $ --
======== =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 9,211 $ 1,252
Income taxes 7,945 --
Noncash Investing and Financing Activities:
Net liabilities (other than cash) contributed by
Historical Red Lion (Note 1), including property and
equipment of $45,006, long-term debt of $45,000,
other assets of $859, joint venture interest of
$412 and current liabilities of $546. $ -- $ 93
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Red Lion Hotels, Inc. and subsidiaries (Red Lion or the Company) is a full
service hospitality company operating 55 hotels in 10 western states. The
Company was incorporated in Delaware in March 1994 as a wholly owned subsidiary
of Red Lion, a California Limited Partnership (Historical Red Lion). The
Company's operations commenced in March 1995 when Historical Red Lion
contributed to the Company a 49.4% interest in a joint venture (the Santa
Barbara Joint Venture) which owns the Santa Barbara Red Lion Hotel in
California.
The Company initiated an initial public offering of a portion of its common
stock on July 26, 1995 (the Offering), which closed August 1, 1995, raising net
proceeds of approximately $173 million. After giving effect to the Offering,
Historical Red Lion owns approximately 67% of the Company.
On August 1, 1995, prior to the closing of the Offering, Historical Red Lion
repaid certain of its outstanding indebtedness with existing cash balances and
contributed substantially all of its assets (excluding 17 hotels and certain
related obligations (the Leased Hotels), certain minority joint venture
interests and certain current assets) and certain liabilities to the Company
(the Formation). Historical Red Lion subsequent to the Formation and
refinancing of the Company (the Partnership) retained the Leased Hotels and the
related goodwill, deferred loan costs and mortgage debt, certain minority joint
venture interests and certain current assets.
On August 1, 1995, the Company refinanced or repaid substantially all of the
debt contributed pursuant to the Formation with the net proceeds of the
Offering, borrowings under a new term loan and existing cash (the
"Refinancing"). The Company also entered into a long-term master lease with the
Partnership for the Leased Hotels.
Basis of Presentation
The accompanying financial statements reflect the contribution, at Historical
Red Lion's net book value, of the interest in the Santa Barbara Joint Venture.
In connection with the Formation, the other assets and liabilities contributed
by Historical Red Lion have been recorded in the accompanying consolidated
financial statements at Historical Red Lion's net book value as of August 1,
1995.
The Santa Barbara Joint Venture contribution did not transfer the right to
manage the operations of the Hotel to the Company. Since the right to manage
the Santa Barbara Hotel had not been transferred to the Company, the financial
statements of the Company prior to the Formation do not include the operating
revenues and expenses of the Santa Barbara Hotel or that hotel's current assets
and current liabilities. These amounts were included in the financial
statements of Historical Red Lion, which continued to manage the Santa Barbara
Hotel. The right to manage the operations of the Santa Barbara Hotel was
transferred to the Company at Formation, and that hotel's operating revenues,
expenses and current assets and current liabilities are reflected in the
consolidated financial statements of the Company beginning August 1, 1995.
<PAGE>
The consolidated financial statements include seven joint ventures in which the
Company holds a 49.9% interest. When combined with the interests retained by
the Partnership, the Company and the Partnership own at least 50% of these joint
ventures. Pursuant to an agreement between the Company and the Partnership, the
Company has the power, in its sole discretion, to prescribe the Partnership's
conduct with respect to the joint venture interests held by the Partnership.
Accordingly, the Company consolidates the four joint ventures in which the
combined interests of the Partnership and the Company exceed 50%. The Company
consolidates one of its 50% owned joint ventures because the Company controls
the joint venture through contractual arrangements, has the majority of capital
at risk through its significant ownership percentage and has guaranteed 100% of
the joint venture's third party debt. The unconsolidated joint ventures,
including one 10% owned joint venture, are accounted for on the equity method of
accounting.
In 1987, Historical Red Lion sold its interest in 10 hotels to Red Lion Inns
Limited Partnership, a publicly traded limited partnership (the "MLP"). Red Lion
Properties, Inc., the general partner of the MLP, was contributed to the Company
in connection with the Formation and is a wholly owned subsidiary of the
Company. The MLP's public limited partners have an effective 98.01% ownership
interest in the MLP's hotels with the general partner retaining the remaining
1.99% ownership interest. The Company operates the MLP's hotels under a
management agreement.
Operating revenues and expenses and current assets and current liabilities of
the MLP and other management contract hotels (including the three unconsolidated
joint ventures which are also managed by the Company) are included in the
accompanying consolidated financial statements because the operating
responsibilities associated with these hotels are substantially the same as
those for owned hotels. The operating profit, net of management fee income
earned by the Company for the managed hotels, is recorded as an expense in the
accompanying consolidated statements of income. The consolidated financial
statements include current assets and current liabilities of $8,843,000 and
$9,933,000 at June 30, 1996 and December 31, 1995, respectively, and operating
revenues of $50,130,000 and $95,128,000 and operating expenses of $31,840,000
and $62,811,000 for the three and six months ended June 30, 1996 respectively,
related to the operation of the MLP and other management contract hotels.
One wholly owned hotel was acquired by Historical Red Lion in 1989 subject to a
nonrecourse cash flow mortgage which requires interest payments contingent on
achieving certain levels of performance. Because of the nonrecourse and cash
flow nature of the loan, the mortgage has not been recorded as an obligation and
the property and equipment of the hotel are excluded from the consolidated
financial statements. The mortgage is in substance a management contract with a
purchase option. Accordingly, the hotel is treated as a management contract in
the accompanying consolidated financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. While management endeavors
to make accurate estimates, actual results could differ from estimates.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The unaudited consolidated financial statements reflect, in the opinion of the
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of the Company at June 30,
1996 and the results of operations and cash flows for the six month period ended
June 30, 1996 and for the four month period ended June 30, 1995. Interim
results are not necessarily indicative of results to be expected for a full
fiscal year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The unaudited consolidated financial statements should be read in conjunction
with the Company's annual consolidated financial statements and notes thereto.
<PAGE>
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," effective January 1, 1996.
SFAS No. 123 defines a fair value based method of accounting for employee stock
options or similar instruments and permits companies to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows a company to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees." The Company has
elected to continue to measure compensation cost in conformity with APB No. 25
and to make pro forma disclosures of net income and earnings per share in its
annual report on Form 10-K for the year ended December 31, 1996, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
3. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Term loan, LIBOR plus 2% (7.5% at June
30, 1996), payable through 2002 $123,869 $133,750
Mortgages, variable rates (6.6% -7.0% at
June 30, 1996), payable through 1998 84,545 84,900
Note payable, 8.69%, payable through 2022 4,914 4,717
-------- --------
213,328 223,367
Current portion of long-term debt (9,219) (7,759)
-------- --------
Long-term debt, net of current portion $204,109 $215,608
======== ========
</TABLE>
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements in order to reduce its
exposure to interest rate fluctuations. The agreements have effectively
converted floating rate debt, which is tied to LIBOR, to fixed rates.
Accordingly, the net interest received or paid on the interest rate swap is
recorded as an adjustment to interest expense.
At June 30, 1996, the Company had three interest rate swap agreements
outstanding which have substantially converted $75 million of debt from floating
LIBOR based rates to fixed rates ranging from 5.19% to 5.57%. The agreements
expire from September 1997 to March 1998. Interest income recognized by the
Company relating to interest rate swap agreements for the six months ended June
30, 1996 was approximately $74,000 and is included as an adjustment to interest
expense.
4. RELATED PARTY TRANSACTIONS
Investments in and advances to unconsolidated joint ventures includes two notes
receivable from one joint venture in the amounts of $1,387,000 and $2,009,000 at
June 30, 1996 and $1,500,000 and $2,009,000 at December 31, 1995. The notes
bear interest at a fixed rate of 10% and a rate based on prime plus 1.0% (9.25%
at June 30, 1996 and 9.5% at December 31, 1995), respectively. In addition,
other assets, net, includes a note receivable from a joint venture in the amount
of $1,714,000 and $1,628,000 outstanding at June 30, 1996 and December 31, 1995,
respectively, which bears interest at a rate based on prime (10.2% at June 30,
1996 and 10.5% at December 31, 1995).
<PAGE>
Transactions with the MLP
Included in accounts receivable-affiliates and due from affiliate is $22,455,000
and $19,078,000 at June 30, 1996 and December 31, 1995, respectively,
representing amounts receivable from the MLP primarily for advances made by the
Company and Historical Red Lion for capital improvements which exceeded the 3%
reserve established in accordance with the provisions of the management
agreement. Such amounts are presented net of current assets and current
liabilities related to the managed MLP hotels of $3,231,000 and $2,194,000 at
June 30, 1996 and December 31, 1995, respectively. The current balance on this
receivable of $1,064,000 and $2,823,000 at June 30, 1996 and December 31, 1995,
respectively, is included in accounts receivable-affiliates. The remaining
balance of $21,391,000 and $16,255,000 at June 30, 1996 and December 31, 1995,
respectively, is classified as due from affiliate. Amounts receivable from the
MLP for capital improvement advances earn interest at the rate of prime plus
0.5% (8.75% at June 30, 1996 and 9.0% at December 31, 1995).
Accounts receivable-affiliates and due from affiliate also include certain other
advances to and deferred incentive management fees receivable from the MLP. A
total of $3,726,000 was advanced to the MLP to fund distributions during the
first 36 months of the MLP's operations and is classified as due from affiliate
at June 30, 1996 and December 31, 1995. The advance is non-interest bearing,
has an unspecified term and is to be repaid out of available cash flow or
refinancing proceeds. Additionally, non-interest bearing deferred incentive
management fees receivable of $6,000,000 were contributed to the Company in the
Formation. The Company received $5,299,000 of such fees during the six months
ended June 30, 1996. Of the total remaining balance of $701,000, $641,000 is
classified as due from affiliate and $60,000 as accounts receivable-affiliate at
June 30, 1996.
5. INCOME TAXES
Since Historical Red Lion was a partnership, no deferred tax benefits had been
provided on the net assets contributed to the Company. In accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the Company recorded net deferred tax assets of $1.2 million in March
1995 related to the contribution of the Santa Barbara Joint Venture. Except for
the tax benefit associated with the contribution of the Santa Barbara Joint
Venture, income taxes have been provided at an estimated effective income tax
rate of 40%.
6. INSURANCE PROCEEDS
On February 8, 1996, three of the Company's hotels were evacuated due to
flooding in northwestern Oregon and southwestern Washington. Two of the hotels
were damaged by flood waters, have reopened and been repaired. The third hotel
was undamaged and reopened quickly. As the Company maintains flood and business
interruption insurance, management does not believe that the ultimate outcome
will have a material adverse effect on the results of operations or financial
position of the Company. Moreover, as the Company's flood insurance policy
covers the replacement cost of the damaged property, insurance proceeds will
likely exceed the net book value of the underlying property, resulting in the
recognition of gains when such proceeds are received.
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
At June 30, 1996, the Company had commitments relating to capital improvement
projects aggregating approximately $9,619,000.
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations or
liquidity.
8. SUBSEQUENT EVENTS
On August 7, 1996, the Company acquired a 319 room hotel in Houston, Texas for
approximately $21,750,000. During the second quarter of 1996, a letter of intent
was signed to purchase the 258 room hotel in Modesto, California which is
currently managed by Red Lion. The Company anticipates this transaction being
completed during the third quarter of 1996.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
-------------
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes appearing elsewhere in this document. The Company believes
the comparison of actual results for the three and six months ended June 30,
1996 to pro forma results for the three and six months ended June 30, 1995
provides a more meaningful presentation than a comparison to actual 1995
operations which represent the results of one hotel and a relatively short time
period since the Company's operations commenced.
<TABLE>
<CAPTION>
PRO FORMA (A) PRO FORMA (A)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30,1995 JUNE 30, 1996 JUNE 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 80,416 $ 72,996 $ 147,445 $135,918
Food and beverage 42,284 41,717 81,389 80,793
Other 14,617 12,412 29,133 24,114
----------- -------- ----------- --------
Total revenues 137,317 127,125 257,967 240,825
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 19,121 17,437 36,991 33,534
Food and beverage 32,694 32,395 63,634 63,473
Other 5,155 4,625 10,079 9,160
Property indirect expenses 27,848 26,118 55,163 51,560
Other costs 9,519 8,457 (b) 18,028 16,954 (b)
Depreciation and amortization 4,771 4,942 9,167 9,884
Payments due to owners of managed
hotels 13,866 12,349 26,178 23,858
----------- -------- ----------- --------
Operating Income 24,343 20,802 38,727 32,402
Equity in Earnings of
Unconsolidated Joint Ventures 576 727 1,423 1,689
Interest Expense, net (3,897) (5,014) (c) (7,779) (10,041) (c)
----------- ------------- ----------- -------------
Income Before Joint Venturers' Interests 21,022 16,515 32,371 24,050
Joint Venturers' Interests (375) (350) (978) (159)
----------- -------- ----------- --------
Income Before Income Taxes 20,647 16,165 31,393 23,891
Income Tax Expense (8,259) (6,466) (12,557) (9,556)
----------- -------- ----------- --------
Net Income $ 12,388 $ 9,699 $ 18,836 $ 14,335
=========== ======== =========== ========
Earnings Per Common Share $ 0.40 $ 0.31 $ 0.60 $ 0.46
=========== ======== =========== ========
Common Shares 31,312,500 31,312,500 (d) 31,312,500 31,312,500 (d)
=========== ============= =========== =============
Other Statistics:
Gross operating profit $ 52,499 $ 46,550 $ 92,100 $ 83,098
Gross operating profit margin 38% 37% 36% 35%
</TABLE>
<PAGE>
(a) On August 1, 1995, Historical Red Lion contributed substantially all of its
assets (excluding the Leased Hotels, certain minority joint venture
interests and certain current assets) and certain liabilities to the
Company in the Formation. Also effective August 1, 1995, the Company
entered into a long-term master lease with the Partnership for the Leased
Hotels. The accompanying consolidated statements of income includes the pro
forma results of Historical Red Lion for the three and six months ended
June 30, 1995 adjusted to give effect to the Formation, the leasing of the
Leased Hotels and the repayment and refinancing of substantially all debt
with borrowings under a new credit facility and the net proceeds of the
public offering, assuming that such events were completed on January 1,
1995.
(b) Pro forma other costs includes quarterly lease expense of $3,750,000
associated with the Leased Hotels, offset by quarterly administrative costs
of $88,000 for which the Company is reimbursed by the Partnership.
(c) Pro forma interest expense for the three and six months ended June 30, 1995
reflects the effects of the Formation and Refinancing as if those events
had occurred on January 1, 1995. Accordingly, pro forma interest expense
does not include interest on debt associated with the Leased Hotels or
repaid with the proceeds of the Offering.
(d) Based on the number of common shares issued in the Offering, as if the
Offering occurred on January 1, 1995.
Comparison of Three Months Ended June 30, 1996 and 1995
- -------------------------------------------------------
Revenues. The Company's operating revenues for the three months ended June 30,
- ---------
1996 were $137.3 million, an increase of $10.2 million or 8% from pro forma
operating revenues of $127.1 for the three months ended June 30, 1995. The
change in operating revenues is primarily a result of increased room revenues.
Room revenues increased 10% to $80.4 million for the three months ended June 30,
1996 as compared to pro forma room revenues of $73 million for the three months
ended June 30, 1995. This increase was primarily due to an 8% rise in average
daily room rates to $81.12. Actual occupancy of 75.3% during the three months
ended June 30, 1996 declined 2% as compared to the pro forma occupancy rate for
the three months ended June 30, 1995. Another component of the increase was the
acquisition of two hotels since June 30, 1995, which contributed room revenues
of approximately $4.5 million during the three months ended June 30, 1996.
A summary of occupancy and room rates for the three months ended June 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Occupancy percentage 75.3% 76.6%
Average rom rate $81.12 $75.42
</TABLE>
Operating results are affected by seasonality. The current quarter results
reflect spring and early summer seasons in which revenues are typically lower
than in the third quarter but higher than in the first quarter. There can be no
assurance, however, that such trends will continue.
Expenses. Departmental direct expenses (expenses related to a specific
- --------
function, such as rooms or food and beverage) for the three months ended June
30, 1996 increased 5% over pro forma departmental direct expenses for the three
months ended June 30, 1995. As a percentage of revenues and pro forma
revenues, departmental direct expenses and pro forma departmental direct
expenses decreased to 41% from 43% for the three months ended June 30, 1996 and
1995, respectively, primarily due to the increase in revenues.
Property indirect expenses for the three months ended June 30, 1996 increased 7%
over pro forma property indirect expenses for the three months ended June 30,
1995 and slightly decreased as a percentage of revenues. Indirect costs include
expenses related to a hotel's general operation, such as utilities, repairs and
maintenance, promotional expenses and administrative costs.
<PAGE>
Gross Operating Profit. The Company's gross operating profit for the three
- ----------------------
months ended June 30, 1996 was $52.5 million, an increase of $5.9 million or 13%
from pro forma gross operating profit of $46.6 million for the three months
ended June 30, 1995. The increase is primarily attributable to the higher
revenues discussed above. Gross operating profit margin for the three months
ended June 30, 1996 improved to 38% from pro forma gross operating profit margin
of 37% for the three months ended June 30, 1995.
Payments Due to Owners of Managed Hotels. Revenues and expenses include
- ----------------------------------------
operating revenues and expenses of unconsolidated managed properties since the
operating responsibilities associated with those hotels are substantially the
same as those for owned hotels. Payments to owners of those hotels, net of the
Company's management fees, increased approximately $1.5 million for the three
months ended June 30, 1996 as compared to the pro forma payments to owners of
managed hotels for the three months ended June 30, 1995. The increase in
payments due to owners of managed hotels is primarily attributable to improved
operating performance at the managed hotels.
Management fees in connection with the managed hotels increased moderately to
$4.4 million for the quarter ended June 30, 1996 as compared to pro forma
management fees of $4 million for the three months ended June 30, 1995.
Operating Income. The Company's operating income for the three months ended June
- ----------------
30, 1996 was $24.3 million, an increase of $3.5 million or 17% from pro forma
operating income of $20.8 million for the three months ended June 30, 1995. The
increase is primarily attributable to the higher revenues discussed above.
Interest Expense. Interest expense, net, decreased $1.1 million to $3.9 million
- ----------------
for the three months ended June 30, 1996 as compared to pro forma interest
expense of $5 million for the three months ended June 30, 1996. The decrease is
primarily due to interest income earned during the second quarter of 1996 of
approximately $540,000 and a lower average outstanding principal balance on
Company debt.
Income Tax Expense. Income tax expense increased $1.8 million to $8.3 million
- ------------------
for the three months ended June 30, 1996 as compared to pro forma income tax
expense of $6.5 million for the three months ended June 30, 1995. The Company's
estimated effective tax rate is 40% for both quarters.
Net Income. The Company's net income increased 28% to $12.4 million ($.40 per
- ----------
share) for the three months ended June 30, 1996 from pro forma net income of
$9.7 million ($.31 per share) for the three months ended June 30, 1995. The
increase in net income is primarily due to increased operating income and
decreased interest expense.
Comparison of Six Months Ended June 30, 1996 and Pro Forma Six Months Ended June
- --------------------------------------------------------------------------------
30, 1995
- --------
Revenues. The Company's operating revenues for the six months ended June 30,
- --------
1996 were $258 million, an increase of $17.2 million or 7% from pro forma
operating revenues of $240.8 for the six months ended June 30, 1995. The change
in operating revenues is primarily a result of increased room and other
revenues.
Room revenues increased 8% to $147.4 million for the six months ended June 30,
1996 as compared to pro forma room revenues of $135.9 million for the six months
ended June 30, 1995. This increase was primarily due to a 7% rise in average
daily room rates to $79.75. Actual occupancy of 71% during the six months ended
June 30, 1996 declined 2% as compared to the pro forma occupancy rate for the
six months ended June 30, 1995. Another component of the increase was the
acquisition of two hotels since June 30, 1995 which contributed additional room
revenues of approximately $6.5 million during the six months ended June 30,
1996.
A summary of occupancy and room rates for the six months ended June 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Occupancy percentage 71.0% 72.2%
Average room rate $79.75 $74.88
</TABLE>
<PAGE>
Other revenues increased 21% to $29.1 million for the six months ended June 30,
1996 as compared to pro forma other revenues of $24.1 million for the six months
ended June 30, 1995 due primarily to increased telephone income, banquet
rentals, ancillary banquet services and insurance proceeds relating to two
hotels which were affected by the February 1996 flood in the Portland, Oregon
area.
Expenses. Departmental direct expenses (expenses related to a specific
- --------
function, such as rooms or food and beverage) for the six months ended June 30,
1996 increased 4% over pro forma departmental direct expenses for the six months
ended June 30, 1995. As a percentage of revenues and pro forma revenues,
departmental direct expenses and pro forma departmental direct expenses
decreased to 43% from 44% for the six months ended June 30, 1996 and 1995,
respectively, primarily due to the increase in revenues.
Property indirect expenses for the six months ended June 30, 1996 increased 7%
over pro forma property indirect expenses for the six months ended June 30, 1995
and remained constant as a percentage of revenues. Indirect costs include
expenses related to a hotel's general operation, such as utilities, repairs and
maintenance, promotional expenses and administrative costs.
Gross Operating Profit. The Company's gross operating profit for the six months
- ----------------------
ended June 30, 1996 was $92.1 million, an increase of $9 million or 11% from pro
forma gross operating profit of $83.1 million for the six months ended June 30,
1995. The increase is primarily attributable to the higher revenues discussed
above. Gross operating profit margin for the six months ended June 30, 1996
improved to 36% from pro forma gross operating profit margin of 35% for the six
months ended June 30, 1995.
Payments Due to Owners of Managed Hotels. Revenues and expenses include
- ----------------------------------------
operating revenues and expenses of unconsolidated managed properties since the
operating responsibilities associated with those hotels are substantially the
same as those for owned hotels. Payments to owners of those hotels, net of the
Company's management fees, increased approximately $2.3 million for the six
months ended June 30, 1996 as compared to the pro forma payments to owners of
managed hotels for the six months ended June 30, 1995. The increase in payments
due to owners of managed hotels is primarily attributable to improved operating
performance at the managed hotels.
Management fees in connection with the managed hotels increased to $6.1 million
for the six months ended June 30, 1996 as compared to pro forma management fees
of $5.4 million for the six months ended June 30, 1995.
Operating Income. The Company's operating income for the six months ended June
- ----------------
30, 1996 was $38.7 million, an increase of $6.3 million or 19% from pro forma
operating income of $32.4 million for the six months ended June 30, 1995. The
increase is primarily attributable to the higher revenues discussed above.
Interest Expense. Interest expense, net, decreased $2.2 million to $7.8 million
- ----------------
for the six months ended June 30, 1996 as compared to pro forma interest
expense of $10 million for the six months ended June 30, 1996. The decrease is
primarily due to interest income earned during the six months ended June 30,
1996 of approximately $1.3 million and a lower average outstanding principal
balance on Company debt.
Income Tax Expense. Income tax expense increased $3 million to $12.6 million
- ------------------
for the six months ended June 30, 1996 as compared to pro forma income tax
expense of $9.6 million for the six months ended June 30, 1995. The Company's
estimated effective tax rate is 40% for both quarters.
Net Income. The Company's net income increased 31% to $18.8 million ($.60 per
- ----------
share) for the six months ended June 30, 1996 from pro forma net income of $14.3
million ($.46 per share) for the six months ended June 30, 1995. The increase
in net income is primarily due to increased operating income and decreased
interest expense.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $36.5 million at June 30, 1996 from $68.4 million at December
31, 1995 primarily as a result of an acquisition, ongoing capital expenditures,
repayment of term loan principal and seasonal working capital fluctuations. The
Company's principal source of cash is hotel operations. The Company and
Historical Red Lion historically have generated internal cash flow to meet
operating needs, make capital expenditures and reduce outstanding debt. The
Company's future debt levels may vary depending on, among other factors,
financing required to fund external growth opportunities, the amount of cash
provided by operations and debt maturities.
At June 30, 1996, commitments relating to capital improvement projects were
approximately $9.6 million. As part of its capital expenditure program, the
Company budgets for costs incurred in connection with environmental compliance
at its properties. These costs historically have not been material, and the
Company does not anticipate incurring material costs for environmental
compliance in the future.
In connection with the Formation, the Company repaid the majority of the debt
contributed to the company by historical Red Lion with the proceeds of the
equity offering and a new $135 million seven year term loan. In addition, on
August 1, 1995, the Company obtained a $130 million credit line facility of
which $80 million is available for acquisitions and $50 million is available for
working capital requirements. The credit line facility has a term of seven
years. The term loan and credit line facility (collectively the "Credit
Facility") carry a variable interest rate based on LIBOR plus 2% (7.5% at June
30, 1996). Quarterly mandatory prepayments which increase over the term of the
Credit Facility are required. In addition, in March of each year a mandatory
prepayment of the Credit Facility is required in an amount equal to 50% of
annual excess cash flow (as defined in the credit agreement) for the prior
fiscal year. The $80 million available for acquisitions is anticipated to be
utilized by the company to finance the addition of hotels to the Red Lion chain
through acquisitions, management contracts, joint ventures or leases. At August
9, 1996, there was no outstanding balance on the credit line facility.
The Company believes that a combination of its existing cash and cash
equivalents, internally generated cash flows and its borrowing ability under the
Credit Facility will be sufficient to fund its operations and capital outlays.
**************
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 and continuing
availability of capital to fund growth and improvements. The forward-looking
statements should be considered in light of these factors.
<PAGE>
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On May 15, 1996, the annual meeting of the stockholders of the Company was held.
Stockholders present in person or by proxy voted for the election of Directors
to Class I of the Board of Directors and ratification of the appointment of
Deloitte & Touche LLP as the Company's independent accountants. The shares were
voted as follows:
(i) elect as directors each of
David J. Johnson 27,991,629 for 9,792 withheld
Todd A. Fisher 27,991,629 for 9,792 withheld
(ii) appoint Deloitte & Touche LLP as the Company's independent accountants
27,988,902 for 2,802 against 9,717 abstain
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS: THE FOLLOWING DOCUMENT IS FILED HEREWITH AND MADE A PART OF
THIS REPORT:
Exhibit 27 - Article 5 Financial Data Schedule for 2nd Quarter 10-Q.
(b) REPORTS ON FORM 8-K : None
<PAGE>
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.
RED LION HOTELS, INC.
Date: August 13, 1996 By /S/DAVID J. JOHNSON
-------------------
David J. Johnson
President, Chief Executive Officer and
Chairman of the Board
Date: August 13, 1996 By /S/MICHAEL VERNON
-----------------
Michael Vernon
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,509
<SECURITIES> 0
<RECEIVABLES> 26,333
<ALLOWANCES> 0
<INVENTORY> 6,286
<CURRENT-ASSETS> 76,520
<PP&E> 549,744
<DEPRECIATION> (174,177)
<TOTAL-ASSETS> 531,883
<CURRENT-LIABILITIES> 65,593
<BONDS> 0
0
0
<COMMON> 313
<OTHER-SE> 248,802
<TOTAL-LIABILITY-AND-EQUITY> 531,883
<SALES> 257,967
<TOTAL-REVENUES> 257,967
<CGS> 0
<TOTAL-COSTS> 219,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,054
<INCOME-PRETAX> 31,393
<INCOME-TAX> 12,557
<INCOME-CONTINUING> 18,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,836
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
