U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15)d OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
------------ ------------
Commission file number 001-13957
---------
CAVANAUGHS HOSPITALITY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1032187
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. North River Drive, Suite 100, Spokane, WA 99201
------------------------------------------------------
(Address of principal executive office)
(509) 459-6100
----------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of October 31, 1999, there were 12,786,392 shares of the
Registrant's common stock outstanding.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
Form 10-Q
For the Quarter Ended September 30, 1999
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets -- December 31, 1998
and September 30, 1999
- Consolidated Statements of Income -- Three and Nine
Months Ended September 30, 1998 and 1999
- Consolidated Statements of Cash Flows -- Nine
Months Ended September 30, 1998 and 1999
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
<PAGE>
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1998 and September 30, 1999
(in thousands, except share data)
December 31, September 30,
1998 1999
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,267 $ 7,853
Accounts receivable 5,426 7,282
Income taxes refundable 957 --
Inventories 858 909
Prepaid expenses and deposits 400 1,121
-------- --------
Total current assets 11,909 17,165
Property and equipment, net 227,423 229,932
Other assets, net 5,571 6,399
-------- --------
Total assets $244,903 $253,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,831 $ 6,626
Accrued payroll and related benefits 1,477 2,441
Accrued interest payable 1,518 652
Other accrued expenses 3,883 3,005
Income taxes payable -- 1,719
Long-term debt, due within one year 1,538 1,682
Capital lease obligations, due within
one year 634 670
-------- --------
Total current liabilities 11,881 16,795
Long-term debt, due after one year 44,150 43,029
Notes payable to bank 82,480 79,900
Capital lease obligations, due after
one year 1,748 1,211
Deferred income taxes 6,349 6,601
Minority interest in partnerships 4,364 2,893
-------- --------
Total liabilities 150,972 150,429
-------- --------
Commitments and contingencies
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED
December 31, 1998 and September 30, 1999
(in thousands, except share data)
December 31, September 30,
1998 1999
------------ -------------
Stockholders' equity:
Preferred stock - 5,000,000 shares
authorized, $0.01 par value, -0-
shares issued and outstanding $ -- $ --
Common stock - 50,000,000 shares
authorized, $0.01 par value;
12,660,847 and 12,786,392 shares
issued and outstanding 126 128
Additional paid-in capital 80,892 82,737
Retained earnings 12,913 20,202
-------- --------
Total stockholders' equity 93,931 103,067
-------- --------
Total liabilities and stockholders'
equity $244,903 $253,496
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
for the three and nine months ended September 30, 1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms $16,813 $18,624 $35,365 $45,632
Food and beverage 6,778 7,723 16,636 22,250
Other 1,289 1,441 3,036 3,758
------- ------- ------- -------
Total hotels and restaurants 24,880 27,788 55,037 71,640
Entertainment, management and services 907 4,072 2,933 6,498
Rental operations 1,801 1,898 5,315 5,745
------- ------- ------- -------
Total revenues 27,588 33,758 63,285 83,883
------- ------- ------- -------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 4,035 4,658 9,080 12,214
Food and beverage 5,412 6,296 13,573 17,760
Other 590 692 1,366 1,672
------- ------- ------- -------
Total hotels and restaurants 10,037 11,646 24,019 31,646
Entertainment, management and services 640 3,833 2,055 5,436
Rental operations 439 520 1,171 1,551
------- ------- ------- -------
Total direct expenses 11,116 15,999 27,245 38,633
------- ------- ------- -------
Undistributed operating expenses:
Selling, general and administrative 2,974 3,736 7,199 10,450
Property operating costs 3,001 3,291 6,977 9,422
Corporate expenses 453 556 1,295 1,623
Depreciation and amortization 1,621 1,985 4,357 5,884
------- ------- ------- -------
Total undistributed operating expenses 8,049 9,568 19,828 27,379
------- ------- ------- -------
Total expenses 19,165 25,567 47,073 66,012
------- ------- ------- -------
Operating income 8,423 8,191 16,212 17,871
Other income (expense):
Interest expense, net of amounts capitalized (1,936) (2,419) (5,990) (7,039)
Interest income 75 116 271 263
Other income 6 7 5 16
Minority interest in partnerships (203) (125) (247) (180)
------- ------- ------- -------
</TABLE>
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED), CONTINUED
for the three and nine months ended September 30, 1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
principle $ 6,365 $ 5,770 $10,251 $10,931
Income tax provision 2,228 1,846 3,549 3,499
------- ------- ------- -------
Income before extraordinary item and cumulative
effect of change in accounting principle 4,137 3,924 6,702 7,432
Extraordinary item, net of income tax benefit (16) -- (546) (10)
Cumulative effect of change in accounting
principle, net of income tax benefit -- -- -- (133)
------- ------- ------- -------
Net income $ 4,121 $ 3,924 $ 6,156 $ 7,289
======= ======= ======= =======
Net income per share -- basic and diluted:
Income before extraordinary item and
cumulative effect of change in accounting
principle $ 0.32 $ 0.31 $ 0.61 $ 0.58
Extraordinary item -- -- (0.05) Nil
Cumulative effect of change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income per share $ 0.32 $ 0.31 $ 0.56 $ 0.57
======= ======= ======= =======
Weighted-average common shares outstanding --
basic 12,983 12,786 10,907 12,713
======= ======= ======= =======
Weighted-average common shares outstanding --
diluted 13,379 13,082 11,201 13,069
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the nine months ended September 30, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Operating activities:
Net income $ 6,156 $ 7,289
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,357 5,884
Minority interest in partnerships 247 180
Extraordinary item 546 10
Cumulative effect of change in accounting
principle -- 133
Deferred income taxes -- 252
Compensation expense related to stock
issuance 174 167
Change in:
Accounts receivable (3,580) (1,856)
Inventories (326) (51)
Prepaid expenses and deposits 682 (721)
Other assets (388) --
Income taxes receivable/payable -- 2,751
Accounts payable 2,149 3,795
Accrued payroll and related benefits 973 964
Accrued interest payable (314) (866)
Other accrued expenses 3,315 (878)
-------- --------
Net cash provided by operating
activities 13,991 17,053
-------- --------
Investing activities:
Additions to property and equipment (4,917) (7,744)
Acquisitions of property and equipment (86,132) --
Issuance of note receivable (17,112) (225)
Payments on note receivable 17,112 --
Purchase of other assets (300) --
Other, net (475) (731)
-------- --------
Net cash used in investing activities (91,824) (8,700)
-------- --------
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
for the nine months ended September 30, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Financing activities:
Distributions to stockholders and partners $ (27) $ (73)
Proceeds from issuance of common stock under
employee stock purchase plan 77 102
Net proceeds from initial public offering
of common stock 81,468 --
Purchase and retirement of common stock (3,391) --
Proceeds from note payable 1,925 8,680
Repayment of note payable (3,054) (11,260)
Proceeds from long-term debt 75,483 --
Repayment of long-term debt (70,124) (1,227)
Advances from (payments to) affiliates (1,133) --
Principal payments on capital lease
obligations (415) (501)
Additions to deferred financing costs (1,210) (488)
-------- --------
Net cash provided by (used in) financing
activities 79,599 (4,767)
-------- --------
Change in cash and cash equivalents:
Net increase in cash and cash equivalents 1,766 3,586
Cash and cash equivalents at beginning of
period 4,955 4,267
-------- --------
Cash and cash equivalents at end of period $ 6,721 $ 7,853
======== ========
Supplemental disclosure of cash flow
information:
Noncash investing and financing activities:
Acquisition of property under capital
leases $ 262 $ --
Issuance of operating partnership units
for property acquisitions 4,548 --
Acquisition of property through assumption
of debt or issuance of note payable 10,687 250
Stock issued for partial acquisition of
partnership interest 879 --
Acquisition of equipment through cancel-
lation of note receivable -- 225
Conversion of operating partnership units
to common stock -- 1,578
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY INFORMATION:
The unaudited consolidated financial statements included herein
have been prepared by Cavanaughs Hospitality Corporation (the
Company) pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted as permitted by such rules and
regulations. The balance sheet as of December 31, 1998 has been
compiled from the audited balance sheet as of such date. The
Company believes that the disclosures included herein are
adequate; however, these consolidated statements should be read
in conjunction with the financial statements and the notes
thereto for the period ended December 31, 1998 previously filed
with the SEC on Form 10-K.
In the opinion of management, these unaudited consolidated
financial statements contain all of the adjustments (normal and
recurring in nature) necessary to present fairly the consolidated
financial position of the Company at September 30, 1999, the
consolidated results of operations for the three and nine months
ended September 30, 1999 and 1998 and the consolidated cash flows
for the nine months ended September 30, 1999 and 1998. The
results of operations for the periods presented may not be
indicative of those which may be expected for a full year.
2. ORGANIZATION:
At September 30, 1998, the Company controlled and operated
(through ownership or lease with purchase option agreements) 18
hotel properties. At September 30, 1999, 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. Further, during the second
quarter 1999, the Company announced the launch of
[www.TicketsWest.com], an Internet ticketing service offering
consumers up-to-the-minute information on live entertainment and
the ability to make real-time ticket purchases of the best
available seats to events through the website. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 adopted the provisions of
SOP 98-5 on January 1, 1999 and reported the change as a
cumulative effect of an accounting change in the consolidated
statement of income. The adoption of SOP 98-5 resulted in the
cumulative effect of an accounting change of $133,000, which is
net of $68,000 of income taxes, being recognized during the nine-
month period ended September 30, 1999.
4. LONG-TERM DEBT AND LINE OF CREDIT:
In May 1998, the Company obtained an $80 million revolving
secured credit facility with a bank. In February 1999, the
credit facility was increased to $100 million. The credit
facility requires that the Company maintain certain financial
ratios and minimum levels of cash flows. Any outstanding
borrowings will bear interest based on the prime rate or LIBOR,
plus 180 to 250 basis points depending on the total funded debt
levels. The credit facility matures in May 2003. At
September 30, 1999, $79.9 million is outstanding under the credit
facility. The Company was in compliance with all required
covenants at September 30, 1999.
During the nine-month period ended September 30, 1999, the
Company paid off certain debt prior to its maturity date.
Deferred loan fees associated with this debt of $15,000 have been
written off and reported as an extraordinary item, net of a
$5,000 income tax benefit.
5. BUSINESS SEGMENTS:
The Company operates in three segments: (1) hotels and
restaurants; (2) entertainment, management and services; and (3)
rental operations. Revenues of each segment are those that are
directly identified with those operations. Operating income for
each segment represents revenues less direct operating expenses
of each segment. Undistributed operating expenses are not
identified by segment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BUSINESS SEGMENTS, CONTINUED:
Selected information with respect to the segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants $ 24,880 $ 27,788 $ 55,037 $ 71,640
Entertainment, management
and services 907 4,072 2,933 6,498
Rental operations 1,801 1,898 5,315 5,745
-------- -------- -------- --------
$ 27,588 $ 33,758 $ 63,285 $ 83,883
======== ======== ======== ========
Operating income:
Hotels and restaurants $ 14,843 $ 16,142 $ 31,018 $ 39,994
Entertainment, management
and services 267 239 878 1,062
Rental operations 1,362 1,378 4,144 4,194
Undistributed operating
expenses (8,049) (9,568) (19,828) (27,379)
-------- -------- -------- --------
$ 8,423 $ 8,191 $ 16,212 $ 17,871
======== ======== ======== ========
</TABLE>
6. 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 stock options that would have been considered in the
diluted EPS computation if they were not anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income before extra-
ordinary item and
cumulative effect of
change in accounting
principle $ 4,137 $ 3,924 $ 6,702 $ 7,432
Extraordinary item (16) -- (546) (10)
Cumulative effect of change
in accounting principle -- -- -- (133)
------- ------- ------- -------
Net income - basic 4,121 3,924 6,156 7,289
Effect of dilutive OP Units 126 91 180 187
------- ------- ------- -------
Net income - diluted $ 4,247 $ 4,015 $ 6,336 $ 7,476
======= ======= ======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. EARNINGS PER SHARE, CONTINUED:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Denominator:
Weighted-average shares
outstanding - basic 12,983 12,786 10,907 12,713
Effect of dilutive
OP Units 396 296 294 356
Effect of dilutive common
stock options (A) (A) (A) (A)
------- ------- ------- -------
Weighted-average shares
outstanding - diluted 13,379 13,082 11,201 13,069
======= ======= ======= =======
Earnings Per Share - basic
and diluted
Income per share before
extraordinary item and
cumulative effect of
change in accounting
principle $ 0.32 $ 0.31 $ 0.61 $ 0.58
Extraordinary item -- -- (0.05) Nil
Cumulative effect of
change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income per share -
basic and diluted $ 0.32 $ 0.31 $ 0.56 $ 0.57
======= ======= ======= =======
</TABLE>
(A) For the three and nine months ended September 30, 1999,
978,851 stock options were outstanding. For the three and
nine months ended September 30, 1998, 804,503 stock options
were 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
because they are anti-dilutive.
7. 1999 ACQUISITIONS:
In October 1999, Ticketswest.com, an operating division of the
Company announced the acquisition of Oregon Ticket Company, Inc.
(d.b.a. Fastixx), headquartered in Portland, Oregon. Fastixx's
extensive 93 outlet ticketing system stretches from Canada to the
northern border of California, including Seattle, Bellingham,
Bellevue, Tacoma, Olympia and Vancouver, Washington, and Portland,
Salem, Eugene and Medford, Oregon. Ticketswest.com also announced
the acquisition of The Show Terminal, LLC (d.b.a. Colorado
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. 1999 ACQUISITIONS, CONTINUED:
Neighborhood Box Office). Colorado Neighborhood Box Office provides
ticketing services to entertainment events in and around Colorado
Springs, Colorado.
Both of these acquisitions will be accounted for under the purchase
method of accounting and will be included in the Company's
consolidated financial statements as of their respective dates of
acquisition.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
-------
The following discussion and analysis addresses the results of
operations for the Company for the three and nine months ended
September 30, 1998 and 1999. The following should be read in
conjunction with the unaudited Consolidated Financial Statements and
the notes thereto. In addition to historical information, the
following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could
differ significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed
in "Risk Factors" and elsewhere in the Form 10-K for the year ended
December 31, 1998, previously filed by the Company with the Securities
and Exchange Commission.
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 85.4% of total
revenue in the nine months ended September 30, 1999 and increased
30.2% from $55.0 million in 1998 to $71.6 million in 1999. This
increase was primarily the result of the addition of five (5) hotels
and an increase in average daily rate (ADR) from the hotels owned for
greater than one year, "Comparable Hotels", from $78.43 in 1998 to
$81.15 in 1999, a 3.5% increase. Comparable Hotel revenue per
available room (REVPAR) declined 0.1% from $47.11 in 1998 to $47.06 in
1999 primarily due to removal of low rate permanent contract business
and the addition of rooms placed in service after renovation. The
balance of the Company's revenues are derived from its entertainment,
management and services and rental operations divisions. These
revenues are generated from ticket distribution handling fees, real
estate management fees, sales commissions and rents. In the nine
months ended September 30, 1999, entertainment, management and
services accounted for 7.7% of total revenues and rental operations
accounted for 6.9% of total revenues. In March 1999, the Company
acquired additional software, development rights, use agreements and a
non-competition agreement for certain regions of the ticket distri-
bution system it uses in the entertainment division. In April of
1999, the Company launched its Internet site, [www.TicketsWest.Com],
which facilitates the real time purchase of entertainment and leisure
activities. The rental operations division is expected to represent a
smaller percent of total revenues in the future as the Company
continues to pursue its hotel and entertainment growth strategy.
<PAGE>
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 income as a percent of total revenues and certain other
selected data:
<TABLE>
<capiton>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1998 1999 1998 1999
------- -------- ------ -------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants 90.2% 82.3% 87.0% 85.4%
Entertainment, management and services 3.3 12.1 4.6 7.7
Rental operations 6.5 5.6 8.4 6.9
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Direct operating expenses 40.3% 47.4% 43.1% 46.1%
----- ----- ----- -----
Undistributed operating expenses:
Selling, general and administrative 10.8 11.1 11.4 12.5
Property operating costs 10.9 9.7 11.0 11.2
Corporate expenses 1.6 1.6 2.0 1.9
Depreciation and amortization 5.9 5.9 6.9 7.0
----- ----- ----- -----
Total undistributed operating expenses 29.2 28.3 31.3 32.6
----- ----- ----- -----
Operating income 30.5 24.3 25.6 21.3
Interest expense, net (7.0) (7.2) (9.5) (8.4)
Other income (expense) (0.4) (0.0) 0.1 0.0
----- ----- ----- -----
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle 23.1 17.1 16.2 13.0
Income tax provision 8.1 5.5 5.6 4.2
----- ----- ----- -----
Income before extraordinary item and cumu-
lative effect of change in accounting
principle 15.0% 11.6% 10.6% 8.8%
===== ===== ===== =====
Comparable Hotels:
REVPAR $52.12 $52.71 $47.11 $47.06
ADR 79.41 77.52 78.43 81.15
Occupancy 65.6% 68.0% 60.1% 58.0%
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
---------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenues increased $20.6 million, or 32.5%, from $63.3 million in
1998 to $83.9 million in 1999. This increase is attributed primarily
to revenue generated from increases in total rooms occupied and the
addition of five (5) hotels.
Total hotel and restaurant revenues increased $16.6 million, or 30.2%,
from $55.0 million in 1998 to $71.6 million in 1999. ADR for the
Comparable Hotels increased $2.72, or 3.5%, from $78.43 in 1998 to
$81.15 in 1999. Comparable Hotel REVPAR decreased $0.05, or 0.1% from
$47.11 in 1998 to $47.06 in 1999. Available room nights increased
38.4% in 1999. Total room revenue increased 29.0% from $35.4 million
in 1998 to $45.6 million in 1999. The results reflect the addition of
five (5) hotels which contributed, in part, to this increase in
revenues.
Entertainment, management and services revenues increased $3.6 million,
or 121.5% in 1999. Entertainment revenue increased due to additional
ticket sales and convenience fees from the Company's Millennium
Broadway Series and other events presented by the Company. Tickets
became available for purchase in March 1999.
Rental income increased 8.1%, to $5.7 million in 1999. This increase
is primarily from lease escalations and new lease contracts in the
Company's office and retail buildings.
Direct operating expenses increased $11.4 million, or 41.8%, from $27.2
million in 1998 to $38.6 million in 1999, primarily due to the increase
in the number of hotel guests served and the addition of five (5)
hotels, and expenses associated with the additional entertainment
events presented by the Company. Direct operating expenses as a
percentage of total revenues increased from 43.1% in 1998 to 46.1% in
1999.
Total undistributed operating expenses increased $7.6 million, or
38.1%, from $19.8 million in 1998 to $27.4 million in 1999. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 45.2% from $7.2 million in
1998 to $10.4 million in 1999, and depreciation and amortization, which
increased 35% from $4.4 million in 1998 to $5.9 million in 1999. Total
undistributed operating expenses as a percentage of total revenues
increased 1.3% from 31.3% in 1998 to 32.6% in 1999. The increase in
undistributed operating expenses as a percentage of total revenues is
primarily attributed to the addition of five (5) hotels and the
additional legal, accounting and administrative expenses of being a
publicly traded company.
<PAGE>
Operating income increased $1.7 million, or 10.2%, from $16.2 million
in 1998 to $17.9 million in 1999. As a percentage of total revenues,
operating income decreased from 25.6% in 1998 to 21.3% in 1999. The
increase in operating income is due primarily to the addition of five
(5) hotels.
Interest expense increased $1.0 million, or 17.5%, from $6.0 million in
1998 to $7.0 million in 1999. This increase is primarily related to
additional debt incurred with the acquisition of the five (5) hotels.
Income tax provision was $3.5 million in 1999 and 1998. The effective
income tax rate was 32.0% for 1999 and 34.6% for 1998. The provision
for income tax rate is lower in 1999 due to the Company qualifying for
certain historical rehabilitation tax credits.
Income before extraordinary item and cumulative effect of change in
accounting principle increased $730,000 from $6.7 million in 1998 to
$7.4 million in 1999. This increase is primarily attributed to the
addition of five (5) hotels in the period.
Net income increased $1.1 million, or 18.4%, from $6.2 million in 1998
to $7.3 million in 1999.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS
ENDED SEPTEMBER 30, 1998
Total revenues increased $6.2 million, or 22.4%, from $27.6 million in
1998 to $33.8 million in 1999. This increase is attributed primarily
to revenue generated from increases in total rooms occupied and the
addition of five (5) hotels.
Total hotel and restaurant revenues increased $2.9 million, or 11.7%,
from $24.9 million in 1998 to $27.8 million in 1999. ADR for the
Comparable Hotels decreased $1.89, or 2.4%, from $79.41 in 1998 to
$77.52 in 1999. Comparable Hotel REVPAR increased $0.59, or 1.1% from
$52.12 in 1998 to $52.71 in 1999. Available room nights increased
11.0% in 1999. Total room revenue increased 10.8% from $16.8 million
in 1998 to $18.6 million in 1999. The results reflect the addition of
five (5) hotels which contributed, in part, to this increase in
revenues.
Entertainment, management and services revenues increased $3.2 million,
or 349% in 1999. Entertainment revenue increased due to additional
ticket sales and convenience fees from the Company's Millennium
Broadway Series and other events presented by the Company. Tickets
became available for purchase in March 1999.
Rental income increased 5.4%, to $1.9 million in 1999. This increase
is primarily from lease escalations and new lease contracts in the
Company's office and retail buildings.
<PAGE>
Direct operating expenses increased $4.9 million, or 43.9%, from $11.1
million in 1998 to $16.0 million in 1999, primarily due to additional
expenses associated with the additional entertainment events presented
by the Company and the increase in the number of hotel guests served
and the addition of five (5) hotels. This represents an increase in
direct operating expenses as a percentage of total revenues from 40.3%
in 1998 to 47.4% in 1999.
Total undistributed operating expenses increased $1.5 million, or
18.9%, from $8.0 million in 1998 to $9.6 million in 1999. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 25.6% from $3.0 million in
1998 to $3.7 million in 1999, and depreciation and amortization, which
increased 22.5% from $1.6 million in 1998 to $2.0 million in 1999.
Total undistributed operating expenses as a percentage of total
revenues decreased 0.9% from 29.2% in 1998 to 28.3% in 1999. The
decrease in undistributed operating expenses as a percentage of total
revenues is primarily attributed to the additional gross revenues from
entertainment events presented by the Company.
Operating income decreased $232,000, or 2.8%, from $8.4 million in 1998
to $8.2 million in 1999. As a percentage of total revenues, operating
income decreased from 30.5% in 1998 to 24.3% in 1999. The decrease in
operating income is due primarily to the addition of five (5) hotels.
Interest expense increased $482,000, or 24.9%, from $1.9 million in
1998 to $2.4 million in 1999. This increase is primarily related to
the additional debt incurred with the acquisition of the five (5)
hotels.
Income tax provision was $1.8 million in 1999. The effective income
tax rate for 1999 was 32% and 35% in 1998.
Income before extraordinary item and cumulative effect of change in
accounting principle decreased $214,000 from $4.1 million in 1998 to
$3.9 million in 1999. This decrease is primarily attributed to the
addition of five (5) hotels in the period.
Net income decreased $197,000, or 4.8%, from $4.1 million in 1998 to
$3.9 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Historically, the Company's principal sources of liquidity have been
cash on hand, cash generated by operations and borrowings under a
revolving credit facility. Cash generated by operations in excess of
operating expenses is used for capital expenditures and to reduce
amounts outstanding under the Revolving Credit Facility. Hotel
acquisitions, development and expansion have been and will be financed
<PAGE>
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 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.
At September 30, 1999, the Company had $7.9 million in cash and cash
equivalents. The Company has made extensive capital expenditures over
the last two years, investing $123.6 million during the year ended
December 31, 1998, and $8.1 million in owned and joint venture
properties through September 30, 1999. 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, excluding
acquisitions of additional hotels, are expected to be approximately
$12.8 million. Management believes the consistent renovation and
upgrading of the Hotels and other properties is imperative to its long-
term reputation and customer satisfaction.
To fund its acquisition program and meet its working capital needs, the
Company has 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 total funded debt
to EBITDA. 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
<PAGE>
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 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 September 30, 1999, the Company had
$79.9 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
September 30, 1999.
In addition to the Revolving Credit Facility, as of September 30, 1999,
the Company had debt and capital leases outstanding of approximately
$46.6 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
<PAGE>
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 Hotels, demand is higher in the late spring through
early fall (May through October) than during the balance of the year.
Demand also changes on different days of the week, with Sunday
generally having the lowest occupancy. Accordingly, the Company's
revenue, operating profit and cash flow are lower during the first and
fourth calendar quarters and higher during the second and third
calendar quarters.
INFLATION
---------
The effect of inflation, as measured by fluctuations in the Consumer
Price Index, has not had a material impact on the Company's revenues or
net loss during the periods under review.
YEAR 2000 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 has
completed the replacement of it with a Year 2000 compliant system.
Individual older personal computers which are scheduled for replacement
in ordinary course of upgrades are not included in these percentages.
<PAGE>
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 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.
THIRD PARTY SERVICES: The Company has completed substantially all of
the assessment of services provided by third parties with which the
Company has a material relationship. These material Third Party
Services include the private companies and municipalities supplying all
utilities and communications to the Company. Evaluation was 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, 2000. The 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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 adopted the provisions of SOP 98-5 on January 1,
1999 and reported the change as a cumulative effect of an accounting
change of $133,000, which is net of income taxes, in the statement of
income.
<PAGE>
Part II - Other Information
---------------------------
ITEMS 1, 2, 3, 4 and 5 of Part II are omitted from this report as they
are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the nine months
ended September 30, 1999.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of
the registrant and in the capacities stated and on the date indicated.
CAVANAUGHS HOSPITALITY CORPORATION
(Registrant)
Date: November 12, 1999 By: /s/ Arthur M. Coffey
--------------------- -----------------------------------
Arthur M. Coffey, Executive Vice
President and Chief Financial
Officer
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