<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998
REGISTRATION NO. 333-44491
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CAVANAUGHS HOSPITALITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 7011 91-1032187
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
201 W. NORTH RIVER DRIVE,
SUITE 100
SPOKANE, WASHINGTON 99201
(509) 459-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DONALD K. BARBIERI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAVANAUGHS HOSPITALITY CORPORATION
201 W. NORTH RIVER DRIVE, SUITE 100
SPOKANE, WASHINGTON 99201
(509) 459-6100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
BARRY LAWRENCE, ESQ. JAY L. BERNSTEIN, ESQ.
BRIAN HOYE, ESQ. ROGERS & WELLS LLP
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP 200 PARK AVENUE
1999 AVENUE OF THE STARS, SUITE 1600 NEW YORK, NEW YORK 10166
LOS ANGELES, CALIFORNIA 90067 (212) 878-8000
(310) 788-1000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]_________.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_________.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 10, 1998
5,175,000 SHARES
[LOGO OF CAVANAUGHS HOSPITALITY CORPORATION]
COMMON STOCK
-----------
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Cavanaughs
Hospitality Corporation (the "Company"). Prior to the Offering, there has been
no public market for the Common Stock of the Company. Upon completion of the
Offering, the Company's current shareholders as a group will own approximately
57.7% of the outstanding shares of Common Stock. As a result these shareholders
will be able to control all corporate matters of the Company that are subject
to shareholder approval, including the election of directors. The Company
anticipates that the initial public offering price per share will be between
$12.00 and $14.00. See "Underwriting" for a discussion of the factors that will
be considered in determining the initial public offering price. The Common
Stock has been approved for listing on the New York Stock Exchange (the "NYSE")
under the symbol "CVH," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATERIAL
RISKS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) The Company has granted an option to the Underwriters, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 776,250
additional shares of Common Stock for the purpose of covering over-
allotments, if any. If the Underwriters exercise such over-allotment option
in full, the total Price to Public, Underwriting Discounts and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered severally by the Underwriters when, as
and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the
shares of Common Stock will be made against payment on or about , 1998 at
the office of CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial
Center, New York, New York 10281.
-----------
CIBC OPPENHEIMER NATIONSBANC MONTGOMERY SECURITIES LLC
The date of this Prospectus is , 1998
<PAGE>
[ON THE INSIDE FRONT COVER OF THE PROSPECTUS IS A MAP OF CERTAIN STATES IN
THE NORTHWESTERN UNITED STATES HIGHLIGHTING VARIOUS CITIES AND, BELOW, THE
LOCATIONS WHERE THE COMPANY HAS PROPERTIES AND PROVIDES ENTERTAINMENT,
MANAGEMENT AND SERVICES.]
[ON THE INSIDE BACK COVER OF THE PROSPECTUS IS A COLLAGE REPRESENTING
FEATURES OF THE ENTERTAINMENT, MANAGEMENT AND SERVICES DIVISION AND PHOTOS OF
SOME OF THE COMPANY'S HOTELS, OFFICE AND RETAIL BUILDINGS]
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE
ITS MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
----------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF A PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE ADVISED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS
TO, THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the Combined Financial Statements and
notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, all references in this Prospectus to the "Company" include
Cavanaughs Hospitality Corporation, a Washington corporation, its subsidiaries,
including Cavanaughs Hospitality Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), and its predecessors. Unless
otherwise indicated, all information in this Prospectus (i) assumes an initial
public offering price of $13.00 per share (which is the midpoint of the range
set forth on the cover page of this Prospectus), (ii) gives retroactive effect
to the merger of Goodale and Barbieri Companies, the Company's predecessor, and
Barbieri Investment Company which occurred in November 1997 (the "Merger"),
whereby the Company was recapitalized and 7,072,025 shares of common stock, par
value $.01 per share (the "Common Stock"), were issued to the existing
shareholders and (iii) assumes that the Underwriters' over-allotment option is
not exercised. As used herein, the term "Northwest" includes the states of
Washington, Oregon, Idaho, Montana, Utah and Alaska, northern California and
the Canadian provinces of Alberta and British Columbia.
THE COMPANY
Cavanaughs Hospitality Corporation is a hotel operating company that owns,
operates, acquires, develops, renovates and repositions full service hotels in
the Northwest under its proprietary brand name, "Cavanaughs(TM)". The Company's
hotel portfolio contains 11 full service hotels (the "Hotels"), with 2,369
guest rooms and approximately 120,000 square feet of meeting space, located in
Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and Post Falls,
Idaho; and Kalispell, Montana. The Company plans to pursue additional growth
opportunities by continuing to acquire and develop full service hotels in the
Northwest. The Company has entered into purchase agreements to acquire two
additional full service hotels, containing 343 guest rooms and approximately
14,500 square feet of meeting space, located in Kalispell, Montana and
Portland, Oregon for an aggregate purchase price of approximately $15.5
million. Substantially all of the Company's assets, including the Hotels, are
owned by the Operating Partnership, the day to day operations of which are
managed by the Company in its capacity as sole general partner. With more than
20 years of experience in the lodging industry, management believes the Company
enjoys an excellent reputation in, and its Cavanaughs brand name is well
recognized throughout, the Northwest. The Company also provides entertainment
services, including event ticketing and theatrical presentations and other
special events, and property management services for third parties and owns and
manages retail and office properties.
The Company is seeking to become the dominant full service hotel company in
the Northwest by providing customers with access to a Cavanaughs brand hotel in
multiple locations throughout the region. As a result of consolidation among
hotel chains, the Company believes there is an absence of a dominant Northwest
based, regionally focused hotel company. The Company's growth strategy focuses
on: (i) the acquisition and re-branding of full service hotels with the
Cavanaughs name, (ii) the acquisition, conversion and redevelopment of non-
hotel properties into Cavanaughs brand hotels, (iii) the construction of new
Cavanaughs hotels and (iv) the expansion of existing Cavanaughs Hotels.
The Company's operating strategy is designed to enhance its revenue and
operating margins by increasing revenue per available room ("REVPAR"), average
daily rates ("ADR"), occupancy and operating efficiencies at the Hotels. This
strategy includes: (i) building brand name recognition by maintaining its
strategic focus on the Northwest; (ii) promoting a coordinated marketing
program utilizing corporate level sales and marketing departments in
conjunction with local hotel-based sales and marketing personnel; (iii)
controlling operating expenses and achieving cost reductions through operating
efficiencies and economies of scale; (iv) enhancing guest satisfaction and
loyalty by providing high quality service; (v) utilizing the Company's yield
management
3
<PAGE>
and proprietary management information systems to enable the general managers
of each Hotel to optimize REVPAR, ADR, occupancy and net income; (vi)
maintaining a consistent level of quality at the Hotels through its maintenance
and capital expenditure programs; (vii) emphasizing the quality of the
Company's food and beverage services to attract convention, group and special
event business and to create local awareness of the Hotels; (viii) providing
valuable guest benefit programs that promote customer loyalty, such as frequent
flier mileage and repeat guest programs; and (ix) attracting and retaining
qualified employees by providing on going training and stock incentive programs
at all levels of employment to enhance productivity and align the efforts of
employees with the Company's objectives. For the fiscal year ended October 31,
1997, the Company's revenues were $52.0 million, operating income was $10.6
million, net income was $1.7 million, REVPAR was $45.72 and ADR was $73.43. On
a pro forma basis, giving effect to the three Hotels acquired since October 31,
1997, the two hotels under contract to be acquired and the Offering, for the
year ended October 31, 1997, the Company's revenues were $77.4 million,
operating income was $14.5 million, net income was $6.0 million, REVPAR was
$41.21 and ADR was $68.94.
The Company has received a commitment from U.S. Bank to provide, upon
consummation of the Offering, up to $80.0 million under a revolving credit
facility (the "Revolving Credit Facility") which will be used by the Company to
finance property acquisitions, development and capital improvements and for
general corporate purposes. As an alternative to debt financing, the Company
may issue shares of Common Stock or units of limited partner interest in the
Operating Partnership ("OP Units") as consideration in future hotel
acquisitions. The issuance of OP Units in exchange for hotels may allow the
current owners of such hotels to achieve certain tax advantages when selling
such hotels to the Company.
In addition to the Hotels, the Company operates two other divisions: (i)
entertainment, management and services and (ii) rental operations. The
entertainment, management and services division includes computerized event
ticketing through G&B Select-a-Seat, which was founded in 1987 and processed in
excess of 2.0 million tickets in 1997, and the presentation of shows and
special events through G&B Presents, which was also founded in 1987 and has
presented over 79 Broadway theatrical presentations and special events in the
last ten years. These services generate income from ticket sales and handling
fees as well as additional room occupancy at the Hotels. The entertainment,
management and services division is supported by the same Company-operated
toll-free call center (the "Toll-Free Call Center") used for hotel
reservations. The Company's rental operations division includes ownership of
three office properties and one retail property containing in excess of 590,000
square feet of leasable space, the majority of which are located near the
Hotels, and third-party management of more than 3.1 million square feet of
retail and office properties and approximately 2,200 residential units in the
Northwest.
The Company, which was formerly known as Goodale and Barbieri Companies, has
been a family-owned enterprise since it was founded in 1937. Between 1937 and
1976, the Company focused on third-party property management services and real
estate development in Spokane, Washington. The Company's history of owning and
operating hotels commenced in 1976 when it constructed the River Inn in
Spokane. In 1980, the Company established its proprietary Cavanaughs brand
name. After changing its name in October 1997 to Cavanaughs Hospitality
Corporation, the Company merged with Barbieri Investment Company, an affiliated
Washington corporation ("BIC"), effective November 3, 1997. In connection with
its merger with BIC, the Company contributed certain assets not related to its
core hospitality business, including, among other things, a long-term residence
inn and a milk processing and distribution business, to a wholly-owned
subsidiary and distributed the capital stock of such subsidiary, as well as the
capital stock of another wholly-owned subsidiary owning recreation real estate
in Priest Lake, Idaho and a retail sales operation, to the shareholders of the
Company. Shortly thereafter, the Company contributed substantially all of its
assets to the Operating Partnership in exchange for general and limited partner
interests therein. The Company is the sole general partner of the Operating
Partnership and owns a controlling 98.8% interest therein. All of the Hotels
and the other assets of the Company are held by or for the benefit of, and
substantially all of the Company's operations are conducted through, the
Operating Partnership.
4
<PAGE>
Since 1968 when Donald Barbieri, the Company's Chairman, President and Chief
Executive Officer, joined the Company, the Company has grown from five
employees to approximately 1,900 employees. The Company's principal executive
offices are located at 201 W. North River Drive, Suite 100, Spokane, Washington
99201 and its telephone number is (509) 459-6100. The Company's website address
is www.cavanaughs.com.
INDUSTRY OVERVIEW
The domestic lodging industry completed its third year of record
profitability in 1996, during which time it produced record income of $12.5
billion. Coopers & Lybrand L.L.P.'s Hospitality Directions (November 1997)
("Coopers & Lybrand Hospitality Directions") estimates that the industry is
expected to again achieve record profitability in 1997. Coopers & Lybrand
Hospitality Directions indicates that average U.S. hotel occupancy reached
65.1% in 1996, its highest level in 13 years. U.S. hotel occupancy is expected
to decline slightly in 1997 to 64.5% due to supply growth exceeding demand
growth. High occupancy during 1995 to 1997 has provided hotel operators with
the ability to support increases in ADR without affecting occupancy
percentages. Sustained ADR growth has contributed to total lodging industry
revenue growth which was 8.6% in 1996 and is expected to be 8.5% in 1997.
The following table reflects the percentage changes in REVPAR, ADR and
occupancy for the twelve months ended October 31, 1996 and 1997, compared to
the same periods in 1995 and 1996, respectively, for (i) the Hotels that were
open for each of the periods presented, (ii) U.S. full service hotels and
(iii) all U.S. hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
-----------------------------------------------
REVPAR(1) ADR OCCUPANCY
-------------- -------------- ---------------
1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotels(2).... 8.3% 8.8% 9.3% 9.1% (1.5)% (1.6)%
U.S. Full Service Ho-
tels(3)................ 8.4% 7.8% 7.4% 7.8% 0.8 % 0.1 %
U.S. Hotels(3)(4)....... 6.4% 5.4% 6.4% 6.4% (0.1)% (0.9)%
</TABLE>
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(1) Determined by dividing annual room revenue by annual available rooms.
(2) Occupancy as a percentage of available rooms declined slightly, primarily
because of the addition of new rooms associated with the opening of
Cavanaughs on Fifth Avenue, which management believes has not reached
stabilized occupancy.
(3) Source: Smith Travel Research.
(4) Includes both full service and limited service hotels.
Lodging room demand has historically tracked the national economy. In 1997,
the U.S. economy's ongoing expansion has been marked by low inflation and
unemployment and, in the northwest states of Idaho, Oregon and Washington,
employment and population growth has been above national averages. According to
U.S. Bank's Economic Update (October 1997), for the twelve months ended July
1997 the metropolitan areas of Seattle, Washington and Portland, Oregon were
the second and fourth fastest growing metropolitan economies in the nation,
respectively. In addition, according to the 1998 U.S. Bank Regional Economic
Review and Forecast, Utah, Washington and Oregon were the second, fifth and
eighth most rapidly growing states in the nation, respectively. The western
region of the United States is expected to continue to outpace the nation in
employment income and population growth through the year 2000, according to the
Oregon Economic Review and Forecast (December 1997).
5
<PAGE>
HOTEL PROPERTIES
The Company's hotel portfolio currently contains 11 full service Hotels, with
2,369 guest rooms and approximately 120,000 square feet of meeting space,
located in the Northwest. In addition, the Company has entered into purchase
agreements to acquire two additional full service hotels. The following table
sets forth certain information regarding the Company's hotel portfolio and
hotels under contract.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
MEETING ---------------------------------
YEAR BUILT/ YEAR GUEST SPACE AVERAGE
LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY
--------------- ----------- --------- ----- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HOTELS OWNED AS OF OCTO-
BER 31, 1997:
Cavanaughs on Fifth Ave-
nue.................... Seattle, WA 1996 1996 297 12,500 $ 73.55 $ 116.24 64.9%
Cavanaughs Inn at the
Park................... Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1
Cavanaughs River Inn.... Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2
Cavanaughs Fourth Ave-
nue.................... Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7
Cavanaughs at Yakima
Center................. Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3
Cavanaughs Gateway Ho-
tel.................... Yakima, WA 1997(1) 1997 172 8,000 34.16 58.96 57.9
Cavanaughs at Columbia
Center................. Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9
Cavanaughs at Kalispell
Center................. Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2
----- ------- --------- ---------- -------
Total/Weighted Average
for Owned Hotels
(2)(3)................ 1,718 84,300 $ 45.72 $ 73.43 63.5%
HOTELS ACQUIRED SINCE
OCTOBER 31, 1997:
Cavanaughs Ridpath Ho-
tel.................... Spokane, WA 1998(4) 1996 342 16,000 $ 33.49 $ 58.43 57.3%
Cavanaughs on the
Falls.................. Idaho Falls, ID 1998(5) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins Re-
sort................... Post Falls, ID 1998(6) 1996 167 11,000 36.45 62.65 58.2
HOTELS CURRENTLY UNDER
CONTRACT:
Cavanaughs Outlaw Ho-
tel.................... Kalispell, MT 1998(7) 1995 220 11,000 $ 29.88 $ 68.88 43.4%
Cavanaughs Hillsboro Ho-
tel.................... Portland, OR 1998(8) 1997 123 3,500 50.13 72.38 69.3
----- ------- --------- ---------- -------
Total/Weighted Average
for Hotels Acquired or
Under Contract Since
October 31, 1997...... 994 50,300 $ 35.40 $ 62.99 56.2%
Total/Weighted Average
for All Hotels
(2)(3)................ 2,712 134,600 $ 41.21 $ 68.94 59.8%
</TABLE>
- --------
(1) Leased by the Company effective October 15, 1997. See "Business and
Properties--Hotel Properties."
(2) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material impact
on REVPAR and average occupancy percentage.
(3) The total/weighted average for owned Hotels includes REVPAR, ADR and
average occupancy of Cavanaughs Gateway Hotel for the period from October
15, 1997 through October 31, 1997.
(4) Leased by the Company effective January 1, 1998. See "Business and
Properties--Hotel Properties."
(5) Acquired by the Company on January 7, 1998.
(6) Acquired by the Company on February 2, 1998.
(7) The Company has entered into a purchase agreement dated November 19, 1997
to acquire this hotel, subject to the satisfaction of normal closing
conditions, for a purchase price of $9.8 million within 60 days of the
closing of the Offering. This hotel, which is currently known as the Outlaw
Inn, will be re-branded as the "Cavanaughs Outlaw Hotel" upon acquisition.
(8) The Company has entered into a purchase agreement dated January 14, 1998
pursuant to which it intends to acquire this hotel, subject to the
satisfaction of normal closing conditions, for a purchase price of $5.7
million on April 1, 1998. This hotel, currently known as the Hallmark Inn,
will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition.
6
<PAGE>
STRUCTURE OF THE COMPANY
The Company is the sole general partner of the Operating Partnership and the
Company, North River Drive Company, the Barbieri Family Foundation, Donald
Barbieri, Thomas Barbieri and Richard Barbieri are currently the limited
partners of the Operating Partnership. The Company will conduct substantially
all of its business, and will hold substantially all of the Hotels and other
assets, through the Operating Partnership. As sole general partner of the
Operating Partnership, the Company has exclusive power to manage and conduct
the operations of the Operating Partnership. Subject to certain holding period
requirements, OP Units will be exchangeable, at the option of the holders
thereof, for cash in an amount equal to the market value of an equivalent
number of shares of Common Stock. The Company has the right, however, if OP
Units are presented for exchange, to deliver to the holder of such OP Units, in
lieu of cash, shares of Common Stock, on a one-for-one basis (subject to
adjustment in the event of stock splits, stock dividends, combinations and
reorganizations). As general partner of the Operating Partnership, whenever the
Company shall issue shares of capital stock, such as in the Offering, the
Company will contribute the net proceeds therefrom to the Operating Partnership
and the Operating Partnership will issue to the Company an equivalent number of
OP Units with rights corresponding to the shares of capital stock issued by the
Company. See "Partnership Agreement of the Operating Partnership." In addition
to the Operating Partnership, the Company holds a 50% general partner interest
in Cowley Street Limited Partnership, a Washington limited partnership which
owns Cavanaughs Fourth Avenue. Each of G&B Select-a-Seat, G&B Presents and G&B
Real Estate Services are fictitious business names of the Company and operate
within the Company's entertainment, management and services division which will
continue to be operated by the Company following the Offering for the benefit
of the Operating Partnership.
The following diagram depicts the ownership structure of the Company upon
completion of the Offering:
[CHART APPEARS HERE]
7
<PAGE>
THE OFFERING
Common Stock Offered by the
Company.................... 5,175,000 shares
Common Stock Outstanding
after the Offering......... 12,270,253 shares(1)
Use of Proceeds............. The Company expects to use the net proceeds of
the Offering to repay certain indebtedness,
including indebtedness incurred with respect to
certain acquisitions. See "Use of Proceeds."
Proposed NYSE symbol........ "CVH"
- --------
(1) Includes 7,084,253 restricted shares owned by David Barbieri, Donald
Barbieri, Kathryn Barbieri, Mark Barbieri, Richard Barbieri, Stephen
Barbieri, Thomas Barbieri, David Bell and certain family trusts
(collectively, the "Barbieri Family") and an aggregate of 11,000 restricted
shares to be issued to five of the Company's employees concurrently with
the Offering. See "Management--Restricted Stock and Certain Stock Option
Grants." Excludes 150,817 shares issuable upon exchange of currently
outstanding OP Units, which OP Units may not be exchanged by the holders
thereof for one year from the date of this Prospectus. See "Partnership
Agreement of the Operating Partnership." Excludes 1,489,000 shares reserved
for issuance with respect to options or stock awards to be granted under
the Company's 1998 Stock Incentive Plan (the "1998 Plan") and Employee
Stock Purchase Plan (the "Employee Stock Purchase Plan" and, together with
the 1998 Plan, the "Plans"). See "Management."
8
<PAGE>
SUMMARY COMBINED FINANCIAL AND OTHER DATA
The following table sets forth summary combined financial data of the Company
as of and for the five years ended October 31, 1997 and the two months ended
December 31, 1996 and 1997. The summary combined statement of operations data
for the fiscal years ended October 31, 1993 and 1994 and the two months ended
December 31, 1996 and the summary combined balance sheet data as of October 31,
1993, 1994 and 1995 and December 31, 1996 are derived from the Company's
unaudited financial statements and reflect all normal recurring adjustments,
which in the opinion of management, are necessary for a fair presentation. The
summary combined statement of operations data for the fiscal years ended
October 31, 1995, 1996 and 1997 and the two months ended December 31, 1997 and
the summary combined balance sheet data as of October 31, 1996 and 1997 and
December 31, 1997 are derived from the Company's audited financial statements
included elsewhere in this Prospectus. The pro forma combined statement of
operations data and balance sheet data as of and for the year ended October 31,
1997 are unaudited and are derived from the pro forma financial statements
included elsewhere in this Prospectus as adjusted for the Offering.
The summary combined financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Historical
Combined Financial Statements and related notes, Pro Forma Combined Financial
Statements and related notes, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
---------------------------------------------------------- ------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Hotels and restau-
rants................. $ 28,417 $ 30,573 $ 31,244 $ 35,205 $ 41,662 $ 67,001 $ 5,683 $ 6,829
Entertainment, manage-
ment and services..... 4,468 3,205 3,092 3,168 3,842 3,842 483 840
Rental operations...... 4,572 4,987 6,027 6,790 6,539 6,539 1,191 1,169
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues........ 37,457 38,765 40,363 45,163 52,043 77,382 7,357 8,838
-------- -------- -------- -------- -------- -------- -------- --------
Operating income(3).... 8,528 8,165 7,978 8,914 10,635 14,478 924 1,343
Interest expense....... 5,301 5,649 6,866 7,319 8,817 6,050 1,317 1,422
Income (loss) before
taxes and extraordi-
nary item(3).......... 3,364 2,765 1,583 1,905 2,641 9,141 (274) --
Income taxes........... 1,254 574 542 730 932 3,153 (104) (6)
Extraordinary item..... 191 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)
(3)(4)................ $ 2,301 $ 2,191 $ 1,041 $ 1,175 $ 1,709 $ 5,988 $ (170) $ 6
Pro forma net income
per share(5).......... -- -- -- -- $ 0.24 $ 0.49 -- --
Shares used in the pro
forma per share
calculation(5)........ -- -- -- -- 7,072 12,270 -- --
Net income per share--
basic and diluted..... -- -- -- -- -- -- -- --
Weighted average shares
outstanding........... -- -- -- -- -- -- -- 7,072
BALANCE SHEET DATA:
Total assets........... $ 80,220 $ 86,924 $107,042 $120,087 $124,104 $157,914 $119,941 $125,117
Long-term debt and
capital leases
excluding current
maturities............ 57,100 66,755 77,636 88,799 96,026 70,852 88,769 96,558
Stockholders'
equity(6)............. 5,318 5,055 8,791 9,613 8,526 69,743 9,089 8,532
OTHER DATA:
EBITDA(3)(7)........... $ 11,469 $ 11,763 $ 11,845 $ 13,575 $ 16,174 $ 21,020 $ 1,788 $ 2,191
EBITDA as a percentage
of revenues........... 30.6% 30.3% 29.4% 30.1% 31.1% 27.1% 24.3% 24.8%
Net cash provided by
operating
activities(8)......... -- -- 3,586 5,200 6,610 6,610 287 1,094
Net cash used in
investing
activities(8)......... -- -- (24,428) (13,184) (6,268) (6,268) (1,523) (3,294)
Net cash provided by
(used in) financing
activities(8)......... -- -- 19,178 9,258 (1,102) (1,102) (261) 715
HOTEL STATISTICS:
Hotels open (at end of
period)............... 6 6 6 7 8 13 7 8
Available rooms (at end
of period)............ 1,242 1,242 1,242 1,539 1,718 2,712 1,539 1,718
REVPAR(9)(10).......... $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 41.21 $ 31.93 $ 36.11
ADR(11)................ $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 68.94 $ 64.88 $ 71.22
Average occupancy
percentage(10)(12).... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8% 50.7% 51.8%
</TABLE>
9
<PAGE>
- --------
(1) The summary combined financial and other data has been presented as though
(i) the predecessor businesses of Cavanaughs Hospitality Corporation,
Barbieri Investment Company, G&B: Lincoln Building partnership and their
respective subsidiaries and partnerships which they controlled had been
combined as of October 31, 1993, 1994, 1995, 1996 and 1997 and (ii) the
spin-off of certain subsidiaries engaged in businesses not related to the
core hospitality business of the Company had occurred as of October 31,
1993, 1994, 1995, 1996 and 1997.
(2) Pro forma results reflect the historical financial and other data as of
October 31, 1997 after reflecting (i) the Merger which occurred in
November 1997, (ii) the acquisitions which occurred or are probable of
occurring as of March 10, 1998 as if they occurred on November 1, 1996 for
purposes of the statement of income and as of October 31, 1997 for
purposes of the balance sheet, and (iii) the Offering and the application
of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(3) Operating income, income (loss) before taxes and extraordinary item, net
income (loss) and EBITDA reflect a nonrecurring charge of $422,000 related
to final settlement of litigation in 1997.
(4) The Company expects to incur prepayment penalties of $139,000 and to
write-off $680,000 of deferred loan fees in connection with the repayment
of indebtedness out of the proceeds of the Offering. These non-recurring
charges, which total $541,000, net of income taxes, are expected to be
charged to operations upon repayment. Such costs have not been included in
the pro forma statement of operations data for the year ended October 31,
1997.
(5) Due to the Merger in November 1997, the historical earnings per share is
not relevant or meaningful. Therefore, pro forma earnings per share for
the year ended October 31, 1997 has been presented based upon the number
of shares of Common Stock of the Company which were outstanding after the
Merger. The pro forma net income per share for the pro forma year ended
October 31, 1997 excludes non-recurring charges of $541,000, net of income
taxes, related to the payment of prepayment penalties and the write-off of
deferred loan fees related to indebtedness which is being repaid out of
the proceeds of the Offering.
(6) Changes in stockholders' equity between fiscal years reflect (i) net
income (loss), (ii) cash dividends and (iii) distributions to or
contributions from shareholders for the activities related to the
subsidiaries, investments or divisions which have been excluded from the
combined financial statements. See Note 1 to the Historical Combined
Financial Statements.
(7) EBITDA represents income before income taxes and extraordinary item,
interest expense, depreciation, amortization and minority interests.
EBITDA is not intended to represent cash flow from operations as defined
by generally accepted accounting principles and such information should
not be considered as an alternative to net income, cash flow from
operations or any other measure of performance prescribed by generally
accepted accounting principles. While not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be
comparable to similarly titled measures of other companies, EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the Company's ability to service debt.
EBITDA is not necessarily available for management's discretionary use due
to restrictions to be included in the Revolving Credit Facility and other
considerations.
(8) Cash flows from operating, investing and financing activities have not
been provided for the years ended October 31, 1993 and 1994. Due to the
mergers of the companies and partnerships described in Note 1 to the
Historical Combined Financial Statements, in the opinion of management,
the cost of preparing this information outweighs the benefit of providing
the data.
(9) REVPAR represents the total revenues divided by total available rooms, net
of rooms out of service due to significant renovations.
(10) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(11) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(12) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported period.
10
<PAGE>
RISK FACTORS
An investment in the Common Stock of the Company involves various risks.
Prospective investors should carefully consider the following risk factors in
conjunction with other information contained in this Prospectus before making
a decision to purchase Common Stock in the Offering.
Operating Risks in the Lodging Industry. The Company's business is subject
to the operating risks inherent in the lodging industry. These risks include
adverse changes in national or local economic conditions, overbuilding in the
lodging industry or a reduction in demand for hotel rooms and related services
in the Northwest generally and, in particular, the markets where the Hotels
are concentrated, competition from other hotels, changes in travel patterns,
extreme weather conditions, cancellation of, or changes in, events scheduled
to occur in the Company's markets, changes in governmental regulations which
influence or determine wages, prices or construction costs, changes in
interest rates, the availability of financing for operating or capital needs
and changes in real estate tax rates and other operating expenses. Further,
the Hotels are located in the Northwest where a number of major industries,
including agriculture, tourism, technology, timber and aerospace, are
concentrated. These industries may be affected by changes in governmental
regulations and economic conditions, such as the relative strength of national
and local economies, the rate of national and local unemployment and the rate
of inflation, all of which could materially affect the local economies in
which these industries and the Company operate. There is no assurance that
downturns or prolonged adverse conditions in these industries or in national
or local economies will not have a material adverse impact on the Company's
results of operations.
Competition in the Lodging Industry. The lodging industry is highly
competitive. The Company competes with other national limited and full service
hotel companies, as well as with various regional and local hotels. Many of
the Company's competitors have a larger network of locations and greater
financial resources than the Company. Competition in the United States lodging
industry is based generally on brand name recognition, convenience of
location, price, range of services and guest amenities offered, quality of
customer service and overall product. Demographic or other changes in one or
more of the Company's markets could impact the convenience or desirability of
the sites of certain of the Hotels which would adversely affect the operations
of those Hotels. Further, there can be no assurance that new or existing
competitors will not offer significantly lower rates or greater convenience,
services or amenities or significantly expand or improve facilities in a
market in which the Hotels compete, thereby adversely affecting the Company's
operations.
Geographic Concentration. Because all of the Hotels currently are located in
the Northwest, the Company's results of operations and financial condition are
dependent on the economy of the Northwest. To the extent that general economic
or other relevant conditions in the Northwest decline and result in a decrease
in consumer demand in this region, the Company's performance and results of
operations will be adversely affected. In addition, the Company owns, or has
under contract, multiple hotels in the cities of Spokane and Yakima,
Washington and Kalispell, Montana. A downturn in general economic or other
relevant conditions in these specific markets or in any other market in which
the Company operates could adversely impact the Company's results of
operations and financial condition.
Constraints on Growth Opportunities. The Company intends to continue to
pursue an aggressive growth strategy for the foreseeable future. Since
December 1996, the Company has acquired four Hotels and has entered into
agreements to acquire two additional hotels. The Company's ability to
successfully pursue new growth opportunities will depend on a number of
factors, including, among others, the Company's ability to identify suitable
hotels for acquisition or development, to finance acquisitions and renovations
and to successfully integrate new hotels into its operations. There is no
assurance that suitable hotels for acquisition or development will be
available or, if available, will be on terms acceptable to the Company or that
capital will be available on terms acceptable to the Company. While the
Company believes that it will have sufficient capital following the Offering
to fund its growth strategy in the near term, this belief is based on adequate
cash being generated from operations and the availability of the Revolving
Credit Facility. There is no assurance that the Company will generate adequate
cash from operations or that the Company will ultimately be successful in
obtaining the Revolving Credit Facility. Even if the Company generates
anticipated cash from operations and obtains the
11
<PAGE>
Revolving Credit Facility, the Company may seek to obtain additional debt or
equity financing, depending upon the amount of capital required to pursue
future growth opportunities or address other liquidity needs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Integration of New Hotels. There is no assurance that the Company will be
able to successfully integrate new hotels or new hotel products into its
operations, that new hotels or new hotel products will achieve revenue and
profitability levels comparable to the Hotels or that the combined business
will be profitable. Newly acquired, developed or converted hotels typically
begin with lower occupancy and room rates. Furthermore, the Company's
expansion within its existing markets could adversely affect the financial
performance of the Hotels in such markets or the Company's overall results of
operations. Expansion into new markets may present operating and marketing
challenges that are different from those currently encountered by the Company
in its existing markets. There is no assurance that the Company will be able
to anticipate all of the changing demands that expanding operations will
impose on its management and management information and reservation systems,
and the failure to adapt its systems and procedures could have a material
adverse effect on the Company's business.
Competition for Growth Opportunities. The Company intends to pursue a full
range of growth opportunities, including acquisitions and new construction.
The Company competes for growth opportunities with national and regional
hospitality companies, some of which have greater name recognition, marketing
support, reservation system capacity and financial resources than the Company.
The Company's ability to make acquisitions is dependent upon the Company's
relationships with owners of existing hotels and certain major hotel
investors. The Company's failure to compete successfully for acquisitions or
to attract or maintain relationships with hotel owners and major hotel
investors could adversely affect the Company's ability to expand its portfolio
of hotels. The Company's inability to implement its external growth strategy
would limit its ability to grow its revenue base.
Acquisition, Development and Redevelopment Risks. The Company intends to
acquire additional hotels in the future. Acquisitions entail the risk that
investments will fail to perform in accordance with the Company's
expectations. The Company also intends to continue the redevelopment and re-
branding of other acquired hotels into "Cavanaughs" hotels. In addition, the
Company expects to develop new hotels in the future, depending on market
conditions. Hotel redevelopment and new project development is subject to a
number of risks, including, without limitation, risks of construction delays
or cost overruns, risks that the hotels will not achieve anticipated
performance levels and new project commencement risks such as receipt of
zoning, occupancy and other required governmental permits and authorizations.
These and other risks could result in the incurrence of substantial costs for
a project that is never completed. There is no assurance that financing for
these projects will be available or, if available, will be on terms acceptable
to the Company. In addition, the renovation of the Hotels is subject to a
number of risks, including, without limitation, construction delays or cost
overruns due to various factors. Any unanticipated delays or expenses in
connection with the renovation of the Hotels could have an adverse effect on
the results of operations and financial condition of the Company.
Real Estate Ownership Risks. Upon closing of the Offering, the Company's
portfolio will contain 15 properties, including the 11 Hotels, three office
properties and one retail property. Accordingly, the Company is subject to
varying degrees of risk generally related to owning real estate. These risks,
many of which are beyond the control of the Company, include, among others,
changes in national, regional and local economic conditions, local real estate
market conditions, changes in interest rates, the availability, cost and terms
of financing, lease obligations, the potential for uninsured casualty and
other losses, the impact of present or future environmental legislation and
compliance with environmental laws, and adverse changes in zoning laws and
other regulations. In addition, real estate investments are relatively
illiquid; therefore the ability of the Company to vary its portfolio in
response to changes in economic and other conditions may be limited.
Control By Principal Shareholders. Upon completion of the Offering, members
of the Barbieri Family will beneficially own, in the aggregate, 57.7% of the
outstanding shares of Common Stock. Donald Barbieri,
12
<PAGE>
Chairman, President and Chief Executive Officer of the Company, will have sole
voting and investment power with respect to 21.5% of the outstanding shares of
Common Stock. So long as the Barbieri Family owns a substantial portion of the
outstanding Common Stock, it will have the ability to control the management
and affairs of the Company and will have the power to approve or block most
actions requiring the approval of the shareholders of the Company, including
the sale of all the assets of the Company. See "Ownership of Common Stock."
Environmental Matters. The Company's operating costs may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of compliance with future
legislation. Under current federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. In addition, the
presence of contamination from hazardous or toxic substances, or the failure
to remediate such contaminated property properly, may adversely affect the
ability of the owner of the property to borrow using such property as
collateral for a loan or to sell such property. Environmental laws also may
impose restrictions on the manner in which a property may be used or
transferred or in which businesses may be operated, and may impose remedial or
compliance costs. The costs of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could materially adversely affect the Company's results of operations and
financial condition.
In connection with the Company's acquisition of a property, a Phase I
environmental assessment is conducted by a qualified independent environmental
engineer. Phase I environmental assessments have been performed on all of the
Company's properties and it is expected that all future hotel acquisitions
will be subject to a Phase I environmental assessment. A Phase I environmental
assessment involves researching historical usages of a property, databases
containing registered underground storage tanks and other matters, including
an on-site inspection, to determine whether an environmental issue exists with
respect to the property which needs to be addressed. If the results of a Phase
I environmental assessment reveal potential issues, a Phase II environmental
assessment, which may include soil testing, ground water monitoring or borings
to locate underground storage tanks, may, depending upon the circumstances, be
ordered for further evaluation.
A Phase I environmental assessment conducted with respect to the Kalispell
Center Mall has revealed a potential environmental concern. Specifically, the
report determined that underground storage tanks ("USTs") had been located on
the site prior to both the acquisition of the land in 1984 and the
construction of the mall in 1985 and due to lack of documentation regarding
their removal, there exists a possibility that USTs may still exist on the
site and that soils and/or groundwater below the site could have been
contaminated due to leakage. While the Phase I assessment recommended further
analysis, the Company has determined that such action is unwarranted at this
time. The Company determined that further investigation was not warranted
because the environmental survey revealed no evidence of any contamination,
the inaccessibility of the land under the mall and its adjacent parking lots
and the high probability that any existing USTs would have been located and
removed during the extensive site excavation work which was performed for
utilities and building foundations during the facility's construction in 1985.
Based on the information provided by the Phase I environmental assessments,
the Company is not aware of any environmental liability or compliance concern
at the properties that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity.
It is possible that Phase I environmental assessments will not reveal all
environmental liabilities or compliance concerns or that there will be
material environmental liabilities or compliance concerns of which the Company
will not be aware. While the Company has not been notified by any governmental
authority and has no other knowledge of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
substances in connection with any of its properties, no assurances can be
given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Company's existing and future properties will not be affected by the
condition of
13
<PAGE>
neighboring properties (such as the presence of leaking USTs) or by third
parties (whether neighbors such as dry cleaners or others) unrelated to the
Company.
Regulatory Risks. The lodging industry is subject to numerous federal, state
and local government regulations, including building and zoning requirements.
Also, the Company is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working conditions
and work permit requirements. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees, could adversely affect
the Company. Under the Americans with Disabilities Act of 1990 (the "ADA"),
all public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. Although the Company believes
it is in compliance with the ADA, there is no assurance that a material ADA
claim will not be asserted against the Company.
Seasonal Fluctuations in the Company's Operating Results. The lodging
industry is seasonal in nature, with the months from May through October
generally accounting for a greater portion of annual revenues than the months
from November through April. For example, for the year ended December 31,
1997, the Company's revenues in the first through fourth quarters were 19.7%,
25.7%, 29.1% and 25.5%, respectively, of its total revenue for such year and
the Company's net income (loss) for the first through fourth quarters was
(17.4)%, 43.5%, 81.7% and (7.8)%, respectively, of its total net income for
such year. Quarterly earnings also may be adversely affected by events beyond
the Company's control such as extreme weather conditions, economic factors and
other considerations affecting travel. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality."
Dependence on Senior Management. The Company will place substantial reliance
on the lodging industry experience and the continued availability of its
senior management led by Donald Barbieri, Chairman, President and Chief
Executive Officer, Arthur Coffey, Executive Vice President and Chief Financial
Officer, Richard Barbieri, Senior Vice President and General Counsel, Thomas
Barbieri, Senior Vice President-Acquisitions and Commercial Operations, and
David Bell, Senior Vice President-Project Design, Development and
Construction. The Company believes that its future success and its ability to
manage future growth depend in large part upon the efforts of the senior
management and on the Company's ability to attract and retain other highly
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company intends to enter into employment
agreements with Donald Barbieri, Arthur Coffey, Richard Barbieri, Thomas
Barbieri and David Bell for terms which expire on December 31, 1999. See
"Management--Employment Agreements." The Company does not carry key man
insurance on any of its senior management.
Rental Income Risks. The Company owns approximately 590,000 square feet of
office and retail space in Spokane, Washington and Kalispell, Montana. The
Company will be subject to the risk that upon expiration, leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than
current lease terms. There is no assurance that the Company will be able to
locate tenants for rental spaces vacated in the future or receive satisfactory
rents from tenants. Delays or difficulties in attracting tenants and costs
incurred by the Company in preparing for tenants could reduce cash flow,
decrease the value of a property or jeopardize the Company's ability to pay
its expenses. Vacancies could subsequently result due to termination of a
tenant's tenancy, the tenant's financial failure or a breach of the tenant's
obligations.
Risks Associated with Termination of Management and Leasing Contracts. The
Company expects to continue to manage and lease properties owned by third
parties. For the year ended December 31, 1997, revenue from management and
third-party leasing was $1.4 million and $0.3 million, respectively. Risks
associated with these activities include the risk that the related contracts
(which are typically cancelable upon 30-days' notice or upon certain events,
including sale of the property) will be terminated by the property owner or
will be lost in connection with a sale of such property, that contracts may
not be renewed upon expiration or may not be renewed on terms consistent with
current terms and that the rental revenues upon which management and leasing
fees are based will decline as a result of general real estate market
conditions or specific market factors affecting properties managed or leased
by the Company, resulting in decreased management or leasing fee income.
14
<PAGE>
Risk Associated with Entertainment, Management and Services Division. The
Company's entertainment services include computerized event ticketing and the
presentation of touring Broadway shows. In addition, the Company attracts
additional hotel guests through cross-selling the products of its
entertainment, management and services division. This division is vulnerable
to risks associated with changes in general regional and economic conditions,
the potential for significant competition and a change in consumer trends,
among others. In addition, there is no assurance that Broadway shows will
continue to tour the Northwest or that such productions will use the Company
as a promoter.
Certain Types of Losses May Exceed Insurance Coverage. The Company carries
comprehensive liability, public area liability, fire, flood, boiler and
machinery, extended coverage and rental loss insurance covering its
properties. There are, however, certain types of losses that are not generally
insured because it is not economically feasible to insure against such losses.
Should an uninsured loss or a loss in excess of insured limits occur with
respect to any particular property, the Company could lose its capital
invested in the property, as well as the anticipated future revenue from the
property and, in the case of debt which is with recourse to the Company, would
remain obligated for any mortgage debt or other financial obligations related
to the property. Although the Company believes that its properties are
adequately insured, any such loss would adversely affect the Company. There is
no assurance that material losses in excess of insurance proceeds will not
occur in the future.
Risk of Debt Financing; No Limit on Indebtedness. As described under "Use of
Proceeds," the Company will use all of the net proceeds of the Offering to
repay a portion of its outstanding indebtedness. After giving effect to such
repayment and the acquisition of the five hotels acquired, or contracted for,
by the Company since December 31, 1997, the Company's outstanding indebtedness
will be approximately $73.1 million. Substantially all of the Company's
outstanding indebtedness is secured by individual properties, including the
Hotels. Borrowings under the Revolving Credit Facility, if obtained, will be
used by the Company to repay existing indebtedness, to fund the acquisition of
hotels, to fund renovations and capital improvements to hotels and for general
working capital needs. The Revolving Credit Facility will be secured by deeds
of trust on certain of the Company's properties. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." There is no assurance that the Company will ultimately
enter into an agreement with U.S. Bank regarding the Revolving Credit
Agreement. Failure to enter into the Revolving Credit Facility or to obtain
other financing required to repay the Company's indebtedness could have a
material adverse effect on the Company. At December 31, 1997, the Company's
outstanding indebtedness had a weighted average annual interest rate of 8.6%
and weighted average remaining maturity of eight years and eight months. At
December 31, 1997, the Company's ratio of long-term debt (including capital
lease obligations) to equity was 11.8 to 1. After giving effect to the
acquisition of the five hotels acquired, or contracted for, by the Company and
the application of net proceeds from the Offering, the Company's ratio of
long-term debt (including capital lease obligations) to equity will be
approximately 1.1 to 1 and the amount of cash required to service the
Company's existing indebtedness during 1998 will be approximately $6.7
million.
Neither the Company's Amended and Restated Articles of Incorporation (the
"Articles") nor its Amended and Restated By-Laws (the "By-Laws") limit the
amount of indebtedness that the Company may incur. Subject to limitations in
its debt instruments, including those expected to be included in the Revolving
Credit Facility, the Company expects to incur additional debt in the future to
finance acquisitions and renovations and for general corporate purposes. The
Company's continuing indebtedness could increase its vulnerability to general
economic and lodging industry conditions (including increases in interest
rates) and could impair the Company's ability to obtain additional financing
in the future and to take advantage of significant business opportunities that
may arise. The Company's indebtedness is, and will likely continue to be,
secured by mortgages on the Hotels. There is no assurance that the Company
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets, including the
Hotels, to foreclosure. Adverse economic conditions could cause the terms on
which borrowings become available to be unfavorable. In such circumstances, if
the Company is in need of capital to repay indebtedness in accordance with its
terms or otherwise, it could be required to liquidate one or more investments
in Hotels at times which may not permit realization of the maximum return on
such investments.
15
<PAGE>
Upon completion of the Offering, most of the Company's outstanding
indebtedness, including the Revolving Credit Facility, if obtained, will bear
interest at a variable rate. Economic conditions could result in higher
interest rates, which would increase debt service requirements on variable
rate debt and could reduce the amount of cash available for various corporate
purposes. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Immediate and Substantial Dilution. As set forth more fully under
"Dilution," the pro forma net tangible book value per share of the Company
after the Offering will be substantially less than the initial public offering
price per share in the Offering. Accordingly, purchasers of the Common Stock
offered hereby will experience an immediate and substantial dilution of $7.43
per share (based on an assumed initial public offering price of $13 per share)
in the net tangible book value of the Common Stock. See "Dilution."
Absence of Public Market. Prior to the Offering, there has been no public
market for the Common Stock. There is no assurance that an active public
market will develop or continue after the Offering. The initial public
offering price of the Common Stock was determined through negotiations between
the Company and representatives of the Underwriters and there is no assurance
that the Common Stock will trade at or in excess of the initial public
offering price. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price.
Price Volatility. The market price of the Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors. In addition, the securities markets have
experienced significant price and volume fluctuations from time to time in
recent years that have often been unrelated or disproportionate to the
operating performance of particular companies. These broad fluctuations may
adversely affect the market price of the Common Stock.
Shares Available for Future Sale. Upon completion of the Offering, the
Company will have 12,270,253 shares of Common Stock outstanding (13,046,503
shares if the Underwriters' over-allotment option is exercised in full). Of
the shares outstanding after the Offering, 7,095,253 of such shares will be
shares of "restricted" common stock as such term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). In addition to shares of Common Stock sold by the Company in the
Offering, the Company will issue an aggregate of 55,000 shares of "restricted"
Common Stock over four years to certain members of management, of which 11,000
shares will be issued upon closing of the Offering. In addition, concurrently
with the Offering, options to purchase up to 900,000 shares of Common Stock
may be granted to certain officers, directors and employees of the Company at
an exercise price equal to the initial public offering price. Sales of a
substantial number of shares of Common Stock (including shares issued upon the
exercise of stock options), or the perception that such sales could occur,
could adversely affect prevailing market prices of the Common Stock. No
prediction can be made about the effect that future sales of Common Stock will
have on the market prices of shares.
No Dividends on Common Stock. The Company anticipates that for the
foreseeable future, all earnings, if any, will be retained for the operation
and expansion of its business and that it will not pay cash dividends on
Common Stock. See "Dividend Policy."
Anti-Takeover Matters. The Articles and By-Laws contain provisions that may
have the effect of delaying, deterring or preventing a takeover of the Company
that shareholders purchasing shares in the Offering may consider to be in
their best interest. The Articles and By-Laws provide for a classified board
of directors serving staggered terms of three years and the By-Laws provide
for advance notice requirements for director nominations. The Articles also
grant the Board of Directors (the "Board") the authority to issue up to
5,000,000 shares of preferred stock, having such rights, preferences and
privileges as designated by the Board without shareholder approval. In
addition, Washington law contains certain provisions that may have the effect
of delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Business Corporation Act (the
"Washington Act") prohibits the Company, with certain exceptions, from
engaging in certain significant business transactions with an "acquiring
person" (defined as a person who acquires 10% or more of the Company's voting
securities without the prior approval of the Board) for a period of five years
after such acquisition. See "Description of Capital Stock."
16
<PAGE>
THE COMPANY
The Company, which was formerly known as Goodale and Barbieri Companies, has
been a family-owned enterprise since it was founded in 1937 by Louis Barbieri
and Frank Goodale. Between 1937 and 1976, the Company focused on third-party
property management services and real estate development in Spokane,
Washington. The Company's history of owning and operating hotels commenced in
1976 when it constructed the River Inn in Spokane. In 1980, the Company
established its proprietary Cavanaughs brand name. After changing its name in
October 1997 to Cavanaughs Hospitality Corporation, the Company merged with
BIC effective November 3, 1997. In connection with its merger with BIC, the
Company contributed certain assets not related to its core hospitality
business, including, among other things, a long-term residence inn and a milk
processing and distribution business, to a wholly-owned subsidiary and
distributed the capital stock of such subsidiary, as well as the capital stock
of another wholly-owned subsidiary owning recreational real estate in Priest
Lake, Idaho and a retail sales operation, to the shareholders of the Company.
Shortly thereafter, the Company contributed substantially all of its assets to
the Operating Partnership in exchange for general and limited partner
interests therein. The Company is the sole general partner of the Operating
Partnership and owns a controlling 98.8% interest therein. All of the Hotels
and the other assets of the Company are held by or for the benefit of, and
substantially all of the Company's operations are conducted through, the
Operating Partnership. As sole general partner of the Operating Partnership,
the Company has exclusive power to manage and conduct the operations of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership." In addition to the Operating Partnership, the Company holds a
50% general partner interest in Cowley Street Limited Partnership, a
Washington limited partnership which owns Cavanaughs Fourth Avenue.
The Company's principal executive offices are located at 201 W. North River
Drive, Suite 100, Spokane, Washington 99201 and its telephone number is (509)
459-6100. The Company's website address is www.cavanaughs.com.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after giving effect to
underwriting discounts and estimated expenses, are expected to be
approximately $61.7 million (approximately $71.1 million if the Underwriters'
over-allotment option is exercised in full). The Company expects to use the
net proceeds from the Offering to repay approximately $61.7 million of
indebtedness outstanding, of which $850,000 was incurred on January 7, 1998 in
connection with the purchase of the Cavanaughs on the Falls hotel. Any
remaining proceeds will be used by the Company for future investments in, or
acquisitions of, hotel properties and for other general corporate purposes. Of
the indebtedness to be repaid with the net proceeds of the Offering, an
aggregate of approximately $1.5 million will be used by the Company to repay a
note payable to Inland Northwest Corporation, an entity owned by certain
members of the Barbieri Family, in the amount of $933,333 and an obligation
owed to the Barbieri Family Foundation, Inc. in the amount of $600,000.
Pending such uses, the Company intends to invest the net proceeds in short-
term investment grade, interest-bearing securities, certificates of deposit or
guaranteed obligations of the United States of America. At December 31, 1997
the indebtedness to be repaid bore interest at fixed and variable rates, with
a weighted average annual rate of 8.8% and a weighted average remaining
maturity of six years and six months. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company intends to retain earnings to
provide funds for the continued growth and development of its business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Any determination to pay cash
dividends in the future will be at the discretion of the Board and will depend
upon, among other things, the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Board. In addition, it is anticipated that the Revolving Credit Facility will
include restrictions on the payment of dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on a combined historical basis and (ii) on a pro forma
basis, giving effect to (a) the Offering and the application of the net
proceeds therefrom and (b) the five hotels acquired, or contracted for, since
December 31, 1997. The information set forth in the following table should be
read in conjunction with the Historical Combined Financial Statements and
related notes, Pro Forma Combined Financial Statements and related notes,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
HISTORICAL
COMBINED PRO FORMA
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Debt, including current portion:
Existing long-term debt............................ $ 98,009 $ 42,735
Existing capital lease obligations................. 2,641 2,641
Borrowings under Revolving Credit Facility(1)...... -- 27,696
----------- -----------
Total debt....................................... 100,650 73,072
----------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding...... -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized; 7,095,253 shares issued and
outstanding(2); 12,270,253 shares issued and
outstanding as adjusted(2)........................ 71 123
Partners' deficit.................................. (879) --
Additional paid-in capital......................... 3,935 64,670
Retained earnings.................................. 5,405 4,956
----------- -----------
Total stockholders' equity....................... 8,532 69,749
----------- -----------
Total capitalization............................. $ 109,182 $ 142,821
=========== ===========
</TABLE>
- --------
(1) The Company has obtained a commitment for the Revolving Credit Facility
for up to $80.0 million. The Revolving Credit Facility is contingent upon
the satisfaction of certain conditions, including the successful
completion of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(2) Includes 7,084,253 restricted shares owned by the Barbieri Family and an
aggregate of 11,000 restricted shares to be issued to five of the
Company's employees concurrently with the Offering. Excludes 150,817
shares issuable upon exchange of currently outstanding OP Units, which
OP Units may not be exchanged by the holders thereof for one year from the
date of this Prospectus. See "Partnership Agreement of the Operating
Partnership." Excludes 1,489,000 shares reserved for issuance with respect
to options or stock awards to be granted under the Plans. See
"Management."
18
<PAGE>
DILUTION
The net tangible book value of the Company at December 31, 1997 was
approximately $6,581,000, or approximately $0.93 per share of Common Stock.
Net tangible book value per share is equal to the Company's total tangible
assets less its total liabilities divided by the number of outstanding shares
of Common Stock. After giving pro forma effect to the sale by the Company of
the 5,175,000 shares offered hereby (at an assumed initial public offering
price of $13 per share) and the application of the net proceeds from the
Offering, the pro forma net tangible book value of the Company at December 31,
1997 would have been approximately $68.3 million, or approximately $5.57 per
share of Common Stock. This amount represents an immediate increase in the pro
forma net tangible book value per share of $4.64 per share to the existing
shareholders and an immediate dilution in pro forma net tangible book value
per share to new investors of approximately $7.43 per share. The following
table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Net tangible book value per share before the Offering....... $0.93
Pro forma net tangible book value increase per share
attributable to the Offering............................... 4.64
-----
Pro forma net tangible book value per share after the
Offering..................................................... 5.57
------
Pro forma net tangible book value dilution per share to new
investors.................................................... $ 7.43
======
</TABLE>
The following table sets forth: (i) the number of shares of Common Stock
held by the existing shareholders and the number of shares of Common Stock
purchased by new investors in this Offering, (ii) the net book value on a pro
forma basis as of December 31, 1997 of the consideration received by the
Company from the existing shareholders and (iii) the net tangible book value
of the consideration received by the Company in this Offering (assuming the
sale of 5,175,000 shares of Common Stock by the Company at an initial public
offering price of $13.00 per share).
<TABLE>
<CAPTION>
TOTAL
SHARES ACQUIRED CONTRIBUTION BOOK VALUE OF
----------------- --------------- CONSIDERATION RECEIVED
NUMBER(1) PERCENT AMOUNT PERCENT BY COMPANY PER SHARE
--------- ------- ------- ------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders... 7,072 57.7% $ 8,532 11.3% $ 1.21
Common Stock purchased
by new investors in the
Offering............... 5,175 42.3 67,275 88.7 13.00
------ ----- ------- -----
Total................. 12,247 100.0% $75,807 100.0%
====== ===== ======= =====
</TABLE>
- --------
(1) Includes 7,072,025 restricted shares owned by the Barbieri Family.
Excludes 150,817 shares issuable upon exchange of currently outstanding OP
Units, which OP Units may not be exchanged by the holders thereof for one
year from the date of this Prospectus, and an aggregate of 11,000
restricted shares to be issued to five of the Company's employees
concurrently with the Offering. See "Partnership Agreement of the
Operating Partnership." Excludes 1,489,000 shares reserved for issuance
with respect to options or stock awards to be granted under the Plans. See
"Management."
19
<PAGE>
SELECTED COMBINED FINANCIAL AND OTHER DATA
The following table sets forth selected combined financial data of the
Company as of and for the five years ended October 31, 1997 and the two months
ended December 31, 1996 and 1997. The selected combined statement of
operations data for the fiscal years ended October 31, 1993 and 1994 and the
two months ended December 31, 1996 and the selected combined balance sheet
data as of October 31, 1993, 1994 and 1995 and December 31, 1996 are derived
from the Company's unaudited financial statements and reflect all normal
recurring adjustments, which in the opinion of management, are necessary for a
fair presentation. The selected combined statement of operations data for the
fiscal years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1997 and the selected combined balance sheet data as of October
31, 1996 and 1997 and December 31, 1997 are derived from the Company's audited
financial statements included elsewhere in this Prospectus. The pro forma
combined statement of operations data and balance sheet data as of and for the
year ended October 31, 1997 are unaudited and are derived from the pro forma
financial statements included elsewhere in this Prospectus as adjusted for the
Offering.
The selected combined financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Historical
Combined Financial Statements and related notes, Pro Forma Combined Financial
Statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
------------------------------------------------------ -----------------
PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
-------- -------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Hotels and restaurants:
Rooms................. $ 16,276 $ 17,531 $ 17,587 $ 20,972 $ 25,147 $ 39,809 $ 2,998 $ 3,626
Food and beverage..... 11,469 12,027 12,397 12,141 13,926 23,547 2,271 2,756
Other................. 672 1,015 1,260 2,092 2,589 3,645 414 447
-------- -------- -------- -------- -------- -------- -------- --------
Total hotels and
restaurants........ 28,417 30,573 31,244 35,205 41,662 67,001 5,683 6,829
Entertainment,
management and
services.............. 4,468 3,205 3,092 3,168 3,842 3,842 483 840
Rental operations...... 4,572 4,987 6,027 6,790 6,539 6,539 1,191 1,169
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues...... 37,457 38,765 40,363 45,163 52,043 77,382 7,357 8,838
-------- -------- -------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
Direct:
Hotels and restaurants:
Rooms................. 4,822 4,868 4,931 5,719 6,820 11,420 958 1,167
Food and beverage..... 9,193 9,657 10,034 10,181 11,483 19,312 1,822 2,208
Other................. 503 808 716 1,008 1,066 1,409 149 170
-------- -------- -------- -------- -------- -------- -------- --------
Total hotels and
restaurants........ 14,518 15,333 15,681 16,908 19,369 32,141 2,929 3,545
Entertainment,
management and
services.............. 2,310 1,519 1,802 2,204 2,052 2,052 397 602
Rental operations...... 364 783 1,026 1,464 1,506 1,506 243 303
-------- -------- -------- -------- -------- -------- -------- --------
Total direct
operating
expenses........... 17,192 17,635 18,509 20,576 22,927 35,699 3,569 4,450
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
----------------------------------------------------------- ------------------
PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
-------- -------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Undistributed operating
expenses:
Selling, general and
administrative........ $ 4,909 $ 3,966 $ 5,426 $ 6,461 $ 8,188 $ 12,244 $ 1,161 $ 1,225
Property operating
costs(3).............. 4,023 5,554 5,022 4,997 5,518 9,183 944 1,022
Depreciation and
amortization.......... 2,805 3,419 3,428 4,215 4,775 5,778 759 798
-------- -------- -------- -------- -------- -------- -------- --------
Total undistributed
operating
expenses........... 11,737 12,939 13,876 15,673 18,481 27,205 2,864 3,045
-------- -------- -------- -------- -------- -------- -------- --------
Total expenses...... 28,929 30,574 32,385 36,249 41,408 62,904 6,433 7,495
-------- -------- -------- -------- -------- -------- -------- --------
Operating income(3)..... 8,528 8,165 7,978 8,914 10,635 14,478 924 1,343
Interest expense........ 5,301 5,649 6,866 7,319 8,817 6,050 1,317 1,422
Other................... 137 249 471 310 823 713 119 79
Income (loss) before
income taxes and
extraordinary item(3).. 3,364 2,765 1,583 1,905 2,641 9,141 (274) --
Income taxes............ 1,254 574 542 730 932 3,153 (104) (6)
Extraordinary item...... 191 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss)(3)(4)........... $ 2,301 $ 2,191 $ 1,041 $ 1,175 $ 1,709 $ 5,988 $ (170) $ 6
Pro forma net income per
share(5)............... -- -- -- -- $ 0.24 $ 0.49 -- --
Shares used in the pro
forma per share
calculation(5)......... -- -- -- -- 7,072 12,270 -- --
Dividends per share(6).. -- -- -- -- -- -- -- --
Net income per share-
basic and diluted...... -- -- -- -- -- -- -- --
Weighted average shares
outstanding............ -- -- -- -- -- -- -- 7,072
BALANCE SHEET DATA:
Total assets............ $ 80,220 $ 86,924 $107,042 $120,087 $124,104 $157,914 $119,941 $125,117
Current maturities of
long-term debt and
capital leases......... 2,652 2,458 10,306 10,509 4,784 1,305 10,753 4,092
Long-term debt and
capital leases
excluding current
maturities............. 57,100 66,755 77,636 88,799 96,026 70,852 88,769 96,558
Stockholders'
equity(7).............. 5,318 5,055 8,791 9,613 8,526 69,743 9,089 8,532
OTHER DATA:
EBITDA(3)(8)............ $ 11,469 $ 11,763 $ 11,845 $ 13,575 $ 16,174 $ 21,020 $ 1,788 $ 2,191
EBITDA as a percentage
of revenues............ 30.6% 30.3% 29.4% 30.1% 31.1% 27.1% 24.3% 24.8%
Net cash provided by
operating
activities(9).......... -- -- 3,586 5,200 6,610 6,610 287 1,094
Net cash used in
investing
activities(9).......... -- -- (24,428) (13,184) (6,268) (6,268) (1,523) (3,294)
Net cash provided by
(used in) financing
activities(9).......... -- -- 19,178 9,258 (1,102) (1,102) (261) 715
HOTEL STATISTICS:
Hotels open (at end of
period)................ 6 6 6 7 8 13 7 8
Available rooms (at end
of period)............. 1,242 1,242 1,242 1,539 1,718 2,712 1,539 1,718
REVPAR(10)(11).......... $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 41.21 $ 31.93 $ 36.11
ADR(12)................. $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 68.94 $ 64.88 $ 71.22
Average occupancy
percentage(11)(13)..... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8% 50.7% 51.8%
</TABLE>
21
<PAGE>
- --------
(1) The summary combined financial and other data has been presented as
though (i) the predecessor businesses of Cavanaughs Hospitality
Corporation, Barbieri Investment Company, G&B: Lincoln Building
partnership and their respective subsidiaries and partnerships which they
controlled had been combined as of October 31, 1993, 1994, 1995, 1996 and
1997 and (ii) the spin-off of certain subsidiaries engaged in businesses
not related to the core hospitality business of the Company had occurred
as of October 31, 1993, 1994, 1995, 1996 and 1997.
(2) Pro forma results reflect the historical financial and other data as of
October 31, 1997 after reflecting (i) the Merger which occurred in
November 1997, (ii) the acquisitions which occurred or are probable of
occurring as of March 10, 1998 as if they occurred on November 1, 1996
for purposes of the statement of income and as of October 31, 1997 for
purposes of the balance sheet, and (iii) the Offering and the application
of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(3) Property operating costs, operating income, income (loss) before taxes
and extraordinary item, net income (loss) and EBITDA reflect a
nonrecurring charge of $422,000 related to final settlement of litigation
in 1997.
(4) The Company expects to incur prepayment penalties of $139,000 and to
write-off $680,000 of deferred loan fees in connection with the repayment
of indebtedness out of the proceeds of the Offering. These non-recurring
charges, which total $541,000, net of income taxes, are expected to be
charged to operations upon repayment. Such costs have not been included
in the pro forma statement of operations data for the year ended October
31, 1997.
(5) Due to the Merger, which was consummated in November 1997, the historical
earnings per share is not relevant or meaningful. Therefore, pro forma
earnings per share for the year ended October 31, 1997 has been presented
based upon the number of shares of Common Stock of the Company which were
outstanding after the Merger. The pro forma net income per share for the
pro forma year ended October 31, 1997 excludes non-recurring charges of
$541,000, net of income taxes, related to the payment of prepayment
penalties and the write-off of deferred loan fees related to indebtedness
which is being repaid out of the proceeds of the Offering.
(6) Due to the Merger in November 1997, historical dividends per share is not
relevant or meaningful and therefore is not presented. Dividends
historically have been paid to the stockholders of Cavanaughs Hospitality
Corporation and BIC. See Combined Statement of Changes in Stockholders'
Equity in the historical financial statements included elsewhere herein.
(7) Changes in stockholders' equity between fiscal years reflect (i) net
income (loss), (ii) cash dividends and (iii) distributions to or
contributions from shareholders for the activities related to the
subsidiaries, investments or divisions which have been excluded from the
combined financial statements. See Note 1 to the Historical Combined
Financial Statements.
(8) EBITDA represents income before income taxes and extraordinary item,
interest expense, depreciation, amortization and minority interests.
EBITDA is not intended to represent cash flow from operations as defined
by generally accepted accounting principles and such information should
not be considered as an alternative to net income, cash flow from
operations or any other measure of performance prescribed by generally
accepted accounting principles. While not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be
comparable to similarly titled measures of other companies, EBITDA is
included herein because management believes that certain investors find
it to be a useful tool for measuring the Company's ability to service
debt. EBITDA is not necessarily available for management's discretionary
use due to restrictions to be included in the Revolving Credit Facility
and other considerations.
(9) Cash flow from operating, investing and financing activities has not been
provided for the years ended October 31, 1993 and 1994. Due to the
mergers of the companies and partnerships described in Note 1 to the
Historical Combined Financial Statements, in the opinion of management,
the cost of preparing this information outweighs the benefit of providing
the data.
(10) REVPAR represents the total revenues divided by total available rooms,
net of rooms out of service due to significant renovations.
(11) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(12) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(13) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported period.
22
<PAGE>
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 fiscal years ended October 31, 1995, 1996, and 1997
and the two months ended December 31, 1996 and 1997. The following should be
read in conjunction with the Historical Combined Financial Statements and the
notes thereto and "Selected Combined Financial and Other Data" included
elsewhere in this Prospectus. 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
this Prospectus.
The financial statements of the Company, which have been audited by Coopers
& Lybrand L.L.P., have been presented as though the predecessor businesses of
Cavanaughs Hospitality Corporation (formerly known as Goodale and Barbieri
Companies), BIC and their respective subsidiaries and partnerships which they
controlled had been combined as of October 31, 1995, 1996 and 1997. These
companies were merged on November 3, 1997. The audited financial statements
also include G&B: Lincoln Building partnership, a partnership previously
controlled by the Barbieri Family. See Note 1 to the Combined Financial
Statements. Income or loss attributed to the minority interests of partners in
Cowley Street Limited Partnership is reported as minority interest in
partnerships. The Company has changed its fiscal year end from October 31 to
December 31, which change shall take effect with the fiscal year beginning on
January 1, 1998.
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 80.0% of total revenue in 1997 and increased at a
compound annual rate of 15.5% from $31.2 million in 1995 to $41.7 million in
1997. This increase was primarily the result of the addition of Cavanaughs on
Fifth Avenue and an increase in REVPAR from $38.83 in 1995 to $45.72 in 1997.
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 1997, entertainment, management and services
accounted for 7.4% of total revenues and rental operations accounted for 12.6%
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, 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.
23
<PAGE>
The following table sets forth selected items from the combined statements
of income as a percent of total revenues and certain other selected data:
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, DECEMBER 31,
------------------------------- -------------------
1995 1996 1997 1996 1997
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restau-
rants................. 77.4% 78.0% 80.0% 77.2% 77.3%
Entertainment, manage-
ment and services..... 7.7 7.0 7.4 6.6 9.5
Rental operations...... 14.9 15.0 12.6 16.2 13.2
--------- --------- --------- -------- --------
Total revenues....... 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ======== ========
Direct operating ex-
penses.................. 45.9% 45.6% 44.0% 48.5% 50.4%
Undistributed operating
expenses:
Selling, general and
administrative........ 13.4 14.3 15.7 15.8 13.9
Property operating
costs................. 12.5 11.1 10.6 12.8 11.6
Depreciation and amor-
tization.............. 8.5 9.3 9.2 10.3 9.0
--------- --------- --------- -------- --------
Total undistributed
operating expenses: 34.4 34.7 35.5 38.9 34.5
Operating income......... 19.8 19.7 20.4 12.6 15.2
Interest expense (net)... 17.0 16.2 16.9 17.9 16.1
Income (loss) before in-
come taxes.............. 3.9 4.2 5.1 (3.7) --
Income tax provision
(benefit)............... 1.3 1.6 1.8 (1.4) (0.1)
--------- --------- --------- -------- --------
Net income (loss)...... 2.6% 2.6% 3.3% (2.3)% 0.1%
========= ========= ========= ======== ========
REVPAR................... $ 38.83 $ 42.04 $ 45.72 $ 31.93 $ 36.11
ADR...................... $ 61.54 $ 67.29 $ 73.43 $ 64.88 $ 71.22
Occupancy................ 65.5% 64.5% 63.5% 50.7% 51.8%
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF TWO MONTHS ENDED DECEMBER 31, 1997 TO TWO MONTHS ENDED DECEMBER
31, 1996
Total revenues increased $1.5 million, or 20.1%, from $7.4 million in the
last two months of 1996 to $8.8 million in the comparable period of 1997. This
increase is attributed primarily to revenue generated from increases in total
rooms occupied, ADR and REVPAR, and the addition of Cavanaughs Gateway Hotel
in Yakima, Washington.
Total hotel and restaurant revenues increased $1.1 million, or 20.2%, from
$5.7 million in the last two months of 1996 to $6.8 million in the comparable
period of 1997. ADR increased $6.34, or 9.8%, from $64.88 in the last two
months of 1996 to $71.22 in the comparable period of 1997. Available room
nights increased 7.0% in the last two months of 1997. REVPAR increased $4.18,
or 13.1% from $31.93 in the last two months of 1996 to $36.11 in the
comparable period of 1997. The Company's hotel and restaurant revenues
increased primarily due to an increase in its ADR and total rooms occupied. In
addition, Cavanaughs Gateway Hotel was acquired in October 1997. November and
December of 1997 were the first two full months of operation for this 172-room
property which also contributed to this increase in revenues.
Entertainment, management and services revenues increased $0.4 million, or
74.0%, from $0.5 million in the last two months of 1996 to $0.8 million in the
comparable period of 1997. Entertainment revenue increased due to the greater
number of Company-presented shows and attendance at such shows. Management and
services revenue increased from the addition of new third-party management
contracts.
Rental income remained relatively stable at $1.2 million in the last two
months of 1996 and the comparable period of 1997.
24
<PAGE>
Direct operating expenses increased $0.9 million, or 24.7%, from $3.6
million in the last two months of 1996 to $4.5 million in the comparable
period of 1997, primarily due to the increase in the number of hotel guests
served and the Broadway shows presented by the Company. This represents an
increase in direct operating expenses as a percentage of total revenues from
48.5% in the last two months of 1996 to 50.4% in the comparable period of 1997
which is primarily attributable to the higher variable costs associated with
the Broadway shows.
Total undistributed operating expenses increased $0.2 million, or 6.3%, from
$2.9 million in the last two months of 1996 to $3.0 million in the comparable
period of 1997. Total undistributed operating expenses include selling,
general and administrative expenses, which increased 5.5% from the last two
months of 1996 to the comparable period of 1997, and depreciation and
amortization, which increased 5.1%. Total undistributed operating expenses as
a percentage of total revenues decreased 4.4% from 38.9% in the last two
months of 1996 to 34.5% in the comparable period of 1997. The decrease in
undistributed operating expenses as a percentage of total revenues is
primarily attributed to the Company's ability to increase REVPAR of the Hotels
while effectively controlling its selling, general and administrative
expenses.
Operating income increased $0.4 million, or 45.3%, from $0.9 million in the
last two months of 1996 to $1.3 million in the comparable period of 1997. As a
percentage of total revenues, operating income increased from 12.6% in the
last two months of 1996 to 15.2% in the comparable period of 1997. This
increase is due primarily to an increase in REVPAR.
Interest expense increased $0.1 million, or 8.0%, from $1.3 million in the
last two months of 1996 to $1.4 million in the comparable period of 1997. This
increase is primarily related to the incurrence of additional debt used for
completion of the conversion of Cavanaughs on Fifth Avenue and other corporate
purposes.
The income tax benefit changed as a result of the change in the pre-tax
loss. The effective income tax rate for both periods was 34%.
The Company incurred a net loss of $170,000 in the last two months of 1996
compared to a net income of $6,000 in the comparable period of 1997.
COMPARISON OF YEAR ENDED OCTOBER 31, 1997 TO YEAR ENDED OCTOBER 31, 1996
Total revenues increased $6.9 million, or 15.2%, from $45.2 million in 1996
to $52.0 million in 1997. This increase is attributed primarily to revenue
generated from increases in total rooms occupied and REVPAR and the addition
of Cavanaughs on Fifth Avenue in Seattle, Washington.
Total hotel and restaurant revenues increased $6.5 million, or 18.3%, from
$35.2 million in 1996 to $41.7 million in 1997. ADR increased $6.14, or 9.1%,
from $67.29 in 1996 to $73.43 in 1997. Available room nights increased 10.3%
in 1997, REVPAR increased $3.68, or 8.8%, from $42.04 in 1996 to $45.72 in
1997. Cavanaughs on Fifth Avenue opened in May 1996; therefore, 1997 was the
first full fiscal year of operation for this 297-room property which
contributed, in part, to this increase in revenues.
Entertainment, management and services revenues increased $0.7 million, or
21.3%, from $3.2 million in 1996 to $3.8 million in 1997. Entertainment
revenue increased from the addition of new third-party management contracts.
Rental income decreased $0.3 million, or 3.7%, from $6.8 million in 1996 to
$6.5 million in 1997 primarily as a result of the Company's need to occupy
additional space in the CHC Building, its corporate headquarters, which had
previously been rented to third parties, and the receipt of a one-time
settlement for a lease termination which occurred in 1996.
Direct operating expenses increased $2.4 million, or 11.4%, from $20.6
million in 1996 to $22.9 million in 1997, primarily due to the increase in the
number of hotel guests served. This represents a decline in direct
25
<PAGE>
operating expenses as a percentage of total revenues from 45.6% in 1996 to
44.0% in 1997. The improvement in direct operating expense percentages is
attributed to the increase in REVPAR while the Company was able to effectively
control expenses and gain volume efficiencies.
Total undistributed operating expenses increased $2.8 million, or 17.9%,
from $15.7 million in 1996 to $18.5 million in 1997. Total undistributed
operating expenses include selling, general and administrative expenses, which
increased 26.7% from $6.5 million in 1996 to $8.2 million in 1997, and
depreciation and amortization, which increased 13.3% from $4.2 million in 1996
to $4.8 million in 1997. Total undistributed operating expenses as a
percentage of total revenues increased 0.8% from 34.7% in 1996 to 35.5% in
1997. The increase in undistributed operating expenses as a percentage of
total revenues is primarily attributed to the addition of Cavanaughs on Fifth
Avenue (which management believes had not attained stabilized occupancy) and
the additional administrative expenses related to preparing the Company for
future growth and the Offering.
Operating income increased $1.7 million, or 19.3%, from $8.9 million in 1996
to $10.6 million in 1997. As a percentage of total revenues, operating income
increased from 19.7% in 1996 to 20.4 % in 1997. This increase is due primarily
to an increase in REVPAR, the addition of Cavanaughs on Fifth Avenue and
improvements in the hotel departmental margins.
Interest expense increased $1.5 million, or 20.5%, from $7.3 million in 1996
to $8.8 million in 1997. This increase is primarily related to the incurrence
of additional debt used for funding the acquisition and conversion of
Cavanaughs on Fifth Avenue and other corporate purposes. Interest expense is
initially anticipated to decline 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 27.7%, from $0.7 million in 1996 to $0.9
million in 1997, due to the increase in income before taxes. The effective
income tax rate for both years was 34%.
Net income increased $0.5 million, or 45.4%, from $1.2 million in 1996 to
$1.7 million in 1997.
COMPARISON OF YEAR ENDED OCTOBER 31, 1996 TO YEAR ENDED OCTOBER 31, 1995
Total revenues increased $4.8 million, or 11.9%, from $40.4 million in 1995
to $45.2 million in 1996. The increase is attributed primarily to the addition
of Cavanaughs on Fifth Avenue which opened in May 1996 and additional rental
income from increased occupancy in the rental properties.
Total hotel and restaurant revenues increased $4.0 million, or 12.7%, from
$31.2 million in 1995 to $35.2 million in 1996. ADR increased 9.3% from $61.54
in 1995 to $67.29 in 1996. Available room nights increased 10.1% in 1996. The
increase is primarily attributed to the addition of Cavanaughs on Fifth
Avenue.
Entertainment, management and services revenues increased 2.5% from $3.1
million in 1995 to $3.2 million in 1996.
Rental income increased $0.8 million, or 12.7%, from $6.0 million in 1995 to
$6.8 million in 1996. The increase is primarily attributed to increased
occupancy and lease payments for the Company's office buildings.
Direct operating expenses increased $2.1 million, or 11.2%, from $18.5
million in 1995 to $20.6 million in 1996. Direct operating expenses as a
percentage of total revenues decreased from 45.9% in 1995 to 45.6% in 1996.
This improvement is attributed primarily to the increase in REVPAR while
controlling expenses.
Total undistributed operating expenses increased $1.8 million, or 12.9%,
from $13.9 million in 1995 to $15.7 million in 1996. Total undistributed
operating expenses include selling, general and administrative expenses, which
increased 19.1% from $5.4 million in 1995 to $6.5 million in 1996, and
depreciation and amortization, which increased 23.0% from $3.4 million in 1995
to $4.2 million in 1996. Total undistributed operating expenses as a
percentage of total revenues increased from 34.4% in 1995 to 34.7% in 1996.
Increased
26
<PAGE>
expenses are attributed primarily to the addition of Cavanaughs on Fifth
Avenue which management believes has not attained stabilized occupancy.
Operating income increased $0.9 million, or 11.7%, from $8.0 million in 1995
to $8.9 million in 1996. This increase was primarily caused by an increase in
hotel guests served and an increase in REVPAR coupled with the Company
controlling operating expenses.
Interest expense increased $0.5 million, or 6.6%, from $6.9 million in 1995
to $7.3 million in 1996 primarily as a result of the additional indebtedness
incurred by the Company in connection with the acquisition and conversion of
Cavanaughs on Fifth Avenue.
Income tax provision increased 34.7%, from $0.5 million in 1995 to $0.7
million in 1996 due to the increase in income before taxes. The effective
income tax rate for both years was 34%.
Net income increased $0.1 million, or 12.9%, from $1.0 million in 1995 to
$1.2 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of liquidity have been cash on
hand, cash generated by operations and borrowings under a $3.0 million working
capital credit facility. Cash generated by operations in excess of operating
expenses is used for capital expenditures and to reduce amounts outstanding
under the working capital 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.
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, by unsecured private or public debt offerings or by
additional equity offerings or the issuances of OP Units, along with cash
generated from internal operations. The Company intends to repay approximately
$61.7 million of its outstanding indebtedness with the estimated net proceeds
of the Offering. On a pro forma basis as of December 31, 1997, after giving
effect to the Offering, the application of the net proceeds thereof and the
acquisition of the five hotels acquired, or contracted for, since December 31,
1997, total outstanding indebtedness decreased from approximately $100.7
million to approximately $73.1 million. See "Use of Proceeds" and
"Capitalization."
At December 31, 1997, the Company had $5.0 million in cash and cash
equivalents. The Company has made extensive capital expenditures over the last
three years, investing $24.1 million, $13.5 million and $6.2 million in owned
and joint venture properties in 1995, 1996 and 1997, respectively. These
expenditures included guest room, lounge and restaurant renovations, public
area refurbishment, telephone and computer system upgrades, tenant
improvements, property acquisitions, construction, and corporate expenditures
and were funded from operating cash flow and debt. The Company establishes
reserves for capital replacement in the amount of 4.0% of the prior year's
actual gross hotel 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 a commitment from U.S. Bank to provide the Revolving
Credit Facility. The commitment letter, which contains a number of conditions
to the initial funding by the lender, provides that the amount available
thereunder will be
27
<PAGE>
equal to the lesser of $80.0 million or the gross proceeds (including the
gross proceeds if the Underwriters' over-allotment option is exercised) of the
Offering. During the initial 12 months following the Offering, subject to the
satisfaction of certain conditions contained in the definitive credit
agreement, the Company will have approximately $50.0 million available to be
drawn under the Revolving Credit Facility at an interest rate of 185 basis
points over LIBOR and declining to 165 basis points after six months if the
Company maintains certain EBITDA to debt ratios. The Revolving Credit Facility
will have an initial term of five years and an annualized fee for the
unutilized portion of the facility. The Company will be able to select 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 210 basis
points, depending on the Company's ratio of EBITDA-to-total funded debt. It is
anticipated that the Revolving Credit Facility will 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. Funds from the Revolving Credit
Facility may be used for acquisitions, renovations, construction and general
corporate purposes. The Company believes the funds available under the
Revolving Credit Facility will be sufficient to meet the Company's near term
growth plans. The Operating Partnership will be the borrower under the
Revolving Credit Facility. The obligations of the Operating Partnership under
the Revolving Credit Facility will be fully guaranteed by the Company. Under
the Revolving Credit Facility, the Company will be permitted to grant new
deeds of trust on any future acquired properties. Mandatory prepayments will
be required to be made in various circumstances including the disposition of
any property, or future acquired property, by the Operating Partnership.
The Revolving Credit Facility will contain various representations,
warranties, covenants and events of default deemed appropriate for financing
of a similar size and nature. Covenants and provisions in the definitive
credit agreement governing the Revolving Credit Facility will include, among
other things, limitations on: (i) substantive changes in the Company's and
Operating Partnership's current business activities, (ii) liquidation,
dissolution, mergers, consolidations, dispositions of material property or
assets involving the Company and its affiliates or their assets, as the case
may be, and acquisitions of property or assets of others, (iii) the creation
or existence of deeds of trust or other 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, (vi) redemption of subordinated debt, (vii) 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, (viii) payment
of dividends or distributions on the Company's capital stock, and (ix)
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 December 31, 1997, the Company had debt and capital leases outstanding
of $100.7 million consisting of primarily variable and fixed rate debt secured
by individual properties. The Company had a working capital credit facility of
$3.0 million with $1.1 million drawn as of December 31, 1997.
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 to be
included therein) and the remaining proceeds from the Offering, will be
adequate to fund the Company's growth strategy in the near term. Thereafter,
the Company expects that future capital needs, including those for property
acquisitions, will be met through a combination of net cash provided by
operations, borrowings and additional issuances of Common Stock or OP Units.
28
<PAGE>
SEASONALITY
The lodging industry is affected by normally recurring seasonal patterns. At
most of the Hotels, demand is higher in the late spring through early fall
(May through October) than during the balance of the year. For example, for
the year ended December 31, 1997, the Company's revenues in the first through
fourth quarters were 19.7%, 25.7%, 29.1% and 25.5%, respectively, of its total
revenue for such year and the Company's net income (loss) for the first
through fourth quarters was (17.4)%, 43.5%, 81.7% and (7.8)%, respectively, of
its total net income for such 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 income
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 February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and simplifies the
existing standards. This standard replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires the dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods, and requires restatement of all prior-period EPS data
presented. The adoption of SFAS No. 128 did not have a material effect on the
presentation of the Company's EPS.
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 statement. 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. This statement is effective for fiscal years
beginning after December 15, 1997. Management does not believe that the
implementation of SFAS No. 130 will have a material impact on the presentation
of its combined 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 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 statement is
effective for fiscal years beginning after December 15, 1997. Management of
the Company does not believe that the implementation of SFAS No. 131 will have
a material impact on the combined financial statements.
29
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Cavanaughs Hospitality Corporation is a hotel operating company that owns,
operates, acquires, develops, renovates and repositions full service hotels in
the Northwest under its proprietary brand name, "Cavanaughs(TM)". The
Company's hotel portfolio contains 11 full service Hotels, with 2,369 guest
rooms and approximately 120,000 square feet of meeting space, located in
Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and Post
Falls, Idaho; and Kalispell, Montana. The Company plans to pursue additional
growth opportunities by continuing to acquire and develop full service hotels
in the Northwest. The Company has entered into purchase agreements to acquire
two additional full service hotels, containing 343 guest rooms and
approximately 14,500 square feet of meeting space, located in Kalispell,
Montana and Portland, Oregon for an aggregate purchase price of approximately
$15.5 million. Substantially all of the Company's assets, including the
Hotels, are owned by the Operating Partnership, the day to day operations of
which are managed by the Company in its capacity as sole general partner. With
more than 20 years of experience in the lodging industry, management believes
the Company enjoys an excellent reputation in, and its Cavanaughs brand name
is well recognized throughout, the Northwest. The Company also provides
entertainment services, including event ticketing and theatrical presentations
and other special events, and property management services for third parties
and owns and manages retail and office properties.
The Company is seeking to become the dominant full service hotel company in
the Northwest by providing customers with access to a Cavanaughs brand hotel
in multiple locations throughout the region. As a result of consolidation
among hotel chains, the Company believes there is an absence of a dominant
Northwest based, regionally focused hotel company. The Company's growth
strategy focuses on: (i) the acquisition and re-branding of full service
hotels with the Cavanaughs name, (ii) the acquisition, conversion and
redevelopment of non-hotel properties into Cavanaughs brand hotels, (iii) the
construction of new Cavanaughs hotels and (iv) the expansion of existing
Cavanaughs Hotels.
The Company's operating strategy is designed to enhance its revenue and
operating margins by increasing REVPAR, ADR, occupancy and operating
efficiencies at the Hotels. This strategy includes: (i) building brand name
recognition by maintaining its strategic focus on the Northwest; (ii)
promoting a coordinated marketing program utilizing corporate level sales and
marketing departments in conjunction with local hotel-based sales and
marketing personnel; (iii) controlling operating expenses and achieving cost
reductions through operating efficiencies and economies of scale; (iv)
enhancing guest satisfaction and loyalty by providing high quality service;
(v) utilizing the Company's yield management and proprietary management
information systems to enable the general managers of each Hotel to optimize
REVPAR, ADR, occupancy and net income; (vi) maintaining a consistent level of
quality at the Hotels through its maintenance and capital expenditure
programs; (vii) emphasizing the quality of the Company's food and beverage
services to attract convention, group and special event business and to create
local awareness of the Hotels; (viii) providing valuable guest benefit
programs that promote customer loyalty, such as frequent flier mileage and
repeat guest programs; and (ix) attracting and retaining qualified employees
by providing on going training and stock incentive programs at all levels of
employment to enhance productivity and align the efforts of employees with the
Company's objectives. For the fiscal year ended October 31, 1997, the
Company's revenues were $52.0 million, operating income was $10.6 million, net
income was $1.7 million, REVPAR was $45.72 and ADR was $73.43. On a pro forma
basis, giving effect to the three Hotels acquired since October 31, 1997, the
two hotels under contract to be acquired and the Offering, for the year ended
October 31, 1997, the Company's revenues were $77.4 million, operating income
was $14.5 million, net income was $6.0 million, REVPAR was $41.21 and ADR was
$68.94.
In addition to the Hotels, the Company operates two other divisions: (i)
entertainment, management and services and (ii) rental operations. The
entertainment, management and services division includes computerized event
ticketing through G&B Select-a-Seat, which was founded in 1987 and processed
in excess of 2.0 million
30
<PAGE>
tickets in 1997, and the presentation of shows and special events through G&B
Presents, which was also founded in 1987 and has presented over 79 Broadway
theatrical presentations and special events in the last ten years. These
services generate income from ticket sales and handling fees as well as
additional room occupancy at the Hotels. The entertainment, management and
services division is supported by the same Toll-Free Call Center used for
hotel reservations. The Company's rental operations division includes
ownership of three office properties and one retail property containing in
excess of 590,000 square feet of leasable space, the majority of which are
located near the Hotels, and third-party management of more than 3.1 million
square feet of retail and office properties and approximately 2,200
residential units in the Northwest.
INDUSTRY OVERVIEW
The domestic lodging industry completed its third year of record
profitability in 1996, during which time it produced record income of $12.5
billion. Coopers & Lybrand Hospitality Directions estimates that the industry
is expected to again achieve record profitability in 1997. Coopers & Lybrand
Hospitality Directions indicates that average U.S. hotel occupancy reached
65.1% in 1996, its highest level in 13 years. U.S. hotel occupancy is expected
to decline slightly in 1997 to 64.5% due to supply growth exceeding demand
growth. High occupancy during 1995 to 1997 has provided hotel operators with
the ability to support increases in ADR without affecting occupancy
percentages. Sustained ADR growth has contributed to total lodging industry
revenue growth which was 8.6% in 1996 and is expected to be 8.5% in 1997.
The following table reflects the percentage changes in REVPAR, ADR and
occupancy for the twelve months ended October 31, 1996 and 1997, compared to
the same periods in 1995 and 1996, respectively, for (i) the Hotels that were
open for each of the periods presented, (ii) U.S. full service hotels and
(iii) all U.S. hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
-----------------------------------------------
REVPAR(1) ADR OCCUPANCY
-------------- -------------- ---------------
1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotels(2).... 8.3% 8.8% 9.3% 9.1% (1.5)% (1.6)%
U.S. Full Service Ho-
tels(3)................ 8.4% 7.8% 7.4% 7.8% 0.8 % 0.1 %
U.S. Hotels(3)(4)....... 6.4% 5.4% 6.4% 6.4% (0.1)% (0.9)%
</TABLE>
- --------
(1) Determined by dividing annual room revenue by annual available rooms.
(2) Occupancy as a percentage of available rooms declined slightly, primarily
because of the addition of new rooms associated with the opening of
Cavanaughs on Fifth Avenue, which management believes has not reached
stabilized occupancy.
(3) Source: Smith Travel Research.
(4)Includes both full service and limited service hotels.
Lodging room demand has historically tracked the national economy. In 1997,
the U.S. economy's ongoing expansion has been marked by low inflation and
unemployment and, in the northwest states of Idaho, Oregon and Washington,
employment and population growth has been above national averages. According
to U.S. Bank's Economic Update (October 1997), for the twelve months ended
July 1997 the metropolitan areas of Seattle, Washington and Portland, Oregon
were the second and fourth fastest growing metropolitan economies in the
nation, respectively. In addition, according to the 1998 US Bank Regional
Economic Review and Forecast, Utah, Washington and Oregon were the second,
fifth and eighth most rapidly growing states in the nation, respectively. The
western region of the United States is expected to continue to outpace the
nation in employment income and population growth through the year 2000,
according to the Oregon Economic Review and Forecast (December 1997).
GROWTH STRATEGY
The Company is presently seeking growth opportunities in markets located
throughout the Northwest. The Company will consider the following factors in
evaluating acquisitions, conversions and redevelopments, construction of new
hotels and expansion of existing hotels: (i) the location of the property,
(ii) the construction quality, condition and design of the property, (iii) the
current and projected REVPAR, ADR and occupancy of
31
<PAGE>
the property and the anticipated ability of the Company to increase REVPAR,
ADR and occupancy through management of the property by the Company and (iv)
the potential for economic growth in the communities in which the hotels are
located. The Company expects that future acquisitions will be based on these
factors or such other similar factors or criteria as are established from time
to time by the Board. The Company has successfully utilized each of these
strategies and, since December 1996, has increased its room count from 1,546
to 2,712.
Following the Offering, the Company expects to have improved access to
equity and debt financing sources with which to implement its growth strategy.
The Company has received a commitment from U.S. Bank which has agreed to
provide, upon consummation of the Offering, the Revolving Credit Facility in
an amount up to $80.0 million which will be used by the Company to finance
property acquisitions, development and capital improvements and for general
corporate purposes. As an alternative to debt financing, the Company may issue
shares of Common Stock or OP Units as consideration in future acquisitions.
The issuance of OP Units in exchange for hotels may allow the current owners
of such hotels to achieve certain tax advantages when selling such hotels to
the Company.
Summarized below are the key elements of the Company's growth strategy:
Acquisition. The Company is presently seeking to acquire full service hotels
in locations where the Company currently operates properties, as well as in
new markets where the Company believes the potential exists to acquire hotel
properties suitable for conversion to a Cavanaughs brand hotel. Acquisitions
are contemplated by the Company when the cost of acquiring an existing hotel
property is less than replacement cost or where construction and development
opportunities no longer exist in a target market. The Company generally
targets for acquisition hotels with certain physical characteristics that
guests associate with a Cavanaughs brand hotel, including full service hotels
with interior hallways, conference and banquet facilities, restaurants,
lounges, recreational amenities and on-site parking. The Company generally
focuses on acquiring hotels containing 150 to 400 rooms. The Company re-brands
an acquired hotel as soon as practicable after acquisition with the
installation of "Cavanaughs" signage and amenities. In addition, as part of
its repositioning process, a dedicated management team is made responsible for
integrating the acquired hotel into the Company's reservations, information,
accounting, budgeting and management systems and, if necessary, upgrading and
renovating the hotel.
The Company utilizes senior management's knowledge of the Northwest and
long-standing relationships with the other hotel owners and operators to
identify potential acquisitions. These relationships have enabled the Company
to acquire certain of the Hotels before they became generally available for
purchase on the open market. Since December 1996, the Company has acquired
four Hotels (Cavanaughs Gateway Hotel, Cavanaughs Ridpath Hotel, Cavanaughs on
the Falls and Cavanaughs Templin's Resort), containing 823 guest rooms and
approximately 43,800 square feet of meeting space. The total purchase and
option price of these Hotels was approximately $31.1 million (including a $6.3
million option purchase price payable with respect to Cavanaughs Gateway Hotel
which the Company is not required to pay until 2003). This total purchase and
option price is comprised of a combination of cash and assumed indebtedness
and, in the case of Cavanaughs Ridpath Hotel, a combination of cash and OP
Units. In addition, the Company has entered into purchase agreements to
acquire two hotels (Cavanaughs Outlaw Hotel and Cavanaughs Hillsboro Hotel)
containing 343 guest rooms and approximately 14,500 square feet of meeting
space. The total purchase price for these hotels is approximately $15.5
million.
Conversion. Based on management's experience in developing hotel, retail and
office properties, the Company believes that it has the ability to convert
non-hotel properties, such as office buildings, into full service hotels. In
completing the conversion process, the Company uses an in-house design and
development staff, combined with third-party architectural and construction
expertise. The Company believes that this in-house capability allows certain
conversion opportunities to be economically feasible for the Company and at a
cost advantage in comparison to its competitors. The Company intends to target
conversion opportunities in markets that do not have hotel properties suitable
for acquisition or where acquisition and conversion of a non-hotel property
offers significant cost saving advantages as compared to new construction.
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<PAGE>
The Company recently completed the conversion of a non-hotel property into
the Cavanaughs on Fifth Avenue, a full service hotel located in Seattle's
central business and retail district. Prior to its conversion to a Cavanaughs
brand hotel, the property was used by U.S. Bank of Washington as its regional
headquarters. The Company acquired the property in June 1995 for approximately
$18.3 million and in less than eleven months completed the design, zoning,
permitting and construction required to convert the building into a 297-room,
full service Cavanaughs brand hotel, containing two restaurants and 12,500
square feet of banquet and meeting space. The total conversion cost, including
acquisition costs, was approximately $36.8 million. The Hotel, which opened in
May 1996, achieved average REVPAR of $73.55, ADR of $116.24 and occupancy of
64.9% during the Company's fiscal year ended October 31, 1997. The Company
believes the Hotel has not yet reached stabilized operating performance.
Construction. The Company intends to construct new hotels when it believes
room demand and local ADR will support the cost of new construction, a well
positioned building site is available and no viable acquisition or conversion
opportunities exist.
Expansion. As part of its growth strategy, the Company seeks to acquire
hotel properties with sufficient excess land to allow for potential future
expansion. The Company's current hotel portfolio includes seven Hotels which
the Company believes can be expanded to include additional hotel rooms and
meeting space although there is no assurance that such expansion will be
accomplished. The Company's expansion criteria focus on the demand for
additional rooms in a given area, the costs related to such expansion and the
potential return on investment to the Company. Through the use of its in-house
development staff, in most cases, an expansion is completed within one year
from the beginning of construction, with little or no disruption of existing
hotel operations. Expansion of an existing hotel allows the Company to obtain
economies of scale in operating its hotels and increase operating margins
because it can leverage existing staff resources, common areas, restaurants
and meeting facilities and guest amenities, such as pools and fitness
facilities.
OPERATING STRATEGY
The Company's operating strategy focuses on increasing REVPAR, ADR and
occupancy and improving operating efficiencies at the Hotels. Summarized below
are the key elements of the Company's operating strategy:
Utilization of Proprietary Cavanaughs(TM) Brand. The Company is focused on
enhancing its Cavanaughs brand name, which is synonymous with quality and
value throughout the Northwest, thereby earning the loyalty and repeat
patronage of business and leisure travelers. By owning its own proprietary
brand, the Company both retains control over the Hotels and avoids certain
operating or marketing restrictions that a competitor might face being
affiliated with a third-party brand or franchise. The Company believes that
the Cavanaughs brand name provides it with a competitive advantage in its
operating profitability over competitors that do not own a hotel brand and are
required to pay third-party franchise fees which typically can range from 6%
to 10% of revenue. As a result of owning its own Cavanaughs brand name, the
Company has the flexibility to freely market as well as cross-sell hotel rooms
with any of its other marketing efforts or promotions, such as ticketing
events or promotional campaigns. These cross-marketing efforts also serve to
strengthen the Cavanaughs brand name. The Company will use the Cavanaughs
brand name on its newly acquired, converted and developed hotels in order to
maximize the long-term value of each of its hotels.
Sales and Marketing. The Company develops sales and marketing programs that
target key segments of the hotel user market, including convention, corporate,
government, tour and travel, team, education, promotion, leisure, transient
and contract. Members of the Company's centrally located sales and marketing
department are assigned to each market segment in which the Company operates
and are responsible for communicating with hotel personnel in those markets
regarding the specific hotel needs of such hotel's guests. In addition, each
Hotel has (or shares with an adjacent Cavanaughs Hotel) sales and banquet and
catering personnel responsible for promoting that property as well as
personnel responsible for the creation of promotional packages designed to
attract individual guests. As a result of the corporate level and hotel level
marketing efforts, the Company
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believes that it is able to more effectively meet customers' needs and enhance
loyalty. The Company also expects that its corporate level marketing program
will allow it to more easily direct those customers to other Cavanaughs brand
Hotels located throughout the Northwest as their hospitality needs require.
Operating Efficiencies. As a result of owning and operating a portfolio of
hotels, the Company is able to achieve operating efficiencies and economies of
scale. By operating more than one hotel in a specific market, the Company
believes that it can better manage its occupancy levels, match customer needs
with a greater variety of price-points, locations and amenities and achieve
economies of scale. For example, during periods when one of the Hotels is
fully booked, customers can be accommodated at one of the Company's other
Hotels, capturing what would otherwise be lost occupancy. Additionally, the
Company is able to reduce costs through the allocation of fixed costs over a
greater number of rooms. Regional management staff oversees the operations of
all Hotels and certain departments, such as accounting and sales, and operates
in these regions with reduced independent staffs through shared accounting and
sales personnel with the Company's corporate headquarters. The Company
utilizes centralized control for the purchase of property, casualty and
liability insurance policies, telephone and cable contracts as well as other
goods and services.
Control Over Hotel Operations. The Company believes that it is able to
effectively manage the relationship between occupancy and ADR of the Hotels
through the delegation of authority to the general manager of each Hotel. The
Company continuously invests in the development of its yield management and
proprietary information reporting systems that enable general managers to
analyze daily Hotel performance statistics and to use this information to
adjust pricing, staffing and customer mix in an effort to maximize their
Hotel's REVPAR. In addition, management believes that the use of centralized
systems and regional support services allow general managers to control costs,
allocate resources efficiently and maintain consistently high product quality
and services.
Policy of Reinvestment. It is the Company's policy to continuously reinvest
capital in the Hotels in order to maintain their quality. The Company
allocates 4.0% of each Hotel's prior year's gross revenues for reinvestment in
the Hotels. During 1997, the Company reinvested approximately $5.0 million for
renovation of rooms and related Hotel facilities. The Company's reinvestment
program is designed to maintain attractive accommodations, common areas,
update restaurants, lounges and meeting and banquet space and to modernize
equipment. The Company believes that its reinvestment program helps to enhance
the Company's competitive position and the value of the Hotels.
Emphasis on Food and Beverage Services. The Company emphasizes its food and
beverage operations (restaurant and lounge, room service, banquet facilities
and catering) in an effort to strengthen its group and convention business as
well as to establish a positive reputation among its local clientele. The
restaurant and catering business serves to establish each Hotel's reputation
and name recognition in their respective markets. In order to ensure
consistency of food and beverage service throughout the Hotels, a new menu and
customer marketing program, Northwest Signatures, has been introduced to all
of the Hotels.
Guest Benefit Programs. The Company has established several incentive
programs to encourage and reward repeat visits by guests at the Hotels. The
incentive programs include: (i) Cavanaughs Constant Traveler and Cavanaughs
Gold Club, a corporate rate and amenity program, (ii) Cavanaughs Cash, a
frequent use program, and (iii) participation in Alaska Airlines/Horizon Air
Mileage Plan, a frequent flyer program. The Company uses the information
gained through guest participation in its incentive programs to design direct
mailing and other promotional programs to attract repeat use of the Hotels.
Maintaining a Unique Corporate Culture. The Company has developed a team of
managers which has the expertise, authority and incentive to execute a plan
for each Hotel that is designed to increase operating profitability. Members
of the Company's senior management team have been with the Company on average
for more than 17 years. The Company's management encourages employee loyalty
and longevity through a number of employee programs that enhance productivity
and align employees' interests with those of the shareholders. Significant
programs include (i) employee stock option and stock purchase plans which are
available to all hourly
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and salaried employees through payroll deduction and 401(k) programs, (ii)
employee bonus plans that target, where possible, all management level
employees to earn a significant portion of their annual compensation from
profits generated through their departments thereby encouraging significant
business decision making among all levels of employees and (iii) continuing
education programs that encourage expanded learning with Company sponsored
tuition programs tied to length of service. In addition, the Company sponsors
a not-for-profit day-care program at the Company's headquarters.
SALES AND MARKETING
The Company's hotel sales and marketing approach includes the following
components:
Centralized Sales Management. In order to serve customers' lodging needs,
the Company's sales department is centrally organized according to expertise
and relationships in each of the following market segments: corporate,
convention, government, tour and travel, education, team, transient, contract,
and promotion/leisure. The sales department works with each Hotel to ensure
that sufficient hotel product is available to accommodate each group, guest or
event in the particular Hotel which best serves the lodging needs of such
group, guest or event. In addition, each Hotel has (or shares with adjacent
Cavanaughs Hotels) sales and banquet and catering personnel promoting that
Hotel to ensure that such Hotel's local individual and corporate customers are
served. The Company's sales and marketing department includes personnel
located at its headquarters as well as sales and marketing personnel located
at each of the Hotels. Sales and marketing personnel residing at the Company's
headquarters are in charge of major national and regional accounts and
promotional campaigns. The Company utilizes media in the Northwest including
television, radio, newspaper, in-flight magazines, business publications, and
billboards, to market the Hotels.
Attention to Customer Service. The Company places significant value on
meeting the changing needs of its customers by employing state-of-the-art
technology to track customer preferences and actively measuring guest
satisfaction through surveys which enables it to reinvest in those services
and amenities which are most appreciated.
In-House Advertising Services. The Company believes that its in-house
advertising and promotional departments allows it to take advantage of hotel
room sales opportunities by generating promotional campaigns more quickly than
its competitors. Through its internal advertising agency, the Company can
purchase media at lower all-inclusive costs than its competitors who must out-
source these functions.
Reservation Systems. The Company's Toll-Free Call Center is designed to
provide integrated hotel, entertainment information and reservation services.
The Toll-Free Call Center has the capacity to accommodate 48 simultaneous
calls and provides access to standardized reservation systems utilized by
travel agents worldwide to book hotel rooms. The Toll-Free Call Center is open
24 hours per day, seven days per week. The Toll-Free Call Center also
maintains a database of information on over 200,000 repeat customers. Both
hotel reservations and event ticketing requests can also be made through the
Company's website address: www.cavanaughs.com.
Promotional Programs. The Company utilizes its own and affiliated incentive
programs to attract additional customers. The Company's Cavanaughs Cash
program enables participants to enjoy guest room savings by accumulating
Cavanaughs Cash coupons. In addition, the Company participates in the Alaska
Airlines/Horizon Air Mileage Plan Program. Alaska Airlines/Horizon Air is a
dominant air service provider in the northwest United States, serving
approximately 77 airports in the United States and 13 additional airports in
Canada, Mexico and Russia. During 1996, Alaska Airlines/Horizon Air carried
11.8 million passengers. Guests of the Hotels who pay qualifying rates earn
mileage credits for each stay, redeemable for air travel and other airline
benefits. The Company and Alaska Airlines/Horizon Air have committed to
jointly market property-specific programs that benefit the customers of both
companies.
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HOTEL PROPERTIES
The Company's hotel portfolio currently contains 11 full service Hotels,
with 2,369 guest rooms and approximately 120,000 square feet of meeting space,
located in the Northwest. In addition, the Company has entered into purchase
agreements to acquire two additional full service hotels. The following table
sets forth certain information regarding the Company's hotel portfolio and
hotels under contract.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
MEETING ---------------------------------
YEAR BUILT/ YEAR GUEST SPACE AVERAGE
LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY
--------------- ----------- --------- ----- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HOTELS OWNED AS OF OCTO-
BER 31, 1997:
Cavanaughs on Fifth Ave-
nue.................... Seattle, WA 1996 1996 297 12,500 $ 73.55 $ 116.24 64.9%
Cavanaughs Inn at the
Park................... Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1
Cavanaughs River Inn.... Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2
Cavanaughs Fourth Ave-
nue.................... Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7
Cavanaughs at Yakima
Center................. Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3
Cavanaughs Gateway Ho-
tel.................... Yakima, WA 1997(1) 1997 172 8,000 34.16 58.96 57.9
Cavanaughs at Columbia
Center................. Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9
Cavanaughs at Kalispell
Center................. Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2
----- ------- --------- ---------- -------
Total/Weighted Average
for Owned Hotels
(2)(3)................ 1,718 84,300 $ 45.72 $ 73.43 63.5%
HOTELS ACQUIRED SINCE
OCTOBER 31, 1997:
Cavanaughs Ridpath Ho-
tel.................... Spokane, WA 1998(4) 1996 342 16,000 $ 33.49 $ 58.43 57.3%
Cavanaughs on the
Falls.................. Idaho Falls, ID 1998(5) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins Re-
sort................... Post Falls, ID 1998(6) 1996 167 11,000 36.45 62.65 58.2
HOTELS CURRENTLY UNDER
CONTRACT:
Cavanaughs Outlaw Ho-
tel.................... Kalispell, MT 1998(7) 1995 220 11,000 $ 29.88 $ 68.88 43.4%
Cavanaughs Hillsboro Ho-
tel.................... Portland, OR 1998(8) 1997 123 3,500 50.13 72.38 69.3
----- ------- --------- ---------- -------
Total/Weighted Average
for Hotels Acquired or
Under Contract Since
October 31, 1997...... 994 50,300 $ 35.40 $ 62.99 56.2%
Total/Weighted Average
for All Hotels
(2)(3)................ 2,712 134,600 $ 41.21 $ 68.94 59.8%
</TABLE>
- --------
(1) Leased by the Company effective October 15, 1997.
(2) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(3) The total/weighted average for owned Hotels includes REVPAR, ADR and
average occupancy of Cavanaughs Gateway Hotel for the period from October
15, 1997 through October 31, 1997.
(4) Leased by the Company effective January 1, 1998.
(5) Acquired by the Company on January 7, 1998.
(6) Acquired by the Company on February 2, 1998.
(7) The Company has entered into a purchase agreement dated November 19, 1997
to acquire this hotel, subject to the satisfaction of normal closing
conditions, for a purchase price of $9.8 million within 60 days of the
closing of the Offering. This hotel, which is currently known as the
Outlaw Inn, will be re-branded as the "Cavanaughs Outlaw Hotel" upon
acquisition.
(8) The Company has entered into a purchase agreement dated January 14, 1998
pursuant to which it intends to acquire this hotel, subject to the
satisfaction of normal closing conditions, for a purchase price of $5.7
million on April 1, 1998. This hotel, currently known as the Hallmark Inn,
will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition.
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Cavanaughs on Fifth Avenue--Seattle, Washington. Formerly the regional
headquarters for U.S. Bank of Washington, the 20-story property was acquired
by the Company in June 1995 and, in eleven months, converted into a 297-room,
full service hotel which opened in May 1996. The Hotel is located in the
central business district of Seattle, and is two blocks from the Washington
State Convention Center. Amenities include two restaurants, a lounge, business
center, fitness center and 12,500 square feet of meeting and banquet space
which can be divided into six separate meeting rooms. The Hotel also includes
14,300 square feet of retail space and 25,000 square feet of office space. The
retail and office space is 100% leased.
Cavanaughs Inn at the Park--Spokane, Washington. Developed by the Company in
1983 and expanded in 1986 and 1993, the property is a 402-room, full service
hotel located along the banks of the Spokane River in Spokane, Washington, the
cultural, entertainment and sports center for the region. The Hotel is
adjacent to the 100-acre Riverfront Park, near the 80,000 square foot Spokane
Convention Center and 2,600-seat Opera House and is two blocks from the
central business district and one block from the 12,000-seat Spokane Arena.
The Hotel is comprised of three guest room wings: the five story Main Wing
containing 181 rooms, the seven story Executive Wing containing 85 rooms, and
the 12-story Tower Wing containing 136 rooms. Amenities include two
restaurants, two lounges, two outdoor pools, one indoor lap pool, fitness
center, sauna, two whirlpools, and gift shop. The Hotel, which is the largest
hotel conference facility in the region, offers approximately 26,300 square
feet of meeting and banquet space which can be divided into separate meeting
rooms. The property contains approximately 2.1 acres of excess land which
could be reallocated for parking and enable the Company to develop an
estimated 336 additional guest rooms on its primary site in the future, if
market conditions warrant.
Cavanaughs River Inn--Spokane, Washington. Developed by the Company in 1976,
the property is a two-story, 245-room, full-service hotel located on the banks
of the Spokane River along the 40 mile long Centennial Trail pedestrian walk.
Amenities include two outdoor pools, tennis court, sauna and whirlpool, gift
shop, and a 2,800 square foot ballroom divisible into two meeting rooms. The
Hotel also has two additional meeting rooms totaling 900 square feet. The
property contains approximately 0.5 acre of excess land upon which, if some of
the Hotel's parking requirements were allocated to a parking lot controlled by
Cavanaughs Inn at the Park, an estimated 168 additional guest rooms in a high-
rise tower may be built in the future, if market conditions warrant.
Cavanaughs Fourth Avenue--Spokane, Washington. Acquired by the Company in
1991 and re-branded as a Cavanaughs hotel, the property is a six story, 153-
room full service hotel located in the center of Spokane's medical community,
adjacent to four hospitals, numerous public and private clinics and
rehabilitation centers. Amenities include a restaurant and lounge, an outdoor
pool and 2,600 square feet of meeting and banquet space divisible into four
meeting rooms. This Hotel is owned by a limited partnership of which the
Company is a 50% owner and general partner and an unaffiliated person is the
sole limited partner.
Cavanaughs Ridpath Hotel--Spokane, Washington. Acquired by the Company in
January 1998 and re-branded as a Cavanaughs hotel, the property is a 13-story,
342-room, full service hotel located in the Spokane central business district
and is four blocks from the Spokane Convention Center and Opera House.
Amenities include two restaurants, two lounges, an outdoor pool, fitness
center and approximately 12,700 square feet of retail space which is leased to
seven tenants. As of January 1998, the retail space was 80% leased. The Hotel
offers approximately 16,000 square feet of meeting and banquet space divisible
into 14 meeting rooms. The Hotel is held by the Company pursuant to a lease
which expires in November 1999, and provides the Company with a purchase
option to acquire the Hotel from the lessor, and the lessor with a put option
to sell the Hotel to the Company, exercisable during the term, for an amount
ranging from $11.5 million to $12.5 million, depending on the date of closing
of the purchase and sale pursuant to the option.
Cavanaughs at Yakima Center--Yakima, Washington. Acquired by the Company in
1991 and re-branded as a Cavanaughs hotel, the property is a two-story, 155-
room, full service hotel located in the center of Yakima's central business
district and is attached to the Yakima Convention Center by a covered walkway.
Yakima is located in the center of the state of Washington and has a diverse
agricultural, industrial and manufacturing base. The Hotel is comprised of
four buildings: the two-story Corporate Building, the two-story Garden
Building, the two-story free standing Townhouse Building and the two-story,
free standing Main Building. Amenities include a restaurant, lounge, two
outdoor pools, and business center. The Hotel offers approximately 11,000
square feet
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<PAGE>
of meeting and banquet space which can be divided into nine separate meeting
rooms and is often used for convention center overflow. The property contains
approximately 0.3 acres of excess land that could be used to facilitate the
addition of an estimated 80 guest rooms, if market conditions warrant.
Cavanaughs Gateway Hotel--Yakima, Washington. Acquired by the Company in
October 1997 and re-branded as a Cavanaughs hotel, the property is a three-
story, 172-room full service hotel located adjacent to the Yakima Convention
Center and across the street from the Company's Cavanaughs at Yakima Center
Hotel. Amenities include a restaurant, lounge, outdoor pool and jacuzzi. The
property offers approximately 8,000 square feet of meeting space which is
divisible into ten meeting rooms and is often used for convention center
overflow. The Hotel is held by the Company pursuant to a lease which expires
in October 2012, subject to the Company's right to extend the term of the
lease for two additional five-year periods, and provides the Company with a
purchase option, exercisable in 2003, to acquire the Hotel from the lessor for
$6.3 million.
Cavanaughs at Columbia Center--Kennewick, Washington. Developed by the
Company in 1978, the property is a two-story, 162-room full service hotel
located across the street from the five anchor, 90-store Columbia Center Mall
and a 6,000 seat arena. Amenities include a restaurant, lounge, outdoor pool
and gift shop. The Hotel offers 9,700 square feet of meeting and banquet space
which is divisible into nine meeting rooms. The property contains
approximately 4.0 acres of excess land upon which an estimated 144 additional
guest rooms in a three-story structure, together with an estimated 50,000
square feet of retail facilities, may be built in the future, if market
conditions warrant.
Cavanaughs on the Falls--Idaho Falls, Idaho. Acquired by the Company in
January 1998 and re-branded as a Cavanaughs hotel, the property is an eight-
story, 142-room full service hotel located in downtown Idaho Falls overlooking
the falls on the Snake River. Amenities include a restaurant, lounge, an
outdoor pool, sauna, spa and fitness center. The Hotel offers 8,800 square
feet of meeting and banquet space which is divisible into eight meeting rooms.
The property underwent major renovations in 1993 and 1994. The property
includes a 13,300 square foot building which could be demolished and re-built
into an estimated 30 additional guest rooms in the future, if market
conditions warrant.
Cavanaughs Templins Resort--Post Falls, Idaho. Acquired by the Company in
February 1998 and re-branded as a Cavanaughs hotel, the property is a three-
story, 167-room full service hotel which was built in three phases between
1986 and 1996. The Hotel, which is located on the Spokane River, has a 76 slip
marina offering boating access to Lake Coeur d'Alene, a popular vacation
destination. The Hotel was previously operated as a Best Western hotel and, in
connection with the integration of the Hotel into the Company's portfolio, the
Company initially intends to continue to maintain such affiliation. Amenities
include two restaurants, lounge, indoor pool, sauna, spa, fitness center, two
tennis courts, and private beach and swim area. The Hotel offers 11,000 square
feet of meeting space which is divisible into 14 meeting rooms. The property
contains approximately 10.5 acres of excess land upon which an estimated 288
additional guest rooms in a series of low-rise buildings, together with an
estimated 10,000 square foot executive conference center and 20,000 square
foot retail facilities, may be built in the future, if market conditions
warrant.
Cavanaughs at Kalispell Center--Kalispell, Montana. Developed by the Company
in 1986 in conjunction with the Company's development of the Kalispell Center
Mall, the property is a three-story, 132-room full service hotel located near
Glacier National Park, Flathead Lake and Big Mountain Ski Resort. Amenities
include a restaurant, lounge, indoor pool, whirlpool, sauna and fitness
center. The Hotel offers 10,500 square feet of meeting and banquet space which
is divisible into nine meeting rooms. The Hotel is connected to the Company's
Kalispell Center Mall. The property contains approximately 3.5 acres of excess
land upon which an estimated 48 additional guest rooms and 100,000 square feet
of additional retail space may be built in the future, if market conditions
warrant.
Cavanaughs Outlaw Hotel--Kalispell, Montana. The property, which the Company
intends to acquire for a purchase price of $9.8 million within 60 days of the
closing of the Offering, is a two-story, 220-room full service hotel and is
the largest full service hotel in northwest Montana. Amenities include a
restaurant, lounge, two indoor pools, four whirlpools, sauna, tennis and
racquetball courts, and fitness center. The hotel offers approximately 11,000
square feet of meeting and banquet space divisible into 13 meeting rooms.
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<PAGE>
Cavanaughs Hillsboro Hotel--Portland, Oregon. The property, which the
Company intends to acquire in April 1998 for a purchase price of $5.7 million
and re-brand as a Cavanaughs hotel, is a two-story, 123-room full service
hotel located in the suburban Portland metropolitan area. The hotel is
adjacent to the Portland/Hillsboro Airport, Washington County Fairplex and in
the heart of the Silicon Forest, Oregon's premier high-tech business area.
This hotel is currently operated as a Best Western hotel and, in connection
with the integration of this hotel into the Company's portfolio, the Company
initially intends to maintain such affiliation. Amenities include a
restaurant, lounge, outdoor pool, indoor spa and fitness center. The hotel
offers 3,500 square feet of meeting and banquet space divisible into five
meeting rooms. The property contains excess land upon which an estimated
70 additional guest rooms may be built, if market conditions warrant.
ENTERTAINMENT SERVICES AND THIRD-PARTY PROPERTY MANAGEMENT
The entertainment, management and services division of the Company is
comprised of: (i) G&B Select-a-Seat, a full service theatrical and event
ticketing agency, (ii) G&B Presents, a promoter of touring Broadway shows and
other special events, and (iii) G&B Real Estate Services, a third-party
property management service. Reservations for entertainment events and hotel
information and reservations are made through the Toll-Free Call Center. The
combination of event ticketing, presentation of Broadway shows, hotel event
packages and a centralized reservations system enables the Company to offer
packages for hotel guests, generating additional room night occupancy and
income from ticket distribution service fees.
G&B Select-A-Seat. G&B Select-a-Seat, established in 1987, is a full service
ticketing agency offering box office ticket distribution through 20 regional
outlets and box offices in Washington, Idaho and Montana. G&B Select-a-Seat is
the exclusive contracted ticket services vendor for certain facilities in
these states, including the Spokane Arena, Spokane Opera House, Spokane
Symphony, Washington State University's stadium and coliseum, Eastern
Washington University and the University of Idaho. During its fiscal year
ended October 31, 1997, the Company processed in excess of 2.0 million
tickets. G&B Select-a-Seat uses state of the art software which enables the
agency to access the many entertainment events being presented throughout the
Northwest. Phone agents are able to coordinate the sales of entertainment and
event tickets with guests making hotel room reservations and vice versa. The
Company is actively seeking additional ticket distribution opportunities in
the Northwest.
G&B Presents. G&B Presents, established in 1987, is one of the largest
regional presenters of events in the Washington area. In addition to special
events, such as sporting events and musical acts, G&B Presents organizes the
presentation of touring Broadway shows in Spokane as part of its "Best of
Broadway" series. During 1997, the Company presented nine Broadway shows and
special events. Past events have included shows such as Cats, South Pacific
and Les Miserables. In its last ten years of operation the Company has
attracted over 500,000 patrons to its 79 Broadway and special event shows. The
Company cross-markets these productions by creating special event/Hotel
packages.
The Toll-Free Call Center. The Toll-Free Call Center is designed to provide
centralized hotel and entertainment information and reservation services. Each
agent is trained to cross-sell Hotel reservations, event tickets, and special
event/Hotel packages. Guests that are traveling to see entertainment events
are able to book their hotel room and confirm event tickets in one toll-free
call. The Toll-Free Call Center is open 24 hours per day, seven days a week
and has the capacity to accept as many as 48 simultaneous phone conversations
and provides access to reservations systems used by travel agents world-wide
to book hotel rooms. The Toll-Free Call Center also maintains a database which
gives reservation agents information on current room and event availability,
guest information, history and preferences. Event ticket requests and hotel
reservations can be made by calling the Toll-Free Call Center at 1-800-325-
4000 and via the Company's website address at www.cavanaughs.com.
G&B Real Estate Services. The Company is a leading property manager of
office, retail and residential space in regions of eastern Washington,
northern Idaho and western Montana, with over 3.1 million square feet of
commercial space under management. The Company's property management staff
includes leasing agents, property managers and building engineers providing
full-service commercial property management. The
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Company's residential property management department manages approximately
2,200 residential units in 39 properties. The Company is experienced in the
management of a full range of multi-family projects, including low income
housing, retirement communities, market rate apartment properties and
condominiums.
RENTAL OPERATIONS
The Company is the owner and manager of approximately 590,000 square feet of
leasable office and retail space located in Spokane, Washington and Kalispell,
Montana. The following is a description of each of the Company's office and
retail properties:
Crescent Court--Spokane, Washington. Acquired and substantially redeveloped
by the Company in 1994, the property is an eight-story, 234,000 square foot
mixed-use commercial building comprised of approximately 59,000 square feet of
leasable retail space, including a food court, 157,000 square feet of leasable
office space and an 8,000 square foot lower level exhibition hall, located in
Spokane's central business district. The property is located directly across
the street from River Park Square, a $100 million redevelopment project which,
when completed in 1999, is expected to include a 130,000 square foot
Nordstrom's department store, a number of speciality retailers, a 20 screen
AMC multiplex cinema and 300,000 square feet of additional retail and
restaurant space. As of December 1997, the retail portion of the property was
63.3% leased to 19 tenants and the office portion of the property was 77.4%
leased to four tenants including the Bonneville Power Administration, the U.S.
Postal Service regional headquarters, Sallie Mae and The Travelers Group which
has an option to lease an additional floor in the building effective December
1999. The Company has determined to retain 22,000 square feet of retail space
in the project for future development and leasing pending completion of the
River Park Square project.
Lincoln Building--Spokane, Washington. Acquired by the Company in 1984, the
property is a 114,000 square foot mixed-use commercial building comprised of
approximately 32,000 square feet of retail space, 82,000 square feet of office
space, and two floors of underground parking which can accommodate 200
automobiles. The building is located in Spokane's central business district,
one block west of the Company's Crescent Court property and one block south of
River Park Square. As of December 1997, the retail portion of the property was
66.8% leased to six tenants, including Pacific Northwest Life and Farmers and
Merchants Bank. The office tower was 88.4% leased to 25 tenants, including New
York Life Insurance and Equitable of Iowa. The Company has determined to
retain 26,000 square feet of retail space for future development and leasing
pending completion of the River Park Square project.
CHC Building--Spokane, Washington. Developed by the Company in 1986, the
property is a six-story, 100,000 square foot office building having an
attached three-story parking deck which can accommodate 250 automobiles. The
building is located on the north bank of the Spokane River, adjacent to
Cavanaughs Inn at the Park. As of December 1997, the property was 100% leased
to 23 tenants including the Company, Morgan Stanley Dean Witter Discover, and
Avista Energy.
Kalispell Center Mall--Kalispell, Montana. Developed by the Company in 1986
in conjunction with the Company's development of the Cavanaughs at Kalispell
Center hotel, the property is a single level enclosed regional mall shopping
center containing 163,000 square feet of gross leasable area. As of December
1997, the property was 98% leased to 46 tenants including J.C. Penney and
Herbergers. The property is connected to the Cavanaughs at Kalispell Center
hotel.
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MANAGEMENT AND EMPLOYEES
The Company employs approximately 1,900 persons. Employees at Cavanaughs
Ridpath Hotel currently are represented by labor unions. Management believes
its ongoing labor relations are good.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits
will not have a material adverse effect on the Company.
TRADEMARKS
"Cavanaugh's(R)" is a registered trademark of the Company in the United
States. The Company has filed an application to register "Cavanaughs" as an
additional trademark in the United States and Canada.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of March 10, 1998
regarding the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald K. Barbieri.......... 52 Chairman, President and Chief Executive Officer
Arthur M. Coffey............ 42 Executive Vice President, Chief Financial
Officer and Director
Richard L. Barbieri......... 55 Senior Vice President, General Counsel and
Director
Thomas M. Barbieri.......... 40 Senior Vice President--Acquisitions and
Commercial Operations and Director
David M. Bell............... 47 Senior Vice President--Project Design,
Development and Construction
Lori L. Farnell............. 43 Vice President--Sales and Marketing
John M. Taffin.............. 34 Vice President--Hotel Operations
Peter F. Stanton............ 41 Proposed Director
Ronald R. Taylor............ 50 Proposed Director
Robert G. Templin........... 74 Proposed Director
</TABLE>
Donald K. Barbieri has been President and Chief Executive Officer and a
Director of the Company since 1978 and Chairman of the Board since 1996. Mr.
Barbieri joined the Company in 1969 and is responsible for the Company's
development activities in commercial, residential, hotels and entertainment
areas. Mr. Barbieri served as president of the Spokane Chapter of the Building
Owners and Managers Association from 1974 to 1975 and served as president of
the Spokane Regional Convention and Visitors Bureau from 1977 to 1979. He also
served on the Washington Tourism Development Council from 1983 to 1985 and the
Washington Economic Development Board while chairing the State of Washington's
Quality of Life Task Force from 1985 to 1989. Mr. Barbieri is the brother of
Richard and Thomas Barbieri and the brother-in-law of David Bell.
Arthur M. Coffey has been Chief Financial Officer and Executive Vice
President of the Company since June 1997 and a Director of the Company since
1990. Mr. Coffey served as Chief Operating Officer of the Company from 1990 to
June 1997. Mr. Coffey has been in the hotel business since 1971 and joined the
Company in 1981. Mr. Coffey is currently a trustee of the Spokane Area Chamber
of Commerce, served as a director of the Washington State Hotel Association
from 1996 to 1997, served as director of the Spokane Regional Convention and
Visitors Bureau from 1982 to 1985 and served as president of the Spokane Hotel
Association from 1989 to 1990.
Richard L. Barbieri has been a Senior Vice President of the Company since
September 1997, full-time General Counsel of the Company since 1995 and a
Director of the Company since 1978. From 1994 to 1997, Mr. Barbieri served as
a Vice President of the Company. From 1978 to 1995, Mr. Barbieri served as
outside counsel and Secretary of the Company, during which time he was engaged
in the practice of law at Edwards and Barbieri, a Seattle law firm, and then
at Riddell Williams Bullitt and Walkinsaw, a Seattle law firm, where he headed
the real estate practice group. Mr. Barbieri has also served as chairman of
various committees of the State and County Bar Association and as a member of
the governing board of the County Bar Association. He also served as vice
chairman of the Citizens' Advisory Committee to the Major League Baseball
Stadium Public Facilities District in Seattle in 1996 and 1997. Mr. Barbieri
is the brother of Donald and Thomas Barbieri and the brother-in-law of David
Bell.
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<PAGE>
Thomas M. Barbieri has been Senior Vice President--Acquisitions and
Commercial Operations of the Company since September 1997 and a Director of
the Company since 1985. From 1985 to 1997, Mr. Barbieri served as a Vice
President of the Company. Mr. Barbieri joined the Company in 1979 and from
1987 to the present has overseen the management, supervision, and development
of the Company's real estate portfolio. From 1982 to 1987, Mr. Barbieri was
Operations Manager of the Company's hospitality division. From 1979 to 1981,
Mr. Barbieri was the General Manager of Cavanaughs River Inn. He served on
Washington State Governor Lowery's Real Estate Advisory Council from 1993 to
1994, as a president of the Downtown Spokane Association from 1992 to 1994, as
a director of the Spokane Convention and Visitors Bureau from 1983 to 1987, as
a trustee of the Spokane Area Chamber of Commerce from 1987 to 1991 and as a
director of the Spokane Economic Development Council from 1991 to 1996. Mr.
Barbieri is the brother of Donald and Richard Barbieri and the brother-in-law
of David Bell.
David M. Bell has been Senior Vice President--Project Design, Development
and Construction of the Company since September 1997 and a Director of the
Company since 1985. From 1985 to 1997, Mr. Bell served as Vice President of
the Company. He is in charge of new project development, property renovations
and major building construction. Since joining the Company in 1984, Mr. Bell
has been responsible for numerous projects, including the development of the
CHC Building, the Cavanaughs at Kalispell Center hotel and the Kalispell
Center Mall, two major room tower additions to Cavanaughs Inn at the Park and
the conversion of the U.S. Bank of Washington office building in Seattle into
Cavanaughs on Fifth Avenue. Mr. Bell is a registered Professional Engineer.
Mr. Bell is the brother-in-law of Donald, Richard and Thomas Barbieri.
Lori L. Farnell has been the Vice President--Sales and Marketing since
October 1993. Ms. Farnell joined the Company in 1981 as Director of Sales for
the hospitality division. Ms. Farnell is responsible for directing the sales
and marketing activities of the Company and the in-house advertising and art
department. Prior to joining the Company, Ms. Farnell worked as Director of
Sales for the Spokane Davenport Hotel. She is a member of the Eastern
Washington University Foundation Board, the Sacred Heart Hospital Ambassadors
Board, a past President and Woman of the Year of Executive Women International
and an active member of the Washington Society of Association Executives and
the National Tour Association.
John M. Taffin has been Vice President--Hotel Operations since September
1997. Mr. Taffin is responsible for the Company's overall hotel operations and
directs the Company's yield management strategy. Mr. Taffin joined the
Company's hospitality division in November 1995 as a regional manager. Mr.
Taffin's prior lodging experience includes 13 years of service with Red Lion
Hotels, during which time he was a general manager of various full service
hotels throughout the Northwest. Prior to September 1997, Mr. Taffin was
responsible for all aspects of operations for the Hotels located in Spokane.
Peter F. Stanton has agreed to become a Director of the Company upon
consummation of the Offering. Mr. Stanton is the Chairman, Chief Executive
Officer and President of Washington Trust Bank. Mr. Stanton has been with
Washington Trust Bank since 1982 and has served as its President since 1990,
Chief Executive Officer since 1993 and Chairman since 1997. Mr. Stanton is
also Chief Executive Officer, President and a director of W.T.B. Financial
Corporation (a bank holding company) and a director of Northern State Bank and
Reardon and Rivard & Associates (a registered investment advisor). In addition
to serving on numerous civic boards, Mr. Stanton was president of the
Washington Bankers Association from 1995 to 1996 and serves as state chairman
of the American Bankers Association for 1997 and 1998.
Ronald R. Taylor has agreed to become a Director of the Company upon
consummation of the Offering. From 1996 to the present, Mr. Taylor has worked
as an independent business consultant. From 1987 to 1996, Mr. Taylor was
chairman, president and chief financial officer of Pyxis Corporation (a health
care services provider). He is currently a director of Watson Pharmaceuticals,
Inc. (a pharmaceutical manufacturer), Allelix Biopharmaceuticals (a
biotechnology company) and Cardio Dynamics (a medical device manufacturer).
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<PAGE>
Robert G. Templin has agreed to become a Director of the Company upon
consummation of the Offering. Mr. Templin has had 50 years of continuous
experience in ownership, acquisition and disposition, transaction counseling,
development, construction and management work in the lodging industry in the
Northwest. From 1962 to 1983, he was Chief Executive Officer of Western
Frontiers, a hotel operator. Since 1986, Mr. Templin has served as governor
for District II for Best Western, Inc. In 1986, he built Templin's Resort and
Conference Center. He served as president of the Idaho Inn Keepers Association
from 1975 to 1976 and president of the Coeur d'Alene Chamber of Commerce in
1963. Mr. Templin also served on the Government Affairs Committee of Holiday
Inn, Inc. from 1981 to 1982. In addition to his responsibilities as a Director
of the Company, Mr. Templin will be asked to represent the Company on the
board of the Idaho Travel Council.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the closing of the Offering, the Board
will establish an audit committee consisting of Peter Stanton and Ronald
Taylor (the "Audit Committee"). The Audit Committee will be responsible for
making recommendations concerning the engagement of the Company's independent
public accountants, reviewing with the independent public accountants the
plans and results of the audit engagement, approving professional services
provided by the independent public accountants, reviewing the independence of
the independent public accountants, considering the range of audit and non-
audit fees and reviewing the adequacy of the Company's internal accounting
controls.
Compensation Committee. Promptly following the closing of the Offering, the
Board will establish a compensation committee consisting of Peter Stanton and
Ronald Taylor (the "Compensation Committee"). The Compensation Committee will
be responsible for determining compensation for the Company's executive
officers and administering the Plans.
OPERATIONS COMMITTEE
The Board has established an operations committee (the "Operations
Committee"). The Operations Committee is chaired by Donald Barbieri and
consists of Arthur Coffey, Thomas Barbieri, John Taffin, Lori Farnell, David
Barbieri, Stephen Barbieri, David Bell and Jack Lucas. The Operations
Committee, which is not a committee of the Board, is responsible for
implementing the policies established by the Board and shall be under the
direction of the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company expects that the Compensation Committee will consist of Peter
Stanton and Ronald Taylor, neither of whom has ever served as an officer of
the Company.
COMPENSATION OF DIRECTORS
The Company intends to pay an annual fee of $6,000 to its non-employee
Directors which will be paid 50% in cash and 50% in shares of Common Stock. In
addition, each non-employee Director will be paid $500 for attendance at each
meeting of the Board and $250 for attendance at each meeting of a committee of
the Board of which such Director is a member. Directors who are employees of
the Company will not receive any fees for their service on the Board or any
committee thereof. In addition, the Company will reimburse Directors for their
out-of-pocket expenses incurred in connection with their service on the Board.
Upon consummation of the Offering, each non-employee Director will be granted
options to purchase 10,000 shares of Common Stock at the initial public
offering price. These options will vest in 20% increments over the five-year
period following the Offering subject to the accelerated vesting schedule
described in "--Restricted Stock and Certain Stock Option Grants." Any non-
employee Director who ceases to be a Director will forfeit the right to
receive any options not previously vested.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company with
respect to the fiscal year ended October 31, 1997 to the Chief Executive
Officer and the four most highly compensated executive officers whose total
annual compensation from the Company exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
--------------------------- ---- ------- -------- ---------------
<S> <C> <C> <C> <C>
Donald K. Barbieri........................ 1997 $88,776 $256,037 $7,129
President and Chief Executive Officer
Arthur M. Coffey.......................... 1997 $76,680 $211,055 $8,799
Executive Vice President and Chief
Financial Officer
Richard L. Barbieri....................... 1997 $79,572 $ 50,891 $6,544
Senior Vice President and General Counsel
David M. Bell............................. 1997 $67,530 $ 36,136 $7,667
Senior Vice President--Project Design,
Development and Construction
Thomas M. Barbieri........................ 1997 $86,645 $ 46,926 $8,289
Senior Vice President--Acquisitions and
Commercial Operations
</TABLE>
- --------
(1) Includes contributions to the Company's 401(k) plan as well as premiums
paid with respect to such executive officer's health, disability and life
insurance policies.
EMPLOYMENT AGREEMENTS
The Company intends to enter into employment agreements with each of Donald
Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri
which will provide for annual base salaries of $155,000 in the case of Donald
Barbieri, $130,000 in the case of Mr. Coffey, and $96,000 in the case of
Richard Barbieri, Mr. Bell and Thomas Barbieri, subject, in each case, to
periodic increases. Each executive officer will be eligible to receive annual
bonuses as determined by the Compensation Committee and will be entitled to
participate in all existing or future benefit plans of the Company, on the
same basis as other senior executive officers of the Company.
The employment agreements with these senior executive officers (as used
below, each an "Executive") will be substantially similar and provide as
follows. Each Executive shall serve in the position described above through
December 31, 1999, unless terminated earlier in accordance with the terms of
such agreement. Thereafter, each agreement will automatically be renewed for
additional one-year periods, unless terminated by either party upon 120 days'
notice prior to any renewal. Each agreement may be terminated by the Company
for Cause (as defined in such agreement) or by the Executive (i) for Good
Reason (as defined in such agreement) or (ii) within six months of a Change of
Control of the Company (as defined in such agreement). If the Executive
terminates the agreement for Good Reason (or the Company terminates the
agreement without Cause) or, after the initial term ends, unilaterally
determines to not renew such Executive's agreement, the Executive will receive
a severance payment equal to two times such Executive's total compensation in
the prior year, plus a continuation of all benefits for a two-year period, and
all outstanding options of such Executive shall become fully vested. If the
Executive terminates the agreement following a Change of Control, the
severance payment will be equal to three times such Executive's total
compensation for the prior year. The Executive is required to devote his full
business time and attention to the business and affairs of the Company, except
that he may devote
45
<PAGE>
such reasonable amount of time, as he determines, to (i) serving, with the
approval of the Board, as a director, trustee or member of any board or
committee of any organization, (ii) engaging in charitable and community
activities, (iii) managing his personal investments and affairs, and (iv)
acting as a director and officer of Inland Northwest Corporation, previously a
wholly-owned subsidiary of the Company; provided, however, that such
activities may not involve any material conflict of interest with the
interests of the Company or interfere materially with the performance of his
duties and responsibilities under such agreement.
Each Executive is eligible to receive a bonus under the Company's management
bonus plan or such other plan adopted from time to time. The award and amount
of such bonus shall be based upon the Compensation Committee's determination
of such Executive's actual performance as measured against established goals.
The Company has also agreed to reimburse the Executive for any federal, state
or local excise taxes ("Excise Tax"), and any additional taxes to which he may
be subject, on any payments to the Executive from the Company as a result of
accelerated vesting of his options, up to a maximum reimbursement equal to two
times the amount of such Excise Tax.
1998 STOCK INCENTIVE PLAN
In January 1998, the Board adopted the 1998 Plan to attract and retain
officers, key employees and consultants. Additional options may be granted
subject to Board approval. An aggregate of 1,200,000 shares of Common Stock,
subject to adjustment for stock splits, stock dividends and similar events,
has been authorized for issuance upon exercise of options, stock appreciation
rights ("SARs"), and other awards, including restricted or deferred stock
awards under the 1998 Plan. Following the Offering, the Compensation Committee
will administer the 1998 Plan and determine to whom options, SARs, restricted
stock purchase rights and other awards are to be granted and the terms and
conditions, including the number of shares and the period of exercisability,
thereof. Upon consummation of the Offering, non-employee Directors will be
granted options under the 1998 Plan to purchase 10,000 shares of Common Stock,
subject to one year restriction on sale and vesting equal percentages over
five years.
The 1998 Plan authorizes the grant or issuance of various options and other
awards. Nonqualified stock options ("NQSOs") may be granted for any term
specified by the Compensation Committee and will provide for the right to
purchase Common Stock at a specified price which, except with respect to NQSOs
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), may be less than
fair market value on the date of grant (but not less than par value), and may
become exercisable (at the discretion of the Compensation Committee) in one or
more installments after the date of grant. Incentive stock options may be
granted only to employees and if granted will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including having an exercise price equal to at least 100% of fair market
value of Common Stock on the grant date and ten year restriction on their
term, but may be subsequently modified to disqualify them from treatment as an
incentive stock option. The maximum fair market value (determined on the date
of grant) of shares which may be issued pursuant to incentive stock options
granted under the 1998 Plan to any individual in any calendar year may not
exceed $100,000. SARs granted by the Compensation Committee in connection with
stock options or other awards typically will provide for payments to the
holder based upon increases in the price of the Common Stock over the exercise
price of the related option or other awards, but alternatively may be based
upon other criteria such as book value. Participants may receive dividend
equivalents representing the value of the dividends per share paid by the
Company, calculated with reference to the number of shares covered by the
stock options, SARs or other awards held by the participant. Performance
awards may be granted by the Compensation Committee on an individual or group
basis and may include bonus or "phantom" stock awards that provide for
payments based upon increases in the price of the Common Stock over a
predetermined period. Restricted stock may be sold to participants at various
prices (but not below par value) and made subject to such restrictions as may
be determined by the Compensation Committee. Deferred stock awards may be
granted to participants, typically without payment of consideration, but
subject to vesting conditions based on continued employment or on performance
criteria established by the Compensation Committee. Whereas purchasers of
restricted stock will
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<PAGE>
have voting rights and will receive dividends prior to the time when the
restrictions lapse, recipients of deferred stock generally will have no voting
or dividend rights prior to the time when vesting conditions are satisfied.
Payments for the shares purchased upon the exercise of options may be in
cash or, if the terms of an option so provide, with shares of Common Stock
owned by the optionee (or issuable upon exercise of the option) or with other
lawful consideration, including services rendered.
No option, SAR or other right to acquire Common Stock granted under the 1998
Plan may be assigned or transferred by the grantee, except by will or the laws
of succession, although the shares underlying such rights may be transferred
if all applicable restrictions have lapsed. During the lifetime of the holder
of any option or right, such option or right may be exercised only by the
holder.
The Compensation Committee will have the right to accelerate, in whole or in
part, from time to time, including upon a change in control of the Company,
conditionally or unconditionally, the right to exercise any option or other
award granted under the 1998 Plan.
Amendments of the 1998 Plan to increase the number of shares as to which
options, SARs, restricted stock and other awards may be granted (except for
adjustments resulting from stock splits and similar events) will require the
approval of the Company's shareholders. In all other respects, the 1998 Plan
may be amended, modified, suspended or terminated by the Compensation
Committee, unless such action would otherwise require shareholder approval as
a matter of applicable law, regulation or rule. Amendments of the 1998 Plan
will not, without the consent of the participant, affect such person's rights
under an award previously granted, unless the award itself otherwise expressly
so provides. The 1998 Plan will terminate ten years after the date the 1998
Plan was adopted by the Board and approved by the Company's shareholders.
EMPLOYEE STOCK PURCHASE PLAN
In January 1998, the Company adopted the Employee Stock Purchase Plan to
assist employees of the Company in acquiring a stock ownership interest in the
Company and to encourage them to remain in the employment of the Company. The
Employee Stock Purchase Plan is intended to qualify under Section 423 of the
Code. A maximum of 300,000 shares of Common Stock will be reserved for
issuance under the Employee Stock Purchase Plan. The Employee Stock Purchase
Plan permits eligible employees to purchase Common Stock at a discount through
payroll deductions during specified six-month offering periods. No employee
may purchase more than $25,000 worth of Common Stock in any calendar year. The
price of shares purchased under the Employee Stock Purchase Plan will be equal
to 85% of the fair market value of the Common Stock on the first or last day
of the offering period, whichever is lower. After the Offering, the Employee
Stock Purchase Plan will be administered by the Compensation Committee.
401(k) PLAN
The Company adopted a tax-qualified employee savings and retirement plan
(the "401(k) Plan") effective as of March 1, 1989 covering all employees who
have been employed by the Company for at least 90 days and who are at least 21
years of age. Pursuant to the 401(k) Plan, participants may elect to reduce
their current compensation by not less than 1.0% nor more than 15.0% of
eligible compensation. The amount of each participant's contributions to the
401(k) Plan is partially matched by the Company based on years of service and
amounts contributed, up to 3% of a participant's earnings. The trustee under
the 401(k) Plan invests the assets of the 401(k) Plan in designated investment
options. The Company intends to amend the 401(k) Plan after the Offering to
permit participants to designate the Company's Common Stock as an investment
option; provided, however, no more than 15% of a participant's total
investments in the 401(k) Plan may be allocated to the Common Stock. The
401(k) Plan is intended to qualify under Section 401 of the Code so that
(i) contributions to the 401(k) Plan, and the income earned on such
contributions, are not taxable to participants until withdrawn from the 401(k)
Plan and (ii) contributions by the Company are deductible by the Company when
made for income tax purposes.
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<PAGE>
RESTRICTED STOCK AND CERTAIN STOCK OPTION GRANTS
The Company has entered into an agreement to issue an aggregate of 55,000
restricted shares of Common Stock under the 1998 Plan to five members of
senior management: Arthur Coffey (15,000 shares), John Taffin (10,000 shares),
Lori Farnell (10,000 shares), David Peterson (10,000 shares) and Shannon Kapek
(10,000 shares). Twenty percent of each recipient's stock grant will be issued
on the date of grant and an additional twenty percent will be issued on each
anniversary of such date of grant, provided such person is an employee of the
Company at that time.
In connection with the Offering, options to purchase up to 900,000 shares of
Common Stock will be granted pursuant to the Plans, at an exercise price equal
to the initial public offering price, including options to be granted to
Donald Barbieri (90,000 shares), Arthur Coffey (55,000 shares), Richard
Barbieri (45,000 shares), Thomas Barbieri (45,000 shares) and David Bell
(45,000 shares). The options will have a term of ten years. Fifty percent of
each recipient's options will vest on the fourth anniversary of the date of
grant and the remaining 50% will vest on the fifth anniversary of the date of
grant. This vesting schedule will change if, beginning one year after the
option grant date, the stock price of the Common Stock reaches the following
target levels (measured as a percentage increase over the exercise price) for
20 consecutive trading days:
<TABLE>
<CAPTION>
PERCENT OF
SHARE PRICE INCREASE: OPTION SHARES VESTED:
--------------------- ---------------------
<S> <C>
25%................. 25%
50%................. 50%
75%................. 75%
100%................. 100%
</TABLE>
Such options shall be exercisable, subject to vesting, for ten years from
the date of grant and in all other respects shall be subject to the terms and
conditions of the 1998 Plan. Vesting of such options is also conditioned upon
the holder's employment with the Company on the scheduled vesting date.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to November 1, 1997, all of the assets of the Company were held by the
Company and BIC directly, or indirectly through various partnerships (the
"Partnerships") and corporations wholly-owned (with one exception) by the
Company and/or BIC, as the case may be, and all of the Hotels and other
properties owned by the Company, BIC and the Partnerships were managed by the
Company, as the general partner of the Partnerships, or through various
management agreements with BIC or the Partnerships. Effective November 3,
1997, BIC merged with and into the Company. The Merger was a stock-for-stock
merger, pursuant to which the holders of the common stock of BIC and the
holders of preferred and common stock of the Company received an aggregate of
7,072,025 shares of Common Stock of the Company pursuant to conversion ratios
jointly determined by the boards of directors of the Company and BIC and
unanimously approved by the shareholders of the Company and BIC. By effecting
a merger of the holders of the general and limited partner interests in the
Partnerships, the Merger resulted in the dissolution of, and a transfer to the
Company of all assets and property held by, the Partnerships, with the
exception of Cowley Street Limited Partnership.
Effective November 1, 1997, the Company (i) contributed certain assets not
related to its core hospitality business to Inland Northwest Corporation, a
wholly owned subsidiary of the Company ("INWC"), and (ii) distributed shares
of capital stock of INWC and Huckleberry Bay Company, another wholly-owned
subsidiary of the Company ("HBC"), on a pro rata basis, to the shareholders of
the Company (the "Spin-Off"). The Spin-Off was structured as a tax-free
transaction. If the Spin-Off is ultimately determined not to qualify as a tax-
free transaction (other than as a result of (i) actions taken by the Company
following the Offering that are approved by a majority of the Company's
independent directors or (ii) transfers of a limited number of shares of
Common Stock with the approval of the INWC Board of Directors by persons who
were shareholders of the Company at the time of the Spin-Off), INWC will
indemnify the Company for any tax liability the Company incurs. As a result of
the foregoing transactions, the following assets are no longer part of the
Company's operations: recreational real estate in Priest Lake, Idaho, a long-
term residence inn operation, an interest in a milk processing and
distribution business and a retail sales operation. The Company recorded
management fees and other income of approximately $35,000, $31,000 and $27,000
during the years ended October 31, 1997, 1996 and 1995, respectively, and
$17,000 for the two months ended December 31, 1997 for performing management
and administrative functions for INWC and HBC. In addition, the Company
received commissions from INWC and HBC for real estate sales on behalf of INWC
and HBC of $87,000, $7,000 and $51,000 for the years ended October 31, 1997,
1996 and 1995, respectively, and $1,000 for the two months ended December 31,
1997. In connection with the Spin-Off, the Company entered into an agreement
with INWC, pursuant to which it will provide management, development,
accounting and other administrative services to INWC in exchange for
commissions, leasing fees, management fees, service fees and development fees,
as applicable, based on certain percentages and costs incurred by the Company
in connection with providing such services. The agreement is automatically
renewed annually and is subject to termination at the option of either party
upon 60 days' notice before such renewal date.
The Company acquired a hotel property (Cavanaughs Templins Resort) from
Templin's Resort and Conference Center, Inc. in February 1998. Robert Templin,
the President of Templin's Resort and Conference Center, Inc., has agreed to
become a Director of the Company upon consummation of the Offering. The
purchase price paid by the Company for this Hotel was $9.5 million consisting
of cash, assumed indebtedness and a note to the seller. Mr. Templin and
members of his immediate family own 100% of equity interest in Templin's
Resort and Conference Center, Inc. and are entitled to receive all of the net
proceeds of the purchase price paid for this Hotel. The purchase price was
determined through arm's-length negotiations between the Company and Mr.
Templin.
In connection with the acquisition of certain real property, the Company
incurred a $600,000 obligation payable to the Barbieri Family Foundation, Inc.
("BFF"), a corporation controlled by the estate of Louis Barbieri, who was the
father of Donald, Richard and Thomas Barbieri. BFF is entitled to receive a
guaranteed interest payment of approximately $67,000 annually, which, pursuant
to the terms of the obligation, increases by
49
<PAGE>
3% annually. The Company has the right to repay its obligation in full at any
time after January 1997, and BFF has the right to require redemption in full at
any time after January 1999. Interest expense of $67,000, $66,000 and $64,000
was paid by the Company to BFF during the years ended October 31, 1997, 1996
and 1995, respectively, and $11,000 for the two months ended December 31, 1997.
The Company will repay this obligation upon closing of the Offering.
Effective January 1, 1998, the Company issued an aggregate of 150,817
OP Units to BFF, Donald Barbieri, Richard Barbieri and Thomas Barbieri and
12,228 shares of Common Stock to Kathryn Barbieri in exchange for such persons'
partnership interests in the G&B: Lincoln Building partnership.
The Company has a $933,333 note payable to INWC. The note will be paid in
full upon closing of the Offering.
The Company intends to enter into employment agreements with each of Donald
Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri which
will provide for annual base salaries of $155,000, $130,000, $96,000, $96,000
and $96,000, respectively. Each executive officer will be eligible to receive
annual bonuses as determined by the Compensation Committee and will be entitled
to participate in all existing or future benefit plans of the Company, on the
same basis as other senior executive officers of the Company.
At October 31, 1997, the Company had loans totaling approximately $11.5
million with Washington Trust Bank, of which Peter Stanton, a Director nominee,
is the Chief Executive Officer and President.
With respect to future material transactions (or series of related
transactions) between the Company and related parties, the Company has
implemented a policy requiring any such transaction to be approved by a
majority of the non-employee Directors, if any, upon such directors'
determination that the terms of the transaction are no less favorable to the
Company than those that could be obtained from unrelated third parties.
50
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 10, 1998, and as adjusted to reflect the
sale of 5,175,000 shares of Common Stock by the Company in the Offering and
the issuance concurrent with the closing of the Offering of 11,000 restricted
shares of Common Stock, by (i) all persons known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each director, (iii) each
of the named executive officers and (iv) all directors and executive officers
as a group. Unless otherwise indicated, the business address of each
shareholder is 201 W. North River Drive, Suite 100, Spokane, Washington,
99201.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
NAME AND ADDRESS NUMBER OF SHARES ------------------------------
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Donald K. Barbieri(2)...................... 3,597,403 50.8% 29.3%
DKB and HHB Unity Trust.................... 958,379 13.5 7.8
Heather H. Barbieri(3)..................... 958,379 13.5 7.8
Barbieri Family Trust...................... 587,070 8.3 4.8
Thomas M. Barbieri......................... 543,871 7.7 4.4
David M. Bell.............................. 543,871 7.7 4.4
Richard L. Barbieri(2)..................... 1,488,537 21.0 12.1
Arthur M. Coffey(4)........................ 3,000 -- *
Mark E. Barbieri........................... 423,275 6.0 3.5
Peter F. Stanton(5)........................ -- -- --
Ronald R. Taylor(5)........................ -- -- --
Robert G. Templin(5)....................... -- -- --
All directors and executive officers as a
group (5 persons)......................... 5,218,303 73.7% 42.5%
</TABLE>
- --------
* Represents less than 1%.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of shares of Common Stock as of a given date which
such person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security which
such person or persons has the right to acquire within 60 days after such
date is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Includes 958,379 shares of Common Stock held by the DKB & HHB Unity Trust,
an irrevocable trust, of which Mr. Barbieri is a co-trustee. Mr. Barbieri
disclaims beneficial ownership of such shares.
(3) These shares are held by the DKB & HHB Unity Trust, an irrevocable trust,
of which Ms. Barbieri is a co-trustee. Ms. Barbieri disclaims beneficial
ownership of such shares.
(4) The Company has agreed to issue Mr. Coffey an aggregate of 15,000
restricted shares of Common Stock under the 1998 Plan over four years,
3,000 shares of which Mr. Coffey will receive upon closing of the
Offering.
(5) Messrs. Stanton, Taylor and Templin have agreed to become directors of the
Company upon closing of the Offering.
51
<PAGE>
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the material terms of the Agreement of Limited
Partnership of the Operating Partnership (the "Partnership Agreement") is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. See "Additional Information."
The Operating Partnership is organized as a Delaware limited partnership.
The Company is the sole general partner of the Operating Partnership, and the
Company, its wholly-owned subsidiary, North River Drive Company, and certain
members of the Barbieri Family are currently the sole limited partners of the
Operating Partnership. The Company intends to conduct substantially all of its
business through the Operating Partnership. Generally, pursuant to the
Partnership Agreement, the Company, as the sole general partner of the
Operating Partnership, will have full, exclusive and complete responsibility
and discretion in the management and control of the Operating Partnership,
including the ability to cause the Operating Partnership to enter into certain
major transactions including acquisitions, dispositions and refinancings and
to cause changes in the Operating Partnership's line of business and certain
distribution policies. The limited partners of the Operating Partnership have
no authority to transact business for, or participate in the management
activities or decisions of, the Operating Partnership, except as required by
applicable law.
INDEMNIFICATION
The Partnership Agreement provides for indemnification of the Company and
officers and directors of the Company and the Operating Partnership (each, an
"Indemnitee") from and against all losses, damages and expenses arising from
any claims that relate to the Operating Partnership in which such Indemnitee
may be involved, unless (i) the act or omission of the Indemnitee was material
to the matter giving rise to the proceeding and either was committed in bad
faith or was the result of active and deliberate dishonesty; (ii) the
Indemnitee actually received an improper personal benefit in money, property
or services; or (iii) in the case of any criminal proceeding, the Indemnitee
had reasonable cause to believe that the act or omission was unlawful. This
indemnification is in addition to any other rights to which an Indemnitee may
be entitled.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer its general partner interest in
the Operating Partnership, without the consent of the holders of a majority of
the partner interests held by the limited partners (including the limited
partnership interests held by the Company, which will represent approximately
98.8% of the total partner interests upon consummation of the Offering).
Pursuant to the Partnership Agreement, the limited partners have agreed not to
transfer, assign, sell, encumber or otherwise dispose of, without the consent
of the general partner, their interest in the Operating Partnership, other
than (a) transfers to (i) the general partner, (ii) immediate family members
or (iii) charitable foundations or (b) pledges to unaffiliated lending
institutions.
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of the Common Stock (other
than a change in par value and subdivisions or combinations of the Common
Stock) (each a "Transaction") unless the Transaction has been approved by
holders of at least a majority of the OP Units (including OP Units held by the
Company, which will represent approximately 98.8% of all OP Units outstanding
upon consummation of the Offering) and in connection with which all limited
partners will receive for each OP Unit an amount of cash, securities or other
property equal to the product of the number of shares of Common Stock into
which each OP Unit is then exchangeable and the greatest amount of cash,
securities or other property paid to a holder of one share of Common Stock in
consideration of one share of Common Stock pursuant to such Transaction.
The Company may also merge with another entity if immediately after such
merger substantially all of the assets of the surviving entity, other than OP
Units held by the Company, are contributed to the Operating Partnership as a
capital contribution in exchange for OP Units with a fair market value, as
reasonably determined by the Company, equal to the value of the assets so
contributed.
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<PAGE>
ISSUANCE OF ADDITIONAL OP UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional OP Units,
including units of limited partnership interests having rights superior to
those attaching to outstanding OP Units; provided, however, that no such
additional OP Units shall be issued to the general partner unless either (a)
the additional OP Units are issued in connection with the grant, award, or
issuance of shares of Common Stock, which shares have rights (except for
voting rights) such that the economic interests attributable to such shares
are substantially similar to the rights of the additional OP Units issued to
the general partner, and (2) the general partner makes a capital contribution
to the Operating Partnership in an amount equal to the proceeds, if any,
raised in connection with the issuance of such shares of Common Stock, or (b)
the additional OP Units are issued pro rata to all partners.
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
The Company may issue shares of Common Stock from time to time after the
Offering; provided, however, that the Company may not issue any additional
shares of Common Stock (other than shares issued pursuant to the
redemption/exchange provisions of the Partnership Agreement described below),
or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase Common Stock (collectively
"New Securities"), other than to all holders of Common Stock, unless (i) the
Company causes the Operating Partnership to issue to the Company OP Units or
rights, options, warrants or convertible or exchangeable securities of the
Operating Partnership having designations, preferences and other rights, all
such that the economic interests are substantially the same as those of the
grant, award or issuance of such New Securities, and (ii) the Company
contributes the net proceeds from the grant, award or issuance of such New
Securities and from the exercise of rights contained in such New Securities to
the Operating Partnership.
CAPITAL CONTRIBUTIONS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. If the Company so contributes
additional capital to the Operating Partnership, the Company's partnership
interest in the Operating Partnership will be increased on a proportionate
basis. Conversely, the partnership interests of the limited partners will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company.
AWARDS UNDER 1998 STOCK INCENTIVE PLAN
If options granted in connection with the 1998 Plan are exercised at any
time or from time to time, or restricted shares of Common Stock are issued
under the 1998 Plan, the Partnership Agreement requires the Company to
contribute to the Operating Partnership as an additional contribution the
consideration received by the Company in connection with the issuance of such
options or shares of Common Stock or the proceeds received by the Company upon
issuance of the shares relating to such options. Upon such contribution the
Company will be issued a number of OP Units in the Operating Partnership equal
to the number of shares of Common Stock so issued.
REDEMPTION/EXCHANGE RIGHTS
Limited partners have the right (the "Redemption Right") to require the
Operating Partnership to redeem part or all of their OP Units for cash, based
upon the fair market value (as defined) of the number of shares of Common
Stock for which each OP Unit is then exchangeable at the time of such
redemption. The Company may elect to exchange such OP Units for shares of
Common Stock (on a one-for-one basis, subject to adjustment in the event of
stock splits, stock dividends, issuance of certain rights, certain
extraordinary distributions and
53
<PAGE>
similar events). With each such redemption or exchange, the Company's
percentage ownership interest in the Operating Partnership will increase. This
redemption/exchange right may be exercised by limited partners from time to
time, in whole or in part, subject to the limitation that such right may not
be exercised prior to the expiration of one year following the date on which
such limited partner acquired his OP Units.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and will have authority to make tax
elections under the Code on behalf of the Operating Partnership. The net
income or net loss of the Operating Partnership will generally be allocated to
the Company and the limited partners in accordance with their respective
percentage interests in the Operating Partnership, subject to compliance with
the provisions of Sections 704(b) and 704(c) of the Code and the Treasury
Regulations promulgated thereunder.
OPERATIONS
The Partnership Agreement provides that the net income of the Operating
Partnership, as well as net sales and refinancing proceeds, will be
distributed from time to time as determined by the Company pro rata in
accordance with the partners' respective percentage interests. Pursuant to the
Partnership Agreement, the Operating Partnership will assume and pay when due,
or reimburse the Company for payment of, all expenses it incurs relating to
the ownership and operation of, or for the benefit of, the Operating
Partnership and all costs and expenses relating to the operations of the
Company.
OUTSIDE ACTIVITIES OF THE GENERAL PARTNER; LIMITATIONS ON INDEBTEDNESS;
BORROWINGS
The Company, as general partner, may not enter into or conduct any business
other than in connection with the ownership, acquisition and disposition of OP
Units, the management of the business of the Operating Partnership and such
activities as are incidental or related thereto. The Company may not incur any
debts other than (i) debt of the Operating Partnership for which it may be
liable in its capacity as general partner of the Operating Partnership, and
(ii) indebtedness for borrowed money the proceeds of which are loaned to the
Operating Partnership on the same terms and conditions as the borrowing by the
general partner. Notwithstanding the above, the Company is permitted to
conduct other businesses and incur other indebtedness (i) with respect to
assets management believes cannot or should not be transferred to or operated
by the Operating Partnership, in which case all benefits and burdens will
inure to the Operating Partnership and (ii) utilizing pro rata distributions
it receives from the Operating Partnership that are not otherwise distributed
to its shareholders, in which case all benefits and burdens will inure only to
the Company.
CONTRACTS WITH AFFILIATES
The Operating Partnership may lend or contribute funds or other assets to
its subsidiaries or other entities in which it has an equity investment, and
such persons may borrow funds from the Operating Partnership, on terms and
conditions established in the discretion of the general partner. The Operating
Partnership may transfer assets to joint ventures, other partnerships,
corporations or other business entities in which it is or thereby becomes a
participant upon such terms and subject to such conditions consistent with the
Partnership Agreement and applicable law as the general partner, in its
discretion, believes are advisable. Except as expressly permitted by the
Partnership Agreement, neither the general partner nor any of its affiliates
may sell, transfer or convey any property to, or purchase any property from,
the Operating Partnership, except pursuant to transactions that are determined
by the general partner in good faith to be fair and reasonable and no less
favorable to the Operating Partnership than would be obtained from an
unaffiliated third party.
TERM
The term of the Operating Partnership commenced on October 21, 1997, the
date the certificate of limited partnership was filed in the office of the
Secretary of State of Delaware and will continue until October 31, 2097,
unless the Operating Partnership is dissolved (sooner) pursuant to the
provisions of the Partnership Agreement or as otherwise provided by law.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Articles and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
Under the Articles, the authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock").
Following the consummation of the Offering, 12,270,253 shares of Common Stock
will be issued and outstanding and no shares of Preferred Stock will be issued
and outstanding.
COMMON STOCK
Except as otherwise provided by law, each holder of Common Stock is entitled
to one vote for each share owned of record on all matters voted upon by
holders of Common Stock, and a majority vote is required for all action to be
taken by such shareholders. Each share of Common Stock has an equal and
ratable right to receive dividends when, as and if declared by the Board out
of funds legally available therefor and subject to the dividend obligations of
the Company to the holders of any Preferred Stock then outstanding. See
"Dividend Policy." In the event of a liquidation, dissolution or winding-up of
the Company, the holders of Common Stock will be entitled to share equally and
ratably in the assets of the Company, if any, remaining after the payment of
all debts and liabilities of the Company and the liquidation preference of any
holders of outstanding Preferred Stock. The Common Stock has neither
preemptive or cumulative voting rights nor redemption, sinking fund or
conversion provisions.
PREFERRED STOCK
The Board is authorized to issue, without shareholder approval, up to
5,000,000 shares of Preferred Stock in one or more series and to determine at
the time of creating such series the designations, and the powers, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereon including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. The
Board may issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of the
Company. As of the date of this Prospectus, the Board has not authorized any
series of Preferred Stock and there are no agreements for the issuance of any
shares of Preferred Stock.
CERTAIN PROVISIONS OF ARTICLES AND BY-LAWS AFFECTING SHAREHOLDERS
The By-Laws provide for shareholder action by written consent and the
Articles reserve to the directors the exclusive right to change the number of
directors or to fill vacancies on the Board. The Articles also provide for the
Board to be divided into three classes of directors serving staggered three
year terms. As a result, approximately one-third of the Board will be elected
each year. The purpose and intended effect of the above described provisions
in the Articles and By-Laws are to enhance the continuity and stability of the
Company's management by making it more difficult for shareholders to remove or
change the incumbent members of the Board. Such provisions, coupled with the
ownership by existing shareholders of approximately 60% of the Common Stock
following the Offering, could also render the Company more difficult to be
acquired pursuant to an unfriendly acquisition by an outsider by making it
more difficult for such person to obtain control of the Company and replace
current management without the approval of the Board.
The Company has included in the Articles and By-Laws provisions to (i)
eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
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Washington Business Corporations Act, as amended from time to time (the
"Washington Act"), and (ii) indemnify its directors and officers to the
fullest extent permitted by the Washington Act, including circumstances in
which indemnification is otherwise discretionary. The Company believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers. The Company's employment agreements with certain
executive officers and directors contain additional indemnification
provisions.
WASHINGTON ANTI-TAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Act prohibits the Company, with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person" (defined as a person who acquires 10% or more of
the Company's voting securities without the prior approval of the Board) for a
period of five years after such acquisition. The prohibited transactions
include, among others, a merger with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person, or otherwise allowing
the acquiring person to receive any disproportionate benefit as a shareholder.
The Company may not exempt itself from coverage of this statute.
TRANSFER AGENT AND REGISTRAR
The Company has appointed American Stock Transfer & Trust Company as the
Company's transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering (assuming no exercise of the Underwriters'
over-allotment option), the Company will have 12,270,253 shares of Common
Stock outstanding on the date of the Offering. Of these shares, all of the
shares of Common Stock sold in this Offering will be freely tradeable by
persons other than "affiliates" of the Company without restriction or
limitation under the Securities Act. The remaining 7,084,253 shares are
"restricted securities" within the meaning of Rule 144 adopted under the
Securities Act (the "Restricted Shares") and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption contained in Rule 144. The Company and its
executive officers and directors have agreed that, subject to certain limited
exceptions, for a period of one year from the date of this Prospectus they
will not, without the prior written consent of CIBC Oppenheimer Corp., offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or
any securities convertible into, or exercisable for, Common Stock. Donald
Barbieri, who will own 21.5% of the outstanding Common Stock after the
Offering, has agreed, subject to the same exceptions contained in the
foregoing lock-up agreements, not to sell, offer to sell, contract to sell,
pledge or otherwise dispose of or transfer, directly or indirectly, any shares
of Common Stock or other capital stock, or any securities convertible into or
exchangeable or exercisable for, or any rights to purchase or acquire, shares
of Common Stock or other capital stock, for a period of three years commencing
on the date of this Prospectus, without the prior written consent of CIBC
Oppenheimer Corp.; provided, however, that one-third of Mr. Barbieri's shares
of Common Stock will be released from this lock-up agreement on each
anniversary of the date of this Prospectus without the consent of CIBC
Oppenheimer Corp. See "Underwriting."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then-outstanding shares of the Company or the average
weekly trading volume of the Common Stock on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If two years
have elapsed since the date of acquisition of Restricted Shares from the
Company or from any "affiliate" of the Company, and the acquiror or subsequent
holder thereof is deemed
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<PAGE>
not to have been an affiliate of the Company at any time during the 90 days
preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144 without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Prior to the Offering, there has been no public market for the Common Stock
and the effect, if any, that future sales of Restricted Shares, the
availability of such Restricted Shares for sale, the issuance of shares of
Common Stock upon the exercise of options or otherwise or the perception that
such sales could occur will have on the market price prevailing from time to
time cannot be predicted. Nevertheless, sales of substantial amounts of
Restricted Shares in the public market could have an adverse effect on the
market price for the Common Stock.
A total of 1,500,000 shares of Common Stock have been reserved for issuance
under the Plans. The Company intends to grant options to purchase an aggregate
of up to 900,000 shares of Common Stock at an exercise price equal to the
initial public offering price in connection with the closing of this Offering.
The Company intends to file a Registration Statement on Form S-8 under the
Securities Act registering the 1,500,000 shares of Common Stock reserved for
issuance under the Plans promptly after completion of the Offering. As a
result, shares of Common Stock issued upon exercise of stock options granted
under the Plans will be freely tradeable by persons other than "affiliates" of
the Company without restriction or limitation under the Securities Act.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company and the underwriters named below (the "Underwriters"), for
whom CIBC Oppenheimer Corp. and NationsBanc Montgomery Securities LLC are
acting as representatives (the "Representatives"), each of the Underwriters
has severally agreed to purchase from the Company, and the Company has agreed
to sell to the Underwriters, the number of shares of Common Stock set forth
below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
CIBC Oppenheimer Corp. .........................................
NationsBanc Montgomery Securities LLC...........................
---------
Total....................................................... 5,175,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to approval of certain legal matters by counsel and
to various other conditions. The Underwriters are committed to purchase and
pay for all of the above shares of Common Stock if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share of Common Stock on sales to certain other brokers or
dealers. After the Offering, the public offering price, concession and re-
allowance to dealers may be changed by the Underwriters.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price for the shares
of Common Stock included in the Offering was determined through negotiations
between the Company and the Representatives. The factors considered in
determining the initial public offering price included the history of, and the
prospects for, the Company's business and the industry in which it competes,
an assessment of the Company's management, the past and present operations of
the Company, the historical results of operations of the Company, the
prospects for future earnings of the Company, the general condition of the
securities markets at the time of the Offering and the recent market prices of
securities of publicly traded companies which are comparable to the Company.
The Company, its executive officers and directors and certain shareholders
of the Company have agreed not to sell, offer to sell, contract to sell,
pledge or otherwise dispose of or transfer, directly or indirectly, any shares
of Common Stock or other capital stock, or any securities convertible into or
exchangeable or exercisable for, or any rights to purchase or acquire, shares
or Common Stock or other capital stock for a period of one year commencing on
the date of this Prospectus, without the prior written consent of CIBC
Oppenheimer Corp., other than the sale of the shares of Common Stock in the
Offering and the issuance or transfer of: (i) options to purchase shares of
Common Stock (and shares of Common Stock issuable upon the exercise of such
options) issued pursuant to the Plans; (ii) shares of Common Stock in
connection with estate planning; (iii) 55,000 restricted shares of Common
Stock to be awarded to certain employees of the Company; and (iv) securities
of the Company or the Operating Partnership issued in connection with the
acquisition by the Company of real property or interests in entities holding
real property, provided that the recipient or transferee of such securities
agrees in writing to be subject to the lock-up contained in this paragraph
(without giving effect to clauses (i), (ii) and (iii)) for a period ending on
the date that is one year after the date hereof. Donald Barbieri, who will own
21.5% of the Common Stock outstanding after the Offering, has agreed, subject
to the same exceptions
58
<PAGE>
contained in the foregoing lock-up agreements, not to sell, offer to sell,
contract to sell, pledge or otherwise dispose of or transfer, directly or
indirectly, any shares of Common Stock or other capital stock, or any
securities convertible into or exchangeable or exercisable for, or any rights
to purchase or acquire, shares of Common Stock or other capital stock, for a
period of three years commencing on the date of this Prospectus, without the
prior written consent of CIBC Oppenheimer Corp.; provided, however, one-third
of Mr. Barbieri's shares of Common Stock will be released from this lock-up
agreement on each anniversary of the date of this Prospectus without the
consent of CIBC Oppenheimer Corp.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 776,250 additional shares of
Common Stock, exercisable at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise such over-allotment option, then each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares of Common Stock to be
purchased by it as shown on the above table bears to the total number of
shares of Common Stock offered hereby. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
to bid for and purchase shares of Common Stock. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize or otherwise affect the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein. In addition, CIBC
Oppenheimer Corp., on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or selling group member participating in the Offering)
for the account of the other Underwriters, the selling concession with respect
to Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Representatives have informed the Company that the Underwriters do not
intend to confirm, without customer authorization, sales to their customer
accounts as to which they have discretionary trading power.
The shares of Common Stock have been approved for listing on the NYSE,
subject to official notice of issuance. In order to meet one of the
requirements for listing the shares of Common Stock on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial holders in the United States.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including, without limitation, liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to
make in respect thereof.
59
<PAGE>
EXPERTS
The combined balance sheets as of October 31, 1996 and 1997 and December 31,
1997 and the combined statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended October
31, 1997, and for the two months ended December 31, 1997, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Kaye, Scholer,
Fierman, Hays & Handler, LLP, Los Angeles, California and for the Underwriters
by Rogers & Wells LLP, New York, New York. The validity of the Common Stock
offered hereby and certain other legal matters will be passed upon for the
Company by Dennis McLaughlin & Associates P.S., Spokane, Washington.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450 Fifth
Street N.W., Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act and the rules and regulations promulgated thereunder,
with respect to the Common Stock offered pursuant to this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and such exhibits,
copies of which may be examined without charge at, or obtained upon payment of
prescribed fees from the Public Reference Section of the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Securities and Exchange Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 or by way of the
Securities and Exchange Commission's website address, http://www.sec.gov. In
addition, the Common Stock will be listed on the NYSE and similar information
concerning the Company can be inspected and copied at the offices of the NYSE,
20 Broad Street, New York, New York 10005.
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended. The Company has changed its fiscal year end from October 31
to December 31, which change shall take effect with the fiscal year beginning
on January 1, 1998. In addition to applicable legal or NYSE requirements, if
any, holders of the Common Stock will receive annual reports containing
audited financial statements with a report thereon by the Company's
independent certified public accountants, and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year. Following consummation of the Offering, holders of the Common
Stock will receive such reports on a calendar year basis.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HISTORICAL COMBINED FINANCIAL STATEMENTS OF CAVANAUGHS HOSPITALITY CORPORATION,
BARBIERI INVESTMENT COMPANY AND LINCOLN BUILDING LIMITED PARTNERSHIP:
- ---------------------------------------------------------------------
<S> <C>
Report of Independent Accountants....................................... F-2
Combined Balance Sheets at October 31, 1996 and 1997 and December 31,
1997................................................................... F-3
Combined Statements of Operations for the years ended October 31, 1995,
1996 and 1997 and the two months ended December 31, 1996 and 1997...... F-4
Combined Statements of Changes in Stockholders' and Partners' Equity for
the years ended October 31, 1995, 1996 and 1997 and the two months
ended December 31, 1997................................................ F-5
Combined Statements of Cash Flows for the years ended October 31, 1995,
1996 and 1997 and the two months ended December 31, 1996 and 1997...... F-6
Notes to Combined Financial Statements.................................. F-7
PRO FORMA COMBINED FINANCIAL STATEMENTS:
- ----------------------------------------
Condensed Pro Forma Combined Financial Information...................... F-22
Condensed Pro Forma Combined Balance Sheet at October 31, 1997.......... F-23
Condensed Pro Forma Combined Statement of Income for the year ended Oc-
tober 31, 1997......................................................... F-24
Notes to Condensed Pro Forma Combined Balance Sheet and Statement of In-
come................................................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Boards of Directors, Stockholders and Partners
Cavanaughs Hospitality Corporation
Barbieri Investment Company
Lincoln Building Limited Partnership
We have audited the accompanying combined balance sheets of Cavanaughs
Hospitality Corporation, Barbieri Investment Company and Lincoln Building
Limited Partnership, excluding certain of their subsidiaries or divisions as
described in Note 1 to the combined financial statements (collectively
referred to as "Cavanaughs Hospitality Corporation" or the "Company"), as of
October 31, 1996 and 1997 and December 31, 1997, and the related combined
statements of operations, changes in stockholders' and partners' equity and
cash flows for each of the three years in the period ended October 31, 1997
and the two months ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
October 31, 1996 and 1997 and December 31, 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1997 and the two months ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Spokane, Washington
February 16, 1998
F-2
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
October 31, 1996 and 1997 and December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 7,200 $ 6,440 $ 4,955
Accounts receivable......................... 1,720 2,806 2,785
Inventories................................. 374 376 427
Prepaid expenses and deposits............... 395 1,128 1,100
-------- -------- --------
Total current assets...................... 9,689 10,750 9,267
Property and equipment, net................... 108,234 109,954 112,234
Other assets, net............................. 2,164 3,400 3,616
-------- -------- --------
Total assets.............................. $120,087 $124,104 $125,117
======== ======== ========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Payable to affiliate........................ $ -- $ 1,333 $ 1,133
Note payable to bank........................ -- -- 1,075
Accounts payable............................ 1,780 2,263 3,234
Accrued payroll and related benefits........ 830 843 983
Accrued interest payable.................... 711 741 689
Other accrued expenses...................... 2,764 3,618 2,882
Long-term debt, due within one year......... 10,086 4,285 3,590
Capital lease obligations, due within one
year....................................... 423 499 502
-------- -------- --------
Total current liabilities................. 16,594 13,582 14,088
Long-term debt, due after one year............ 86,450 93,771 94,419
Capital lease obligations, due after one
year......................................... 2,349 2,255 2,139
Deferred income taxes......................... 4,469 5,417 5,415
Minority interest in partnerships............. 612 553 524
-------- -------- --------
Total liabilities......................... 110,474 115,578 116,585
-------- -------- --------
Commitments and contingencies (Notes 4, 10, 11
and 14)
Stockholders' and partners' equity:
Cavanaughs Hospitality Corporation:
Preferred stock--1,424, 1,424 and 5,000,000
shares authorized, $450, $450 and $0.01
par value; 1,100, 1,100 and -0- shares
issued and outstanding, liquidation value
$495,000 at October 31, 1996 and 1997..... 495 495 --
Common stock--2,848, 2,848 and 50,000,000
shares authorized, $10, $10 and $0.01 par
value; 1,858, 1,766 and 7,072,025 shares
issued and outstanding.................... 19 18 71
Discount on stock.......................... (318) (318) --
Barbieri Investment Company:
Common stock--1,000, 1,000 and -0- shares
authorized, no par value; 929, 929 and -0-
shares issued and outstanding 686 686 --
Partners' deficit........................... (796) (897) (879)
Additional paid-in capital.................. 3,787 3,125 3,935
Retained earnings........................... 5,740 5,417 5,405
-------- -------- --------
Total stockholders' and partners' equity.. 9,613 8,526 8,532
-------- -------- --------
Total liabilities and stockholders' and
partners' equity......................... $120,087 $124,104 $125,117
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
for the years ended October 31, 1995, 1996 and 1997
and the two months ended December 31, 1996 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms........................ $17,587 $20,972 $25,147 $2,998 $3,626
Food and beverage............ 12,397 12,141 13,926 2,271 2,756
Other........................ 1,260 2,092 2,589 414 447
------- ------- ------- ------ ------
Total hotels and restau-
rants..................... 31,244 35,205 41,662 5,683 6,829
Entertainment, management and
services..................... 3,092 3,168 3,842 483 840
Rental operations............. 6,027 6,790 6,539 1,191 1,169
------- ------- ------- ------ ------
Total revenues............. 40,363 45,163 52,043 7,357 8,838
------- ------- ------- ------ ------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms....................... 4,931 5,719 6,820 958 1,167
Food and beverage........... 10,034 10,181 11,483 1,822 2,208
Other....................... 716 1,008 1,066 149 170
------- ------- ------- ------ ------
Total hotels and restau-
rants..................... 15,681 16,908 19,369 2,929 3,545
Entertainment, management and
services.................... 1,802 2,204 2,052 397 602
Rental operations............ 1,026 1,464 1,506 243 303
------- ------- ------- ------ ------
Total direct expenses...... 18,509 20,576 22,927 3,569 4,450
------- ------- ------- ------ ------
Undistributed operating ex-
penses:
Selling, general and adminis-
trative..................... 5,426 6,461 8,188 1,161 1,225
Property operating costs..... 5,022 4,997 5,518 944 1,022
Depreciation and amortiza-
tion........................ 3,428 4,215 4,775 759 798
------- ------- ------- ------ ------
Total undistributed operat-
ing expenses.............. 13,876 15,673 18,481 2,864 3,045
------- ------- ------- ------ ------
Total expenses............. 32,385 36,249 41,408 6,433 7,495
------- ------- ------- ------ ------
Operating income............... 7,978 8,914 10,635 924 1,343
Other income (expense):
Interest expense, net of
amounts capitalized.......... (6,866) (7,319) (8,817) (1,317) (1,422)
Interest income............... 439 296 416 92 54
Other income (expense)........ -- 150 348 13 (4)
Minority interest in partner-
ships........................ 32 (136) 59 14 29
------- ------- ------- ------ ------
Income (loss) before income
taxes......................... 1,583 1,905 2,641 (274) --
Income tax provision (bene-
fit).......................... 542 730 932 (104) (6)
------- ------- ------- ------ ------
Net income (loss).............. $ 1,041 $ 1,175 $ 1,709 $ (170) $ 6
======= ======= ======= ====== ======
Pro forma net income per
share--basic and diluted...... $ 0.24
=======
Number of shares used in the
pro forma computation......... 7,072
=======
Net income per share--basic and
diluted....................... $ --
======
Weighted-average shares out-
standing...................... 7,072
======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY
for the years ended October 31, 1995, 1996 and 1997
and the two months ended December 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
BARBIERI
INVESTMENT
CAVANAUGHS HOSPITALITY CORPORATION COMPANY
----------------------------------------- -------------
PREFERRED
STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------- ----------------- DISCOUNT ------------- PARTNERS' PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT ON STOCK SHARES AMOUNT DEFICIT CAPITAL EARNINGS
------ ------ --------- ------ -------- ------ ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, OCTOBER 31,
1994................... 1,100 $495 1,877 $19 $(318) 929 $686 $(428) $3,190 $1,411
Net income (loss)...... (166) 1,207
Contributions from
stockholders.......... 600 2,496
Dividends on Cavanaughs
Hospitality
Corporation common
stock ($85.00 per
share)................ (158)
Dividends on preferred
stock ($31.50 per
share)................ (35)
Dividends on Barbieri
Investment Company
common stock ($85.00
per share)............ (79)
Redemption of stock.... (19) (129)
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, OCTOBER 31,
1995................... 1,100 495 1,858 19 (318) 929 686 (594) 3,661 4,842
Net income (loss)...... (243) 1,418
Contributions from
(distributions to)
stockholders and part-
ners.................. 41 126 (248)
Dividends on Cavanaughs
Hospitality Corpora-
tion common stock
($85.00 per share).... (158)
Dividends on preferred
stock ($31.50 per
share)................ (35)
Dividends on Barbieri
Investment Company
common stock ($85.00
per share)............ (79)
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, OCTOBER 31,
1996................... 1,100 495 1,858 19 (318) 929 686 (796) 3,787 5,740
Net income (loss)...... (101) 1,810
Distributions to stock-
holders and partners.. (1,815)
Dividends on Cavanaughs
Hospitality Corporation
common stock ($102.00
per share)............ (188)
Dividends on preferred
stock ($31.50 per
share)................ (35)
Dividends on Barbieri
Investment Company
common stock ($102.00
per share)............ (95)
Redemption of stock.... (92) (1) (662)
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, OCTOBER 31,
1997................... 1,100 495 1,766 18 (318) 929 686 (897) 3,125 5,417
Net income (loss)...... 18 (12)
Effect of merger....... (1,100) (495) 7,070,259 53 318 (929) (686) 810
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, DECEMBER 31,
1997................... 0 $ 0 7,072,025 $71 $ 0 0 $ 0 $(879) $3,935 $5,405
====== ==== ========= === ===== ==== ==== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
for the years ended October 31, 1995, 1996 and 1997
and the two months ended December 31, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
--------------------------- ------------------
1995 1996 1997 1996 1997
-------- -------- ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............ $ 1,041 $ 1,175 $ 1,709 $ (170) $ 6
Adjustments to reconcile net
income (loss) to net cash
provided by operating activ-
ities:
Depreciation and amortiza-
tion........................ 3,428 4,215 4,775 759 798
Gain on disposition of prop-
erty and equipment.......... -- -- (322) -- --
Deferred income tax provi-
sion (benefit).............. (151) 89 948 -- (2)
Minority interest in part-
nerships.................... (32) 136 (59) (14) (29)
Change in:
Accounts receivable......... 2 (356) (1,086) (675) 21
Inventories................. 25 (50) (2) 15 (51)
Prepaid expenses and depos-
its........................ 305 (64) (733) 195 28
Accounts payable............ (153) (1,576) 483 (24) 971
Accrued payroll and related
benefits................... 38 189 13 (248) 140
Accrued interest payable.... 99 21 30 (27) (52)
Other accrued expenses...... (1,016) 1,421 854 476 (736)
-------- -------- ------- ------ ------
Net cash provided by oper-
ating activities.......... 3,586 5,200 6,610 287 1,094
-------- -------- ------- ------ ------
Investing activities:
Additions to property and
equipment................... (24,124) (13,457) (6,192) (1,589) (2,400)
Proceeds from disposition of
property and equipment...... 128 185 1,159 -- --
Payment for purchase option
agreement................... -- -- (500) -- --
Other, net................... (432) 88 (735) 66 (894)
-------- -------- ------- ------ ------
Net cash used in investing
activities................ (24,428) (13,184) (6,268) (1,523) (3,294)
-------- -------- ------- ------ ------
Financing activities:
Capital contributions from
stockholders and partners... 3,096 -- -- -- --
Distributions to stockholders
and partners................ -- (122) (1,815) (353) --
Dividends to stockholders.... (272) (272) (318) -- --
Proceeds from note payable to
bank........................ -- -- -- -- 1,075
Proceeds from long-term
debt........................ 21,853 34,735 10,559 7,595 2,982
Repayment of long-term debt.. (4,389) (24,844) (9,539) (7,435) (3,029)
Purchase and retirement of
common stock................ (129) -- (663) -- --
Principal payments on capital
lease obligations........... (981) (239) (659) (68) (113)
Advances from (payments to)
affiliate................... -- -- 1,333 -- (200)
-------- -------- ------- ------ ------
Net cash provided by (used
in) financing activities.. 19,178 9,258 (1,102) (261) 715
-------- -------- ------- ------ ------
Change in cash and cash equiv-
alents:
Net increase (decrease) in
cash and cash equivalents... (1,664) 1,274 (760) (1,497) (1,485)
Cash and cash equivalents at
beginning of period......... 7,590 5,926 7,200 7,200 6,440
-------- -------- ------- ------ ------
Cash and cash equivalents at
end of period............... $ 5,926 $ 7,200 $ 6,440 $5,703 $4,955
======== ======== ======= ====== ======
Supplemental disclosure of
cash flow information:
Cash paid during period for:
Interest (net of amount cap-
italized)................... $ 6,176 $ 7,298 $ 8,787 $1,344 $1,474
Income taxes................. 300 130 1,646 -- --
Noncash investing and financ-
ing activities:.............
Acquisition of capital
leases...................... $ 1,112 $ 1,714 $ 641 $ 122 $ --
Issuance of note payable for
purchase option............. -- -- 500 -- --
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION:
At October 31, 1997 and December 31, 1997, the Company controlled and
operated (through ownership or lease with purchase option agreements) eight
hotel properties in Seattle, Spokane, Yakima and Kennewick, Washington and
Kalispell, Montana 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.
The combined financial statements include the accounts (except as described
below) of the following entities which are under common control through
Barbieri family ownership.
. Cavanaughs Hospitality Corporation (CHC-Washington), a Washington
corporation (formerly known as Goodale and Barbieri Companies until
October 1997)
. Barbieri Investment Company (BIC)
. Lincoln Building Limited Partnership (Lincoln Building)
CHC-Washington and/or BIC have the following wholly owned subsidiary or
partnership investments which are included in the combined financial
statements.
. Cowley Street Limited Partnership (Cowley)
. Inn on Fifth Avenue Associates, L. P. (Inn on Fifth)
. West 201 North River Drive Limited Partnership (North River Drive
Partnership)
. Kalispell Center Limited Partnership (KCLP)
. North River Drive Company
CHC-Washington is the sole general partner of all of the above partnerships.
CHC-Washington and/or BIC hold all of the limited partnership units in all of
the partnerships except for Cowley (which has a 50% limited partner). The
Lincoln Building Limited Partnership is a partnership which was formed to
operate a commercial office building. The partnership is comprised of the
Barbieri Family Foundation (BFF) and four members of the Barbieri family. All
partners are general partners of the partnership.
Unless otherwise defined, "the Company" refers to all of the above companies
and partnerships collectively. All significant intercompany accounts and
transactions have been eliminated in the combined financial statements.
In October 1997, Cavanaughs Hospitality Limited Partnership (CHLP), a
Delaware partnership, was formed. CHLP was inactive at October 31, 1997.
F-7
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION, CONTINUED:
In November 1997, the Company distributed certain of its operations
(consisting of subsidiaries, partnership investments or divisions of the
Company) to the existing stockholders as they were dissimilar to the
predominant business of the Company. These operations consisted primarily of
real estate development, a wholesale dairy processor and a long-term residence
inn operation. These operations have historically been managed and financed
autonomously, will be operated autonomously in the future and do not have
material financial commitments, guarantees or contingent liabilities
associated with the Company. Accordingly, these operations have been excluded
from the combined financial statements for all periods presented. The effects
of excluding the subsidiaries, investments or divisions are recorded as a
contribution from or distribution to stockholders and partners.
In November 1997, BIC was merged into CHC-Washington, and the Company
contributed all of its assets to CHLP in exchange for the general partnership
interest (which holds a 1% interest in CHLP) and limited partnership
interests. Operating units (OP Units) of CHLP will be issued to certain of the
partners for their interest in the Lincoln Building. OP Units may also be used
for future acquisitions (see Note 14). OP Units will be convertible to common
stock of CHC-Washington on a one-for-one basis.
Effective December 31, 1997, the Company changed its fiscal year end from
October 31 to December 31; therefore, the combined financial statements
presented herein are audited as of and for the two months ended December 31,
1997 with comparative unaudited combined financial statements for the two
months ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
remaining maturities at time of purchase of three months or less. The Company
places its cash with high credit quality institutions. At times, cash balances
may be in excess of federal insurance limits.
The Company maintains several trust accounts for owners of real properties
which it manages. These cash accounts are not owned by the Company and
therefore, are not included in the combined financial statements. At December
31, 1997, these accounts totaled approximately $2.1 million.
INVENTORIES
Inventories consist primarily of food and beverage products held for sale at
the restaurants operated by the Company. Inventories are valued at the lower
of cost, determined on a first-in, first-out basis, or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the lesser of the estimated useful lives of the
related assets or the lease term as follows:
<TABLE>
<S> <C>
Buildings........................................................ 25-40 years
Equipment........................................................ 5-20 years
Furniture and fixtures........................................... 15 years
Landscaping and land improvements................................ 15 years
</TABLE>
F-8
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Major additions and betterments are capitalized. Costs of maintenance and
repairs which do not improve or extend the lives of the respective assets are
expensed currently. When items are disposed of, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized in operations. Management of the Company periodically reviews the
net carrying value of all properties to determine whether there has been a
permanent impairment of value and assesses the need for any write-downs in
carrying value.
INTEREST CAPITALIZATION
The Company capitalizes interest costs during the construction period for
qualifying assets. During the years ended October 31, 1995, 1996 and 1997 and
the two months ended December 31, 1996 and 1997, the Company capitalized
approximately $459,000, $1,412,000, $6,000, $12,000 and $17,000 of interest
costs, respectively.
OTHER ASSETS
Other assets primarily include deferred loan fees, deferred stock offering
costs, purchase option payments and prepaid rental income. Deferred loan fees
are amortized using the interest method over the term of the related loan
agreement. Costs incurred in connection with the Company's planned common
stock offering (the Offering-- see Note 15) are deferred and will be offset
against the proceeds of the offering, if successful. If the offering is
unsuccessful, the costs will be charged to operations. At October 31, 1997 and
December 31, 1997, the Company has deferred purchase option payments made
pursuant to a purchase agreement for a hotel property which is currently being
leased and operated by the Company (see Note 10). If the option is exercised,
the option payments will offset a portion of the purchase price. If the option
is not exercised, the option payments will be charged to operations.
INCOME TAXES
Prior to their merger, CHC-Washington and BIC filed separate federal and
state income tax returns. The Lincoln Building and the other partnerships
which are owned by CHC-Washington and/or BIC are not tax paying entities.
However, the income tax attributes of these partnerships flow through to the
respective partners of the partnerships.
LEASE INCOME
The Company records rental income from operating leases which contain fixed
escalation clauses on the straight-line method. The difference between income
earned and lease payments received from the tenants is included in other
assets on the combined balance sheets. Rental income from retail lessees which
is contingent upon the lessees' revenues is recorded as income in the period
earned.
EARNINGS PER SHARE
Due to the combination of the companies and partnerships, historical
earnings per share information prior to the combination is not relevant or
meaningful. Therefore, pro forma earnings per share for the year ended October
31, 1997 has been presented based upon the number of common shares of CHC-
Washington which are outstanding after the merger of the companies and
partnerships (see Note 15).
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS) and simplifies the existing
standards. This standard replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The Company did not
F-9
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
have any dilutive securities outstanding for any of the periods presented.
Therefore, there are no differences between basic and diluted earnings per
share. The adoption of SFAS No. 128 did not have a material effect on the
presentation of the Company's EPS for the two months ended December 31, 1997.
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 statement. 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. This Statement is effective for fiscal years
beginning after December 15, 1997. Management does not believe that the
implementation of SFAS No. 130 will have a material impact on the presentation
of its combined 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 Statement is
effective for fiscal years beginning after December 15, 1997. Management of
the Company does not believe that the implementation of SFAS No. 131 will have
a material impact on the combined financial statements.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 1996 and 1997 and December 31, 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- DECEMBER 31,
1996 1997 1997
--------- -------- ------------
<S> <C> <C> <C>
Buildings and equipment.................. $ 105,039 $108,507 $110,812
Furniture and fixtures................... 11,150 14,163 14,258
Equipment acquired under capital leases.. 4,421 4,543 4,543
Landscaping and land improvements........ 863 863 863
--------- -------- --------
121,473 128,076 130,476
Less accumulated depreciation and amorti-
zation.................................. (30,049) (34,325) (34,445)
--------- -------- --------
91,424 93,751 96,031
Land..................................... 16,810 16,203 16,203
--------- -------- --------
$ 108,234 $109,954 $112,234
========= ======== ========
</TABLE>
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT:
Long-term debt consists of mortgage notes payable and notes and contracts
payable, collateralized by real property, equipment and the assignment of
certain rental income. Long-term debt as of October 31, 1997 and December 31,
1997 is as follows (amounts outstanding in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Note payable in monthly installments of $146,494
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. $16,816 $16,776
Note payable in monthly installments of $117,487
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 13,884 13,857
Note payable in monthly installments of $79,828
including interest at 7.25%, collateralized by
real property.................................... 9,785 9,744
Note payable in monthly installments of $85,156
including interest at a variable rate (8.125% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 9,083 9,038
Note payable in monthly installments of $64,637
including interest at a variable rate (7.88% at
October 31, 1997 and December 31, 1997),
collateralized by assignment of certain rental
income........................................... 7,773 7,746
Industrial revenue bonds payable in monthly
installments of $73,668 including interest at a
variable rate (7.65% at October 31, 1997 and
December 31, 1997), collateralized by real
property......................................... 7,555 7,504
Note payable in monthly installments of $63,378 at
October 31, 1997 and $65,393 at December 31,
1997, including interest at a variable rate
(10.375% at October 31, 1997 and 9.5% at December
31, 1997), collateralized by real property....... 7,128 7,110
Note payable in monthly installments of $46,369
including interest at 8.875%, collateralized by
real property.................................... 5,046 5,029
Note payable in monthly installments of $56,875
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 4,794 4,775
Note payable in monthly installments of $23,804
including interest at 8.5% at December 31, 1997,
collateralized by real property, assignment of
certain rental income and certain furniture and
fixtures......................................... -- 2,660
Urban Development Action Grant loan payable in
monthly installments of $27,807 including
interest at 9.0%, collateralized by real
property (A)..................................... 2,603 --
Note payable in monthly installments of $25,777
including interest at 9.25%, collateralized by
real property.................................... 2,412 2,397
</TABLE>
F-11
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Note payable in monthly installments of $37,604
including interest at an index rate plus 2.375%
(8.66% at October 31, 1997 and December 31,
1997), collateralized by real property........... $ 2,292 $ 2,250
Note payable in monthly installments of $17,608 at
October 31, 1997 and $19,702 at December 31,
1997, including interest at a variable rate (8.5%
at October 31, 1997 and December 31, 1997),
collateralized by real property.................. 2,151 2,467
Note payable in monthly installments of $18,418 at
October 31, 1997 and $18,845 at December 31,
1997, including interest at an index rate plus
1.5%, subject to a minimum of 9.5% and a maximum
of 12.0% (9.75% at October 31, 1997 and 10.0% at
December 31, 1997), collateralized by real
property......................................... 1,696 1,687
Note payable in monthly installments of $22,702
including interest at a variable rate (9.5% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 1,190 1,164
Note payable in monthly installments of $41,674
including interest at a variable rate plus 0.5%
(9.0% at October 31, 1997 and December 31, 1997),
collateralized by real property.................. 1,091 1,072
Note payable in monthly installments of $9,076 at
October 31, 1997 and December 31, 1997, including
interest at a variable rate (9.5% at October 31,
1997 and December 31, 1997), collateralized by
certain equipment and furniture and fixtures..... 760 754
Amount payable at $67,000 interest only annually
(B).............................................. 600 600
Note payable of interest only at 8.0% until
maturity in October 2002, collateralized by
letter of credit................................. 500 500
Note payable in monthly installments of $9,000
including interest at an index rate (8.5% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 462 451
Note payable in monthly installments of $5,003
including interest at prime plus 1.0% (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 238 231
Note payable of interest only at 6.4% until
maturity in June 1998, collateralized by a
certificate of deposit........................... 100 100
Note payable in annual principal payments of
$37,000 plus interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 74 74
Other............................................. 23 23
------- -------
98,056 98,009
Less current portion.............................. (4,285) (3,590)
------- -------
Total long-term debt.............................. $93,771 $94,419
======= =======
</TABLE>
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
- --------
(A) This loan agreement requires the City of Kalispell, Montana (the City) to
receive 15% of cumulative annual net cash flow (as defined in the
agreement) from the property until the loan is paid in full. The
cumulative net cash flow of the property resulted in participation by the
City of approximately $20,000, $45,000 and $22,000 for the years ended
October 31, 1995, 1996 and 1997, respectively. The Company repaid this
note in full in December 1997.
(B) The Company has a $600,000 obligation payable to BFF. BFF is entitled to a
guaranteed annual payment of approximately $67,000, which is increased by
3% annually. The Company has the right to pay off its obligation at any
time after January 1997, and BFF has the right to require redemption at
any time after January 1999.
Contractual maturities for long-term debt outstanding at December 31, 1997,
are summarized by year as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 3,590
1999............................................................... 3,908
2000............................................................... 3,252
2001............................................................... 3,331
2002............................................................... 4,089
Thereafter......................................................... 79,839
-------
$98,009
=======
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital leases. The imputed
interest rates on the leases range from 7.6% to 8.6%. Cost and accumulated
amortization of this equipment as of October 31, 1996 are approximately
$4,421,000 and $1,831,000, respectively. Cost and accumulated amortization of
equipment under capital lease obligations as of October 31, 1997 are
approximately $4,543,000 and $2,074,000, respectively. Cost and accumulated
amortization of equipment under capital lease obligations as of December 31,
1997 are approximately $4,543,000 and $2,065,000, respectively.
Future minimum lease payments at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 706
1999............................................................... 696
2000............................................................... 661
2001............................................................... 513
2002............................................................... 400
Thereafter......................................................... 270
------
Total minimum lease payments....................................... 3,246
Less amount representing interest.................................. (605)
------
Total obligations under capital lease.............................. 2,641
Less current maturities............................................ (502)
------
$2,139
======
</TABLE>
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
6. LINES OF CREDIT:
At October 31, 1997, the Company had a $1.0 million line-of-credit agreement
with U.S. Bank of Washington. The outstanding balance on the unsecured credit
line bears interest at the bank's prime rate plus 0.25% (8.75% at December 31,
1997). At October 31, 1997, there were no amounts outstanding on the line of
credit. In November 1997, the borrowing limit under this agreement was
increased to $3.0 million and expires in March 1998. At December 31, 1997,
there was $1,075,000 outstanding on the line of credit. The agreement requires
that the Company maintain a defined current ratio and minimum levels of cash
flow.
Additionally, the Company has a non-revolving line-of-credit agreement. Any
outstanding amounts bear interest at the bank's index rate plus 2.75%. At
October 31, 1997, $9,083,000 was outstanding under this agreement (see Note 4)
and $670,000 was available to be drawn. At December 31, 1997, $9,038,000 was
outstanding under this agreement, and $670,000 was available to be drawn.
In December 1997, the Company obtained a commitment for a revolving secured
credit facility with a bank for borrowings up to $80.0 million. The credit
facility is contingent upon the successful completion of the Offering. The
agreement requires that the Company maintain certain financial ratios and
minimum levels of cash flows. Any outstanding borrowings will bear interest
based on prime rate or LIBOR. The credit facility matures five years after
closing.
7. STOCKHOLDERS' EQUITY:
Prior to the merger described in Note 1, the preferred stock of CHC-
Washington was the only voting stock of CHC-Washington. The preferred
stockholders were entitled to 7% annual, noncumulative dividends if and when
declared by the Board of Directors. In the event of liquidation or dissolution
of CHC-Washington, the preferred stockholders had a liquidation preference
equal to $450 plus any unpaid dividends per share. At October 31, 1997, all
declared dividends had been paid to the preferred stockholders. In connection
with the merger and changes in the capital structure of CHC-Washington (see
Note 15), the outstanding preferred stock of CHC-Washington was retired and
cancelled.
In January 1998, the Board of Directors adopted, subject to shareholder
approval, two Company stock benefit plans. A total of 1,500,000 shares of
common stock were reserved for issuance or grant under the plans of which up
to 900,000 shares are planned to be granted to certain employees at the
initial public offering price concurrent with the closing of the Offering.
8. INCOME TAXES:
Major components of the Company's income tax provision (benefit) for the
years ended October 31, 1995, 1996 and 1997 and the two months ended December
31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
TWO MONTHS
YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31,
---------------- --------------
1995 1996 1997 1996 1997
----- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Current.................................... $ 693 $641 $(16) $ (104) $ (4)
Deferred................................... (151) 89 948 (2)
----- ---- ---- ------ ------
$ 542 $730 $932 $ (104) $ (6)
===== ==== ==== ====== ======
</TABLE>
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
8. INCOME TAXES, CONTINUED:
The income tax provisions (benefits) shown in the statements of operations
for the years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1996 and 1997 differ from the amounts calculated using the
federal statutory rate applied to income (loss) before income taxes as follows
(amounts in thousands):
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
------------ ----------- ----------- ------------ ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ---- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Provision (benefit) at
federal statutory
rate................... $ 538 34.0% $648 34.0% $898 34.0% $ (93) 34.0% $ -- --
Effect of tax credits... (64) (4.0) -- -- (20) (0.7) -- -- -- --
Other................... 68 4.2 82 4.3 54 2.0 (11) 4.0 (6) --
----- ---- ---- ---- ---- ---- ----- ---- ---- ---
$ 542 34.2% $730 38.3% $932 35.3% $(104) 38.0% $ (6) --
===== ==== ==== ==== ==== ==== ===== ==== ==== ===
</TABLE>
Components of the net deferred tax assets and liabilities as of October 31,
1996 and 1997 and December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
-------------------------------------- ------------------
1996 1997 1997
------------------- ------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation on property
and equipment.......... $ -- $5,331 $ -- $5,295 $ -- $5,612
Rental income........... -- 192 -- 248 -- 285
Tax credits............. 577 -- 367 -- 367 --
Other................... 477 -- -- 241 115 --
------- ------ ---- ------ ---- ------
$ 1,054 $5,523 $367 $5,784 $482 $5,897
======= ====== ==== ====== ==== ======
</TABLE>
At October 31, 1997 and December 31, 1997, the Company has approximately
$352,000 of alternative minimum tax credits available to offset future regular
taxes payable to the extent they exceed alternative minimum taxes.
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
9. OPERATING LEASE INCOME:
KCLP leases shopping mall space to various tenants over terms ranging from
one to ten years. The leases generally provide for fixed minimum monthly rent
as well as tenants' payments for their pro rata share of taxes and insurance,
common area maintenance and expenses associated with the shopping mall. In
addition, the Company leases commercial office space over terms ranging from
one to eighteen years. At October 31, 1996, cost and accumulated depreciation
of retail and commercial properties which are subject to operating leases was
$31,008,000 and $7,191,000, respectively. The cost and accumulated
depreciation of these properties at October 31, 1997 was approximately
$31,875,000 and $8,281,000, respectively. The cost and accumulated
depreciation of these properties at December 31, 1997 was approximately
$32,924,000 and $8,323,000, respectively.
Future minimum lease income under existing noncancellable leases at December
31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 6,903
1999............................................................... 6,647
2000............................................................... 6,116
2001............................................................... 5,140
2002............................................................... 4,275
Thereafter......................................................... 15,601
-------
$44,682
=======
</TABLE>
Rental income for the years ended October 31, 1995, 1996 and 1997 and the
two months ended December 31, 1996 and 1997 was approximately $6,027,000,
$6,790,000, $6,539,000, $1,191,000 and $1,169,000, respectively, which
included contingent rents of approximately $309,000, $342,000, $217,000,
$58,000 and $93,000, respectively.
10. OPERATING LEASE COMMITMENTS:
The Company leases building space under an operating lease agreement which
requires monthly payments of $4,500 through March 2009. Commencing in 1999,
the monthly payments can be increased for inflation.
In October 1997, the Company began operating a hotel in Yakima, Washington
under an operating lease and purchase option agreement. The lease agreement is
for a period of 15 years with two five-year renewal options. The Company pays
all operating costs of the hotel plus monthly lease payments of $35,000
through September 2003. Commencing October 2003, the monthly lease requirement
will be $52,083 and monthly payments shall increase by $5,208 each year
thereafter. The Company agreed to a $1.0 million option payment which allows
the purchase of this hotel at a fixed price. One-half of this option payment
was paid in cash and the remaining $500,000 is payable in October 2002. The
option is exercisable by the Company between March and September 2003 for a
total purchase price of $6,250,000. If the Company exercises its purchase
option, the option payments made by the Company will be applied against the
total purchase price.
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
10. OPERATING LEASE COMMITMENTS, CONTINUED:
Assuming the Company exercises its purchase option for the hotel in March
2003, total payments due under these leases at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................................ $ 474
1999................................................................ 474
2000................................................................ 474
2001................................................................ 474
2002................................................................ 474
Thereafter.......................................................... 443
------
$2,813
======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Until January 1998, the Company guaranteed certain debt of entities
affiliated through common ownership, which are excluded from the combined
financial statements (see Note 1). At October 31, 1997 and December 31, 1997,
total debt outstanding which was guaranteed by the Company was approximately
$5,748,000 and $5,092,000, respectively. In January 1998, the Company's
guarantee of these affiliated companies' debt was eliminated.
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 December 31, 1997, 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.
12. RELATED-PARTY TRANSACTIONS:
In addition to related-party transactions described in Notes 4 and 11, the
Company had the following transactions with related parties during the years
ended October 31, 1995, 1996 and 1997 and the two months ended December 31,
1996 and 1997:
. Interest expense of approximately $64,000, $66,000, $67,000, $11,000 and
$11,000 was incurred related to the payable to BFF (see Note 4) for the
years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1996 and 1997, respectively.
. The Company recorded management fee and other income of approximately
$27,000, $31,000, $35,000, $8,000 and $17,000 during the years ended
October 31, 1995, 1996 and 1997 and the two months ended December 31,
1996 and 1997, respectively, for performing management and administrative
functions for entities which are owned by the stockholders of the
Company, but are excluded from the combined financial statements.
. The Company received commissions for real estate sales from entities
which are owned by the stockholders of the Company, but are excluded from
the combined financial statements of $51,000, $7,000, $87,000, $3,000 and
$1,000 for the years ended October 31, 1995, 1996 and 1997 and the two
months ended December 31, 1996 and 1997, respectively.
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
. At October 31, 1997, the Company had a $1,333,000 payable to an
affiliated entity due to common control. Effective November 1, 1997, the
payable began bearing interest at the prime rate (8.5% at December 31,
1997). During the two months ended December 31, 1997, the Company
incurred $16,000 of interest expense associated with this note. At
December 31, 1997, there was $1,133,000 outstanding on this note. The
note is due in July 1998.
13. EMPLOYEE BENEFIT PLAN:
The Goodale and Barbieri Retirement Savings Plan, to which both the Company
and employees contribute, was established in March 1989. The defined
contribution plan was created for the benefit of substantially all employees
of the Company. The Company makes contributions of up to 3% of an employee's
compensation based on a vesting schedule and eligibility requirements set
forth in the plan document. Company contributions to the plan for the years
ended October 31, 1995, 1996 and 1997 and the two months ended December 31,
1996 and 1997 were approximately $78,000, $93,000, $97,000, $18,000 and
$20,000, respectively.
14. ACQUISITIONS:
In October 1997, the Company entered into a lease (which was effective in
January 1998) with purchase option for an operating hotel in Spokane,
Washington. The Company is obligated to pay debt service and all costs of
operating the hotel through the lease termination date of November 1, 1999.
The Company intends to exercise its option to purchase this hotel prior to
July 1998. The purchase price is $11,500,000. Approximately $2,000,000 of the
purchase price shall be paid by the transfer of OP Units to the owner.
In November 1997, CHLP entered into separate purchase agreements to acquire
certain assets of operating hotels in Post Falls, Idaho and in Idaho Falls,
Idaho for a total purchase price of $13,000,000. The Idaho Falls acquisition
was closed in January 1998 and the Post Falls acquisition closed in February
1998.
In December 1997, the Company entered into an agreement for the acquisition
of an operating hotel in Kalispell, Montana. The acquisition is contingent
upon the Company's successful completion of the Offering. The purchase price
is $9,800,000.
In January, 1998, the Company entered into an agreement to acquire an
operating hotel in Portland, Oregon for a total purchase price of $5,650,000.
The transaction is scheduled to close in March 1998.
15. CAPITALIZATION OF THE COMPANY AND PROPOSED INITIAL PUBLIC OFFERING:
After the mergers described in Note 1 were completed, the Articles of
Incorporation of CHC-Washington were amended to authorize 50.0 million common
shares and 5.0 million preferred shares. The preferred stock rights,
preferences and privileges will be determined by the Board of Directors. The
existing stockholders of CHC-Washington and BIC received a total of 7,072,025
newly issued shares in exchange for all of their outstanding shares. CHC-
Washington intends to enter into an underwriting agreement with CIBC
Oppenheimer Corp. for the sale of 5,175,000 shares of the Company's common
stock.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange.
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, accounts receivable and
current liabilities are a reasonable estimate of their fair values. The fair
values of long-term debt and capital lease obligations are based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for debt or capital lease obligations with
similar remaining maturities.
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------- DECEMBER 31
1996 1997 1997
--------------- --------------- ---------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNTS VALUES AMOUNTS VALUES AMOUNTS VALUES
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.... $7,200 $7,200 $6,440 $6,440 $4,955 $4,955
Accounts receivable.......... 1,720 1,720 2,806 2,806 2,785 2,785
Financial liabilities:
Current liabilities, exclud-
ing debt.................... 6,085 6,085 8,798 8,798 8,921 8,921
Note payable to bank......... -- -- -- -- 1,075 1,075
Long-term debt............... 96,536 97,764 98,056 99,615 98,009 99,776
Capital lease obligations.... 2,772 2,772 2,754 2,754 2,641 2,641
</TABLE>
17. BUSINESS SEGMENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
-------------------------- --------------
1995 1996 1997 1996 1997
-------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants........... $ 31,244 $35,205 $41,662 $5,683 $6,829
Entertainment, management and
services........................ 3,092 3,168 3,842 483 840
Rental operations................ 6,027 6,790 6,539 1,191 1,169
-------- ------- ------- ------ ------
$ 40,363 $45,163 $52,043 $7,357 $8,838
======== ======= ======= ====== ======
Operating income:
Hotels and restaurants........... $ 15,563 $18,297 $22,293 $2,754 $3,284
Entertainment, management and
services........................ 1,290 964 1,790 86 238
Rental operations................ 5,001 5,326 5,033 948 866
Undistributed operating ex-
penses.......................... (13,876) (15,673) (18,481) (2,864) (3,045)
-------- ------- ------- ------ ------
$ 7,978 $ 8,914 $10,635 $ 924 $1,343
======== ======= ======= ====== ======
</TABLE>
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
17. BUSINESS SEGMENTS (IN THOUSANDS), CONTINUED:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
--------------------------- -----------------
1995 1996 1997 1996 1997
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital expenditures:
Hotels and restaurants......... $ 20,439 $ 11,705 $ 4,960 $ 1,407 $ 1,322
Rental operations.............. 3,536 1,631 980 150 1,060
General corporate, including
entertainment, management and
services...................... 149 121 252 32 18
--------- -------- -------- -------- --------
$ 24,124 $ 13,457 $ 6,192 $ 1,589 $ 2,400
========= ======== ======== ======== ========
Depreciation and amortization:
Hotels and restaurants......... $ 2,274 $ 2,840 $ 3,457 $ 573 $ 581
Rental operations.............. 1,005 1,210 1,179 172 188
General corporate, including
entertainment, management and
services...................... 149 165 139 14 29
--------- -------- -------- -------- --------
$ 3,428 $ 4,215 $ 4,775 $ 759 $ 798
========= ======== ======== ======== ========
Identifiable assets:
Hotels and restaurants......... $ 77,310 $ 90,345 $ 91,431 $ 89,591 $ 92,415
Rental operations.............. 24,155 24,049 24,035 24,645 25,965
General corporate, including
entertainment, management and
services...................... 5,577 5,693 8,638 5,705 6,737
--------- -------- -------- -------- --------
$ 107,042 $120,087 $124,104 $119,941 $125,117
========= ======== ======== ======== ========
</TABLE>
Revenues and identifiable assets of each segment are those that are directly
identified with those operations. Capital expenditures and identifiable assets
for the entertainment, management and services segment are not separated from
corporate. General corporate assets consist primarily of cash and cash
equivalents, receivables and certain property and equipment. Operating income
for each segment represents revenues less direct operating expenses of each
segment. Undistributed operating expenses are not identified by segment.
18. EARNINGS PER SHARE:
In accordance with SFAS No. 128, 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).
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1997:
Net income per share--ba-
sic and diluted:
Net income.............. $ 6
===
Weighted average shares
outstanding............ 7,072
=====
Per share............... $ --
====
</TABLE>
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
18. EARNINGS PER SHARE, CONTINUED:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
OCTOBER 31, 1997:
Pro forma net income per share--basic
and diluted:
Net income............................ $1,709
======
Weighted average shares outstanding... 7,072
=====
Per share............................. $0.24
=====
</TABLE>
F-21
<PAGE>
CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION
The following condensed pro forma combined balance sheet and condensed pro
forma combined statement of income, collectively, the "Pro Forma Financial
Statements" were prepared by Cavanaughs Hospitality Corporation to illustrate
the estimated effects of (i) the merger of the companies and partnerships
which occurred in November 1997, (ii) acquiring minority interests through the
issuance of common stock and OP Units, and (iii) business combinations to be
accounted for as purchases under generally accepted accounting principles. The
acquisitions include the property and equipment of the following hotel
properties:
. Templin's Resort (Templin's)
. Outlaw Inn (Outlaw)
. Inn on the Falls
. The Ridpath Hotel (Ridpath)
. Hallmark Inn (Hallmark)
Additionally, in October 1997, Cavanaughs Hospitality Corporation entered
into a lease with purchase option agreement for the Gateway Hotel (Gateway).
Therefore, the historical results of operations of Gateway are included in the
condensed pro forma combined financial information. Templin's, Outlaw, Inn on
the Falls, Ridpath, Gateway and Hallmark are collectively referred to as the
"Acquired Hotels." Accordingly, the financial information of Cavanaughs
Hospitality Corporation, Barbieri Investment Company and Lincoln Building
Limited Partnership (collectively, "CHC" or "the Company") and the Acquired
Hotels has been combined as if the acquisitions occurred on November 1, 1996
for purposes of the condensed pro forma combined statement of income, and as
of October 31, 1997, for purposes of the condensed pro forma combined balance
sheet. There are no differences between CHC's and the Acquired Hotel's
accounting policies, which are expected to have a material impact on the pro
forma combined financial statements. The Pro Forma Financial Statements do not
purport to represent what the combined financial position or results of
operations would have been if the acquisitions had occurred at the beginning
of the period or to project the combined financial position or results of
operations for any future date or period.
The Pro Forma Financial Statements should be read in conjunction with the
historical combined financial statements, including the notes thereto, of CHC,
which are included in this document.
The Pro Forma Financial Statements are presented utilizing the purchase
method of accounting whereby the excess of the total purchase price over the
fair value of the assets acquired of the Acquired Hotels is recorded as
property and equipment. The combined pro forma results of operations presented
herein are not necessarily indicative of the future results of operations.
F-22
<PAGE>
CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at October 31, 1997
(in thousands, except for share data)
<TABLE>
<CAPTION>
ACQUIRED PRO
CHC HOTELS PRO FORMA FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents.................. $ 6,440 $ -- $ (6,440)(a) $ --
Accounts receivable..... 2,806 -- -- 2,806
Inventories............. 376 -- -- 376
Prepaid expenses and de-
posits................. 1,128 -- -- 1,128
-------- ------- -------- --------
Total current assets.. 10,750 -- (6,440) 4,310
Property and equipment,
net...................... 109,954 20,478 19,772 (b) 150,204
Other assets, net......... 3,400 -- -- 3,400
-------- ------- -------- --------
Total assets.......... $124,104 $20,478 $ 13,332 $157,914
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQ-
UITY
Current liabilities:
Payable to affiliates... $ 1,333 $ -- $ -- $ 1,333
Accounts payable........ 2,263 -- -- 2,263
Accrued payroll and re-
lated benefits......... 843 -- -- 843
Accrued interest pay-
able................... 741 -- -- 741
Other accrued expenses.. 3,618 -- -- 3,618
Long-term debt, due
within one year........ 4,285 -- -- 4,285
Capital lease obliga-
tions, due within one
year................... 499 -- -- 499
-------- ------- -------- --------
Total current liabili-
ties................. 13,582 -- -- 13,582
Long-term debt, due after
one year................. 93,771 -- 31,810 (c) 125,581
Capital lease obligations,
due after one year....... 2,255 -- -- 2,255
Deferred income taxes..... 5,417 -- -- 5,417
Minority interest......... 553 -- 2,000 (d) 2,553
-------- ------- -------- --------
Total liabilities..... 115,578 -- 33,810 149,388
-------- ------- -------- --------
Stockholders' and part-
ners' equity:
Preferred stock, $.01
par value, 5,000,000
shares authorized;
no shares issued and
outstanding............ -- -- -- --
Common stock, $.01 par
value, 50,000,000
shares authorized;
7,072,025 and 7,084,253
shares issued and
outstanding............ 71 -- -- 71
Partners' deficit....... (897) -- 897 (e) --
Additional paid-in capi-
tal.................... 3,935 -- (897)(e) 3,038
Retained earnings....... 5,417 20,478 (20,478) 5,417
-------- ------- -------- --------
Total stockholders'
and partners' equi-
ty................... 8,526 20,478 (20,478) 8,526
-------- ------- -------- --------
Total liabilities and
stockholders' and
partners' equity..... $124,104 $20,478 $ 13,332 $157,914
======== ======= ======== ========
</TABLE>
See notes to condensed pro forma combined balance sheet and statement of
income.
F-23
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
for the year ended October 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
ACQUIRED PRO
CHC HOTELS PRO FORMA FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms......................... $25,147 $14,662 $ -- $ 39,809
Food and beverage............. 13,926 9,621 -- 23,547
Other......................... 2,589 1,056 -- 3,645
------- ------- ------- --------
Total hotels and restau-
rants...................... 41,662 25,339 -- 67,001
Entertainment, management and
services...................... 3,842 -- -- 3,842
Rental operations.............. 6,539 -- -- 6,539
------- ------- ------- --------
Total revenues.............. 52,043 25,339 -- 77,382
------- ------- ------- --------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms........................ 6,820 4,600 -- 11,420
Food and beverage............ 11,483 7,829 -- 19,312
Other........................ 1,066 343 -- 1,409
------- ------- ------- --------
Total hotels and restau-
rants...................... 19,369 12,772 -- 32,141
Entertainment, management and
services..................... 2,052 -- -- 2,052
Rental operations............. 1,506 -- -- 1,506
------- ------- ------- --------
Total direct expenses....... 22,927 12,772 -- 35,699
------- ------- ------- --------
Undistributed operating ex-
penses:
Selling, general and adminis-
trative....................... 8,188 4,653 (743)(f)
Selling, general and
administrative................ -- -- 146 (g) 12,244
Property operating costs....... 5,518 3,353 312 (h) 9,183
Depreciation and amortization.. 4,775 2,501 (1,003)(i)
Depreciation and amortization.. -- -- (495)(j) 5,778
------- ------- ------- --------
Total undistributed operat-
ing expenses............... 18,481 10,507 (1,783) 27,205
------- ------- ------- --------
Total expenses.............. 41,408 23,279 (1,783) 62,904
------- ------- ------- --------
Operating income................ 10,635 2,060 1,783 14,478
Other income (expense):
Interest expense, net of
amounts capitalized........... (8,817) (2,555) 2,555 (k)
Interest expense, net of
amounts capitalized........... -- -- (2,359)(l) (11,176)
Interest income................ 416 -- -- 416
Other income................... 348 -- -- 348
Minority interest in partner-
ships......................... 59 -- (110)(m) (51)
------- ------- ------- --------
Income (loss) before income tax-
es............................. 2,641 (495) 1,869 4,015
Income tax provision............ 932 61 406 (n) 1,399
------- ------- ------- --------
Net income (loss)............... $ 1,709 $ (556) $ 1,463 $ 2,616
======= ======= ======= ========
Pro forma net income per share.. $ 0.24 $ 0.37
======= ========
Number of shares used in the pro
forma computation.............. 7,072 7,095
======= ========
</TABLE>
See notes to condensed pro forma combined balance sheet and statement of
income.
F-24
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME
1. BUSINESSES ACQUIRED:
Subsequent to October 31, 1997, the Company has entered into agreements to
purchase the real and personal property and equipment of the following hotel
properties:
. Templin's Resort
. Outlaw Inn
. Inn on the Falls
. The Ridpath Hotel
. Hallmark Inn
The agreement with the Ridpath Hotel is a lease with purchase option which
can be exercised at anytime. The Company intends to exercise the purchase
option prior to July 1998 and therefore has included the financial information
of the Ridpath in these pro forma financial statements assuming the purchase
option is exercised. Additionally, the Company has entered into a lease with
purchase option agreement with the owner of the Gateway Hotel. The purchase
option cannot be exercised by the Company until 2003 and therefore, the
acquisition of the property and equipment of the Gateway Hotel has not been
assumed in the pro forma balance sheet. However, the pro forma statement of
income reflects the lease expense associated with the Gateway Hotel along with
its historical operations. The acquisitions will be accounted for utilizing
the purchase method of accounting. The purchase price for all of the acquired
hotels will be paid in cash except for the Ridpath. The purchase price for the
Ridpath assumes that the purchase option is exercised prior to July 1998 and
that $2.0 million of the purchase price is satisfied by the issuance of OP
Units (see Note 14 to the historical financial statements of the Company).
The total purchase price and the amount in excess of the historical book
value of the property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL EXCESS
PURCHASE PURCHASE
PRICE PRICE
-------- --------
<S> <C> <C>
Templin's Resort........................................... $ 9,500 $ 5,376
Outlaw Inn................................................. 9,800 5,477
Inn on the Falls........................................... 3,800 259
The Ridpath Hotel.......................................... 11,500 4,587
Hallmark Inn............................................... 5,650 4,073
------- -------
$40,250 $19,772
======= =======
</TABLE>
The purchase price has been allocated to the acquired land, building,
furniture and fixtures as follows based upon the estimated fair value of the
components (in thousands):
<TABLE>
<CAPTION>
DEPRECIABLE
AMOUNT LIFE
------- -----------
<S> <C> <C>
Land.................................................... $11,795
Building................................................ 25,824 35 years
Furniture and fixtures.................................. 2,631 10 years
-------
$40,250
=======
</TABLE>
F-25
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
1. BUSINESSES ACQUIRED, CONTINUED:
The historical depreciation expense for the Acquired Hotels was calculated
using depreciable lives for certain assets that are commonly used for income
tax purposes. The pro forma adjustments include $495,000 to reduce the
historical depreciation expense to an estimated amount which would have been
reported if the useful lives of the assets were in accordance with industry
practice and generally accepted accounting principals (GAAP). Since the
acquisitions will be accounted for under the purchase method of accounting,
the excess purchase price over the historical net book value of the property
and equipment will be attributed to the property and equipment and depreciated
over the estimated remaining useful lives of the acquired assets.
2. PRO FORMA ADJUSTMENTS:
The following pro forma adjustments were made to the condensed pro forma
combined balance sheet and statement of income to reflect the acquisitions of
the Acquired Hotels and the issuance of common stock and OP Units for the
acquisition of minority interests in the Lincoln Building.
(a) Represents the cash to be used for the purchase of the Acquired Hotels.
(b) Represents the purchase price in excess of the historical value of the
property and equipment of the Acquired Hotels.
(c) Represents the amount of the purchase price of the Acquired Hotels which
will be financed by the Company's revolving line-of-credit agreement.
(d) Assumes the purchase price of the Ridpath will be $9.5 million cash plus
OP Units equivalent to $2.0 million.
(e) The historical financial statements of the Lincoln Building Limited
Partnership (Lincoln Building) are included in the combined CHC historical
financial statements as they are all entities under common control (see Note 1
to the historical combined financial statements). In January 1998, the Company
issued 12,228 shares of common stock and 150,817 OP Units to the Lincoln
Building partners in exchange for their partnership interests in the Lincoln
Building. The acquisition of the Lincoln Building has been accounted for as if
it were a pooling of interests due to common control of the entities. The
partners' deficit has been reclassified to additional paid-in capital as a pro
forma adjustment.
(f) The Gateway and Inn on the Falls were previously Holiday Inn franchises.
The franchises have been terminated by the Company. Therefore, the franchise
fees which were based on gross room revenues have been eliminated as a pro
forma adjustment.
(g) Represents the maximum potential increase in management compensation
expense as a result of the planned new employment agreements as described
herein as compared to historical compensation levels. The employment
agreements will provide for bonuses up to a maximum of 100% of the executive's
base salary.
(h) The historical financial statements of the Ridpath included an equipment
lease expense of $108,000 per year. However, this equipment is a capital lease
and the expense should not have been recorded as an operating lease.
Therefore, the pro forma adjustment eliminates this lease payment.
Additionally, the Company has leased the Gateway for $420,000 annually. This
facility lease expense is not recorded in the historical financial statements
of Gateway and therefore, has been included as a pro forma adjustment.
F-26
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
2. PRO FORMA ADJUSTMENTS, CONTINUED:
(i) Represents the reduction in depreciation and amortization expense from
the adjusted historical amounts for the Acquired Hotels based on the
depreciation of the purchase prices over the estimated remaining lives of the
acquired assets (see Note 1).
(j) Represents a reduction in historical depreciation expense for the
Acquired Hotels to record depreciation in accordance with GAAP (see Note 1).
(k) Represents the elimination of interest expense incurred by the Acquired
Hotels as the Company acquired the property and equipment only of the Acquired
Hotels and did not assume the historical liabilities. Therefore, interest
expense historically incurred by the Acquired Hotels will not be incurred by
the Company.
(l) Represents the interest expense which would be incurred by the Company
based on the purchase price of the Acquired Hotels, which will be financed
under the Company's revolving line-of-credit agreement. The interest rate used
in the pro forma adjustment was 7.4% based upon the currently expected
borrowing rate under the Company's line-of-credit agreement commitment.
(m) Represents the minority interest share of the pro forma net income
associated with OP units for the year ended October 31, 1997.
(n) Represents estimated income taxes related to the Acquired Hotels
historical income before income taxes and the tax effects of pro forma
adjustments.
3. INTEREST EXPENSE:
Assuming the acquisitions were made as of November 1, 1996, the Company
would have incurred debt to finance part of the purchase price of the Acquired
Hotels. Pro forma interest expense associated with the Company's acquisitions
has been calculated assuming borrowings were made in amounts as presented in
the pro forma condensed combined balance sheet and at interest rates that
would be charged under the Company's revolving line-of-credit agreement. The
Company's revolving line-of-credit agreement bears interest at a variable
rate. The expected rate of 7.4% has been used to calculate the pro forma
interest expense. If the rate increased or decreased by 0.25%, the Company's
pro forma interest expense, net income and earnings per share for the year
ended October 31, 1997 would increase or decrease by approximately $80,000,
$53,000 and $0.01, respectively.
4. INSURANCE COSTS:
The Company has obtained insurance premium quotations for the Acquired
Hotels which indicate that insurance expense will be approximately $180,000
less than the historical insurance expense which was incurred by the Acquired
Hotels. This reduction in expense has not been reflected in the pro forma
financial statements.
5. PRO FORMA NET INCOME PER SHARE:
The pro forma net income per share has been calculated by dividing pro forma
net income by 7,084,253 common shares outstanding plus 11,000 shares to be
issued to certain Company officers in connection with the Offering.
F-27
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
5. PRO FORMA NET INCOME PER SHARE, CONTINUED:
The Company intends to use the $61.7 million net proceeds of the Offering to
repay outstanding indebtedness. The use of the proceeds to repay debt will
reduce interest expense by $5.1 million ($3.4 million after tax). Pro forma
net income per share after reflecting this reduction of interest expense is
$0.49 per share based on 12,270,253 shares outstanding after the Offering.
Also, in connection with the repayment of debt, the Company expects to incur
prepayment penalties of $139,000 and write-off $680,000 of deferred loan fees
related to the long-term debt. These non-recurring charges of $541,000, net of
income taxes, are expected to be charged to operations upon repayment. Such
costs have not been included in the pro forma statement of income for the year
ended October 31, 1997.
F-28
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses, other than underwriting
discounts and commissions, paid or payable in connection with the issuance and
distribution of the Common Stock being registered hereby (all amounts are
estimated except the Securities and Exchange Commission Registration Fee, the
NASD Filing Fee and the NYSE Listing Fee):
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 24,600
NASD Filing Fee................................................. 8,800
NYSE Listing Fee................................................ 84,600
Printing and Engraving Expenses................................. 50,000
Legal Fees and Expenses......................................... 350,000
Accounting Fees and Expenses.................................... 380,000
Transfer Agent and Registrar Fees............................... 2,000
--------
Total......................................................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated By-Laws ("By-Laws") and Amended and
Restated Articles of Incorporation (the "Articles") provide that the Company
shall, to the full extent permitted by the Washington Business Corporation Act
(the "WBCA"), as amended from time to time, indemnify all directors and
officers of the Company. In addition, the Company's Articles contain a
provision eliminating the personal liability of directors to the Company or
its stockholders for monetary damage arising out of a breach of fiduciary
duty. Chapter 23B.08.510 and .570 of the WBCA authorizes a corporation to
indemnify its directors, officers, employees, or agents in terms sufficiently
broad to permit such indemnification under certain circumstances for
liabilities (including provisions permitting advances for reasonable expenses
incurred) arising under the 1933 Act.
Pursuant to Chapter 23B.08.580 of the WBCA, the Board of Directors (the
"Board") may authorize, by a vote of a majority of a quorum of the Board, the
Company to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Company would have the power to
indemnify him against such liability under Chapter 23B.08.510 or 23B.08.520 of
the WBCA. The Board intends to authorize the Company to purchase and maintain
appropriate policies of insurance on behalf of the Company's directors and
officers against liabilities asserted against any such person arising out of
his or her status as such. The Board may authorize the Company to enter into a
contract with any person who is or was a director, officer, partner, trustee,
employee or agent of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another partnership,
joint venture, trust, employee benefit plan or other enterprise providing for
indemnification rights equivalent to or, if the Board so determines, greater
than those provided for in the By-Laws. The Board intends to authorize the
Company to enter into contracts providing for indemnification with any person
who is or was a director or officer of the Company.
Section 6 of the Underwriting Agreement (filed as an Exhibit hereto)
provides that the Underwriters will indemnify and hold harmless the Company
and each director, officer or controlling person of the Company from and
against any liability caused by any statement or omission in the Registration
Statement or Prospectus based on certain information furnished to the Company
by the Underwriters for use in the preparation thereof.
Each of the employment agreements described in "Management--Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Effective November 3, 1997, Barbieri Investment Company ("BIC"), a company
that was owned by the same group of shareholders which owned the Company prior
to such date, merged into the Company. In connection with this merger, the
Company issued an aggregate of 7,072,025 shares of Common Stock to the
shareholders of the Company and BIC. This issuance of Common Stock is exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act") pursuant to Section 4(2) promulgated thereunder.
Effective January 1, 1998, the Company issued an aggregate of 150,817 OP
Units to the Barbieri Family Foundation, Inc. ("BBF"), Donald Barbieri,
Richard Barbieri and Thomas Barbieri and 12,228 shares of Common Stock to
Kathryn Barbieri in exchange for such persons' partnership interests in the
G&B: Lincoln Building partnership. This issuance is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
On January 15, 1998, the Board adopted the 1998 Plan which provides for,
subject to the closing of the Offering, the issuance of an aggregate of 55,000
shares of Common Stock to Arthur Coffey (15,000 shares), John Taffin (10,000
shares), Lori Farnell (10,000 shares), David Peterson (10,000 shares) and
Shannon Kapek (10,000 shares) over five years. Of these 55,000 shares, 11,000
will be issued upon closing of the Offering and an additional 11,000 shares
will be issued on each anniversary thereof until such anniversary date in 2002
provided such person is an employee of the Company at that time.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* --Form of Underwriting Agreement
3.1* --Amended and Restated Articles of Incorporation of the Company
3.2* --Amended and Restated By-Laws of the Company
4.1* --Specimen Common Stock Certificate
5.1* --Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP,
regarding the legality of issuance of the Common Stock being
registered
5.2* --Opinion of Dennis McLaughlin & Associates P.S. regarding the
legality of the issuance of the Common Stock being registered.
10.1* --Employment Agreement between the Company and Donald Barbieri
10.2* --Employment Agreement between the Company and Arthur Coffey
10.3* --Employment Agreement between the Company and Richard Barbieri
10.4* --Employment Agreement between the Company and David Bell
10.5* --Employment Agreement between the Company and Thomas Barbieri
10.6* --Form of Revolving Credit Facility Agreement
10.7* --Amended and Restated Agreement of Limited Partnership of
Cavanaughs Hospitality Limited Partnership
10.8* --Employee Stock Purchase Plan of Cavanaughs Hospitality
Corporation
10.9* --1998 Stock Incentive Plan of Cavanaughs Hospitality
Corporation
10.11* --Form of Stock Option Award Agreement
10.12* --Form of Restricted Stock Award Agreement
10.13* --Gateway Property Lease Agreement
10.13(A)* --Gateway Property Option Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14* --Ridpath Property Lease Agreement
10.15 --Form of Indemnification Agreement
11.0* --Computation of Earnings Per Share
21* --List of Subsidiaries of the Company
23.1 --Consent of Coopers & Lybrand L.L.P.
23.2* --Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP
(included in Exhibit 5.1)
23.2(A)* --Consent of Dennis McLaughlin & Associates P.S. (included in
Exhibit 5.2)
23.3* --Consent of Peter F. Stanton
23.4* --Consent of Ronald R. Taylor
23.5* --Consent of Robert G. Templin
24.1* --Power of Attorney (see signature pages)
27.1* --Financial Data Schedule
</TABLE>
- --------
* Previously filed.
b. Financial Statement Schedules
All schedules for which provisions is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable or the information is contained
in the Financial Statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
a. To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser;
b. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue;
c. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
d. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF SPOKANE AND STATE OF WASHINGTON, ON THE 27TH DAY OF MARCH, 1998.
Cavanaughs Hospitality Corporation
/s/ Richard L. Barbieri
By: _________________________________
RICHARD L. BARBIERI
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
* President, Chief
- ------------------------------------- Executive Officer March 27, 1998
DONALD K. BARBIERI and Chairman of the
Board
* Executive Vice
- ------------------------------------- President, Chief March 27, 1998
ARTHUR M. COFFEY Financial Officer
and Director
(principal
accounting officer)
/s/ Richard L. Barbieri Senior Vice
- ------------------------------------- President, General March 27, 1998
RICHARD L. BARBIERI Counsel and
Director
* Senior Vice
- ------------------------------------- President and March 27, 1998
THOMAS M. BARBIERI Director
*By: /s/ Richard L. Barbieri
-----------------------------------
RICHARD L. BARBIERI
(ATTORNEY-IN-FACT)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* --Form of Underwriting Agreement
3.1* --Amended and Restated Articles of Incorporation of the Company
3.2* --Amended and Restated By-Laws of the Company
4.1* --Specimen Common Stock Certificate
5.1* --Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP,
regarding the legality of issuance of the Common Stock being
registered
5.2* --Opinion of Dennis McLaughlin & Associates P.S. regarding the
legality of the issuance of the Common Stock being registered.
10.1* --Employment Agreement between the Company and Donald Barbieri
10.2* --Employment Agreement between the Company and Arthur Coffey
10.3* --Employment Agreement between the Company and Richard Barbieri
10.4* --Employment Agreement between the Company and David Bell
10.5* --Employment Agreement between the Company and Thomas Barbieri
10.6* --Form of Revolving Credit Facility Agreement
10.7* --Amended and Restated Agreement of Limited Partnership of
Cavanaughs Hospitality Limited Partnership
10.8* --Employee Stock Purchase Plan of Cavanaughs Hospitality
Corporation
10.9* --1998 Stock Incentive Plan of Cavanaughs Hospitality Corporation
10.11* --Form of Stock Option Award Agreement
10.12* --Form of Restricted Stock Award Agreement
10.13* --Gateway Property Lease Agreement
10.13(A)* --Gateway Property Option Agreement
10.14* --Ridpath Property Lease Agreement
10.15 --Form of Indemnification Agreement
11.0* --Computation of Earnings Per Share
21* --List of Subsidiaries of the Company
23.1 --Consent of Coopers & Lybrand L.L.P.
23.2* --Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included
in Exhibit 5.1)
23.2(A)* --Consent of Dennis McLaughlin & Associates P.S. (included in
Exhibit 5.2)
23.3* --Consent of Peter F. Stanton
23.4* --Consent of Ronald R. Taylor
23.5* --Consent of Robert G. Templin
24.1* --Power of Attorney (see signature pages)
27.1* --Financial Data Schedule
</TABLE>
- --------
* Previously filed
II-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
The Company.............................................................. 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Combined Financial and Other Data............................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business and Properties.................................................. 30
Management............................................................... 42
Certain Relationships and Related Transactions........................... 49
Ownership of Common Stock................................................ 51
Partnership Agreement of the Operating Partnership....................... 52
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Experts.................................................................. 60
Legal Matters............................................................ 60
Additional Information................................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,175,000 SHARES
[LOGO OF CAVANAUGHS HOSPITALITY CORPORATION]
COMMON STOCK
----------------
PROSPECTUS
----------------
CIBC OPPENHEIMER
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.15
FORM OF INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT dated as of March 13, 1998, by and between Inland
Northwest Corporation, a Washington corporation ("INWC"), and Cavanaughs
Hospitality Corporation, a Washington corporation (the "Company"), and the
holders of the Company's Common Stock, par value $.01 per share ("Common Stock")
on the date of the Spin-Off (as defined below) ("Pre-IPO Shareholders").
W I T N E S S E T H:
WHEREAS, the Company intends to engage in an initial public offering
("IPO") of its Common Stock pursuant to an Underwriting Agreement, dated March
___, 1998 (the "Underwriting Agreement"), by and between the Company and CIBC
Oppenheimer Corp. and NationsBanc Montgomery Securities LLC, as representatives
of the Underwriters (the "Representatives");
WHEREAS, in November 1997, in contemplation of the IPO, the Company
contributed certain assets unrelated to its core hospitality business to INWC,
which was, at the time, a wholly-owned subsidiary of the Company, and
distributed all of the capital stock of INWC, and another wholly-owned
subsidiary of the Company, the Huckleberry Bay Company, to the Pre-IPO
Shareholders (the "Spin-Off"), in a transaction intended to qualify as a Tax-
Free Spin-Off (as hereinafter defined); and
WHEREAS, in contemplation of the IPO, INWC is willing to indemnify the
Company for any tax liability it may incur as a result of any failure of the
Spin-Off to qualify, and, subject to certain limited exceptions, continue to be
qualified, as a Tax-Free Spin-Off, and the Company and the Pre-IPO Shareholders
are willing to set up certain procedures to ensure the tax-free treatment and
qualification of the Spin-Off.
NOW, THEREFORE, in consideration of the premises, and the mutual promises,
covenants and agreements herein contained, the parties hereto, intending to be
legally bound, hereby agree as follows:
<PAGE>
1. If, other than (i) because of actions taken by the Company that are
approved by a majority of the Independent Directors of the Company after
completion of the IPO; or (ii) as a result of the Pre-IPO Shareholders
transferring shares which do not cause the collective aggregate number of shares
held at any given time by the Pre-IPO Shareholders to fall below 6,809,253
shares of Common Stock in the aggregate (provided that such transfers are
transferred in accordance with paragraph 3 hereof), it is ultimately determined
that the Spin-Off did not qualify, or does not qualify in the future, for Tax-
Free Status, and as a result the Company incurs any Spin-Off Tax Liabilities as
a result of the Spin-Off, INWC will pay to the Company an amount such that the
amount received by the Company, net of any taxes payable with the respect to the
payments from INWC, is equal to the Tax Cost of the Spin-Off.
2. For purposes of this agreement, the following terms will have the
meanings set forth below:
"Tax Cost" means (i) the Aggregate Spin-Off Tax Liabilities; and
(ii) all accounting, legal and other professional fees, and court costs incurred
in connection with any settlement, final determination, judgement or other
determination with respect to such Aggregate Spin-Off Tax Liabilities.
"Taxing Jurisdiction" means the United States and every other
government or governmental unit having jurisdiction to tax the Company or INWC.
"Spin-Off Tax Liabilities," with respect to any Taxing
Jurisdiction, means all taxes, interest and penalties actually paid to such
Taxing Jurisdiction that would not have been paid if the Spin-Off qualified for
Tax-Free Status.
"Aggregate Spin-Off Tax Liabilities" means the sum of the Spin-
Off Tax Liabilities with respect to each Taxing Jurisdiction.
"Tax-Free Status" means the qualification of the Spin-Off (i) as
a transaction described in Section 355 (a)(1) of the Code, (ii) as a transaction
in which the stock which is distributed is qualified property for purposes of
Section 355 (c)(2) of the Code, and (iii) as a transaction in which the Company
recognizes no income or gain other than inter-company items or excess loss
accounts taken into account pursuant to the Treasury Regulations promulgated
pursuant to Section 1502 of the Code
2
<PAGE>
Except as otherwise required by law, in filing its tax returns for the
year in which the Spin-Off date falls, the Company will treat the Spin-Off as
not resulting in recognition of gain to the Company. If the Company becomes
aware during an examination of its Federal corporate income tax return, or any
state income, franchise or similar tax return, for the taxable year in which the
Spin-Off date falls that the agent conducting the examination is seriously
considering asserting that the Spin-Off did not qualify for Tax-Free Status and
therefore (or for any other reason) the Company and its subsidiaries may incur
Spin-Off Tax Liabilities, the Company will (i) promptly notify INWC of this
fact, (ii) to the extent reasonably practicable, segregate the issue of whether
the Spin-Off qualified for Tax-Free Status from other issues being examined,
(iii) permit INWC to control the tax examination in so far as it relates to that
issue and any administrative or judicial appeals relating to the issue
(including whether to settle the issue or to appeal from an adverse
determination with regard to the issue) and (iv) cooperate with INWC in all
reasonable respects in INWC's efforts to establish that the Spin-Off qualified
for Tax-Free Status and because of that (or for any other reason) the Company
and its subsidiaries are not required to recognize income or gain because of the
Spin-Off.
3. Each of the Pre-IPO Shareholders hereby agrees as follows:
(a) From the date hereof until November 2, 1999 (the "Termination Date"),
all shares of Common Stock and share certificates owned by the Pre-IPO
Shareholders shall be held by the Secretary of the Company, or such other
Company officer as may be designated by the Independent Directors of the
Company;
(b) Until the Termination Date, all transfers of shares of Common Stock by
the Pre-IPO Shareholders must be approved by a majority vote of the Directors of
INWC, shall not cause a reduction in the collective aggregate ownership by the
Pre-IPO Shareholders of shares of Common Stock to be less than 6,809,253 shares,
and shall be based upon current and foreseeable needs of the Pre-IPO
Shareholders.
4. Anything in this Agreement to the contrary notwithstanding, the
issuance of options to purchase shares of Common Stock to Pre-IPO Shareholders
and of options to purchase up 275,000 shares of Common Stock to persons who are
not Pre-IPO Shareholders, that can be
3
<PAGE>
exercisable on or prior to November 2, 1999, pursuant to the Company's stock
option plans, shall not be an "action taken by the Company" under section 1(i)
of this Agreement .
5. The provisions and restrictions contained in this agreement and the
separate Lock-up Agreements that are being delivered by certain of the Pre-IPO
Shareholders to the Representatives pursuant to the Underwriting Agreement shall
operate independently of each other such that a restriction, or other term or
provision in one agreement shall be binding upon the parties thereto, regardless
of whether such restriction, or other term or provision is contained in another
agreement.
6. This Agreement may not be modified, amended, or terminated except by
agreement of the parties hereto and the majority approval of the Independent
Directors of the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
Pre-IPO Shareholders: Inland Northwest Corporation
- ------------------------------ ----------------------------------
Donald K. Barbieri Name: Donald K. Barbieri
Title: President
- ------------------------------
Barbieri Revocable Trust Cavanaughs Hospitality Corporation
Name: Kathryn K. Barbieri
Title: Trustee
- ------------------------------ by
Ann Barbieri and David Bell --------------------------------
Name: Donald K. Barbieri
Title: President
- ------------------------------
David M. Barbieri
- ------------------------------
DKB & HHB Unity Trust
Name: Donald K. Barbieri
Title: Trustee
4
<PAGE>
- ------------------------------
Stephen K. Barbieri
- ------------------------------
Mark E. Barbieri
- ------------------------------
Mary Kay Barbieri
- ------------------------------
Thomas M. Barbieri
- ------------------------------
Richard L. Barbieri
- ------------------------------
Janice McAvoy
5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-44491) of our report dated February 16, 1998, on our audits of the
combined financial statements of Cavanaughs Hospitality Corporation, Barbieri
Investment Company and Lincoln Building Limited Partnership. We also consent
to the reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Spokane, Washington
March 25, 1998
