U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15)d OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 001-13957
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CAVANAUGHS HOSPITALITY CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1032187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. North River Drive, Suite 100, Spokane, WA 99201
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(Address of principal executive office)
(509) 459-6100
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of July 31, 1999, there were 12,771,847 shares of the
Registrant's common stock outstanding.
CAVANAUGHS HOSPITALITY CORPORATION
Form 10-Q
For the Quarter Ended June 30, 1999
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets -- December 31, 1998
and June 30, 1999
- Consolidated Statements of Income -- Three and Six
Months Ended June 30, 1998 and 1999
- Consolidated Statements of Cash Flows -- Six
Months Ended June 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 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1998 and June 30, 1999
(in thousands, except share data)
December 31, June 30,
1998 1999
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,267 $ 7,583
Accounts receivable 5,427 6,760
Income taxes refundable 957 --
Inventories 858 941
Prepaid expenses and deposits 400 1,437
-------- --------
Total current assets 11,909 16,721
Property and equipment, net 227,423 229,648
Other assets, net 5,571 6,280
-------- --------
Total assets $244,903 $252,649
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,831 $ 7,076
Accrued payroll and related benefits 1,477 2,541
Accrued interest payable 1,518 687
Other accrued expenses 3,883 2,234
Income taxes payable -- 521
Long-term debt, due within one year 1,538 1,643
Capital lease obligations, due within
one year 634 667
-------- --------
Total current liabilities 11,881 15,369
Long-term debt, due after one year 44,150 43,464
Notes payable to bank 82,480 83,980
Capital lease obligations, due after
one year 1,748 1,383
Deferred income taxes 6,349 6,601
Minority interest in partnerships 4,364 2,831
-------- --------
Total liabilities 150,972 153,628
-------- --------
Commitments and contingencies
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED
December 31, 1998 and June 30, 1999
(in thousands, except share data)
December 31, June 30,
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 and
12,771,847 shares issued and outstanding 126 128
Additional paid-in capital 80,892 82,615
Retained earnings 12,913 16,278
-------- --------
Total stockholders' equity 93,931 99,021
-------- --------
Total liabilities and stockholders'
equity $244,903 $252,649
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
for the three and six months ended June 30, 1998 and 1999
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1999 1998 1999
------- ------- ------- -------
Revenues:
Hotels and restaurants
Rooms $11,668 $15,633 $18,552 $27,008
Food and beverage 5,683 8,016 9,858 14,527
Other 965 1,223 1,747 2,317
------- ------- ------- -------
Total hotels and restaurants 18,316 24,872 30,157 43,852
Entertainment, management and services 1,008 1,097 2,026 2,426
Rental operations 1,738 2,009 3,514 3,847
------- ------- ------- -------
Total revenues 21,062 27,978 35,697 50,125
------- ------- ------- -------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 2,954 4,158 5,045 7,556
Food and beverage 4,602 6,179 8,160 11,464
Other 440 543 777 980
------- ------- ------- -------
Total hotels and restaurants 7,996 10,880 13,982 20,000
Entertainment, management and services 718 826 1,415 1,603
Rental operations 347 495 732 1,032
------- ------- ------- -------
Total direct expenses 9,061 12,201 16,129 22,635
------- ------- ------- -------
Undistributed operating expenses:
Selling, general and administrative 2,445 3,407 4,223 6,714
Property operating costs 2,177 3,051 3,977 6,130
Corporate expenses 625 590 842 1,067
Depreciation and amortization 1,417 1,969 2,736 3,899
------- ------- ------- -------
Total undistributed operating expenses 6,664 9,017 11,778 17,810
------- ------- ------- -------
Total expenses 15,725 21,218 27,907 40,445
------- ------- ------- -------
Operating income 5,337 6,760 7,790 9,680
Other income (expense):
Interest expense, net of amounts capitalized (1,360) (2,340) (4,054) (4,620)
Interest income 126 91 196 146
Other income -- 4 -- 10
Minority interest in partnerships (85) (105) (45) (55)
------- ------- ------- -------
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED), CONTINUED
for the three and six months ended June 30, 1998 and 1999
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1999 1998 1999
------- ------- ------- ------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle $ 4,018 $ 4,410 $ 3,887 $ 5,161
Income tax provision 1,366 1,397 1,322 1,653
------- ------- ------- -------
Income before extraordinary item and cumulative
effect of change in accounting principle 2,652 3,013 2,565 3,508
Extraordinary item, net of income tax benefit (530) -- (530) (10)
Cumulative effect of change in accounting
principle, net of income tax benefit -- -- -- (133)
------- ------- ------- -------
Net income $ 2,122 $ 3,013 $ 2,035 $ 3,365
======= ======= ======= =======
Income per share -- basic and diluted:
Income before extraordinary item and
cumulative effect of change in
accounting principle $ 0.21 $ 0.24 $ 0.26 $ 0.28
Extraordinary item (0.04) -- (0.05) --
Cumulative effect of change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income per share $ 0.17 $ 0.24 $ 0.21 $ 0.27
======= ======= ======= =======
Weighted-average common shares outstanding --
basic 12,588 12,690 9,836 12,676
======= ======= ======= =======
Weighted-average common shares outstanding --
diluted 12,920 13,067 10,077 13,062
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended June 30, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Operating activities:
Net income $ 2,035 $ 3,365
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,736 3,899
Minority interest in partnerships 45 55
Extraordinary item 530 10
Cumulative effect of change in
accounting principle -- 133
Deferred income taxes -- 252
Compensation expense related to stock
issuance 165 165
Change in:
Accounts receivable (1,977) (1,333)
Inventories (118) (83)
Prepaid expenses and deposits 211 (1,037)
Other assets (275) --
Income taxes receivable/payable 1,144 1,553
Accounts payable 467 4,245
Accrued payroll and related benefits 710 1,064
Accrued interest payable (235) (831)
Other accrued expenses 188 (1,649)
-------- --------
Net cash provided by operating
activities 5,626 9,808
-------- --------
Investing activities:
Additions to property and equipment (27,769) (5,619)
Issuance of note receivable (17,112) (225)
Deposit for acquisition of hotel (1,980) --
Other, net (283) (535)
-------- --------
Net cash used in investing activities (47,144) (6,379)
-------- --------
Financing activities:
Proceeds from issuance of common stock under
employee stock purchase plan 77 --
Net proceeds from initial public offering
of common stock 81,659 --
Proceeds from note payable to bank 1,925 8,680
Repayment of note payable to bank (3,000) (7,180)
Proceeds from long-term debt 32,971 --
Repayment of long-term debt (68,319) (832)
Payments to affiliate (1,133) --
CAVANAUGHS HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the six months ended June 30, 1998 and 1999
(in thousands)
1998 1999
-------- --------
Financing activities, continued:
Principal payments on capital lease
obligations $ (267) $ (332)
Additions to deferred financing costs (1,123) (421)
Distribution to minority interest -- (28)
-------- --------
Net cash provided by (used in)
financing activities 42,790 (113)
-------- --------
Change in cash and cash equivalents:
Net increase in cash and cash equivalents 1,272 3,316
Cash and cash equivalents at beginning of
period 4,955 4,267
-------- --------
Cash and cash equivalents at end of period $ 6,227 $ 7,583
======== ========
Supplemental disclosure of cash flow
information:
Noncash investing and financing activities:
Acquisition of property through assumption
of capital leases $ 222 $ --
Issuance of operating partnership units
for property acquisitions 3,677 --
Acquisition of property through assumption
of debt or issuance of note payable 9,904 250
Stock issued for partial acquisition of
partnership interests 879 --
Acquisition of equipment through cancel-
lation of note receivable -- 225
Conversion of operating partnership units
to common stock -- 1,559
The accompanying notes are an integral part of the consolidated
financial statements.
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 June 30, 1999, the
consolidated results of operations for the three and six months
ended June 30, 1999 and 1998 and the consolidated cash flows for
the six months ended June 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 June 30, 1998, the Company controlled and operated (through
ownership or lease with purchase option agreements) 14 hotel
properties. At June 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.
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
six-month period ended June 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 June 30,
1999, $83,980,000 is outstanding under the credit facility. The
Company was in compliance with all required covenants at
June 30, 1999.
During the six-month period ended June 30, 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. Operating income for
each segment represents revenues less direct operating expenses
of each segment. Undistributed operating expenses are not
identified by segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BUSINESS SEGMENTS, CONTINUED:
Selected information with respect to the segments is as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
Revenues:
Hotels and restaurants $ 18,316 $ 24,872 $ 30,157 $ 43,852
Entertainment, management
and services 1,008 1,097 2,026 2,426
Rental operations 1,738 2,009 3,514 3,847
-------- -------- -------- --------
$ 21,062 $ 27,978 $ 35,697 $ 50,125
======== ======== ======== ========
Operating income:
Hotels and restaurants $ 10,320 $ 13,992 $ 16,175 $ 23,852
Entertainment, management
and services 290 271 611 823
Rental operations 1,391 1,514 2,782 2,815
Undistributed operating
expenses (6,664) (9,017) (11,778) (17,810)
-------- -------- -------- --------
$ 5,337 $ 6,760 $ 7,790 $ 9,680
======== ======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 considerded in the
diluted EPS computation if they were not anti-dilutive.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1999 1998 1999
------- ------- ------- -------
Numerator:
Income before extra-
ordinary item and
cumulative effect of
change in accounting
principle $ 2,652 $ 3,013 $ 2,565 $ 3,508
Extraordinary item (530) -- (530) (10)
Cumulative effect of change
in accounting principle -- -- -- (133)
------- ------- ------- -------
Net income - basic 2,122 3,013 2,035 3,365
Income effect of dilutive
OP Units 85 87 82 98
------- ------- ------- -------
Net income - diluted $ 2,207 $ 3,100 $ 2,117 $ 3,463
======= ======= ======= =======
Denominator:
Weighted-average shares
outstanding - basic 12,588 12,690 9,836 12,676
Effect of dilutive
OP Units 332 377 241 386
Effect of dilutive common
stock options (A) (A) (A) (A)
------- ------- ------- -------
Weighted-average shares
outstanding - diluted 12,920 13,067 10,077 13,062
======= ======= ======= =======
Earnings Per Share - basic
and diluted:
Income per share before
extraordinary item and
cumulative effect of
change in accounting
principle $ 0.21 $ 0.24 $ 0.26 $ 0.28
Extraordinary item (0.04) -- (0.05) nil
Cumulative effect of
change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income per share -
basic and diluted $ 0.17 $ 0.24 $ 0.21 $ 0.27
======= ======= ======= =======
(A) For the three and six months ended June 30, 1999, 1,000,385
stock options were outstanding. For the three and six
months ended June 30, 1998, 775,395 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.
CAVANAUGHS HOSPITALITY CORPORATION
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
-------
The following discussion and analysis addresses the results of
operations for the Company for the three and six months ended June 30,
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 87.5% of total
revenue in the six months ended June 30, 1999 and increased 45.4% from
$30.2 million in 1998 to $43.9 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 $75.60 in 1998 to $80.74 in
1999, a 6.8% increase. Comparable Hotel revenue per available room
(REVPAR) declined 3.1% from $43.78 in 1998 to $42.43 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 six months
ended June 30, 1999, entertainment, management and services accounted
for 4.8% of total revenues and rental operations accounted for 7.7% 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
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:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1999 1998 1999
------ ------ ----- -----
Revenues:
Hotels and restaurants 87.0% 88.9% 84.5% 87.5%
Entertainment, management
and services 4.8 3.9 5.7 4.8
Rental operations 8.2 7.2 9.8 7.7
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Direct operating expenses 43.0% 43.6% 45.2% 45.2%
Undistributed operating expenses:
Selling, general and
administrative 11.6 12.2 11.8 13.4
Property operating costs 10.3 10.9 11.1 12.2
Corporate expenses 3.0 2.1 2.4 2.1
Depreciation and amortization 6.7 7.0 7.7 7.8
----- ----- ----- -----
Total undistributed operating
expenses 31.6 32.2 33.0 35.5
Operating income 25.3 24.2 21.8 19.3
Interest expense (net) 5.9 8.0 10.9 8.9
Income before income taxes, extra-
ordinary item and cumulative
effect of change in accounting
principle 19.1 15.8 10.9 10.3
Income tax provision 6.5 5.0 3.7 3.3
----- ----- ----- -----
Income before extraordinary item
and cumulative effect of change
in accounting principle 12.6% 10.8% 7.2% 7.0%
===== ===== ===== =====
Comparable Hotels:
REVPAR $48.89 $48.83 $43.78 $42.23
ADR $77.22 $81.23 $75.60 $80.74
Occupancy 63.3% 60.1% 57.9% 52.6%
RESULTS OF OPERATIONS
---------------------
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED
JUNE 30, 1998
Total revenues increased $14.4 million, or 40.4%, from $35.7 million
in 1998 to $50.1 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 $13.7 million, or 45.4%,
from $30.2 million in 1998 to $43.9 million in 1999. ADR for the
Comparable Hotels increased $5.14, or 6.8%, from $75.60 in 1998 to
$80.74 in 1999. Comparable Hotel REVPAR decreased $1.35, or 3.1% from
$43.78 in 1998 to $42.43 in 1999. Available room nights increased
58.7% in 1999. Total room revenue increased 45.6% from $18.6 million
in 1998 to $27.0 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 $400,000, or
19.7% 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 9.5%, to $3.8 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 $6.5 million, or 40.3%, from $16.1
million in 1998 to $22.6 million in 1999, primarily due to the
increase in the number of hotel guests served and the addition of five
(5) hotels. Direct operating expenses as a percentage of total
revenues remained constant at 45.2% in both 1998 and 1999.
Total undistributed operating expenses increased $6.0 million, or
51.2%, from $11.8 million in 1998 to $17.8 million in 1999. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 58.9% from $4.2 million in
1998 to $6.7 million in 1999, and depreciation and amortization, which
increased 42.5% from $2.7 million in 1998 to $3.9 million in 1999.
Total undistributed operating expenses as a percentage of total
revenues increased 2.5% from 33.0% in 1998 to 35.5% 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.
Operating income increased $1.9 million, or 24.3%, from $7.8 million
in 1998 to $9.7 million in 1999. As a percentage of total revenues,
operating income decreased from 21.8% in 1998 to 19.3% in 1998.
The increase in operating income is due primarily to the addition of
five (5) hotels.
Interest expense increased $566,000, or 14.0%, from $4.1 million in
1998 to $4.6 million in 1999. This increase is primarily related to
additional debt incurred with the acquisition of the five (5) hotels.
Income tax provision was $1.7 million in 1999 versus $1.3 million in
1998. The increase in income tax provision is due to the increase in
the income before income taxes. The effective income tax rate was 32%
for 1999 and 34% 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 $0.9 million from $2.6 million in 1998
to $3.5 million in 1999. This increase is primarily attributed to the
addition of five (5) hotels in the period.
Net income increased $1.3 million, or 65.4%, from $2.0 million in 1998
to $3.4 million in 1999.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED
JUNE 30, 1998
Total revenues increased $6.9 million, or 32.8%, from $21.1 million in
1998 to $28.0 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 $6.6 million, or 35.8%,
from $18.3 million in 1998 to $24.9 million in 1999. ADR for the
Comparable Hotels increased $4.01, or 5.2%, from $77.22 in 1998 to
$81.23 in 1999. Comparable Hotel REVPAR decreased $0.06, or 0.1% from
$48.89 in 1998 to $48.83 in 1999. Available room nights increased
48.3% in 1999. Total room revenue increased 34.0% from $11.7 million
in 1998 to $15.7 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 $89,000, or
8.8% 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 15.6%, to $2.0 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 $3.1 million, or 34.7%, from $9.1
million in 1998 to $12.2 million in 1999, primarily due to 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 43.0% in 1998 to 43.6% in 1999.
Total undistributed operating expenses increased $2.4 million, or
35.3%, from $6.7 million in 1998 to $9.0 million in 1999. Total
undistributed operating expenses include selling, general and
administrative expenses, which increased 39.4% from $2.4 million in
1998 to $3.4 million in 1999, and depreciation and amortization, which
increased 38.9% from $1.4 million in 1998 to $2.0 million in 1999.
Total undistributed operating expenses as a percentage of total
revenues increased 0.6% from 31.6% in 1998 to 32.2% 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.
Operating income increased $1.4 million, or 26.6%, from $5.3 million
in 1998 to $6.8 million in 1999. As a percentage of total revenues,
operating income decreased from 25.3% in 1998 to 24.2% in 1998. The
increase in operating income is due primarily to the addition of five
(5) hotels.
Interest expense increased $1.0 million, or 72%, from $1.3 million in
1998 to $2.3 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 $1.4 million in 1999. The effective income
tax rate for 1999 was 32% and 34% in 1998.
Income before extraordinary item and cumulative effect of change in
accounting principle increased $0.4 million from $2.7 million in 1998
to $3.0 million in 1999. This increase is primarily attributed to the
addition of five (5) hotels in the period.
Net income increased $891,000, or 42.0%, from $2.1 million in 1998 to
$3.0 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
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 June 30, 1999, the Company had $7.6 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 $6.2 million in owned and joint venture
properties through June 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 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,
(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 June 30, 1999, the Company
had $84.0 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
June 30, 1999.
In addition to the Revolving Credit Facility, as of June 30, 1999, the
Company had debt and capital leases outstanding of approximately $47.2
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.
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
September 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 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 operations.
Part II - Other Information
---------------------------
ITEMS 1, 2, 3 and 5 of Part II are omitted from this report as they
are not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders on April 19, 1999, the following
actions were taken:
Total Outstanding Shares: 12,660,847
1. Election of Directors
Votes
Name Votes For PCT Against
------------------- ---------- --- -------
Richard L. Barbieri 11,044,096 87% 2,975
Robert G. Templin 11,044,096 87% 2,975
2. Ratification of PricewaterhouseCoopers LLP as independent auditors
for the year ending December 31, 1999
Votes Votes
Votes For PCT Against Abstained
---------- --- ------- ---------
11,040,596 87% 1,082 5,413
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 June 30, 1999.
CAVANAUGHS HOSPITALITY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
CAVANAUGHS HOSPITALITY CORPORATION
(Registrant)
Date: August 10, 1999 By: /s/ Arthur M. Coffey
-------------------- --------------------------------
Arthur M. Coffey, Executive Vice
President and Chief Financial
Officer