U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-13957
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CAVANAUGHS HOSPITALITY CORPORATION
--------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1032187
------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
201 WEST NORTH RIVER DRIVE, SUITE 100
SPOKANE WASHINGTON 99201-2293
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (509) 459-6100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------------------- -----------------------
Common Stock, par value $.01 per share; New York Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting common stock
held by non-affiliates was $46,245,472 as of March 5, 1999. There
were 12,660,847 shares of the Registrant's common stock outstanding as
of March 5, 1999.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE.
Documents incorporated by reference herein: Proxy statement which
will be filed with the Commission pursuant to Regulation 14A within
120 days of the end of the Registrant's 1998 fiscal year is
incorporated by reference herein in Part III.
TABLE OF CONTENTS
Part Item No. Description
---------------------------------------------------------------------
I 1 Business
I 2 Properties
I 3 Legal Proceedings
I 4 Submission Of Matter To A Vote Of The Security
Holders
II 5 Market For Registrant's Common Equity and Related
Stockholder Matters
II 6 Selected Financial Data
II 7 Management's Discussion and Analysis Of Financial
Condition and Results of Operations
II 7A Quantitative and Qualitative Disclosures About
Market Risk
II 8 Financial Statements and Supplementary Data
III 9 Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure
III 10 Directors and Executive Officers Of The Registrant
III 11 Executive Compensation
III 12 Security Ownership Of Certain Beneficial Owners and
Management
III 13 Certain Relationships and Related Transactions
IV 14 Exhibits, Financial Statement Schedules, and Report
On Form 8-K
<PAGE>
PART I
ITEM 1. Business
-----------------
THE COMPANY
Cavanaughs Hospitality Corporation (the "Company") 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(R)". The Company's hotel
portfolio contains 19 full service hotels (the "Hotels"), with 3,933
guest rooms and approximately 196,900 square feet of meeting space,
located in Seattle, Olympia, Spokane, Yakima and Kennewick,
Washington; Boise, Idaho Falls, Pocatello, Post Falls and Twin Falls,
Idaho; Kalispell and Helena, Montana; Portland, Oregon; and Salt Lake
City, Utah. The Company plans to pursue additional growth
opportunities by continuing to acquire and develop full service hotels
in the Northwest. Substantially all of the Company's assets,
including the Hotels, are owned by Cavanaughs Hospitality Limited
Partnership (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
partes 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. As part of the Company's acquisition strategy, it completed
acquisition of 11 full service hotels in 1998. The Company completed
an initial public offering in April 1998, raising approximately $81.3
million net of issuance costs. Proceeds from the offering were used
to pay down debt and fund acquisitions.
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
<PAGE>
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 calendar
year ended December 31, 1998, the Company's revenues were $86.3
million, operating income was $20.3 million, net income was $7.5
million, REVPAR for Comparable Hotels (Hotels owned for greater than
one year) was $50.30 and ADR was $82.07.
The Company has a $100 million Revolving Credit facility provided by
U.S. Bank N.A., as agent, which is 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 limited partnership
interests 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 1.8 million tickets in
1998, and the presentation of shows and special events through
Cavanaughs Entertainment, formerly G&B Presents, which was also
founded in 1987 and has presented over 91 Broadway theatrical
presentations and special events in the last eleven 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 four 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 and/or
leasing agent of more than 3.1 million square feet of retail and
office properties and approximately 2,000 residential units in the
Northwest.
<PAGE>
The Company, which was formerly known as Goodale and Barbieri
Companies, 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").
That merger became effective on 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, residential condominiums, a milk
processing and distribution business, and associated real property, 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 97.0% 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.
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 2,600 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 fifth year of record
profitability in 1998, during which time it produced record income of
$18.9 billion. PricewaterhouseCoopers LLP's Hospitality Directions
(February 1999) ("PricewaterhouseCoopers Hospitality Directions")
indicates that average U.S. hotel occupancy declined slightly in 1998,
due to supply growth exceeding demand growth, although room starts
peaked in 1997 at 150,600 rooms and are not expected to reach that
level in 1998. Sustained ADR growth has contributed to total lodging
industry revenue growth, which increased 7.6% from 1997 to 1998.
The following table reflects the percentage changes in REVPAR, ADR and
occupancy for the twelve months ended October 31, 1997 and
December 31, 1998, compared to the respective prior fiscal year, 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.
<PAGE>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
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<TABLE>
<CAPTION>
REVPAR(1) ADR OCCUPANCY
--------------- --------------- ---------------
1997 1998 1997 1998 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotels (2) 8.8% 7.9% 9.1% 10.1% (1.6)% (1.3)%
U.S. Full Service Hotels (3) 7.8% 4.7% 7.8% 6.2% 0.1% (0.9)%
U.S. Hotels (3) (4) 5.4% 3.4% 6.4% 4.5% (0.9)% (0.6)%
</TABLE>
(1) Determined by dividing annual room revenue by annual available
rooms.
(2) Includes Comparable Hotels; Hotels owned greater than one year.
(3) Source: Smith Travel Research
(4) Includes both full service and limited service hotels.
COMPETITION IN 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.
RISK FACTORS
An investment in the Common Stock of the Company involves various
risks. Prior to making a decision to invest in the Company, investors
should carefully consider the risk factors, described in the Form S-1
filed by the Company on March 27, 1998 and which became effective on
April 1, 1998. In addition, investors should also consult and
consider other information contained in the public filings of the
Company.
<PAGE>
FORWARD LOOKING STATEMENTS
Statements that are not based on historical facts are forward-looking
statements subject to uncertainties and risks, including, but not
limited to, (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 actual results may
differ significantly from those anticipated in these forward-looking
statements as a result of these and other risks and factors detailed
in the Company's filings with the Securities and Exchange Commission.
TRADEMARKS
"Cavanaughs(R)" is a registered trademark of the Company in the United
States and reserved in Canada.
SEGMENT REVENUES
The information required by this item is contained in, and
incorporated by reference from the Financial Statements and
supplementary data, note 15, contained herein.
<PAGE>
ITEM 2. Properties
------------------
HOTEL PROPERTIES
The Company's hotel portfolio currently contains 19 full service
Hotels, with 3,933 guest rooms and approximately 196,900 square feet
of meeting space, located in the Northwest. The following table sets
forth certain information regarding the Company's hotel portfolio at
December 31, 1998.
<TABLE>
<capiton>
Meeting
Year Built/ Year Guest Space
Location Acquired Renovated Rooms (sq. ft.)
------------------ ----------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Cavanaughs on Fifth Avenue Seattle, WA 1996 1996 297 12,500
Cavanaughs Inn at the Park Spokane, WA 1983 1997 402 26,300
Cavanaughs River Inn Spokane, WA 1976 1997 245 3,700
Cavanaughs Fourth Avenue Spokane, WA 1991 1997 153 2,600
Cavanaughs Ridpath Hotel Spokane, WA 1998 1996 342 16,000
Cavanaughs at Yakima Center Yakima, WA 1991 1997 155 11,000
Cavanaughs Gateway Hotel Yakima, WA 1997 1997 172 8,000
Cavanaughs at Columbia Center Kennewick, WA 1978 1997 162 9,700
Cavanaughs at Capitol Lake Olympia, WA 1998 1998 177 17,000
Cavanaughs on the Falls Idaho Falls, ID 1998 1994 142 8,800
Cavanaughs Templins Resort Post Falls, ID 1998 1996 167 11,000
Cavanaughs Park Center Suites Boise, ID 1998 1996 238 2,200
Cavanaughs Canyon Springs Hotel Twin Falls, ID 1998 1990 112 4,300
Cavanaughs Pocatello Hotel Pocatello, ID 1998 1993 152 12,000
Cavanaughs Colonial Inn Helena,MT 1998 1985 149 14,000
Cavanaughs at Kalispell Center Kalispell, MT 1986 1997 132 10,500
Cavanaughs Outlaw Hotel Kalispell, MT 1998 1995 220 11,000
Cavanaughs Olympus Hotel Salt Lake City, UT 1998 1997 393 12,800
Cavanaughs Hillsboro Hotel Portland, OR 1998 1997 123 3,500
----- -------
Total 3,933 196,900
===== =======
</TABLE>
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) Cavanaughs Entertainment, formerly 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.
<PAGE>
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 Company's corporate
headquarters is located in the Spokane CHC Building and occupies
25,061 square feet of this 100,350 square foot building.
ITEM 3. LEGAL PROCEEDINGS
At any given time, the Company is subject to claims and actions
incident to the operation of its business. While the outcome of these
proceedings cannot be predicted, it is the opinion of management that
none of such proceedings, individually or in the aggregate, will have
a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF THE SECURITY HOLDERS
No matters have been submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
---------------------------------------------------------------------
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "CVH". The following table sets forth for
the periods indicated the high and low closing sale prices for the
Common Stock on the NYSE.
High Low
---------- ---------
1999:
First Quarter (through March 5, 1999) $12 $7 5/8
1998:
Fourth Quarter (ended December 31, 1998) 12 15/16 6 7/8
Third Quarter (ended September 30, 1998) 14 3/4 7 15/16
Second Quarter (ended June 30, 1998) 17 3/8 10 7/8
The Company's common stock commenced trading on the NYSE on April 3,
1998; therefore, market information prior to the second quarter 1998
is not applicable.
The last reported sale price of the Common Stock on the NYSE on
March 5, 1999 was $8 3/16. As of March 5, 1999, there were
approximately 83 holders of record of the Common Stock.
<PAGE>
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, the Revolving Credit Facility includes restrictions on the
payment of dividends. As of December 31, 1998 the Company was
restricted from paying dividends under the terms and conditions of the
Revolving Credit Facility.
On January 1, 1998, the Company issued 44,837 OP units, 32,608 OP
units, 8,154 OP Units, and 65,218 OP units to Donald K. Barbieri and
Heather M. Barbieri, Thomas M. Barbieri and Eileen Barbieri, Richard
L. Barbieri and Cara Lyn Tangen, and the Barbieri Family Foundation,
Inc., respectively, in connection with the Company's purchase of the
Lincoln Building. The OP Units were issued without registration under
the Securities Act pursuant to the exemption from registration
afforded by Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder. The Company issued 12,228
restricted common shares to Kathryn Barbieri in connection with the
purchase of the Lincoln Building.
On April 20, 1998, the Company issued 100,000 OP units to Templin's
Resort & Conference Center, Inc. in connection with the Company's
purchase of Templin's Resort & Conference Center. The OP Units were
issued without registration under the Securities Act pursuant to the
exemption from registration afforded by Section 4(2) of the Securities
Act and the rules and regulations promulgated thereunder.
On April 28, 1998, the Company issued 145,148 OP units to Dunson
Ridpath Hotel associates Limited Partnership, a Washington limited
partnership, in connection with the Company's purchase of the Ridpath
Hotel. The OP Units were issued without registration under the
Securities Act pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.
<PAGE>
ITEM 6. Selected Financial Data
-------------------------------
The following table sets forth selected combined financial data of the
Company as of and for the year ended December 31, 1998, the two months
ended December 31, 1996 and 1997, and each of the four years in the
period ended October 31, 1997. The selected combined statement of
operations data for the fiscal year ended October 31, 1994 and the two
months ended December 31, 1996 and the selected combined balance sheet
data as of October 31, 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,
1997, the two months ended December 31, 1997, and year ended
December 31, 1998, 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
Report.
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,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included
elsewhere in this Report.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Two Months Ended Ended
Fiscal Year Ended October 31, (1) December 31, December 31,
----------------------------------------- ------------------- ------------
1994 1995 1996 1997 1996 1997 1998
-------- -------- -------- -------- -------- -------- ------------
(In Thousands, Except Per Share Data and Hotel Statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
------------------------------
Revenues:
Hotels and restaurants:
Rooms $ 17,531 $ 17,587 $ 20,972 $ 25,147 $ 2,998 $ 3,626 $ 46,688
Food and beverage 12,027 12,397 12,141 13,926 2,271 2,756 24,400
Other 1,015 1,260 2,092 2,589 414 447 4,084
-------- -------- -------- -------- -------- -------- --------
Total hotels and restaurants 30,573 31,244 35,205 41,662 5,683 6,829 75,172
Entertainment, management and services 3,205 3,092 3,168 3,842 483 840 4,006
Rental operations 4,987 6,027 6,790 6,539 1,191 1,169 7,155
-------- -------- -------- -------- -------- -------- --------
Total revenue 38,765 40,363 45,163 52,043 7,357 8,838 86,333
-------- -------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
-------------------
Direct:
Hotels and restaurants:
Rooms 4,868 4,931 5,719 6,820 958 1,167 12,562
Food and beverage 9,657 10,034 10,181 11,483 1,822 2,208 19,588
Other 808 716 1,008 1,066 149 170 1,802
-------- -------- -------- -------- -------- -------- --------
Total hotels and restaurants 15,333 15,681 16,908 19,369 2,929 3,545 33,952
-------- -------- -------- -------- -------- -------- --------
Entertainment, management and services 1,519 1,802 2,204 2,052 397 602 2,685
Rental operations 783 1,026 1,464 1,506 243 303 1,570
-------- -------- -------- -------- -------- -------- --------
Total direct operating expenses 17,635 18,509 20,576 22,927 3,569 4,450 38,207
-------- -------- -------- -------- -------- -------- --------
Undistributed operating expenses:
Selling, general and administrative $ 3,992 $ 5,426 $ 6,461 $ 8,188 $ 1,161 $ 1,225 $ 11,569
Property operating costs (2) 5,554 5,022 4,997 5,518 944 1,022 10,132
Depreciation and amortization 3,419 3,428 4,215 4,775 759 798 6,115
-------- -------- -------- -------- -------- -------- --------
Total undistributed operating
expenses 12,965 13,876 15,673 18,481 2,864 3,045 27,816
-------- -------- -------- -------- -------- -------- --------
Total expenses 30,600 32,385 36,249 41,408 6,433 7,495 66,023
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Two Months Ended Ended
Fiscal Year Ended October 31, (1) December 31, December 31,
----------------------------------------- ------------------- ------------
1994 1995 1996 1997 1996 1997 1998
-------- -------- -------- -------- -------- -------- ------------
(In Thousands, Except Per Share Data and Hotel Statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income (2) 8,165 7,978 8,914 10,635 924 1,343 20,310
Interest expense 5,649 6,866 7,319 8,817 1,317 1,422 8,127
Other 249 471 310 823 119 79 90
Income (loss) before income taxes and
extraordinary item (2) 2,765 1,583 1,905 2,641 (274) -- 12,364
Income taxes 574 542 730 932 (104) (6) 4,310
Extraordinary item (3) -- -- -- -- -- -- 546
-------- -------- -------- -------- -------- -------- --------
Net income (loss) (2)(3) $ 2,191 $ 1,041 $ 1,175 $ 1,709 $ (170) $ 6 $ 7,508
Pro forma net income per share (4) -- -- -- $ 0.24 -- -- --
Shares used in the pro forma per share
calculation (4) -- -- -- $ 7,072 -- -- --
Dividends per share (5) -- -- -- -- -- -- --
Net income per share-basic and diluted -- -- -- -- -- -- 0.66
Weighted average shares outstanding -- -- -- -- -- 7,072 11,347
BALANCE SHEET DATA:
-------------------
Total assets $ 86,911 $107,018 $120,087 $124,104 $119,941 $125,117 $244,903
Current maturities of long-term debt and
capital leases 2,458 10,306 10,509 4,784 10,753 4,092 2,172
Long-term debt and capital leases
excluding current maturities 66,755 77,636 88,799 96,026 88,769 96,558 128,378
Stockholders' equity (6) 5,055 8,791 9,613 8,526 9,089 8,532 93,931
OTHER DATA:
-----------
EBITDA (2)(7) $ 11,584 $ 11,406 $ 13,129 $ 15,410 $ 1,683 $ 2,141 $ 26,425
EBITDA as a percentage of revenues 29.88% 28.26% 29.07% 29.61% 22.88% 24.22% 30.61%
Net cash provided by operating
activities (8) -- 3,586 5,200 6,610 287 1,094 14,178
Net cash used in investing activities (8) -- (24,428) (13,184) (6,268) (1,523) (3,294) (108,745)
Net cash provided by (used in) financing
activities (8) -- 19,178 9,258 (1,102) (261) 715 93,879
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Two Months Ended Ended
Fiscal Year Ended October 31, (1) December 31, December 31,
----------------------------------------- ------------------- ------------
1994 1995 1996 1997 1996 1997 1998
-------- -------- -------- -------- -------- -------- ------------
(In Thousands, Except Per Share Data and Hotel Statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
HOTEL STATISTICS:
-----------------
Hotels open (at end of period) 6 6 7 8 7 8 19
Available rooms (at end of period) 1,242 1,242 1,539 1,718 1,539 1,718 3,933
REVPAR (9)(10)(13) $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 31.93 $ 36.11 $ 50.30
ADR (11)(13) $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 64.88 $ 71.22 $ 82.07
Average occupancy
percentage (10)(12)(13) 65.2% 65.5% 64.5% 63.5% 50.7% 51.8% 61.3%
</TABLE>
(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, 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, 1994, 1995, 1996 and 1997.
(2) 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.
(3) The Company incurred $546,378 extraordinary expense net of income
taxes for the write-off of prepayment penalties and deferred loan
fees in connection with the repayment of indebtedness out of the
proceeds of the April 1998 initial public offering.
<PAGE>
(4) 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.
(5) 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.
(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 (net of interest income), depreciation,
amortization, minority interests, and other income. 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 included in the Revolving
Credit Facility and other considerations.
(8) Cash flow from operating, investing and financing activities has
not been provided for the year ended October 31, 1994. Due to
the mergers of the companies and partnerships described in Note 1
to the 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 room 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.
<PAGE>
(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.
(13) Hotel statistics for the fiscal year ended December 31, 1998, are
presented for only Comparable Hotels. Comparable Hotels means
Hotels owned by the Company for greater than one year.
ITEM 7. 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 years ended October 31, 1995, 1996,
and 1997 and the two months ended December 31, 1996 and 1997, and the
years ended December 31, 1997 and 1998. The following should be read
in conjunction with the Consolidated Financial Statements and the
notes thereto and "Selected Financial Data" included elsewhere in this
report. In addition to historical information, the following
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed
in "Risk Factors" and elsewhere in the Form S-1 Prospectus filed by
the Company on March 27, 1998.
The financial statements of the Company, which have been audited by
PricewaterhouseCoopers LLP, 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 Consolidated Financial
Statements. Income or loss attributed to the minority interests of
partners in Cowley Street Limited Partnership and Cavanaughs
Hospitality 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 took effect with the fiscal
year beginning on January 1, 1998.
<PAGE>
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 87.1% of total
revenue in 1998 and increased at a compound annual rate of 34.1% from
$31.2 million in 1995 to $75.2 million in 1998. This increase was
primarily the result of the addition of thirteen hotels during the
period. 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 1998, entertainment, management and services accounted for
4.6% of total revenues and rental operations accounted for 8.3% 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.
The following table sets forth selected items from the consolidated
statements of operations as a percent of total revenues and certain
other selected data:
<TABLE>
<CAPTION>
Fiscal Year
Fiscal Year Ended Two Months Ended Ended
October 31, December 31, December 31,
--------------------------- ----------------- ------------
1995 1996 1997 1996 1997 1998 (1)
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants 77.4% 78.0% 80.0% 77.2% 77.3% 87.1%
Entertainment, management
and services 7.7 7.0 7.4 6.6 9.5 4.6
Rental operations 14.9 15.0 12.6 16.2 13.2 8.3
------ ------ ------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
Fiscal Year Ended Two Months Ended Ended
October 31, December 31, December 31,
--------------------------- ----------------- ------------
1995 1996 1997 1996 1997 1998
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Direct operating expenses 45.9% 45.6% 44.0% 48.5% 50.4% 44.3%
Undistributed operating
expenses:
Selling, general and
administrative 13.4 14.3 15.7 15.8 13.9 13.4
Property operating costs 12.5 11.1 10.6 12.8 11.6 11.7
Depreciation and amorti-
zation 8.5 9.3 9.2 10.3 9.0 7.1
------ ------ ------ ------ ------ ------
Total undistributed
operating expenses 34.4 34.7 35.5 38.9 34.5 32.2
Operating income 19.8 19.7 20.4 12.6 15.2 23.5
Interest expense net 17.0 16.2 16.9 17.9 16.1 9.0
Income (loss) before income
taxes 3.9 4.2 5.1 (3.7) --- 14.3
Income tax provision (benefit) 1.3 1.6 1.8 (1.4) (0.1) 5.0
------ ------ ------ ------ ------ ------
Net income (loss) 2.6% 2.6% 3.3% (2.3)% 0.1% 8.7%
====== ====== ====== ====== ====== ======
REVPAR (1) $38.83 $42.04 $45.72 $31.93 $36.11 $50.30
ADR (1) $61.54 $67.29 $73.43 $64.88 $71.22 $82.07
Occupancy (1) 65.5% 64.5% 63.5% 50.7% 51.8% 61.3%
</TABLE>
(1) 1998 REVPAR, ADR, Occupancy is for Comparable Hotels (hotels
owned for greater than one year)
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO THE UNAUDITED YEAR ENDED
DECEMBER 31, 1997
Total revenues increased $32.8 million, or 61.3%, from $53.5 million
in 1997 to $86.3 million in 1998. This increase is attributed
primarily to revenue generated from the addition of eleven Hotels in
the period, increases in total rooms occupied and REVPAR increases at
the Comparable Hotels (Hotels owned by the Company for greater than
one year).
Total hotel and restaurant revenues increased $32.4 million, or 75.6%,
from $42.8 million in 1997 to $75.2 million in 1998. Comparable Hotel
ADR increased $7.53, or 10.1%, from $74.54 in 1997 to $82.07 in 1998.
Comparable Hotel REVPAR increased $3.68, or 7.9%, from $46.62 in 1997
to $50.30 in 1998. The Company acquired eleven Hotels in 1998 which
added 559,808 available rooms, an increase of 102%.
<PAGE>
Entertainment, management and services revenues decreased $0.2
million, or 5.1%, from $4.2 million in 1997 to $4.0 million in 1998.
Entertainment revenue decreased primarily from lower attendance at
entertainment events and the reduction of third-party management
contracts.
Rental income increased $0.7 million, or 10.4%, from $6.5 million in
1997 to $7.2 million in 1998 primarily from lease escalations and new
lease contracts in the Company's office and retail buildings.
Direct operating expenses increased $14.1 million, or 58.8%, from
$24.1 million in 1997 to $38.2 million in 1998, primarily due to the
increase in the number of hotel guests served. This represents a
decline in direct operating expenses as a percentage of total revenues
from 45.0% in 1997 to 44.3% in 1998. The improvement in direct
operating expense percentages is attributed to the increase in room
revenue while the Company was able to effectively control expenses and
gain volume efficiencies.
Total undistributed operating expenses increased $9.4 million, or
51.3%, from $18.4 million in 1997 to $27.8 million in 1998. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 47.3% from $7.9 million in
1997 to $11.6 million in 1998, and depreciation and amortization,
which increased 27.2% from $4.8 million in 1997 to $6.1 million in
1998. Total undistributed operating expenses as a percentage of total
revenues decreased 2.1% from 34.3% in 1997 to 32.2% in 1998. The
decrease in undistributed operating expenses as a percentage of total
revenues is primarily attributed to the increase in Comparable Hotel
REVPAR and the addition of eleven Hotels which the Company believes
has lead to greater efficiencies.
Operating income increased $9.2 million, or 83.4%, from $11.1 million
in 1997 to $20.3 million in 1998. As a percentage of total revenues,
operating income increased from 20.7% in 1997 to 23.5% in 1998This
increase is due primarily to an increase in REVPAR, the addition of
eleven hotels and improvements in the hotel departmental margins.
Interest expense decreased $0.8 million, or 9.2%, from $8.9 million in
1997 to $8.1 million in 1998. This decrease is primarily related to
the repayment of debt with the proceeds from the initial public
offering and the reduction of the weighted average interest rate
charged the Company for its remaining debt. Interest expense
initially declined as a result of the application of the net proceeds
of the offering, but is expected to increase in the future due to the
funding of hotel acquisitions with additional debt.
Income tax provision increased 338.4%, from $1.0 million in 1997 to
$4.3 million in 1998, due to the increase in income before taxes. The
effective income tax provision rate was 34.1% and 34.9% for 1997 and
1998 respectively.
<PAGE>
The Company recorded an extraordinary item related to prepayment
penalties and the write-off of deferred loan fees of $546,000 net of
$282,000 of income taxes due to the repayment of debt with proceeds
from the initial public offering.
Net income increased $5.6 million, or 295.3%, from $1.9 million in
1997 to $7.5 million in 1998.
Earnings per share before extraordinary item increased 165% from $0.27
in 1997 to $0.71 in 1998.
COMPARISON OF TWO MONTHS ENDED DECEMBER 31, 1997 TO TWO MONTHS ENDED
DECEMBER 31, 1996
The Company is including this stub period financial information due to
the change in fiscal year end from October 31, to December 31, as of
the fiscal year beginning January 1, 1998.
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.
<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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
Total undistributed operating expenses as a percentage of total
revenues increased from 34.4% in 1995 to 34.7% in 1996. Increased
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 an
$80.0 million revolving credit facility. Cash generated by operations
in excess of operating expenses is used for capital expenditures and
to reduce amounts outstanding under the Revolving Credit Facility.
The Company has increased the Revolving Credit Facility to $100
million effective February 26, 1999Hotel 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. In April 1998, the Company
completed an initial public offering. Proceeds net of issuance cost
were $81.3 million and were used to pay debt, fund acquisitions and
other corporate purposes.
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 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.
<PAGE>
At December 31, 1998, the Company had $4.3 million in cash and cash
equivalents. The Company has made extensive capital expenditures over
the last three years, investing $13.5 million, $6.2 million, and
$123.6 million in owned and joint venture properties in 1996, 1997,
and 1998, 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 the initial public offering, issuance of operating partnership
units, 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 1999 are expected to be approximately $12.8
millionManagement 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 a Revolving Credit Facility. The Revolving Credit
Facility has an initial term of five years and an annualized fee for
the unutilized portion of the facility. The Company selects from four
different interest rates when it draws funds: the lender's prime rate
or one, three, or six month LIBOR plus the applicable margin of 180 to
250 basis points, depending on the Company's ratio of EBITDA-to-total
funded debt. The Revolving Credit Facility allows 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 and additional
debt instruments will be sufficient to meet the Company's near term
growth plans. The Operating Partnership is the borrower under the
Revolving Credit Facility. The obligations of the Operating
Partnership under the Revolving Credit Facility are fully guaranteed
by the Company. Under the Revolving Credit Facility, the Company is
permitted to grant new deeds of trust on any future acquired
properties. Mandatory prepayments are 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 contains various representations,
warranties, covenants and events of default deemed appropriate for a
Credit Facility of similar size and nature. Covenants and provisions
in the definitive credit agreement governing the Revolving Credit
Facility 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
<PAGE>
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
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. At December 31, 1998, the
Company had $76.3 million outstanding under the Revolving Credit
Facility and was in compliance with all required covenants. The
Revolving Credit Facility restricted the Company from paying any
dividends as of December 31, 1998.
In addition to the Revolving Credit Facility, as of December 31, 1998,
the Company had debt and capital leases outstanding of approximately
$54.3 million consisting of primarily variable and fixed rate debt
secured by individual properties.
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 additional debt financing, 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.
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, 1998, the
Company's revenues in the first through fourth quarters were 16.9%,
24.4%, 32.0% and 26.7%, respectively, of its total revenue for such
year and the Company's income (loss) before extraordinary items for
the first through fourth quarters was (1.1)%, 32.9%, 51.4% and 16.8%,
respectively, of its total net income for such yearDemand 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.
<PAGE>
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 ASSESSMENT
BACKGROUND: The "Year 2000 problem" arose because many existing
computer programs use only the last two digits to refer to a year
Therefore, these computer programs do not properly recognize a year
that begins with "20" instead of the familiar "19". If not corrected,
many computer applications could fail or create erroneous results.
The extent of the potential impact of the Year 2000 problem is not yet
known, and if not timely corrected, could affect the global economy.
State of Readiness:
IT SYSTEMS: The Company has completed 100% of the assessment of all
of its information technology ("IT") hardware and software systems for
Year 2000 issues. Of the critical hardware and software applications
evaluated (hardware and software applications for reservation,
accounting, payroll and billing functions), only the payroll
application has been determined to be non-compliant with Year 2000
functionality. The Company had anticipated retiring its non-compliant
payroll application independent of any Year 2000 issues and will
complete replacement of it with a Year 2000 compliant system by July
of 1999. Individual older personal computers which are scheduled for
replacement in ordinary course of upgrades are not included in these
percentages. The Company relies upon certifications from the
manufacturers, developers and authorized vendors of the specific
hardware and software applications for evaluation of compliance with
Year 2000 functionality.
EMBEDDED SYSTEMS: The Company has completed substantially all of the
assessment of its critical Embedded Technology systems, which are
those systems in properties owned or leased by the Company in which a
microprocessor is embedded in equipment controlling building
environment, power, lighting, transportation, security, and fire
safety. The Company anticipates completion of remediation of all
affected systems by July 1999. The evaluation completed to date has
not revealed any critical Embedded System which is not (or will not
become so with minor software modifications) compliant with Year 2000
functionality. Embedded Systems in properties for which the Company
provides management services but which are not owned or leased by the
Company are not included in these percentages. The Company relies
upon certifications from the manufacturers, developers and authorized
vendors of the specific components containing Embedded Systems for
evaluation of compliance with Year 2000 functionality.
<PAGE>
THIRD PARTY SERVICES: The Company has commenced its evaluation of the
assessment of services provided by third parties with which the
Company has a material relationship and anticipates completing that
evaluation by July of 1999. These material Third Party Services
include the private companies and municipalities supplying all
utilities and communications to the Company. Evaluation will be by
means of review of representations made by the third parties or of
responses to written questionnaires by the Company to the third
parties. The Company does not anticipate that its exposure to a
failure of Third Party Services to be Year 2000 compliant will differ
from the exposure of communities at large to such failure.
COST TO ADDRESS YEAR 2000 ISSUES: The Company's projection of capital
expenditures and other financial items related to remediation and
testing of Year 2000 issues is necessarily an estimate because it
anticipates how remediation and testing will proceed in the future.
This assessment also cannot include property specific issues for
properties which may be acquired in the future and have not as yet
been evaluated. Nevertheless, based on the evaluation completed to
date, the costs to the Company of replacing or modifying IT and
Embedded Systems to bring them to Year 2000 compliance does not appear
to be material. The preceding statement does not include the cost of
replacement and modification of systems for which the replacement or
modification was not accelerated by Year 2000 issues, such as the
Company's payroll system, the costs for which are included in the
normal capital and operating budgets of the Company.
RISKS OF YEAR 2000 ISSUES: The only certainty about the Year 2000
problem is the difficulty of predicting with certainty what will
happen. The Company cannot guarantee that its efforts will prevent
all consequences. The failure of vendors, suppliers, customers,
transportation systems and utilities systems to anticipate and solve
Year 2000 issues could impact the Company and each community in which
it operates. The Company has not identified a material effect from
Year 2000 issues on the Company's results of operations, liquidity,
and financial condition. The worst case effects would appear to be
analogous to a natural disaster such as a storm or flood, with the
primary effect being a temporary interruption of utilities,
transportation and communication services.
CONTINGENCY PLANS: Each property owned and/or managed by the Company
has developed a contingency plan in order to respond to any Year 2000
problem-related interruption of such property's utility and
communication services. The Company anticipates completing an update
of the operational contingency plans for such properties before
January 1, 2000The Company has solicited from its material Third Party
Service Providers information with respect to such providers'
responses to and compliance with the Year 2000 problem. The Company
will, on an on-going basis, carefully monitor the responses it
receives from these Third Party Service Providers. Nevertheless,
there can be no assurance that such plans will be adequate or
completed in a timely manner and the responses developed by the
Company's material Third Party Service Providers are beyond the
general operational control of the Company.
<PAGE>
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. Comprehensive income is defined as the
change in equity of a business enterprise arising from non-owner
sources. The classifications of comprehensive income under current
accounting standards include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. The Company adopted the
provisions of SFAS No. 130 on January 1, 1998. However, since the
Company does not have any comprehensive income items, there was no
impact on the presentation of its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments for an Enterprise and Related
Information." This statement changed 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 Company adopted the provision of SFAS
No. 131 on January 1, 1998.
In April 1998, Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-up Activities" was issued. The SOP requires that all
costs of start-up activities and organization costs be expensed as
incurred. The Company is required to implement the SOP on January 1,
1999 and report the change as a cumulative effect of an accounting
change in the statement of income. Management estimates that the
effect of adopting this new standard will be a charge to operations
for the year ending December 31, 1999 of approximately $128,000, which
is net of related income taxes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables summarize the financial instruments held by the
Company at December 31, 1998, which are sensitive to changes in
interest rates. At December 31, 1998, approximately 90% of the
Company's debt and capital lease obligations are subject to changes in
market interest rates and are sensitive to those changes. The Company
currently has no derivative instruments to offset the risk of interest
rate changes. In the future, the Company may choose to use derivative
instruments, such as interest rate swaps to manage the risk associated
with interest rate changes.
The following table presents principal cash flows for debt and capital
leases outstanding at December 31, 1998, by maturity date and the
related average interest rate.
<PAGE>
<TABLE>
<CAPTION>
Outstanding Debt and Capital Lease Obligations (in thousands)
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------- ------- ------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Note payable to bank (a) $ -- $ -- $ -- $ -- $82,480 $ -- $82,480 $82,480
Long-term debt:
Fixed rate 320 344 370 897 427 8,996 11,354 13,128
Weighted-average interest rate 7.28% 7.28% 7.28% 7.25% 7.25% 7.25% --% --%
Variable rate 1,218 1,368 1,458 1,562 1,680 27,048 34,334 34,334
Weighted-average interest rate 7.56% 7.58% 7.59% 7.61% 7.64% 7.67% --% --%
Capital lease obligations 634 631 496 351 270 -- 2,382 2,382
Weighted-average interest rate 8.00% 8.03% 8.20% 8.64% 8.64% --% --% --%
</TABLE>
(a) The interest rate on the note payable is based on LIBOR plus a
variable interest margin based on the Company's funded debt
ratio. The interest margin can vary from 180 - 250 basis points.
At December 31, 1998, the interest margin was 210 basis points.
<PAGE>
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Cavanaughs Hospitality Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in
stockholders' and partners' equity and of cash flows present fairly,
in all material respects, the financial position of Cavanaughs
Hospitality Corporation and its subsidiaries at December 31, 1997 and
1998, and the results of their operations and their cash flows for the
years ended October 31, 1996 and 1997, the two months ended
December 31, 1997 and the year ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Spokane, Washington
January 29, 1999
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1998
(in thousands, except share data)
1997 1998
-------- --------
Assets:
Current assets:
Cash and cash equivalents $ 4,955 $ 4,267
Accounts receivable 2,785 5,427
Income taxes refundable 520 957
Inventories 427 858
Prepaid expenses and deposits 580 400
-------- --------
Total current assets 9,267 11,909
Property and equipment, net 112,234 227,423
Other assets, net 3,616 5,571
-------- --------
Total assets $125,117 $244,903
======== ========
Liabilities:
Current liabilities:
Payable to affiliate $ 1,133 $ --
Note payable to bank 1,075 --
Accounts payable 3,234 2,831
Accrued payroll and related benefits 983 1,477
Accrued interest payable 689 1,518
Other accrued expenses 2,882 3,883
Long-term debt, due within one year 3,590 1,538
Capital lease obligations, due within
one year 502 634
-------- --------
Total current liabilities 14,088 11,881
Long-term debt, due after one year 94,419 44,150
Notes payable to bank -- 82,480
Capital lease obligations, due after one year 2,139 1,748
Deferred income taxes 5,415 6,349
Minority interest in partnerships 524 4,364
-------- --------
Total liabilities 116,585 150,972
-------- --------
Commitments and contingencies (Note 10)
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1998, CONTINUED
(in thousands, except share data)
1997 1998
-------- --------
Stockholders' and partners' equity:
Preferred stock - 5,000,000 shares authorized;
$0.01 par value; no shares issued and
outstanding $ -- $ --
Common stock - 50,000,000 shares authorized;
$0.01 par value; 7,072,025 and 12,660,847
shares issued and outstanding 71 126
Partners' deficit (879) --
Additional paid-in capital 3,935 80,892
Retained earnings 5,405 12,913
-------- --------
Total stockholders' and partners' equity 8,532 93,931
-------- --------
Total liabilities and stockholders' and
partners' equity $125,117 $244,903
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
----------------- ----------------- December 31,
1996 1997 1996 1997 1998
------- ------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms $20,972 $25,147 $ 2,998 $ 3,626 $46,688
Food and beverage 12,141 13,926 2,271 2,756 24,400
Other 2,092 2,589 414 447 4,084
------- ------- ------- ------- -------
Total hotels and restaurants 35,205 41,662 5,683 6,829 75,172
Entertainment, management and services 3,168 3,842 483 840 4,006
Rental operations 6,790 6,539 1,191 1,169 7,155
------- ------- ------- ------- -------
Total revenues 45,163 52,043 7,357 8,838 86,333
------- ------- ------- ------- -------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 5,719 6,820 958 1,167 12,562
Food and beverage 10,181 11,483 1,822 2,208 19,588
Other 1,008 1,066 149 170 1,802
------- ------- ------- ------- -------
Total hotels and restaurants 16,908 19,369 2,929 3,545 33,952
Entertainment, management and
services 2,204 2,052 397 602 2,685
Rental operations 1,464 1,506 243 303 1,570
------- ------- ------- ------- -------
Total direct expenses 20,576 22,927 3,569 4,450 38,207
------- ------- ------- ------- -------
Undistributed operating expenses:
Selling, general and administrative 6,461 8,188 1,161 1,225 11,569
Property operating costs 4,997 5,518 944 1,022 10,132
Depreciation and amortization 4,215 4,775 759 798 6,115
------- ------- ------- ------- -------
Total undistributed operating
expenses 15,673 18,481 2,864 3,045 27,816
------- ------- ------- ------- -------
Total expenses 36,249 41,408 6,433 7,495 66,023
------- ------- ------- ------- -------
Operating income 8,914 10,635 924 1,343 20,310
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(in thousands, except per share data)
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
----------------- ----------------- December 31,
1996 1997 1996 1997 1998
------- ------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Other income (expense):
Interest expense, net of amounts
capitalized $(7,319) $(8,817) $(1,317) $(1,422) $(8,127)
Interest income 296 416 92 54 346
Other income (expense) 150 348 13 (4) 90
Minority interest in partnerships (136) 59 14 29 (255)
------- ------- ------- ------- -------
Income (loss) before income taxes 1,905 2,641 (274) -- 12,364
Income tax provision (benefit) 730 932 (104) (6) 4,310
------- ------- ------- ------- -------
Income (loss) before extraordinary item 1,175 1,709 (170) 6 8,054
Extraordinary item, net of tax benefit -- -- -- -- (546)
------- ------- ------- ------- -------
Net income (loss) $ 1,175 $ 1,709 $ (170) $ 6 $ 7,508
======= ======= ======= ======= =======
Income per share:
Income per share before extraordinary
item $ -- $ 0.71
Extraordinary item -- (0.05)
------- -------
Net income per share - basic and
diluted $ -- 0.66
======= =======
Weighted-average shares outstanding -
basic 7,072 11,347
======= =======
Weighted-average shares outstanding -
diluted 7,072 11,666
======= =======
Pro forma net income per share - basic
and diluted $ 0.24
=======
Number of shares used in the pro forma
computation 7,072
=======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY
for the years endedOctober 31, 1996 and 1997, the two months ended
December 31, 1997 and the year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Barbieri
Cavanaughs Hospitality Corporation Investment
-------------------------------------------- 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, 1995 1,100 $ 495 1,858 $ 19 $ (318) 929 $ 686 $ (594) $ 3,661 $ 4,842
Net income (loss) (243) 1,418
Contributions from (distri-
butions to) stockholders
and partners 41 126 (248)
Dividends on Cavanaughs
Hospitality Corporation
common stock ($85.00
per share) (158)
Dividends on preferred stock
($31.50 per share) (35)
Dividends on Barbieri Invest-
ment 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 stockholders
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 Invest-
ment 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
------ ------ ---------- ------ -------- ------ ------ ------- ------- -------
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY
for the years ended October 31, 1996 and 1997, the two months ended
December 31, 1997 and the year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Barbieri
Cavanaughs Hospitality Corporation Investment
-------------------------------------------- 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, 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
Net income 7,508
Stock issued for acquisition
of partnership interest 12,228 879 (879)
Stock issued for cash, net
of issuance costs 5,951,250 59 81,269
Stock issued under employee
stock purchase plan 18,752 184
Stock issued to directors
and certain senior
management 11,692 174
Income tax effect of stock
grants (25)
Purchases and retirement of
stock (405,100) (4) (3,766)
------ ------ ---------- ------ -------- ------ ------ ------- ------- -------
Balances, December 31, 1998 0 $ 0 12,660,847 $ 126 $ 0 0 $ 0 $ 0 $80,892 $12,913
====== ====== ========== ====== ======== ====== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
----------------- ----------------- December 31,
1996 1997 1996 1997 1998
------- ------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,175 $ 1,709 $ (170) $ 6 $ 7,508
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 4,215 4,775 759 798 6,115
Gain on disposition of property
and equipment -- (322) -- -- (80)
Deferred income tax provision
(benefit) 89 948 -- (2) 934
Minority interest in partnerships 136 (59) (14) (29) 255
Extraordinary item-write-off of
deferred loan fees -- -- -- -- 546
Compensation expense related to
stock issuance -- -- -- -- 174
Change in:
Accounts receivable (356) (1,086) (675) 21 (2,642)
Inventories (50) (2) 15 (51) (431)
Prepaid expenses and deposits (64) (733) 195 28 (2)
Accounts payable (1,576) 483 (24) 971 (523)
Accrued payroll and related
benefits 189 13 (248) 140 494
Accrued interest payable 21 30 (27) (52) 829
Other accrued expenses 1,421 854 476 (736) 1,001
------- ------- ------- ------- --------
Net cash provided by oper-
ating activities 5,200 6,610 287 1,094 14,178
------- ------- ------- ------- --------
Investing activities:
Additions to property and equipment (13,457) (6,192) (1,589) (2,400) (7,772)
Proceeds from disposition of property
and equipment 185 1,159 -- -- 172
Acquisitions of property and equipment -- -- -- -- (99,356)
Payment for purchase option agreement -- (500) -- -- --
Issuance of note receivable -- -- -- -- (17,112)
Payment received on note receivable -- -- -- -- 17,112
Other, net 88 (735) 66 (894) (1,789)
------- ------- ------- ------- --------
Net cash used in investing
activities (13,184) (6,268) (1,523) (3,294) (108,745)
------- ------- ------- ------- --------
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
----------------- ----------------- December 31,
1996 1997 1996 1997 1998
------- ------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Financing activities:
Distributions to stockholders and
partners $ (122) $(1,815) $ (353) $ -- $ --
Dividends to stockholders (272) (318) -- -- --
Proceeds from note payable to bank -- -- -- 1,075 84,405
Repayment of note payable to bank -- -- -- -- (3,135)
Proceeds from long-term debt 34,735 10,559 7,595 2,982 8,433
Repayment of long-term debt (24,844) (9,539) (7,435) (3,029) (70,655)
Proceeds from sale of stock, net of
issuance costs -- -- -- -- 81,328
Purchase and retirement of common stock -- (663) -- -- (3,770)
Proceeds from issuance of common stock
under employee stock purchase plan -- -- -- -- 184
Principal payments on capital lease
obligations (239) (659) (68) (113) (537)
Advances from (payments to) affiliate -- 1,333 -- (200) (1,133)
Additions to deferred financing costs -- -- -- -- (1,241)
------- ------- ------- ------- --------
Net cash provided by (used
in) financing activities 9,258 (1,102) (261) 715 93,879
------- ------- ------- ------- --------
Change in cash and cash equivalents:
Net increase (decrease) in cash and
cash equivalents 1,274 (760) (1,497) (1,485) (688)
Cash and cash equivalents at beginning
of period 5,926 7,200 7,200 6,440 4,955
------- ------- ------- ------- --------
Cash and cash equivalents at end of
period $ 7,200 $ 6,440 $ 5,703 $ 4,955 $ 4,267
======= ======= ======= ======= ========
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
----------------- ----------------- December 31,
1996 1997 1996 1997 1998
------- ------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during period for:
Interest (net of amount
capitalized) $ 7,298 $ 8,787 $ 1,344 $ 1,474 $ 7,297
Income taxes 130 1,646 -- -- 3,554
Noncash investing and financing
activities:
Assumption of capital leases $ 1,714 $ 641 $ 122 $ -- $ 278
Issuance of note payable for
purchase option -- 500 -- -- --
Issuance of operating partnership
units for property acquisitions -- -- -- -- 3,677
Acquisitions of property through
assumption of debt or issuance
of note payable -- -- -- -- 10,066
Stock issued for partial acquisi-
tion of partnership interest -- -- -- -- 879
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION:
At December 31, 1997, the Company controlled and operated
(through ownership or lease with purchase option agreements)
eight hotel properties. At December 31, 1998, the Company
controlled and operated 19 hotel properties in Seattle, Spokane,
Yakima, Kennewick and Olympia, Washington; Post Falls, Boise,
Twin Falls, Pocatello and Idaho Falls, Idaho; Kalispell and
Helena, Montana; Portland, Oregon and Salt Lake City, Utah under
its Cavanaughs(R) 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
segregated into three divisions: (1) hotels and restaurants,
(2) entertainment, management and services, and (3) rental
operations.
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
consolidated 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, the Company contributed all of its assets to
Cavanaughs Hospitality Limited Partnership (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 were issued as limited partnership interests. OP
Units are convertible to common stock of Cavanaughs Hospitality
Corporation on a one-for-one basis.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION, CONTINUED:
Prior to January 1, 1998, the combined financial statements
included the operations of Cavanaughs Hospitality Corporation
(including its merged and predecessor entities which included
Barbieri Investment Company (BIC)) and G & B: Lincoln Building
Limited Partnership (Lincoln Building) as these entities were
under common control through the Barbieri family. On January 1,
1998, the Company issued common stock and OP Units in CHLP to the
partners of Lincoln Building in exchange for the assets and
liabilities of Lincoln Building.
The consolidated financial statements as of and for the year
ended December 31, 1998 include the accounts of Cavanaughs
Hospitality Corporation, its wholly owned subsidiaries, a 50%
interest in Cowley Street Limited Partnership and its general and
limited partnership interest in CHLP. All of these entities are
collectively referred to as "the Company." All significant
intercompany transactions and amounts have been eliminated in the
consolidated financial statements.
Effective December 31, 1997, the Company changed its fiscal year
end from October 31 to December 31; therefore, the consolidated
financial statements presented herein are audited as of and for
the two months ended December 31, 1997 with comparative unaudited
consolidated 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
consolidated financial statements. At December 31, 1998, these
accounts totaled approximately $2,090,000.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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:
Buildings 25-40 years
Equipment 5-20 years
Furniture and fixtures 15 years
Landscaping and land improvements 15 years
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, 1996 and 1997, the two months ended December 31,
1996 and 1997 and the year ended December 31, 1998, the Company
capitalized approximately $1,412,000, $6,000, $12,000, $17,000
and $363,000 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.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
OTHER ASSETS, CONTINUED
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. At December 31,
1997, the Company also had deferred stock offering costs
related to its initial public offering. When the offering was
completed in April 1998, the deferred offering costs were
offset against the proceeds of the offering.
INCOME TAXES
Prior to their merger, Cavanaughs Hospitality Corporation and
BIC filed separate federal and state income tax returns. CHLP,
the Lincoln Building and the other partnerships which are
partially or wholly owned by Cavanaughs Hospitality Corporation
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
consolidated 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, only pro
forma earnings per share for the year ended October 31, 1997
has been presented based upon the number of common shares of
Cavanaughs Hospitality Corporation which were outstanding after
the merger of the companies and partnerships.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
EARNINGS PER SHARE, CONTINUED
Net income per share - basic is computed by dividing net income
by the weighted-average number of common shares outstanding
during the period. Net income per share - diluted is computed
by adjusting net income by the effect of the minority interest
related to OP units and increasing the weighted-average number
of common shares outstanding by the effect of the OP units and
the additional common shares that would have been outstanding
if the dilutive potential common shares (stock options) had
been issued. There is no difference between basic and diluted
earnings per share because the stock options are antidilutive.
ACCOUNTING FOR STOCK OPTIONS
As permitted by Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation",
the Company has chosen to measure compensation cost for stock-
based employee compensation plans using the intrinsic value
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and
to provide the disclosure only requirements of SFAS 123.
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. Comprehensive
income is defined as the change in equity of a business
enterprise arising from non-owner sources. The classifications
of comprehensive income under current accounting standards
include foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The Company adopted
the provisions of SFAS No. 130 on January 1, 1998. However,
since the Company does not have any comprehensive income items,
there was no impact on the presentation of its consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments for an Enterprise and
Related Information". This Statement changes the way public
companies report information about segments of their business
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED
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 Company adopted the provisions of
SFAS No. 131 on January 1, 1998. Accordingly, prior periods
presented include disclosures required by this new standard.
In April 1998, Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-up Activities" was issued. The SOP requires
that all costs of start-up activities and organization costs be
expensed as incurred. The Company is required to implement the
SOP on January 1, 1999 and report the change as a cumulative
effect of an accounting change in the statement of income.
Management estimates that the effect of adopting this new
standard will be a charge to operations for the year ending
December 31, 1999 of approximately $128,000, which is net of
related income taxes.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with the 1998 presentation. These reclassifications had no
effect on net income (loss) or retained earnings as previously
reported.
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.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1998 is
summarized as follows (in thousands):
1997 1998
-------- --------
Buildings and equipment $110,812 $191,680
Furniture and fixture 14,258 14,926
Equipment acquired under capital leases 4,543 4,633
Landscaping and land improvements 863 1,260
-------- --------
130,476 212,499
Less accumulated depreciation and
amortization (34,445) (40,302)
-------- --------
96,031 172,197
Land 16,203 54,056
Construction in progress 1,170
-------- --------
$112,234 $227,423
======== ========
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
December 31, 1997 and 1998 is as follows (amounts outstanding in
thousands):
1997 1998
-------- --------
Note payable in monthly installments of
$79,828 including interest at 7.25%,
through June 2006, collateralized by
real property $ 9,744 $ 10,855
Note payable in monthly installments of
$64,637 including interest at a
variable rate (7.88% at December 31,
1997 and 7.36% at December 31, 1998),
through September 2007, collateralized
by assignment of certain rental income 7,746 7,602
Industrial revenue bonds payable in
monthly installments of $73,668
including interest at a variable rate
(7.65% at December 31, 1997 and 1998),
through May 2009, collateralized by real
property 7,504 7,182
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
1997 1998
-------- --------
Note payable in monthly installments of
$65,393, including interest at a
variable rate (9.5% at December 31,
1997 and 7.79% at December 31, 1998),
through June 2018, collateralized by
real property $ 7,110 $ 6,985
Note payable in monthly installments of
$56,875 including interest at a
variable rate (9.0% at December 31,
1997 and 1998), through April 2004,
collateralized by real property 4,775 4,654
Note payable in monthly installments of
$23,006 including interest at a
variable rate (8.25% at December 31,
1998), through January 2008, collater-
alized by real property -- 2,649
Industrial revenue bonds payable in
monthly installments of $19,167
including interest at a variable rate
(4.2% at December 31, 1998), through
January 2007, collateralized by real
property -- 2,271
Note payable in monthly installments of
$18,845 including interest at an index
rate plus 1.5%, subject to a minimum of
9.5% and a maximum of 12.0% (10.0% at
December 31, 1997 and 1998), through
December 2011, collateralized by real
property 1,687 1,630
Note payable in monthly installments of
$9,076, including interest at a
variable rate (9.5% at December 31,
1997 and 7.7% at December 31, 1998),
through November 2009, collateralized
by certain equipment and furniture
and fixtures 754 711
Note payable in monthly installments of
$7,024 including interest at a variable
rate (9.25% at December 31, 1998), through
March 2008, collateralized by real
property -- 523
Note payable of interest only at 8.0% until
maturity in October 2002, collateralized
by letter of credit 500 500
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
1997 1998
-------- --------
Notes payable which were substantially
collateralized by real property and
were paid in full during the year
ended December 31, 1998 $ 58,166 $ --
Other 23 126
-------- --------
98,009 45,688
Less current portion (3,590) (1,538)
-------- --------
Total long-term debt $ 94,419 $ 44,150
======== ========
The Company used the net proceeds of the initial public offering
to repay approximately $68.6 million of debt during the year
ended December 31, 1998. In connection with the debt repayment,
approximately $546,000 of deferred loan fees and prepayment
penalties, net of $282,000 income taxes, were charged to
operations during the year ended December 31, 1998 and are
presented as an extraordinary item.
Contractual maturities for long-term debt outstanding at
December 31, 1998, are summarized by year as follows (in
thousands):
Years Ending
December 31,
------------
1999 $ 1,538
2000 1,712
2001 1,828
2002 2,459
2003 2,107
Thereafter 36,044
--------
$ 45,688
========
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
5. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital leases. The
imputed interest rates on the leases range from 8.0% to 8.6%.
Cost and accumulated amortization of the equipment as of
December 31, 1997 are approximately $4,543,000 and $2,065,000,
respectively. Cost and accumulated amortization of this
equipment as of December 31, 1998 are approximately $4,633,000
and $1,799,000, respectively.
Future minimum lease payments due under capital leases at
December 31, 1998 are as follows (in thousands):
Years Ending
December 31,
------------
1999 $ 779
2000 733
2001 561
2002 396
2003 269
--------
Total minimum lease payments 2,738
Less amount representing interest (356)
--------
Total obligations under capital lease 2,382
Less current maturities (634)
--------
$ 1,748
========
6. NOTES PAYABLE TO BANK:
In May 1998, the Company obtained an $80 million revolving
secured credit facility with a consortium of banks. The credit
facility is collateralized by certain property and requires that
the Company maintain certain financial ratios, minimum levels of
cash flows and restricts the payment of dividends. Any
outstanding borrowings bear interest based on the prime rate or
LIBOR. At December 31, 1998, the interest rate on outstanding
borrowings ranged from 7.225% to 8.25%. The weighted-average
interest rate on outstanding borrowings was 7.27%. Interest only
payments are due monthly. The credit facility matures in 2003.
The credit facility requires the initial payment of a 1% fee plus
an annual standby fee of 0.25%. At December 31, 1998,
$76,300,000 is outstanding under the credit facility. The
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
6. NOTES PAYABLE TO BANK, CONTINUED:
Company was in compliance with all required covenants at
December 31, 1998. The debt agreement allows the Company to pay
dividends as long as certain minimum financial ratios are
maintained. At December 31, 1998, the Company was restricted
from paying any dividends. In December 1998, the Company
received a commitment to amend the credit facility to increase
the total amount available under the facility to $100 million.
At December 31, 1998, the Company also had a $6,180,000 note
payable to the lead bank under the credit facility. Interest
only at a variable rate (7.79% at December 31, 1998) was payable
monthly. This note will be paid in full upon the closing of the
amended credit facility.
At December 31, 1997, the Company had $1,075,000 outstanding
under a $3.0 million line-of-credit agreement with U.S. Bank of
Washington. The outstanding balance on the unsecured credit line
bore interest at the bank's prime rate plus 0.25% (8.75% at
December 31, 1997).
7. STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING:
After the mergers described in Note 1 were completed, the
Articles of Incorporation of the Company 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 stockholders
of the former companies which were merged received a total of
7,072,025 newly issued shares in exchange for all of their
outstanding shares.
In April 1998, the Company completed an initial public offering
of 5,951,250 shares of common stock at $15 per share. The net
proceeds, after deducting the underwriting discount and offering
expenses, of approximately $81,328,000 were primarily used to
repay certain debt and acquire hotel properties.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
8. INCOME TAXES:
Major components of the Company's income tax provision (benefit)
for the years ended October 31, 1996 and 1997, the two months
ended December 31, 1996 and 1997 and the year ended December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Two Months
Years Ended Ended
October 31, December 31, Year Ended
--------------- --------------- December 31,
1996 1997 1996 1997 1998
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 641 $ (16) $ (104) $ (4) $3,249
State -- -- -- -- 127
Deferred 89 948 -- (2) 934
------ ------ ------ ------ ------
$ 730 $ 932 $ (104) $ (6) $4,310
====== ====== ====== ====== ======
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
8. INCOME TAXES:
The income tax provisions (benefits) shown in the statements of
operations differ from the amounts calculated using the federal
statutory rate applied to income (loss) before income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
Two Months Ended
Years Ended October 31, December 31, Year Ended
------------------------------- ------------------------------- December 31,
1996 1997 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Provision (benefit) at
federal statutory rate $ 648 34.0% $ 898 34.0% $ (93) (34.0)% $ -- --% $4,204 34.0%
Effect of tax credits -- -- (20) (0.7) -- -- -- -- (59) (0.4)
State taxes, net of
federal benefit -- -- -- -- -- -- -- -- 84 0.7
Other 82 4.3 54 2.0 (11) 4.0 (6) -- 81 0.6
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$ 730 38.3% $ 932 35.3% $ (104) (38.0)% $ (6) --% $4,310 34.9%
====== ==== ====== ==== ====== ===== ====== ==== ====== ====
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
8. INCOME TAXES, CONTINUED:
Components of the net deferred tax assets and liabilities as of
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation on property and
equipment $ -- $5,612 $ -- $6,222
Rental income -- 285 -- 437
Tax credits 367 -- 266 --
Other 115 -- 44 --
------ ------ ------ ------
$ 482 $5,897 $ 310 $6,659
====== ====== ====== ======
</TABLE>
At December 31, 1998, the Company has approximately $177,000 of
alternative minimum tax credits available to offset future
regular taxes payable to the extent they exceed alternative
minimum taxes. The Company also has approximately $89,000 of
investment tax credits available to offset future Idaho state
taxes payable.
9. OPERATING LEASE INCOME:
The Company 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. The cost and
accumulated depreciation of these properties at December 31, 1997
was approximately $32,924,000 and $8,323,000, respectively. The
cost and accumulated depreciation of these properties at
December 31, 1998 was approximately $34,106,000 and $9,421,000,
respectively.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
9. OPERATING LEASE INCOME, CONTINUED:
Future minimum lease income under existing noncancellable leases
at December 31, 1998 is as follows (in thousands):
Years Ending
December 31,
------------
1999 $ 7,252
2000 7,085
2001 6,339
2002 5,354
2003 5,126
Thereafter 19,355
-------
$50,511
=======
Rental income for the years ended October 31, 1996 and 1997, the
two months ended December 31, 1996 and 1997 and the year ended
December 31, 1998 was approximately $6,790,000, $6,539,000,
$1,191,000, $1,169,000 and $7,155,000, respectively, which
included contingent rents of approximately $342,000, $217,000,
$58,000, $93,000 and $147,000, 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 1998, the Company began leasing land at one of its hotel
properties which requires monthly payments based on either gross
receipts from the hotel or a monthly minimum, whichever is
greater, through July 2014, with two 10-year renewal options. At
December 31, 1998, monthly minimum lease payments were $4,896.
The monthly minimum payments can be adjusted every three years
based on the average monthly payments.
In 1998, the Company began leasing land at one of its hotel
properties, which requires monthly payments of $5,454 through May
2062. The monthly payments are subject to adjustment annually.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
10. OPERATING LEASE COMMITMENTS, CONTINUED:
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.
Assuming the Company exercises its purchase option for the hotel
in March 2003, total payments due under these leases at
December 31, 1998 are as follows (in thousands):
Years Ending
December 31,
------------
1999 $ 598
2000 598
2001 598
2002 598
2003 283
Thereafter 4,681
-------
$ 7,356
=======
Total rent expense under these leases for the years ended
October 31, 1996 and 1997, the two months ended December 31, 1996
and 1997 and the year ended December 31, 1998 was $54,000,
$54,000, $9,000, $79,000 and $573,000, respectively.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
11. RELATED-PARTY TRANSACTIONS:
The Company had the following transactions with related parties:
-- Interest expense of approximately $66,000, $67,000, $11,000,
$11,000 and $0 was incurred related to a $600,000 payable to
an affiliated entity due to common control for the years
ended October 31, 1996 and 1997, the two months ended
December 31, 1996 and 1997 and the year ended December 31,
1998, respectively. The principal balance was paid in full
during 1998.
-- The Company recorded management fee and other income of
approximately $31,000, $35,000, $8,000, $17,000 and $177,000
during the years ended October 31, 1996 and 1997, the two
months ended December 31, 1996 and 1997 and the year ended
December 31, 1998, respectively, for performing management
and administrative functions for entities which are owned by
key stockholders and management of the Company, but are
excluded from the consolidated financial statements.
-- The Company received commissions for real estate sales from
entities which are owned by key stockholders and management
of the Company, but are excluded from the consolidated
financial statements of $7,000, $87,000, $3,000, $1,000 and
$42,000 for the years ended October 31, 1996 and 1997, the
two months ended December 31, 1996 and 1997 and the year
ended December 31, 1998, respectively.
-- At December 31, 1997, the Company had a $1,133,000 payable to
an affiliated entity due to common control. The payable bore
interest at the prime rate (8.5% at December 31, 1997). The
note was paid in full during 1998. During the two months
ended December 31, 1997 and the year ended December 31, 1998,
the Company incurred $16,000 and $26,000 of interest expense
associated with this note.
-- During 1998, the Company held certain cash and investment
accounts in a bank and had notes payable to the same bank.
The bank's chairman, chief executive officer and president
became a director of the Company in April 1998. At
December 31, 1998, total cash and investments of
approximately $1,306,000 and a note payable totaling
approximately $1,436,000 were outstanding with this bank.
Total interest income and interest expense of $74,000 and
$128,000, respectively, was incurred related to this bank
during the year ended December 31, 1998.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. EMPLOYEE BENEFIT AND STOCK PLANS:
1998 STOCK INCENTIVE PLAN
The 1998 Stock Incentive Plan (the Plan) was adopted by the
Board of Directors in 1998. The Plan authorizes the grant or
issuance of various option or other awards. The maximum number
of shares which may be awarded under the Plan is 1,200,000
shares, subject to adjustment for stock splits, stock dividends
and similar events. The Compensation Committee of the Board of
Directors administers the Plan and establishes to whom, the
type and the terms and conditions, including the exercise
period, the awards are granted.
Nonqualified stock options may be granted for any term
specified by the Compensation Committee and may be granted at
less than fair market value, but not less than par value on the
date of grant. Incentive stock options may be granted only to
employees and must be granted at an exercise price at least
equal to fair market value on the date of grant and have a ten
year exercise period. The maximum fair market value of shares
which may be issued pursuant to incentive stock options granted
under the Plan to any individual in any calendar year may not
exceed $100,000. Stock Appreciation Rights (SARs) may also be
granted in connection with stock options or other awards. SARs
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 award, but alternatively may be
based upon other criteria such as book value. Other awards
such as restricted stock awards, dividend equivalent awards,
performance awards or deferred stock awards may also be granted
under the Plan by the Compensation Committee.
During 1998, the Compensation Committee granted 889,919
options. All options were designated as nonqualified options,
with an exercise price equal to or in excess of fair market
value on the date of grant and for a term of ten years. Fifty
percent of each recipients' 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. The
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 60 consecutive trading days:
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:
1998 STOCK INCENTIVE PLAN, CONTINUED
Stock Price Percent of Option
Increase Shares Vested
----------- -----------------
25% 25%
50% 50%
75% 75%
100% 100%
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Exercise
Number Weighted-Average Price Expiration
of Shares Exercise Price Per Share Date
--------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 -- $ -- $ -- --
Options granted 889,919 15.00 15.00 2008
Options forfeited (54,050) 15.00 15.00 2008
------- ------ ------
Balance, December 31, 1998 835,869 $15.00 $15.00 2008
======= ====== ======
</TABLE>
Remaining options available for grant at December 31, 1998 were
364,131. None of the options outstanding at December 31, 1998
are exercisable.
The Company uses the intrinsic value method versus the fair
value method of recording compensation expense associated with
its stock options. Accordingly, since all options granted in
1998 were granted at exercise prices equal to or greater than
the fair market value of the common stock on the grant date, no
compensation expense has been recognized in the statement of
operations. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the
grant date consistent with the provisions of SFAS 123, the
Company's net income and income per share for the year ended
December 31, 1998 would have been decreased to the pro forma
amounts indicated below (in thousands, except per share
amounts):
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:
1998 STOCK INCENTIVE PLAN, CONTINUED
As Reported Pro Forma
----------- ---------
Income before extraordinary item $8,054 $7,392
Extraordinary item (546) (546)
------ ------
Net income $7,508 $6,846
====== ======
Income per share before extra-
ordinary item $ 0.71 $ 0.65
Extraordinary item (0.05) (0.05)
------ ------
Net income per share - basic and
diluted $ 0.66 $ 0.60
====== ======
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998:
Dividend yield 0%
Expected volatility 58%
Risk free interest rates 5.55%
Expected option lives 4 years
The weighted-average fair value of options granted during 1998
was $7.25 per share.
In connection with the Company's initial public offering in
1998, the Company also granted 55,000 restricted shares of
common stock to certain members of senior management. Twenty
percent of these shares were issued in 1998 and twenty percent
will be issued in each subsequent year provided such employee
is an employee of the Company at that time. The Company
recorded compensation expense of approximately $165,000 during
the year ended December 31, 1998 associated with these grants.
EMPLOYEE STOCK PURCHASE PLAN
In 1998, the Company adopted the Employee Stock Purchase Plan
to assist employees of the Company in acquiring a stock
ownership interest in the Company. A maximum of 300,000 shares
of common stock is reserved for issuance under this plan.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:
EMPLOYEE STOCK PURCHASE PLAN, CONTINUED
The Employee Stock Purchase Plan permits eligible employees to
purchase common stock at a discount through payroll deductions.
No employee may purchase more than $25,000 worth of common
stock under this plan in any calendar year. During the year
ended December 31, 1998, 18,752 shares were purchased under
this plan for approximately $184,000.
DEFINED CONTRIBUTION PLAN
The Company and employees contribute to the Cavanaughs
Hospitality Corporation Amended and Restated Retirement and
Savings Plan. 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, 1996
and 1997, the two months ended December 31, 1996 and 1997 and
the year ended December 31, 1998 were approximately $93,000,
$97,000, $18,000, $20,000 and $161,000, respectively.
13. ACQUISITIONS:
During 1998, the Company acquired certain property and equipment
of hotels in the following locations:
<TABLE>
<CAPTION>
Month Number of Purchase
Acquired Location Hotels Price
-------- ------------------------------- --------- --------------
<S> <C> <C> <C>
January Spokane, WA 1 $ 11.5 million
February Idaho Falls, ID 1 3.8 million
March Post Falls, ID 1 9.5 million
April Hillsboro, OR 1 5.5 million
June Kalispell, MT 1 9.6 million
June Salt Lake City, UT 1 31.6 million
July Boise, ID, Twin Falls, ID,
Pocatello, ID, and Helena, MT 4 30.3 million
December Olympia, WA 1 11.7 million
--------------
$113.5 million
==============
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
13. ACQUISITIONS, CONTINUED:
The Spokane, Washington acquisition was a lease with purchase
option. The purchase option was exercised in April 1998. The
purchase prices for the hotels were satisfied through a
combination of the payment of cash, the assumption of debt and
the issuance of OP Units. As part of the total purchase price
above, CHLP issued 245,148 OP Units which were valued at
approximately $3.7 million.
All of these acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the results of
operations of these hotels have been included in the consolidated
statement of operations since their respective dates of
acquisition. Total property and equipment acquired was
approximately $78.0 million, and debt of approximately $8.7
million was assumed in these acquisitions. The excess purchase
price of the assets over their historical cost bases has been
allocated to property and equipment and is being depreciated over
the estimated remaining useful life of the related assets
(approximately 15-40 years).
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
acquisitions had occurred at the beginning of the fiscal year
ended October 31, 1997:
1997 1998
-------- --------
Revenue $105,424 $105,006
======== ========
Net income $ 3,255 $ 7,720
======== ========
Net income per share - basic and diluted $ 0.46 $ 0.68
======== ========
14. 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.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
14. 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 at
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,955 $ 4,955 $ 4,267 $ 4,267
Accounts receivable 2,785 2,785 5,427 5,427
Financial liabilities:
Current liabilities, excluding
debt 8,921 8,921 9,709 9,709
Notes payable to bank 1,075 1,075 82,480 82,480
Long-term debt 98,009 99,776 45,688 47,462
Capital lease obligations 2,641 2,641 2,382 2,382
</TABLE>
15. BUSINESS SEGMENTS:
As described in Note 1, the Company operates in three segments:
(1) hotels and restaurants; (2) entertainment, management and
services; and (3) rental operations. 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
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
15. BUSINESS SEGMENTS, CONTINUED:
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. Interest expense related to debt which is specifically
associated with a segment is presented as an expense of the
segment. Interest expense not allocated to a segment is
presented as general corporate interest expense. Selected
information with respect to the segments is as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended Two Months Ended Year Ended
October 31, December 31, December 31,
------------------ ------------------ ------------
1996 1997 1996 1997 1998
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants $ 35,205 $ 41,662 $ 5,683 $ 6,829 $ 75,172
Entertainment, management
and services 3,168 3,842 483 840 4,006
Rental operations 6,790 6,539 1,191 1,169 7,155
-------- -------- -------- -------- --------
$ 45,163 $ 52,043 $ 7,357 $ 8,838 $ 86,333
======== ======== ======== ======== ========
Operating income:
Hotels and restaurants $ 18,297 $ 22,293 $ 2,754 $ 3,284 $ 41,220
Entertainment, management
and services 964 1,790 86 238 1,321
Rental operations 5,326 5,033 948 866 5,585
Undistributed operating
expenses (15,673) (18,481) (2,864) (3,045) (27,816)
-------- -------- -------- -------- --------
$ 8,914 $ 10,635 $ 924 $ 1,343 $ 20,310
======== ======== ======== ======== ========
Capital expenditures:
Hotels and restaurants $ 11,705 $ 4,960 $ 1,407 $ 1,322 $118,899
Rental operations 1,631 980 150 1,060 1,056
General corporate, including
entertainment, management
and services 121 252 32 18 1,194
-------- -------- -------- -------- --------
$ 13,457 $ 6,192 $ 1,589 $ 2,400 $121,149
======== ======== ======== ======== ========
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
15. BUSINESS SEGMENTS, CONTINUED:
<TABLE>
<CAPTION>
Years Ended Two Months Ended Year Ended
October 31, December 31, December 31,
------------------ ------------------ ------------
1996 1997 1996 1997 1998
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Depreciation and amortization:
Hotels and restaurants $ 2,840 $ 3,457 $ 573 $ 581 $ 4,789
Rental operations 1,210 1,179 172 188 1,005
General corporate, including
entertainment, management
and services 165 139 14 29 321
-------- -------- -------- -------- --------
$ 4,215 $ 4,775 $ 759 $ 798 $ 6,115
======== ======== ======== ======== ========
Interest expense:
Hotels and restaurants $ 4,812 $ 6,343 $ 890 $ 1,040 $ 3,395
Rental operations 2,243 2,235 368 356 1,990
General corporate, including
entertainment, management
and services 264 239 59 26 2,742
-------- -------- -------- -------- --------
$ 7,319 $ 8,817 $ 1,317 $ 1,422 $ 8,127
======== ======== ======== ======== ========
Identifiable assets:
Hotels and restaurants $ 90,345 $ 91,431 $ 89,591 $ 92,415 $209,539
Rental operations 24,049 24,035 24,645 25,965 26,327
General corporate, including
entertainment, management
and services 5,693 8,638 5,705 6,737 9,037
-------- -------- -------- -------- --------
$120,087 $124,104 $119,941 $125,117 $244,903
======== ======== ======== ======== ========
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
16. EARNINGS PER SHARE:
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted EPS computations
(in thousands, except per share amounts). Also shown is the
number of dilutive securities (stock options) that would have
been included in the diluted EPS computation if they were not
anti-dilutive.
<TABLE>
<CAPTION>
Year Ended
October 31, 1997 Two Months Ended Year Ended
(Pro Forma) December 31, 1997 December 31, 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
Numerator:
Income before extra-
ordinary item $ 1,709 $ 6 $ 8,054
Extraordinary item -- -- (546)
------- ------- -------
Net income after extra-
ordinary item - basic 1,709 6 7,508
Income effect of
dilutive OP Units -- -- 223
------- ------- -------
Net income after extra-
ordinary item - diluted $ 1,709 $ 6 $ 7,731
======= ======= =======
Denominator:
Weighted-average shares
outstanding - basic 7,072 7,072 11,347
Effect of dilutive OP Units -- -- 319
Effect of dilutive common
stock options -- -- (A)
------- ------- -------
Weighted-average shares
outstanding - diluted 7,072 7,072 11,666
======= ======= =======
Earnings Per Share - basic
and diluted:
Income per share before
extraordinary item $ 0.24 $ -- $ 0.71
Extraordinary item -- -- (0.05)
------- ------- -------
Net income per share -
basic and diluted $ 0.24 $ -- $ 0.66
======= ======= =======
</TABLE>
(A) At December 31, 1998, 835,869 stock options are outstanding.
The effects of the shares which would be issued upon the
exercise of these options have been excluded from the
calculation of diluted earnings per share for the year ended
December 31, 1998 because they are anti-dilutive.
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
-------------------------------------------------------------------
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in, and
incorporated by reference from, the Proxy Statement for the Company's
1999 Annual Meeting of Shareholders under the caption "Directors and
Officers of the Registrant."
COMPENSATION OF DIRECTORS
The information required by this item is contained in, and
incorporated by reference from, the Proxy Statement for the Company's
1999 Annual Meeting of Shareholders under the caption "Compensation of
Directors."
ITEM 11. Executive Compensation
-------------------------------
The information required by this item is contained in, and
incorporated by reference from, the Proxy Statement for the Company's
1999 Annual Meeting of Shareholders under the caption "Executive
Compensation."
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
------------------------------------------------------------
The information required by this item is contained in, and
incorporated by reference from, the Proxy Statement for the Company's
1999 Annual Meeting of Shareholders under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. Certain Relationships and Related Transactions
-------------------------------------------------------
The information required by this item is contained, and incorporated
by reference from, the Proxy Statement for the Company's 1999 Annual
Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions."
<PAGE>
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
----------------------------------------------------------------
A. List of documents filed as part of this report.
1. Index to financial statements:
a. Cavanaughs Hospitality Corporation - Consolidated Balance
Sheets
b. Cavanaughs Hospitality Corporation - Consolidated
Statements of Operations
c. Cavanaughs Hospitality Corporation - Consolidated
Statements of Changes in Stockholders' and Partners'
Equity
d. Cavanaughs Hospitality Corporation - Consolidated
Statements of Cash Flows
e. Cavanaughs Hospitality Corporation - Notes to Consolidated
Financial Statements
2. Index to financial statement schedules:
All schedules for which provisions are 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.
3. Index to exhibits:
EXHIBIT NO. DESCRIPTION
---------------------------------------------------------------------
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
10.1* Form of Revolving Credit Facility Agreement
10.2 Amendment to Revolving Credit Facility Agreement
10.3* Amended and Restated Agreement of Limited Partnership
of Cavanaughs Hospitality Limited Partnership
10.4* Employee Stock Purchase Plan of Cavanaughs Hospitality
Corporation
10.5* 1998 Stock Incentive Plan of Cavanaughs Hospitality
Corporation
10.6* Form of Stock Option Award Agreement
10.7* Form of Restricted Stock Award Agreement
10.8* Gateway Property Lease Agreement
10.9* Gateway Property Option Agreement
10.10* Ridpath Property Lease Agreement
10.11* Form of Indemnification Agreement
21* List of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
24.1* Power of Attorney (see signature pages)
27.1 Financial Data Schedule
<PAGE>
*Previously filed with the Securities and Exchange Commission as an
exhibit to the Company's Form S-1 or the Company's periodic reports
required pursuant to the Securities Exchange Act of 1934, as amended.
B. Reports on Form 8-K:
During the fourth quarter 1998, the Company filed with the
Securities and Exchange Commission a Form 8-K, dated December 1,
1998, with respect to an acquisition of a hotel by the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Cavanaughs Hospitality Corporation
--------------------------------------------------
Registrant
By: /s/ Donald K. Barbieri
---------------------------------------------
Donald K. Barbieri
Chairman, President and Chief Executive
Officer
March 10, 1999
--------------------------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
By: /s/ Arthur M. Coffey
---------------------------------------------
Arthur M. Coffey
Executive Vice President, Chief Financial
Officer and Director
March 10, 1999
--------------------------------------------------
Date
<PAGE>
By: /s/ Thomas M. Barbieri
---------------------------------------------
Thomas M. Barbieri
Executive Vice President Operations and
Director
March 10, 1999
--------------------------------------------------
Date
By: /s/ Richard L. Barbieri
---------------------------------------------
Richard L. Barbieri
Senior Vice President, General Counsel and
Director
March 10, 1999
--------------------------------------------------
Date
By: /s/ David M. Bell
---------------------------------------------
David M. Bell
Senior Vice President-Project Design,
Development and Construction
March 10, 1999
--------------------------------------------------
Date
By: /s/ Peter F. Stanton
---------------------------------------------
Peter F. Stanton
Director
March 10, 1999
--------------------------------------------------
Date
By: /s/ Ronald R. Taylor
---------------------------------------------
Ronald R. Taylor
Director
March 10, 1999
--------------------------------------------------
Date
<PAGE>
By: /s/ Robert G. Templin
---------------------------------------------
Robert G. Templin
Director
March 10, 1999
--------------------------------------------------
Date
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
(a) Except to the extent that the materials enumerated in (1) and/or
(2) below are specifically incorporated into this form by
reference (in which case see Rule 12b-23(d)), every registrant
which files an annual report on this form pursuant to
Section 15(d) of the Act shall furnish to the Commission for its
information, at the time of filing its report on this form, four
copies of the following:
(1) Any annual report to security holders covering the
registrant's last fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting
material sent to more than 10 of the registrant's security
holders with respect to any annual or other meeting of
security holders.
(b) The foregoing material shall not deemed to be "filed" with the
Commission or otherwise subject to the liabilities of Section 18
of the Act, except to the extent that the registrant specifically
incorporates it in its annual report on this form by reference.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4267
<SECURITIES> 0
<RECEIVABLES> 5427
<ALLOWANCES> 0
<INVENTORY> 858
<CURRENT-ASSETS> 11909
<PP&E> 267725
<DEPRECIATION> (40302)
<TOTAL-ASSETS> 244903
<CURRENT-LIABILITIES> 11881
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 93805
<TOTAL-LIABILITY-AND-EQUITY> 244903
<SALES> 86333
<TOTAL-REVENUES> 86333
<CGS> 38207
<TOTAL-COSTS> 66023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8127
<INCOME-PRETAX> 12364
<INCOME-TAX> 4310
<INCOME-CONTINUING> 8054
<DISCONTINUED> 0
<EXTRAORDINARY> (546)
<CHANGES> 0
<NET-INCOME> 7508
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Cavanaughs Hospitality Corporation on Form S-8 (File
No. 333-60791) of our report dated January 29, 1999, on our audits of
the consolidated financial statements of Cavanaughs Hospitality
Corporation as of December 31, 1997 and 1998 and for the years ended
October 31, 1996 and 1997, the two months ended December 31, 1997 and
the year ended December 31, 1998 which report is included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Spokane, Washington
March 15, 1999
<PAGE>
Exhibit 10.2
------------
FIRST AMENDMENT TO CREDIT AGREEMENT
This first amendment to credit agreement ("Amendment") is made and
entered into as of July 23, 1998, among CAVANAUGHS HOSPITALITY LIMITED
PARTNERSHIP, a Delaware limited partnership (the "Borrower"), the
several financial institutions that are party to this Agreement
(collectively, the "Lenders"; individually, a "Lender"), and
U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), as administrative
agent for the Lenders (the "Agent").
RECITALS:
A. On May 5, 1998, the Borrower and U. S. Bank, as the Agent and a
Lender, entered into that certain credit agreement (together with
all amendments, supplements, exhibits, and modifications thereto,
the "Credit Agreement") whereby the Lenders agreed to extend
certain credit facilities to the Borrower. The other Lenders
that are parties to this Amendment have become Lenders under the
Credit Agreement since May 5, 1998.
B. The Borrower has requested the Lenders to (1) modify certain
provisions of the Credit Agreement, (2) consent to the
acquisition of certain hotel properties by the Borrower, and
(3) consent to the inclusion as Eligible Real Property of hotel
properties owned by the Borrower and located in Salt Lake City,
Utah and Post Falls, Idaho (collectively, the "Additional
Property").
C. The purpose of this Amendment is to set forth the terms and
conditions under which the Lenders will agree to the Borrower's
requests.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:
ARTICLE I. AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents, are
hereby amended as set forth herein. Except as specifically provided
for herein, all of the terms and conditions of the Credit Agreement
and each of the other Loan Documents shall remain in full force and
effect throughout the terms of the Loans, as well as any extensions or
renewals thereof.
<PAGE>
ARTICLE II. DEFINITIONS
As used herein, capitalized terms shall have the meanings given to
them in the Credit Agreement, except as otherwise defined herein, or
as the context otherwise requires.
ARTICLE III. ACQUISITION AND ADDITIONAL PROPERTY
3.1 Consent to Acquisition
Notwithstanding the provisions of Sections 8.4(d) and 8.7 of the
Credit Agreement, the Lenders hereby consent to (a) the acquisition by
the Borrower from Sunstone Hotels, L.L.C. of four hotel properties,
one each located in Boise, Idaho, Twin Falls, Idaho, Pocatello, Idaho
and Helena, Montana for a total purchase price of $30,516,050, and (b)
the use of Loan proceeds to finance such acquisition.
3.2 Consent to Inclusion
Notwithstanding the provisions of Section 7.13 of the Credit
Agreement, and subject to the satisfaction of the conditions set forth
in Section 5.3 of the Credit Agreement as to the Additional Property,
the Lenders hereby consent to the inclusion of the Additional Property
as "Eligible Real Property."
3.3 Advance Against Additional Property
(a) The Approved Appraised Value has not been established for the
Additional Property. However, subject to the satisfaction of the
conditions set forth in Section 5.3 of the Credit Agreement as to
the Additional Property, the Lenders hereby agree to include
$20,300,000 in the Borrowing Base until the earlier of
(i) October 31, 1998, or (ii) the date that the Approved
Appraised Value of the Additional Property is established.
(b) As a condition to establishing the Approved Appraised Value of
the Additional Property, the Agent shall have ordered, reviewed
and approved in writing an M.A.I. appraisal of each of the
Additional Properties that is in compliance with the Financial
Institutions Reform, Recovery and Enforcement Act. Once the
Approved Appraised Value of the Additional Property has been
established and provided that the conditions set forth in
Section 5.3 of the Credit Agreement have been complied with as to
the Additional Property, such Approved Appraised Value shall be
added to the Collateral Pool Value.
<PAGE>
ARTICLE IV. MODIFICATION OF COVENANTS
4.1 Use of Proceeds
Section 8.7(g) of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
(g) except as otherwise approved in writing by Lenders holding
51% or more of the then aggregate unpaid principal amount of the
Loans, or, if no such principal amount is then outstanding,
Lenders then having Pro Rata Shares equal to or greater than 51%
of the Commitments, to finance or refinance Acquisitions in an
aggregate amount in excess of (i) $80,000,000 in any 12-month
period through June 2, 1999, and (ii) $50,000,000 in any 12-month
period thereafter.
4.2 Capitalization Ratio
(a) Section 8.14(d) of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
As of the end of each fiscal quarter, the Capitalization Ratio
shall not exceed 0.60:1.00.
(b) The reference to a Capitalization Ratio of 0.50:1.00 in Section
8.10(c)(iv) of the Credit Agreement is hereby amended to
0.60:1.00.
ARTICLE V. FORM OF DEED OF TRUST
The form of Deed of Trust attached to the Credit Agreement as
Exhibit B shall be modified to the form attached to this Amendment as
Exhibit A in order to reflect changes to the Deed of Trust Act of the
State of Washington enacted since the date of the Credit Agreement.
ARTICLE VI. CONDITIONS PRECEDENT
The modifications set forth in this Amendment shall not be effective
unless and until the following conditions have been fulfilled to
Lenders' satisfaction:
(a) The Agent shall have received this Amendment, duly executed and
delivered by the Borrower and each of the Lenders;
(b) The Agent shall have received an opinion of counsel to the
Borrower addressed to the Agent and the Lenders, substantially in
the form of Exhibit B;
(c) The Borrower shall have paid to the Agent a nonrefundable fee in
the amount of $80,000;
<PAGE>
(d) The Agent shall have received, at the Borrower's sole cost and
expense, a 110.5 endorsement in a form acceptable to the Agent to
each of the Title Insurance Policies insuring Deeds of Trust on
each parcel of Eligible Real Property (excluding the Additional
Property) as of the date of this Amendment;
(e) There shall not exist any Default or Event of Default under the
Credit Agreement or any other Loan Document;
(f) All representations and warranties of the Borrower contained in
the Credit Agreement or otherwise made in writing in connection
therewith or herewith shall be true and correct and in all
material respects have the same effect as though such
representations and warranties had been made on and as of the
date of this Amendment; and
(g) The Agent shall have received a certified resolution of the board
of directors of CHC in the form attached hereto as Exhibit C.
ARTICLE VII. GENERAL PROVISIONS
7.1 Representations and Warranties
The Borrower hereby represents and warrants to the Lenders that as of
the date of this Amendment, there exists no Default or Event of
Default. All representations and warranties of the Borrower contained
in the Credit Agreement and the other Loan Documents, or otherwise
made in writing in connection therewith, are true and correct as of
the date of this Amendment. The Borrower acknowledges and agrees that
all of the Borrower's Indebtedness to the Lenders under the Credit
Agreement is payable without offset, defense or counterclaim.
7.2 Security
All Loan Documents evidencing the Agent's security interest in the
Collateral on behalf of the Lenders shall remain in full force and
effect, and shall continue to secure, without change in priority, the
payment and performance of the Loans and all other secured obligations
of the Borrower to the Agent on behalf of the Lenders.
7.3 Survival of Loan Documents
The terms and conditions of the Credit Agreement and each of the other
Loan Documents shall survive until all of the Borrower's obligations
under the Credit Agreement have been satisfied in full. By execution
of this Amendment, CHC consents to this Amendment and reaffirms its
obligations under the Guaranty, the Security Agreement and each of the
other Loan Documents executed by CHC.
<PAGE>
7.5 Counterparts
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which
together shall constitute one and the same agreement.
7.6 Statutory Notice
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the Borrower, the Agent, and the Lenders have
caused this Agreement to be duly executed by the respective, duly
authorized signatories as of the date first above written.
CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP
By: Cavanaughs Hospitality Corporation,
General Partner
By ______________________________________
Title ______________________________________
CAVANAUGHS HOSPITALITY CORPORATION
By ______________________________________
Title ______________________________________
U. S. BANK NATIONAL ASSOCIATION, as Agent
By ______________________________________
Title ______________________________________
U. S. BANK NATIONAL ASSOCIATION, as a Lender
By ______________________________________
Title ______________________________________
BANK OF SCOTLAND
By ______________________________________
Title ______________________________________
<PAGE>
BANK LEUMI USA
By ______________________________________
Title ______________________________________
IMPERIAL BANK
By ______________________________________
Title ______________________________________
FIRST SECURITY BANK, N.A.
By ______________________________________
Title ______________________________________
<PAGE>
EXHIBIT A
to First Amendment to Credit Agreement
FORM OF DEED OF TRUST
<PAGE>
EXHIBIT B
to First Amendment to Credit Agreement
FORM OF OPINION LETTER
<PAGE>
EXHIBIT C
to First Amendment to Credit Agreement
FORM OF CAVANAUGHS HOSPITALITY CORPORATION
ACTION OF DIRECTORS
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
This second amendment to credit agreement ("Amendment") is made and
entered into as of February 5, 1999, among CAVANAUGHS HOSPITALITY
LIMITED PARTNERSHIP, a Delaware limited partnership (the "Borrower"),
the several financial institutions that are party to this Agreement
(collectively, the "Lenders"; individually, a "Lender"), and
U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), as administrative
agent for the Lenders (the "Agent").
RECITALS:
A. On May 5, 1998, the Borrower and U. S. Bank, as the Agent and a
Lender, entered into that certain credit agreement (together with
all amendments, supplements, exhibits, and modifications thereto,
the "Credit Agreement") whereby the Lenders agreed to extend
certain credit facilities to the Borrower. The other Lenders
that are parties to this Amendment have become Lenders under the
Credit Agreement since May 5, 1998. The Credit Agreement has
been amended by that certain first amendment to credit agreement
dated as of July 23, 1998.
B. The Borrower has requested the Lenders to (1) increase the
Commitment from $80,000,000 to $100,000,000, and (2) eliminate
the limitations on the use of the proceeds of the Loans for the
acquisition of hotel properties.
C. The purpose of this Amendment is to set forth the terms and
conditions under which the Lenders will agree to the Borrower's
requests.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:
ARTICLE I. AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents, are
hereby amended as set forth herein. Except as specifically provided
for herein, all of the terms and conditions of the Credit Agreement
and each of the other Loan Documents shall remain in full force and
effect throughout the terms of the Loans, as well as any extensions or
renewals thereof.
ARTICLE II. DEFINITIONS
2.1 Defined Terms
As used herein, capitalized terms shall have the meanings given to
them in the Credit Agreement, except as otherwise defined herein or as
the context otherwise requires.
<PAGE>
2.2 Amended Defined Terms
Section 1.1 of the Credit Agreement is hereby amended to modify the
following defined terms:
"Commitment" means $100,000,000 less the aggregate amount of mandatory
prepayments made in accordance with Section 2.6.
"Interest Margin" means the number of basis points per annum
determined in accordance with the following matrix and based upon the
quarterly financial statements of the Borrower provided to the Agent
in accordance with the terms of this Agreement for the preceding
fiscal quarter. Adjustments shall be made 45 days after the end of
each fiscal quarter (when quarterly financial statements are required
to be delivered to the Agent); provided, however, that if the Borrower
has not delivered its financial statements for the previous fiscal
quarter within 45 days of the end of such fiscal quarter, then the
Interest Margin in effect for the previous fiscal quarter shall
continue to apply unless the Agent exercises its right to impose
interest at the default rate as provided for in this Agreement:
Funded Debt Ratio Level I Level II Level III Level IV
----------------- ------- ----------- ----------- --------
Funded Debt Ratio <3.00 >3.00 <35.0 >3.50 <4.00 >4.00
- - -
Reference Margin 0 0 25 37.5
LIBOR Margin 180 200 225 250
> means greater than or equal to
-
< means less than
The margins set forth above shall apply unless there exists an Event
of Default, in which case the Agent may elect to impose the default
rate as provided for in this Agreement.
<PAGE>
ARTICLE III. MODIFICATION OF THE LOANS
3.1 Modification of Pro Rata Shares
Schedule 2.1 to the Credit Agreement is hereby replaced with
Schedule 2.1 attached to this Amendment.
3.2 Renewal Promissory Note
Concurrently with the execution of this Amendment, the Borrower shall
execute and deliver to the Agent, for the benefit of the Lenders, a
renewal promissory note in the form attached hereto as EXHIBIT A
("Renewal Note"). The Renewal Note shall be in substitution for, but
not in payment of, the Note, which shall be marked "renewed" and shall
be retained by the Agent until the Loans have been repaid in full and
the Commitment under the Credit Agreement is terminated.
ARTICLE IV. COVENANTS
4.1 Deletion of Covenant Limiting Use of Proceeds
Section 8.7(g) of the Credit Agreement is hereby deleted in its
entirety.
4.2 Repayment of Bridge Loan
Concurrently with the first Loan advanced after the date of this
Amendment, the Borrower shall pay in full the $6,180,000 loan extended
by U. S. Bank to the Borrower on November 30, 1998.
ARTICLE V. CONDITIONS PRECEDENT
The modifications set forth in this Amendment shall not be effective
unless and until the following conditions have been fulfilled:
(a) The Agent shall have received this Amendment and the Renewal
Note, duly executed and delivered by the respective parties
thereto;
(b) The Agent shall have received, duly executed and delivered by the
Borrower, amendments to the Deeds of Trust on each parcel of
Eligible Real Property as of the date of this Amendment in the
form attached hereto as EXHIBITS B-1 through B-6;
(c) The Agent shall have received, at the Borrower's sole cost and
expense, a 110.5 endorsement and such other endorsements as
reasonably deemed necessary by the Agent in forms acceptable to
the Agent to each of the Title Insurance Policies insuring Deeds
of Trust on each parcel of Eligible Real Property as of the date
of this Amendment;
<PAGE>
(d) The conditions set forth in that certain commitment letter dated
as of December 18, 1998, between the Agent and the Borrower shall
have been satisfied;
(e) The Agent shall have received an opinion of counsel to the
Borrower, addressed to the Agent and the Lenders, substantially
in the form of EXHIBIT C;
(f) There shall not exist any Default or Event of Default under the
Credit Agreement or any other Loan Document;
(g) All representations and warranties of the Borrower contained in
the Credit Agreement or otherwise made in writing in connection
therewith or herewith shall be true and correct and in all
material respects have the same effect as though such
representations and warranties had been made on and as of the
date of this Amendment; and
(h) The Borrower shall have paid an amendment fee to the Agent for
the benefit of each of the Lenders that evidences its approval of
this Amendment by executing a counterpart original of this
Amendment and returning the same to the Agent on or before
February 28, 1999. The amount of the amendment fee shall be
equal to 20 basis points of each such Lender's Pro Rata Share of
$80,000,000 prior to this Amendment becoming effective, as
reflected on Schedule 2.1 attached to this Amendment.
ARTICLE VI. GENERAL PROVISIONS
6.1 Representations and Warranties
The Borrower hereby represents and warrants to the Lenders that as of
the date of this Amendment, there exists no Default or Event of
Default. All representations and warranties of the Borrower contained
in the Credit Agreement and the other Loan Documents, or otherwise
made in writing in connection therewith, are true and correct as of
the date of this Amendment. The Borrower acknowledges and agrees that
all of the Borrower's Indebtedness to the Lenders under the Credit
Agreement is payable without offset, defense or counterclaim.
6.2 Security
All Loan Documents evidencing the Agent's security interest in the
Collateral on behalf of the Lenders shall remain in full force and
effect, and shall continue to secure, without change in priority, the
payment and performance of the Loans and all other secured obligations
of the Borrower to the Agent on behalf of the Lenders.
6.3 Survival of Loan Documents
The terms and conditions of the Credit Agreement and each of the other
Loan Documents shall survive until all of the Borrower's obligations
under the Credit Agreement have been satisfied in full.
<PAGE>
6.4 Consent of CHC
By execution of this Amendment, CHC consents to this Amendment,
including, without limitation, the increase in the Commitment provided
for herein, and reaffirms its obligations under the Guaranty, the
Security Agreement and each of the other Loan Documents executed by
CHC.
6.5 Year 2000
The Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem"
(that is, that computer applications and equipment used by the
Borrower, directly or indirectly through third parties, may be unable
to properly perform date-sensitive functions before, during and after
January 1, 2000). The Borrower reasonably believes that the year 2000
problem will not result in a material adverse change in the Borrower's
business condition (financial or otherwise), operations, properties or
prospects or ability to repay the Lenders. The Borrower agrees that
this representation will be true and correct on and shall be deemed
made by the Borrower on each date that the Borrower requests any
advance under a Loan or delivers any information to the Agent. The
Borrower will promptly deliver to the Agent such information relating
to this representation as the Agent requests from time to time.
6.6 Counterparts
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which
together shall constitute one and the same agreement.
6.7 Statutory Notice
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the Borrower, the Agent, and the Lenders have
caused this Amendment to be duly executed by the respective, duly
authorized signatories as of the date first above written.
CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP
By: Cavanaughs Hospitality Corporation,
General Partner
By ______________________________________
Title ______________________________________
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
By ______________________________________
Title ______________________________________
U. S. BANK NATIONAL ASSOCIATION, as Agent
By ______________________________________
Title ______________________________________
U. S. BANK NATIONAL ASSOCIATION, as a Lender
By ______________________________________
Title ______________________________________
BANK OF SCOTLAND
By ______________________________________
Title ______________________________________
<PAGE>
BANK LEUMI USA
By ______________________________________
Title ______________________________________
IMPERIAL BANK
By ______________________________________
Title ______________________________________
FIRST SECURITY BANK, N.A.
By ______________________________________
Title ______________________________________
<PAGE>
