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 March 31, 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
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CAVANAUGHS HOSPITALITY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1032187
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. North River Drive, Suite 100, Spokane, WA 99201
------------------------------------------------------
(Address of principal executive office)
(509) 459-6100
----------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of April 30, 1999, there were 12,671,847 shares of the
Registrant's common stock outstanding.
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
Form 10-Q
For the Quarter Ended March 31, 1999
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets --
December 31, 1998 and March 31, 1999 1-2
- Consolidated Statements of Operations --
Three Months Ended March 31, 1998 and 1999 3-4
- Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1998 and 1999 5-6
- Notes to Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-19
PART II - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 20
<PAGE>
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1998 and March 31, 1999
(in thousands, except share data)
December 31, March 31,
1998 1999
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,267 $ 2,419
Accounts receivable 5,427 5,874
Income taxes refundable 957 822
Inventories 858 872
Prepaid expenses and deposits 400 1,069
-------- --------
Total current assets 11,909 11,056
Property and equipment, net 227,423 228,963
Other assets, net 5,571 6,256
-------- --------
Total assets $244,903 $246,275
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,831 $ 2,138
Accrued payroll and related benefits 1,477 2,131
Accrued interest payable 1,518 1,502
Other accrued expenses 3,883 4,900
Long-term debt, due within one year 1,538 1,599
Capital lease obligations, due within
one year 634 658
-------- --------
Total current liabilities 11,881 12,928
Long-term debt, due after one year 44,150 43,902
Notes payable to bank 82,480 82,980
Capital lease obligations, due after
one year 1,748 1,542
Deferred income taxes 6,349 6,349
Minority interest in partnerships 4,364 4,291
-------- --------
Total liabilities 150,972 151,992
-------- --------
Commitments and contingencies
1
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED
December 31, 1998 and March 31, 1999
(in thousands, except share data)
December 31, March 31,
1998 1999
------------ ---------
Stockholders' equity:
Preferred stock - 5,000,000 shares author-
ized, $0.01 par value, -0- shares issued
and outstanding $ -- $ --
Common stock - 50,000,000 shares author-
ized, $0.01 par value; 12,660,847 shares
issued and outstanding 126 126
Additional paid-in capital 80,892 80,892
Retained earnings 12,913 13,265
-------- --------
Total stockholders' equity 93,931 94,283
-------- --------
Total liabilities and stockholders'
equity $244,903 $246,275
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
for the three months ended March 31, 1998 and 1999
(in thousands, except per share data)
1998 1999
-------- --------
Revenues:
Hotels and restaurants:
Rooms $ 6,884 $ 11,375
Food and beverage 4,175 6,512
Other 782 1,093
-------- --------
Total hotels and restaurants 11,841 18,980
Entertainment, management and services 1,018 1,329
Rental operations 1,776 1,839
-------- --------
Total revenues 14,635 22,148
-------- --------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 2,091 3,397
Food and beverage 3,558 5,285
Other 337 438
-------- --------
Total hotels and restaurants 5,986 9,120
Entertainment, management and services 697 777
Rental operations 385 536
-------- --------
Total direct expenses 7,068 10,433
-------- --------
Undistributed operating expenses:
Selling, general and administrative 1,780 3,307
Property operating costs 1,796 3,080
Corporate expenses 216 477
Depreciation and amortization 1,338 1,931
-------- --------
Total undistributed operating expenses 5,130 8,795
-------- --------
Total expenses 12,198 19,228
-------- --------
Operating income 2,437 2,920
Other income (expense):
Interest expense, net of amounts capitalized (2,679) (2,280)
Interest income 70 55
Other income -- 5
Minority interest in partnerships 40 50
-------- --------
3
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED), CONTINUED
for the three months ended March 31, 1998 and 1999
(in thousands, except per share data)
1998 1999
-------- --------
Income (loss) before income taxes, extra-
ordinary item and cumulative effect of
accounting change $ (132) $ 750
Income tax provision (benefit) (45) 255
-------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (87) 495
Extraordinary item, net of income tax benefit -- (10)
Cumulative effect of change in accounting
principle, net of income tax benefit -- (133)
-------- --------
Net income (loss) $ (87) $ 352
======== ========
Income (loss) per share - basic and diluted:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle $ (0.01) $ 0.04
Extraordinary item -- nil
Cumulative effect of accounting change -- (0.01)
-------- --------
Net income (loss) per share $ (0.01) $ 0.03
======== ========
Weighted-average common shares out-
standing - basic 7,084 12,661
======== ========
Weighted-average common shares out-
standing - diluted 7,084 13,057
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the three months ended March 31, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Operating activities:
Net income (loss) $ (87) $ 352
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,338 1,931
Minority interest in partnerships (40) (50)
Extraordinary item -- 10
Cumulative effect of change in accounting
principle -- 133
Change in:
Accounts receivable 133 (447)
Inventories (56) (14)
Prepaid expenses and deposits (1,060) (461)
Accounts payable -- (714)
Accrued payroll and related benefits 56 654
Accrued interest payable 143 (16)
Other accrued expenses 1,497 1,017
-------- --------
Net cash provided by operating
activities 1,924 2,395
-------- --------
Investing activities:
Additions to property and equipment (5,664) (3,237)
Issuance of note receivable -- (225)
Other, net (268) (262)
-------- --------
Net cash used in investing activities (5,932) (3,724)
-------- --------
Financing activities:
Proceeds from note payable to bank 1,925 7,680
Repayment of note payable to bank -- (7,180)
Proceeds from long-term debt 6,406 --
Repayment of long-term debt (744) (437)
Principal payments on capital lease
obligations (128) (182)
Advances from (payments to) affiliate (200) --
Additions to deferred financing costs -- (400)
-------- --------
Net cash provided by (used in)
financing activities 7,259 (519)
-------- --------
5
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the three months ended March 31, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Change in cash and cash equivalents:
Net increase (decrease) in cash and cash
equivalents $ 3,251 $ (1,848)
Cash and cash equivalents at beginning of
period 4,955 4,267
-------- --------
Cash and cash equivalents at end of period $ 8,206 $ 2,419
======== ========
Supplemental disclosure of cash flow
information:
Noncash investing and financing activities:
Issuance of operating partnership units
for Lincoln Building $ 880 $ --
Acquisition of property through assumption
of capital leases 21 --
Acquisition of property through issuance
of debt -- 250
Acquisition of equipment through cancella-
tion of note receivable -- 225
The accompanying notes are an integral part of the consolidated
financial statements.
6
<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 year 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 March 31, 1999 and the
consolidated results of operations and cash flows for the three
months ended March 31, 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 March 31, 1998, the Company controlled and operated (through
ownership or lease with purchase option agreements) 11 hotel
properties. At March 31, 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, the Company recently
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.
7
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
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 operations. 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
three months ended March 31, 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 March 31,
1999, $82,980,000 is outstanding under the credit facility. The
Company was in compliance with all required covenants at
March 31, 1999.
During the quarter ended March 31, 1999, the Company paid off
certain debt prior to its maturity date. Deferred loan fees
associated with this debt of $15,000 has 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. Capital expenditures
and identifiable assets for the entertainment, management and
services segment are not separated from corporate. General
corporate assets consist primarily of cash and cash equivalents,
receivables and certain property and equipment. Operating income
for each segment represents revenues less direct operating
expenses of each segment. Undistributed operating expenses are
not identified by segment. Interest expense related to debt
which is specifically associated with a segment is presented as
8
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BUSINESS SEGMENTS, CONTINUED:
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):
Three Months Ended
March 31,
-------------------
1998 1999
-------- --------
Revenues:
Hotels and restaurants $ 11,841 $ 18,980
Entertainment, management and
services 1,018 1,329
Rental operations 1,776 1,839
-------- --------
$ 14,635 $ 22,148
======== ========
Operating income:
Hotels and restaurants $ 5,855 $ 9,860
Entertainment, management and
services 321 552
Rental operations 1,391 1,303
Undistributed operating expenses (5,130) (8,795)
-------- --------
$ 2,437 $ 2,920
======== ========
6. EARNINGS (LOSS) 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.
March 31,
-------------------
1998 1999
-------- --------
Numerator:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle $ (87) $ 495
Extraordinary item -- (10)
Cumulative effect of accounting change -- (133)
-------- --------
Net income (loss) - basic (87) 352
Loss effect of dilutive OP Units -- 11
-------- --------
Net income (loss) - diluted $ (87) $ 363
======== ========
11
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. EARNINGS PER SHARE, CONTINUED:
March 31,
-------------------
1998 1999
-------- --------
Denominator:
Weighted-average shares outstanding -
basic 7,084 12,661
Effect of dilutive OP units -- 396
Effect of dilutive common stock
options -- (A)
-------- --------
Weighted-average shares outstanding -
diluted 7,084 13,057
======== ========
Earnings (loss) per share - basic
and diluted:
Income (loss) per share before
extraordinary item and cumulative
effect of change in accounting
principle $ (0.01) $ 0.04
Extraordinary item -- nil
Cumulative effect of accounting change -- (0.01)
-------- --------
Net earnings (loss) per share - basic
and diluted $ (0.01) $ 0.03
======== ========
(A) At March 31, 1999, 986,143 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 quarter
ended March 31, 1999 because they are anti-dilutive.
12
<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 months ended March 31, 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 85.7% of total
revenue in the three months ended March 31, 1999 and increased 60.3%
from $11.8 million in 1998 to $19.0 million in 1999. This increase
was primarily the result of the addition of eight(8)hotels and an
increase in average daily rate (ADR) from the hotels owned for greater
than one year, "Comparable Hotels", from $70.96 in 1998 to $76.73 in
1999, a 8.1% increase. Comparable Hotel revenue per available room
(REVPAR) declined 6.9% from $36.26 in 1998 to $33.74 in 1999 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 three months
ended March 31, 1999, entertainment, management and services accounted
for 6.0% of total revenues and rental operations accounted for 8.3% of
total revenues. In March 1999, the Company acquired additional
software, development rights, use agreements and non-competition
agreement for certain regions of the ticket distribution 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.
As is typical in the hospitality industry, REVPAR, ADR and occupancy
levels are important performance measures. The Company's operating
13
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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:
Three Months
Ended March 31,
----------------
1998 1999
------ ------
Revenues:
Hotels and restaurants 80.9% 85.7%
Entertainment, management and services 7.0 6.0
Rental operations 12.1 8.3
----- -----
Total revenues 100.0% 100.0%
===== =====
Direct operating expenses 48.3% 47.1%
Undistributed operating expenses:
Selling, general and administrative 12.2 14.9
Property operating costs 12.3 13.9
Corporate expenses 1.5 2.2
Depreciation and amortization 9.1 8.7
----- -----
Total undistributed operating expenses 35.1 39.7
Operating income 16.6 13.2
Interest expense (net) 17.8 10.1
Income (loss) before income taxes (0.9) 3.4
Income tax provision (benefit) (0.3) 1.2
----- -----
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (0.6)% 2.2%
===== =====
Comparable Hotels:
REVPAR $36.26 $33.74
ADR $70.96 $76.73
Occupancy 51.1% 44.0%
14
<PAGE>
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED
MARCH 31, 1998
Total revenues increased $7.5 million, or 51.3%, from $14.6 million in
1998 to $22.1 million in 1999. This increase is attributed primarily
to revenue generated from increases in total rooms occupied and the
addition of eight hotels.
Total hotel and restaurant revenues increased $7.1 million, or 60.3%,
from $11.8 million in 1998 to $19.0 million in 1999. ADR for the
Comparable Hotels increased $5.77, or 8.1%, from $70.96 in 1998 to
$76.73 in 1999. Comparable Hotel REVPAR decreased $2.52, or 6.9% from
$36.26 in 1998 to $33.74 in 1999. Available room nights increased 71%
in 1999. Total room revenue increased 65.2% from $6.9 million in 1998
to $11.4 million in 1999. The results reflect the addition of eight
(8) hotels which contributed, in part, to this increase in revenues.
Entertainment, management and services revenues increased $311,000, or
30.5% in 1999. Entertainment revenue increased due to additional
ticket convenience fees from the Company's Millennium Broadway Series.
Tickets became available for purchase in March 1999.
Rental income increased 3.5%, to $1.8 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 $3.4 million, or 47.6%, from $7.1
million in 1998 to $10.4 million in 1999, primarily due to the
increase in the number of hotel guests served and the addition of
eight (8) hotels. This represents a decrease in direct operating
expenses as a percentage of total revenues from 48.3% in 1998 to 47.1%
in 1999.
Total undistributed operating expenses increased $3.7 million, or
71.4%, from $5.1 million in 1998 to $8.8 million in 1999. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 85.9% from $1.8 million in
1998 to $3.3 million in 1999, and depreciation and amortization, which
increased 44.3% from $1.3 million in 1998 to $1.9 million in 1999.
Total undistributed operating expenses as a percentage of total
revenues increased 4.6% from 35.1% in 1998 to 39.7% in 1999. The
increase in undistributed operating expenses as a percentage of total
revenues is primarily attributed to the addition of eight (8) hotels
and the additional legal, accounting and administrative expenses of
being a publicly traded company.
Operating income increased $0.5 million, or 19.9%, from $2.4 million
in 1998 to $2.9 million in 1999. As a percentage of total revenues,
operating income decreased from 16.6% in 1998 to 13.2% in 1998.
The increase in operating income is due primarily to the addition of
15
<PAGE>
eight (8) hotels and improvements in the direct operating expense
margins.
Interest expense decreased $0.4 million, or 14.9%, from $2.7 million
in 1998 to $2.3 million in 1999. This decrease is primarily related
to the repayment of debt with proceeds from the Initial Public
Offering.
Income tax provision was $255,000 in 1999 versus a benefit of $45,000
in 1998. The increase in income tax provision is due to the increase
in the income before income taxes versus a loss in 1998. The
effective income tax rate for both periods was 34%.
Income before extraordinary item and cumulative effect of change in
accounting principle increased $0.6 million from a loss of $87,000 in
1998 to an income of $495,000 in 1999. This increase is primarily
attributed to the addition of eight (8) hotels in the period.
Net income increased $439,000, or 503.7%, from a loss of $87,000 in
1998 to income of $352,000 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 (which was increased from $80.0 to $100.0
million effective February 26, 1999). Cash generated by operations in
excess of operating expenses is used for capital expenditures and to
reduce amounts outstanding under the Revolving Credit Facility. Hotel
acquisitions, development and expansion have been and will be financed
through a combination of internally generated cash, borrowing under
credit facilities, and the issuance of Common Stock or OP Units. 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 March 31, 1999, the Company had $2.4 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 $3.7 million in owned and joint venture
16
<PAGE>
properties through March 31, 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 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 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,
17
<PAGE>
(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 March 31, 1999, the Company
had $83.0 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
March 31, 1999.
In addition to the Revolving Credit Facility, as of March 31, 1999,
the Company had debt and capital leases outstanding of approximately
$47.7 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 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.
18
<PAGE>
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.
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
19
<PAGE>
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.
20
<PAGE>
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 operations.
Part II - Other Information
---------------------------
ITEMS 1, 2, 3, 4 and 5 of Part II are omitted from this report as they
are not applicable.
21
<PAGE>
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 three months
ended March 31, 1999.
22
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
CAVANAUGHS HOSPITALITY CORPORATION
(Registrant)
Date: May 14, 1999 By: /s/ Arthur M. Coffey
-------------------- --------------------------------
Arthur M. Coffey, Executive Vice
President and Chief Financial
Officer
23
<PAGE>
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