U.S. 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, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
------------ ------------
Commission file number 001-13957
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CAVANAUGHS HOSPITALITY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1032187
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. North River Drive, Suite 100, Spokane, WA 99201
------------------------------------------------------
(Address of principal executive office)
(509) 459-6100
----------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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
----- -----
As of July 31, 1998, there were 13,053,576 shares of the
Registrant's common stock outstanding.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
Form 10-Q
For the Quarter Ended June 30, 1998
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets -- December 31, 1997
and June 30, 1998
- Consolidated Statements of Income and
Comprehensive Income -- Three and Six Months
Ended June 30, 1997 and 1998
- Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1997 and 1998
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 6 - Exhibits and Reports on Form 8-K
<PAGE>
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1997 and June 30, 1998
(in thousands, except share data)
December 31, June 30,
1997 1998
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,955 $ 6,227
Accounts receivable 2,785 4,762
Note receivable 17,112
Inventories 427 545
Prepaid expenses and deposits 1,100 370
-------- --------
Total current assets 9,267 29,016
Property and equipment, net 112,234 152,701
Other assets, net 3,616 6,351
-------- --------
Total assets $125,117 $188,068
======== ========
LIABILITIES AND STOCKHOLDERS' AND
PARTNERS' EQUITY
Current liabilities:
Payable to affiliate $ 1,133
Note payable to bank 1,075
Accounts payable 3,234 $ 3,701
Accrued payroll and related benefits 983 1,693
Accrued interest payable 689 454
Other accrued expenses 2,882 3,429
Long-term debt, due within one year 3,590 1,374
Capital lease obligations, due within
one year 502 519
-------- --------
Total current liabilities 14,088 11,170
Long-term debt, due after one year 94,419 72,691
Capital lease obligations, due after
one year 2,139 2,079
Deferred income taxes 5,415 5,415
Minority interest in partnerships 524 4,246
-------- --------
Total liabilities 116,585 95,601
-------- --------
Commitments and contingencies
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED
December 31, 1997 and June 30, 1998
(in thousands, except share data)
December 31, June 30,
1997 1998
------------ ---------
Stockholders' and partners' equity:
Preferred stock - 5,000,000 shares author-
ized, $0.01 par value, -0- shares issued
and outstanding $ -- $ --
Common stock - 50,000,000 shares author-
ized, $0.01 par value; 7,084,254 and
13,053,345 shares issued and outstanding 71 131
Partners' deficit (879)
Additional paid-in capital 3,935 84,896
Retained earnings 5,405 7,440
-------- --------
Total stockholders' and partners'
equity 8,532 92,467
-------- --------
Total liabilities and stockholders'
and partners' equity $125,117 $188,068
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
for the three and six months ended June 30, 1997 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants
Rooms $ 7,028 $11,668 $11,419 $18,552
Food and beverage 3,583 5,683 6,478 9,858
Other 692 965 1,307 1,747
------- ------- ------- -------
Total hotels and restaurants 11,303 18,316 19,204 30,157
Entertainment, management and services 798 1,008 1,810 2,026
Rental operations 1,602 1,738 3,220 3,514
------- ------- ------- -------
Total revenues 13,703 21,062 24,234 35,697
------- ------- ------- -------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 1,765 2,954 3,192 5,045
Food and beverage 2,874 4,602 5,320 8,160
Other 249 440 475 777
------- ------- ------- -------
Total hotels and restaurants 4,888 7,996 8,987 13,982
Entertainment, management and services 463 718 1,078 1,415
Rental operations 371 347 738 732
------- ------- ------- -------
Total direct expenses 5,722 9,061 10,803 16,129
------- ------- ------- -------
Undistributed operating expenses:
Selling, general and administrative 2,081 3,070 3,801 5,065
Property operating costs 1,311 2,177 2,556 3,977
Depreciation and amortization 1,160 1,417 2,296 2,736
------- ------- ------- -------
Total undistributed operating expenses 4,552 6,664 8,653 11,778
------- ------- ------- -------
Total expenses 10,274 15,725 19,456 27,907
------- ------- ------- -------
Operating income 3,429 5,337 4,778 7,790
Other income (expense):
Interest expense, net of amounts capitalized (2,245) (1,360) (4,600) (4,054)
Interest income 77 126 170 196
Other income 346
Minority interest in partnerships (9) (85) 39 (45)
------- ------- ------- -------
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED), CONTINUED
for the three and six months ended June 30, 1997 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1998 1997 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Income before income taxes and extraordinary
item $ 1,252 $ 4,018 $ 733 $ 3,887
Income tax provision 426 1,366 252 1,322
------- ------- ------- -------
Income before extraordinary item 826 2,652 481 2,565
Extraordinary item -- write off
of deferred loan fees, net of tax (530) (530)
------- ------- ------- -------
Net and comprehensive income $ 826 $ 2,122 $ 481 $ 2,035
======= ======= ======= =======
Income per share before extraordinary item $ 0.12 $ 0.21 $ 0.07 $ 0.26
======= ======= ======= =======
Net income per share:
Basic $ 0.12 $ 0.17 $ 0.07 $ 0.21
======= ======= ======= =======
Diluted $ 0.12 $ 0.17 $ 0.07 $ 0.21
======= ======= ======= =======
Weighted-average shares outstanding:
Basic 7,072 12,588 7,072 9,836
======= ======= ======= =======
Diluted 7,072 12,920 7,072 10,077
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended June 30, 1997 and 1998
(in thousands)
1997 1998
-------- --------
Operating activities:
Net income $ 481 $ 2,035
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,296 2,736
Minority interest in partnerships (39) 45
Extraordinary item -- write off of
deferred loan fees 530
Change in:
Accounts receivable (19) (1,977)
Inventories (11) (118)
Prepaid expenses and deposits (10) 730
Other assets (275)
Accounts payable (109) 467
Accrued payroll and related benefits 176 710
Accrued interest payable 64 (235)
Other accrued expenses (808) 813
-------- --------
Net cash provided by operating
activities 2,021 5,461
-------- --------
Investing activities:
Additions to property and equipment (3,368) (27,769)
Proceeds from disposition of property and
equipment 703
Issuance of note receivable (17,112)
Deposit for acquisition of hotel (1,980)
Other, net (36) (283)
-------- --------
Net cash used in investing activities (2,701) (47,144)
-------- --------
Financing activities:
Redemption of common stock (163)
Distributions to stockholders and partners (1,124)
Dividends to stockholders (177)
Proceeds from issuance of common stock under
employee stock purchase plan 242
Net proceeds from initial public offering
of common stock 81,659
Proceeds from note payable to bank 1,925
Repayment of note payable to bank (3,000)
Proceeds from long-term debt 4,352 32,971
Repayment of long-term debt (1,712) (68,319)
Payments to affiliate (1,133)
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended June 30, 1997 and 1998
(in thousands)
1997 1998
-------- --------
Financing activities, Continued:
Principal payments on capital lease
obligations $ (219) $ (267)
Payment of loan fees (1,123)
-------- --------
Net cash provided by financing activities 957 42,955
-------- --------
Change in cash and cash equivalents:
Net increase in cash and cash equivalents 277 1,272
Cash and cash equivalents at beginning of
period 5,703 4,955
-------- --------
Cash and cash equivalents at end of period $ 5,980 $ 6,227
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during period for:
Interest (net of amount capitalized) $ 4,536 $ 3,819
Income taxes 125
Noncash investing and financing activities:
Acquisition of leases 222
Issuance of operating partnership units
for property acquisitions 4,557
Acquisition of property through assumption
of debt and capital leases 11,404
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY INFORMATION:
The unaudited consolidated financial statements included herein
have been prepared by Cavanaughs Hospitality Corporation (the
Company) pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted as permitted by such rules and
regulations. The balance sheet as of December 31, 1997 has been
derived from the audited balance sheet as of such date. The
Company believes that the disclosures included herein are
adequate; however, these consolidated statements should be read
in conjunction with the financial statements and the notes
thereto for the period ended December 31, 1997 previously filed
with the SEC on Form S-1 which was effective in April 1998.
In the opinion of management, these unaudited consolidated
financial statements contain all of the adjustments normal and
recurring in nature, necessary to present fairly the consolidated
financial position of the Company at June 30, 1998 and the
consolidated results of operations and cash flows for the three
and six months ended June 30, 1998 and 1997. The results of
operations for the periods presented may not be indicative of
those which may be expected for a full year.
2. ORGANIZATION:
At June 30, 1997, the Company controlled and operated (through
ownership or lease with purchase option agreements) seven hotel
properties. At June 30, 1998, the Company controlled and
operated 14 hotel properties in Seattle, Spokane, Yakima and
Kennewick, Washington; Post Falls and Idaho Falls, Idaho;
Kalispell, Montana; Hillsboro, Oregon; and Salt Lake City, Utah
under its Cavanaughs(TM) brand. Additionally, the Company
provides computerized ticketing for entertainment events and
arranges Broadway and other entertainment event productions. The
Company also leases retail and office space in buildings owned by
the Company and manages residential and commercial properties in
Washington, Idaho and Montana. The Company's operations are
classified into three divisions: (1) hotels and restaurants, (2)
entertainment, management and services, and (3) rental
operations.
Prior to January 1, 1998, the financial statements included the
combined operations of Cavanaughs Hospitality Corporation
(including its merged and predecessor entities) and G&B: Lincoln
Building Limited Partnership (Lincoln Building). On January 1,
1998, the Company issued common stock and units in the Cavanaughs
Hospitality Limited Partnership (OP Units) to the partners of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ORGANIZATION, CONTINUED:
Lincoln Building in exchange for the assets and liabilities of
Lincoln Building. Therefore, consolidated financial statements
of the Company are presented at June 30, 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
New Accounting Pronouncements
-----------------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income",
was issued. This Statement requires that comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. This Statement
does not require a specific format for the financial statement,
but requires that an enterprise display net income as a
component of comprehensive income in the financial statements.
Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. The
classifications of comprehensive income under current
accounting standards include foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses
on certain investments in debt and equity securities. The
implementation of this standard on January 1, 1998 did not have
a material impact on the presentation of the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments for an Enterprise and
Related Information". This Statement will change the way
public companies report information about segments of their
business in their annual financial statements and requires them
to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides,
and its major customers. The implementation of SFAS No. 131 on
January 1, 1998 did not have a material impact on the
consolidated financial statements.
4. INITIAL PUBLIC OFFERING:
In April 1998, the Company completed an initial public offering
(Offering) of 5,951,250 shares of common stock. The proceeds,
after deducting the underwriting discount and before offering
expenses, of approximately $83.0 million were used to repay
certain debt and acquire hotel properties.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. 1998 ACQUISITIONS:
In January 1998, the Company entered into a lease with purchase
option to acquire certain assets of a hotel in Spokane,
Washington for approximately $11.5 million and acquired certain
assets of a hotel in Idaho Falls, Idaho for approximately $3.8
million. In April 1998, the purchase option on the Spokane,
Washington hotel was exercised. In February 1998, the Company
acquired certain assets of a hotel in Post Falls, Idaho for
approximately $9.5 million. In April 1998, the Company acquired
certain assets of a hotel in Hillsboro, Oregon for approximately
$5.5 million. In June 1998, the Company acquired certain assets
of a hotel in Kalispell, Montana for approximately $9.6 million.
In June 1998, the Company acquired, through a management and
purchase agreement, The Olympus Hotel and Conference Center,
located in Salt Lake City, Utah. The final closing on the
purchase of the assets was made on July 1, 1998 for a total price
of $31.6 million. A Current Report on Form 8-K/A was filed with
the SEC on August 13, 1998, which included the pro forma
disclosures of the acquisition.
All of these acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the results of
operations of these hotels have been included in the consolidated
statement of operations since their respective dates of
acquisition. The excess purchase price of the assets over their
historical cost bases has been allocated to property and
equipment and is being depreciated over the estimated remaining
useful life of the related assets. Pro forma disclosures
reflecting these acquisitions have been included in the Company's
Form S-1 and Form 8-K/A as previously filed with the SEC.
On July 31, 1998, the Company acquired four additional hotels for
$30.3 million from one seller. The hotels are located in Boise,
Twin Falls and Pocatello, Idaho and Helena, Montana. This
acquisition will be accounted for using the purchase method of
accounting.
The Company used the net proceeds of the initial public offering
to repay $68.3 million of debt. In connection with the debt
repayment, approximately $530,000 of deferred loan fees and
prepayment penalties, net of income taxes, were charged to
operations during the second quarter of 1998 and are presented as
an extraordinary item.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT AND LINE OF CREDIT, CONTINUED:
In May 1998, the Company obtained an $80 million revolving
secured credit facility with a bank (Revolving Credit Facility).
The credit facility requires that the Company maintain certain
financial ratios and minimum levels of cash flows. Any
outstanding borrowings bear interest based on prime rate or
LIBOR. The credit facility matures in five years. The credit
facility requires the payment of a 1% fee plus an annual standby
fee of 0.25%. At June 30, 1998, $26,050,000 is outstanding under
the credit facility. The Company was in compliance with all
required covenants at June 30, 1998
7. CONTINGENCY:
In 1994, the Company was sued by the contractor who constructed
one of the Company's hotel properties asserting lack of payment
of cost overruns. The Company filed a counter claim for the
recovery of various damages. The Company obtained summary
judgment for most of the claims. As of June 30, 1998, the amount
of claims against the Company which have not been dismissed or
are subject to appeal is $233,000, plus interest. The Company's
counter claims which have not been dismissed are $419,000.
Management believes that the ultimate resolution of this matter
will not have a material effect on the Company's results of
operations, financial condition or cash flows.
<PAGE>
8. EARNINGS PER SHARE:
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted EPS computations
(in thousands, except per share amounts). Also shown is the
number of dilutive securities (stock options) that would have
been included in the diluted EPS computation if they were not
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income before extra-
ordinary item $ 826 $ 2,652 $ 481 $ 2,565
Extraordinary item -- (530) -- (530)
------- ------- ------- -------
Net income after extra-
ordinary item - basic 826 2,122 481 2,035
Income effect of dilutive
OP Units -- 85 -- 82
------- ------- ------- -------
Net income after extra-
ordinary item - diluted $ 826 $ 2,207 $ 481 $ 2,117
======= ======= ======= =======
Denominator:
Weighted-average shares
outstanding - basic 7,072 12,588 7,072 9,836
Effect of dilutive
OP Units -- 332 -- 241
Effect of dilutive common
stock options -- (A) -- (A)
------- ------- ------- -------
Weighted-average shares
outstanding - diluted 7,072 12,920 7,072 10,077
======= ======= ======= =======
Earnings Per Share - basic
and diluted
Income per share before
extraordinary item $ 0.12 $ 0.21 $ 0.07 $ 0.26
Extraordinary item -- (0.04) -- (0.05)
------- ------- ------- -------
Net income per share -
basic and diluted $ 0.12 $ 0.17 $ 0.07 $ 0.21
======= ======= ======= =======
</TABLE>
(A) For the six and three months ending June 30, 1998, 591,028
stock options were excluded from the calculation of diluted
earnings per share because there would be no effect as the
exercise price of the options is greater than the current
market value.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
-------
The following discussion and analysis addresses the results of
operations for the Company for the three and six months ended June 30,
1997 and 1998. The following should be read in conjunction with the
unaudited Consolidated Financial Statements and the notes thereto. In
addition to historical information, the following Management's
Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed
in "Risk Factors" and elsewhere in the Form S-1 filed originally by
the Company in April 1998 (File No. 333-44491)
The Company's revenues are derived primarily from the Hotels and
reflect revenue from rooms, food and beverage and other sources,
including telephone, guest services, banquet room rentals, gift shops
and other amenities. Hotel revenues accounted for 84.5% of total
revenue in the six months ended June 30, 1998 and increased 57.0% from
$19.2 million in 1997 to $30.2 million in 1998. This increase was
primarily the result of the addition of seven hotels in the period and
an increase in revenue per available room (REVPAR) from the hotels
owned for greater than one year ("Comparable Hotels") of $42.21 in
1997 to $49.47 in 1998, a 17.2% increase. The balance of the
Company's revenues are derived from its entertainment, management and
services and rental operations divisions. These revenues are
generated from ticket distribution handling fees, real estate
management fees, sales commissions and rents. In the six months ended
June 30, 1998, entertainment, management and services accounted for
5.7% of total revenues and rental operations accounted for 9.8% of
total revenues. These two divisions are expected to represent a
smaller percent of total revenues in the future as the Company
continues to pursue its hotel growth strategy.
As is typical in the hospitality industry, REVPAR, average daily rates
(ADR) and occupancy levels are important performance measures. The
Company's operating strategy is focused on enhancing revenue and
operating margins by increasing REVPAR, ADR, occupancy and operating
efficiencies of the Hotels. These performance measures are impacted
by a variety of factors, including national, regional and local
economic conditions, degree of competition with other hotels in their
respective market areas and, in the case of occupancy levels, changes
in travel patterns.
<PAGE>
The following table sets forth selected items from the consolidated
statements of income and comprehensive income as a percent of total
revenues and certain other selected data:
<TABLE>
<capiton>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1998 1997 1998
------- -------- ------ -------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants 82.5% 87.0% 79.2% 84.5%
Entertainment, management and services 5.8 4.8 7.5 5.7
Rental operations 11.7 8.2 13.3 9.8
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Direct operating expenses 41.8% 43.0% 44.6% 45.2%
----- ----- ----- -----
Undistributed operating expenses:
Selling, general and administrative 15.2 14.6 15.7 14.2
Property operating costs 9.5 10.4 10.5 11.1
Depreciation and amortization 8.5 6.6 9.5 7.7
----- ----- ----- -----
Total undistributed operating expenses 33.2 31.6 35.7 33.0
----- ----- ----- -----
Operating income 25.0 25.4 19.7 21.8
Interest expense, net 15.9 5.9 18.3 10.9
Other income -- -- 1.6 --
----- ----- ----- -----
Income before income taxes and extra-
ordinary item 9.1 19.1 3.0 10.9
Income tax provision 3.1 6.5 1.0 3.7
----- ----- ----- -----
Income before extraordinary item 6.0% 12.6% 2.0% 7.2%
===== ===== ===== =====
<CAPTION>
Comparable Hotels:
REVPAR $51.49 $56.48 $42.21 $49.47
ADR 77.55 83.35 72.65 79.79
Occupancy 66.40% 67.80% 58.1% 62.0%
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
---------------------
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED
JUNE 30, 1997
Total revenues increased $11.5 million, or 47.3%, from $24.2 million in
1997 to $35.7 million in 1998. This increase is attributed primarily
to revenue generated from increases in total rooms occupied and REVPAR
and the addition of seven hotels.
Total hotel and restaurant revenues increased $11.0 million, or 57.0%,
from $19.2 million in 1997 to $30.2 million in 1998. ADR for the seven
Comparable Hotels increased $7.14, or 9.8%, from $72.65 in 1997 to
$79.79 in 1998. Available room nights increased 61.9% in 1998. REVPAR
for the seven Comparable Hotels increased $7.26, or 17.2% from $42.21
in 1997 to $49.47 in 1998. The results reflect the addition of
Cavanaughs Gateway Hotel, Cavanaughs Ridpath Hotel, Cavanaughs on the
Falls, Cavanaughs Outlaw Hotel, Cavanaughs Olympus Hotel, Cavanaughs
Hillsboro Hotel and Cavanaughs Templin's Resort which contributed, in
part, to this increase in revenues.
Entertainment, management and services revenues increased $217,000, or
12.0% in 1998. Management and services revenue increased from the
addition of new third-party management contracts.
Rental income increased $293,000, or 9.1%, from $3.2 million in 1997 to
$3.5 million in 1998. This increase is due primarily to the addition
of leased space in the Crescent Court property to The Travelers company
which commenced occupancy in January 1998.
Direct operating expenses increased $5.3 million, or 49.3%, from $10.8
million in 1997 to $16.1 million in 1998, primarily due to the increase
in the number of hotel guests served and the addition of seven hotels.
This represents an increase in direct operating expenses as a
percentage of total revenues from 44.6% in 1997 to 45.2% in 1998.
Total undistributed operating expenses increased $3.1 million, or
36.1%, from $8.7 million in 1997 to $11.8 million in 1998. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 33.3% from $3.8 million in
1997 to $5.1 million in 1998, and depreciation and amortization, which
increased 19.2% from $2.3 million in 1997 to $2.7 million in 1998.
Total undistributed operating expenses as a percentage of total
revenues decreased 2.7% from 35.7% in 1997 to 33.0% in 1998. The
decrease in undistributed operating expenses as a percentage of total
revenues is primarily attributed to the increased REVPAR and the
company controlling sales and administrative expenses.
<PAGE>
Operating income increased $3.0 million, or 63.0%, from $4.8 million in
1997 to $7.8 million in 1998. As a percentage of total revenues,
operating income increased from 19.7% in 1997 to 21.8% in 1998. This
increase is due primarily to an increase in REVPAR, the addition of
seven hotels and improvements in the undistributed operating expense
margins.
Interest expense decreased $0.5 million, or 11.9%, from $4.6 million in
1997 to $4.1 million in 1998. Interest expense declined as a result of
the application of the net proceeds of the Offering to repay certain
indebtedness, but is expected to increase in the future due to the
funding of hotel acquisitions with additional debt.
Income tax provision increased 424.6%, from $0.3 million in 1997 to
$1.3 million in 1998, due to the increase in the income before income
taxes. The effective income tax rate for both periods was 34.0%.
Income before extraordinary item (noncash write off of deferred loan
fees) increased $2.1 million, or 433.4%, from $0.5 in 1997 to $2.6
million in 1998.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED
JUNE 30, 1997
Total revenues increased $7.4 million, or 53.7%, from $13.7 million in
1997 to $21.1 million in 1998. This increase is attributed primarily
to revenue generated from increases in total rooms occupied and REVPAR
and the addition of seven hotels.
Total hotel and restaurant revenues increased $7.0 million, or 62.0%,
from $11.3 million in 1997 to $18.3 million in 1998. ADR for the
Comparable Hotels increased $5.80, or 7.5%, from $77.55 in 1997 to
$83.35 in 1998. REVPAR for the Comparable Hotels increased $4.99, or
9.7% from $51.49 in 1997 to $56.48 in 1998. The results reflect the
addition of Cavanaughs Gateway Hotel, Cavanaughs Ridpath Hotel,
Cavanaughs on the Falls, Cavanaughs Outlaw Hotel, Cavanaughs Hillsboro
Hotel, Cavanaughs Olympus Hotel and Cavanaughs Templin's Resort which
contributed, in part, to this increase in revenues.
Entertainment, management and services revenues increased $211,000, or
26.5% in 1998. Management and services revenue increased from the
addition of new third-party management contracts.
Rental income increased $0.1 million, or 8.4%, from $1.6 million in
1997 to $1.7 million in 1998. This increase is due primarily to the
addition of leased space in the Crescent Court property to The
Travelers company which commenced occupancy in January 1998.
<PAGE>
Direct operating expenses increased $3.3 million, or 58.4%, from $5.7
million in 1997 to $9.1 million in 1998, primarily due to the increase
in the number of hotel guests served and the addition of seven hotels.
This represents an increase in direct operating expenses as a
percentage of total revenues from 41.8% in 1997 to 43.0% in 1998.
Total undistributed operating expenses increased $2.1 million, or
46.4%, from $4.6 million in 1997 to $6.7 million in 1998. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 47.5% from $2.1 million in
1997 to $3.1 million in 1998, and depreciation and amortization, which
increased 22.2% from $1.2 million in 1997 to $1.4 million in 1998.
Total undistributed operating expenses as a percentage of total
revenues decreased 1.6% from 33.2% in 1997 to 31.6% in 1998. The
decrease in undistributed operating expenses as a percentage of total
revenues is primarily attributed to the increased REVPAR and the
company controlling sales and administrative expenses.
Operating income increased $1.9 million, or 55.7%, from $3.4 million in
1997 to $5.3 million in 1998. As a percentage of total revenues,
operating income increased from 25.0% in 1997 to 25.3% in 1998. This
increase is due primarily to an increase in REVPAR, the addition of
seven hotels and improvements in the undistributed operating expense
margins.
Interest expense decreased $0.9 million, or 39.4%, from $2.3 million in
1997 to $1.4 million in 1998. Interest expense declined as a result of
the application of the net proceeds of the Offering to repay certain
indebtedness, but is expected to increase in the future due to the
funding of hotel acquisitions with additional debt.
Income tax provision increased 221.1%, from $0.4 million in 1997 to
$1.4 in 1998, due to the increase in the income before income taxes.
The effective income tax rate for both periods was 34.0%.
Income before extraordinary item (noncash write off of deferred loan
fees) increased $1.8 million, or 221.1%, from $0.8 in 1997 to $2.7
million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's principal sources of liquidity are cash on hand, cash
generated by operations and borrowings under a $80.0 million Revolving
Credit Facility. Cash generated by operations in excess of operating
expenses is used for capital expenditures and to reduce amounts
outstanding under the Revolving Credit Facility. Hotel acquisitions,
development and expansion have been and will be financed through a
combination of internally generated cash, borrowing under credit
facilities, and the issuance of common stock or OP Units.
<PAGE>
The Company's short-term capital needs include food and beverage
inventory, payroll and the repayment of interest expense on outstanding
mortgage indebtedness. Historically, the Company has met these needs
through internally generated cash.
The Company's long-term capital needs include funds for property
acquisitions, scheduled debt maturities and renovations and other non-
recurring capital improvements. The Company anticipates meeting its
future long-term capital needs through the borrowing of additional debt
financing secured by the Hotels, unsecured private or public debt
offerings, additional equity offerings or the issuances of OP Units,
along with cash generated from internal operations. In April 1998, the
Company completed its initial public offering of 5,951,250 shares at
$15.00 per share. The proceeds to the Company after deducting the
underwriter's commission, but before other expenses, was $83.0 million.
In April, the Company used the proceeds from the offering to repay
approximately $68.6 million of debt, the balance was used to fund the
acquisition of the fee interest in the Cavanaughs Ridpath and to
acquire the Cavanaughs Hillsboro Hotel.
At June 30, 1998, the Company had $6.2 million in cash and cash
equivalents, an increase of $1.3 million from $4.9 million on
December 31, 1997. The Company has acquired six hotels during the six
months ended June 30, 1998 and has expended $47.1 million for these
acquisitions and capital expenditures. The Company establishes
reserves for capital replacement in the amount of 4.0% of gross income
to maintain the Hotels at acceptable levels. Acquired hotel properties
have a separate capital budget for purchase, construction, renovation,
and branding costs. Capital expenditures planned for Hotels in 1998
are expected to be approximately $3.0 million. Management believes the
consistent renovation and upgrading of the Hotels and other properties
is imperative to its long-term reputation and customer satisfaction.
To fund its acquisition program and meet its working capital needs, the
Company has received an $80 million Revolving Credit Facility from U.S.
Bank which was consummated on May 5, 1998. The interest rate is 185
basis points over LIBOR and declining to 165 basis points after six
months if the Company maintains certain earnings before interest,
taxes, depreciation and amortization (EBITDA) to debt ratios. The
Revolving Credit Facility has an initial term of five years and an
annualized fee for the unutilized portion of the facility. The Company
selects from four different interest rates when it draws funds: the
lender's prime rate or one, three, or six month LIBOR plus the
applicable margin of 165 to 235 basis points, depending on the ratio of
EBITDA to total funded debt. The Revolving Credit Facility has
covenants that allow for the Company to draw funds based on the
trailing 12 months performance on a pro forma basis for both acquired
and owned properties. The Revolving Credit Facility allows the Company
to choose which properties are part of the collateral base and,
therefore, gives the Company the ability to utilize other long-term
<PAGE>
credit facilities that may be more favorable to the Company. Funds
from the Revolving Credit Facility may be used for acquisitions,
renovations, construction and general corporate purposes. The Company
believes the structure and availability of funds under the Revolving
Credit Facility will be sufficient to meet the Company's long-term
growth plans.
The Revolving Credit Facility contains various representations,
warranties, covenants and events of default deemed appropriate for
financing of a similar size and nature. Covenants and provisions in
the definitive agreements governing the Revolving Credit Facility
include, among other things, limitations on: (i) substantive changes in
the Company's current business activities, (ii) liquidation,
dissolution, mergers, consolidations, dispositions of material property
or assets and acquisitions of property or assets of others, (iii) the
creation or existence of liens on property or assets, (iv)
the addition or existence of indebtedness, including guarantees and
other contingent obligations, (v) loans and advances to others and
investments in others, redemption of subordinated debt, (vi) amendment
or modification of certain material documents or of the Articles in a
manner adverse to the interests of the lenders under the Revolving
Credit Facility, (vii) payment of dividends or distributions on the
Company's capital stock, and (viii) maintenance of certain financial
ratios. Each of the covenants described above will provide for certain
ordinary course of business and other exceptions. If the Company
breaches any of these covenants and does not obtain a waiver of that
breach, the breach will constitute an event of default under the
Revolving Credit Facility.
As of June 30, 1998, the Company had debt outstanding of $74.1 million
consisting of primarily variable and fixed rate debt secured by
individual properties. In April 1998, the Company completed its
initial public offering and entered into the $80.0 million Revolving
Credit Facility, which has $26.0 million outstanding at June 30, 1998
and $54.0 million available to be drawn.
The Company believes that cash generated by operations will be
sufficient to fund the Company's operating strategy for the foreseeable
future, and that any remaining cash generated by operations, together
with capital available under the Revolving Credit Facility (subject to
the terms and covenants included therein) will be adequate to fund the
Company's growth strategy in the near term. Thereafter, the Company
expects that future capital needs, including property acquisitions,
will be met through a combination of net cash provided by operations,
borrowings and additional issuances of Common Stock or OP Units.
<PAGE>
SEASONALITY
-----------
The lodging industry is affected by normally recurring seasonal
patterns. At most Hotels, demand is higher in the late spring through
and early fall (May through October) than during the balance of the
year. Demand also changes on different days of the week, with Sunday
generally having the lowest occupancy. Accordingly, the Company's
revenue, operating profit and cash flow are lower during the first and
fourth calendar quarters and higher during the second and third
calendar quarters.
INFLATION
---------
The effect of inflation, as measured by fluctuations in the Consumer
Price Index, has not had a material impact on the Company's revenues or
net loss during the periods under review.
YEAR 2000
---------
The Company does not believe that the costs of converting its computer
systems to address the advent of the year 2000 will be material.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments for an Enterprise and Related Information
("SFAS 131"). This Statement requires public companies to report
selected segment information in their quarterly and annual reports
issued to shareholders, and entity wide disclosures about products and
services and major customers. The statement was adopted by the Company
on January 1, 1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement requires that comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the
change in equity of a business enterprise arising from non-owner
sources. This Statement was adopted by the Company on January 1, 1998.
<PAGE>
Part II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
In 1994, the Company was sued by the contractor who constructed one of
the Company's hotel properties asserting lack of payment of cost
overruns. The Company filed a counter claim for the recovery of
various damages. The Company obtained summary judgment for most of the
claims. As of June 30, 1998, the amount of claims against the Company
which have not been dismissed or are subject to appeal is $233,000,
plus interest. The Company's counter claims which have not been
dismissed are $419,000. Management believes that the ultimate
resolution of this matter will not have a material effect on the
Company's results of operations, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement for its initial public offering of
securities (File No. 333-44491) became effective on April 3, 1998.
Of the total net proceeds to the Company from the offering which are
estimated to be in the amount of $81.4 million, the following amounts
were used from the date of the offering through the date of this
report:
Amount
Category of Use of Use
---------------------------------------------------- ----------
Purchases of real estate $12.8 million
Repayment of indebtedness 68.6 million
None of the net proceeds to the Company of the offering was paid to
directors, officers, ten percent shareholders or affiliates of the
Company.
ITEMS 3, 4 and 5 of Part II are omitted from this report as they are
not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 12, 1998, the Company filed a Current Report on Form
8-K relating to The Olympus Hotel and Conference Center
(Olympus). On August 14, 1998, the Company filed an Amendment
No. 1 to said Report on Form 8-K/A to include the audited
financial statements of Olympus.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
CAVANAUGHS HOSPITALITY CORPORATION
(Registrant)
Date: August 14, 1998 By: /s/ Arthur M. Coffey
--------------------- -----------------------------------
Arthur M. Coffey, Executive Vice
President and Chief Financial
Officer
<PAGE>
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