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, 2000
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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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WESTCOAST HOSPITALITY CORPORATION
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(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
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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 April 30, 2000, there were 12,938,573 shares of the Registrant's common
stock outstanding.
WESTCOAST HOSPITALITY CORPORATION
Form 10-Q
For the Quarter Ended March 31, 2000
INDEX
Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets --
December 31, 1999 and March 31,2000 1-2
- Consolidated Statements of Operations --
Three Months Ended March 31, 1999 and 2000 3-4
- Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1999 and 2000 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
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 1999 and March 31, 2000 (in thousands, except share data)
December 31, March 31,
1999 2000
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,357 $ 4,072
Accounts receivable 7,548 7,454
Income taxes refundable -- 541
Inventories 1,110 1,069
Prepaid expenses and deposits 883 1,225
------- --------
Total current assets 13,898 14,361
Property and equipment, net 243,237 243,237
Intangible assets, net 29,613 29,532
Other assets, net 22,384 22,306
-------- --------
Total assets $309,132 $309,436
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,739 $ 2,712
Accrued payroll and related benefits 3,024 2,545
Income taxes payable 457 --
Accrued interest payable 721 906
Other accrued expenses 8,994 5,659
Long-term debt, due within one year 7,445 2,749
Capital lease obligations, due within
one year 623 597
-------- --------
Total current liabilities 26,003 15,168
Long-term debt, due after one year 57,516 54,212
Notes payable to bank 101,263 116,400
Capital lease obligations, due after
one year 1,103 1,051
Deferred income taxes 15,617 15,106
Minority interest in partnerships 2,798 2,731
-------- --------
Total liabilities 204,300 204,668
-------- --------
1
WESTCOAST HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED
December 31, 1999 and March 31, 2000
(in thousands, except share data)
December 31, March 31,
1999 2000
------------ ---------
Commitments and contingencies
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; 12,925,276 and
12,937,726 shares issued and outstanding 129 129
Additional paid-in capital 83,761 83,844
Retained earnings 20,942 20,795
-------- --------
Total stockholders' equity 104,832 104,768
-------- --------
Total liabilities and stockholders'
equity $309,132 $309,436
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
2
WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF
OPERATIONS(UNAUDITED) for the three months ended March 31, 1999 and 2000 (in
thousands, except per share data)
1999 2000
---- ----
Revenues:
Hotels and Restaurants $ 18,980 $ 22,507
Franchise, Central Services and Development -- 896
TicketsWest.com 678 1,416
Real Estate Division 2,366 2,317
Corporate Services 124 73
-------- --------
22,148 27,209
-------- --------
Operating expenses:
Direct:
Hotels and Restaurants 15,317 18,385
Franchise, Central Services and Development -- 249
TicketsWest.com 330 1,114
Real Estate Division 1,130 1,096
Corporate Services 59 43
Depreciation and amortization:
Hotels and Restaurants 1,461 1,888
Franchise, Central Services and Development -- 100
TicketsWest.com 17 75
Real Estate Division 334 326
Corporate Services 119 169
-------- --------
Total direct expenses 18,767 23,445
Undistributed corporate expenses 461 600
-------- --------
Total expenses 19,228 24,045
-------- --------
Operating income 2,920 3,164
Other income (expense):
Interest expense (2,280) (3,514)
Interest income 55 52
Other income 5 3
Equity in investments -- 7
Minority interest in partnerships 50 59
-------- --------
Income (loss) before income taxes, extra-
ordinary item and cumulative effect of
accounting change 750 (229)
Income tax provision (benefit) 255 (82)
-------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle 495 (147)
3
WESTCOAST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED), CONTINUED for the three
months ended March 31, 1999 and 2000 (in thousands, except per share data)
1999 2000
---- ----
Extraordinary expense, net of income tax benefit $ (10) $ --
Cumulative effect of change in accounting
principle, net of income tax benefit (133) --
-------- --------
Net income (loss) $ 352 $ (147)
======== ========
Income (loss) per share - basic and diluted:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle $ 0.04 $ (0.01)
Extraordinary item nil --
Cumulative effect of accounting change (0.01) --
-------- --------
Net income (loss) per share $ 0.03 $ (0.01)
======== ========
Weighted-average common shares outstanding -
basic 12,661 12,932
======== ========
Weighted-average common shares outstanding -
diluted 13,057 13,228
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
WESTCOAST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the three months ended March 31, 1999 and 2000 (in thousands)
1999 2000
---- ----
Operating activities:
Net income (loss) $ 352 $ (147)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)operating activities:
Depreciation and amortization 1,931 2,558
Minority interest in partnerships (50) (59)
Equity in investments -- 7
Extraordinary item 10 --
Cumulative effect of change in accounting
principle 133 --
Change in:
Accounts receivable (447) 94
Inventories (14) 41
Prepaid expenses and deposits (669) (342)
Income taxes receivable/payable 208 (1,509)
Accounts payable (714) (2,027)
Accrued payroll and related benefits 654 (479)
Accrued interest payable (16) 185
Other accrued expenses 1,017 (3,335)
-------- --------
Net cash provided by (used in)operating
activities 2,395 (5,013)
-------- --------
Investing activities:
Additions to property and equipment (3,237) (2,001)
Cash paid for acquisition of property and
equipment or subsidiaries, net of cash
received -- (91)
Issuance of note receivable (225) --
Other, net (262) 110
-------- --------
Net cash used in investing activities (3,724) (1,982)
-------- --------
Financing activities:
Proceeds from note payable to bank 7,680 15,137
Repayment of note payable to bank (7,180) --
Repayment of long-term debt (437) (8,000)
Principal payments on capital lease obligations (182) (164)
Proceeds from issuance of common stock under
employee stock purchase plan -- 83
Additions to deferred financing costs (400) (338)
Other, net -- (8)
-------- --------
Net cash provided by (used in)
financing activities (519) 6,710
-------- --------
5
WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) for the three months ended March 31, 1999 and 2000 (in thousands)
1999 2000
---- ----
Change in cash and cash equivalents:
Net decrease in cash and cash
equivalents $ (1,848) $ (285)
Cash and cash equivalents at beginning of
period 4,267 4,357
-------- --------
Cash and cash equivalents at end of period $ 2,419 $ 4,072
======== ========
Supplemental disclosure of cash flow information:
Noncash investing and financing activities:
Acquisition of property through assumption
of capital leases -- 87
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
WESTCOAST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY INFORMATION:
The unaudited consolidated financial statements included herein have
been prepared by WestCoast 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, 1999 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, 1999 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, 2000 and the consolidated results of
operations and cash flows for the three months ended March 31, 2000 and
1999. 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, 1999, the Company controlled and operated (through
ownership or lease with purchase option agreements) 19 hotel
properties. As of March 31, 2000, the Company has ownership interests
and operated 24 hotel properties, managed an additional 9 properties
and franchised an additional 13 properties, totaling 46 hotels in 9
states, including Alaska, Arizona, California, Hawaii, Idaho, Montana,
Oregon, Utah and Washington. Additionally, the Company provides
computerized ticketing for entertainment events and arranges Broadway
and other entertainment event productions. Also, during the second
quarter of 1999, the Company launched 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
to events through the website. The Company owns and manages ticketing
operations in Colorado, Idaho, Montana, Oregon and Washington. The
Company also leases retail and office space in buildings owned by the
Company and manages residential and commercial properties for others in
Idaho, Montana and Washington. The Company's operations are segregated
into four
7
WESTCOAST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ORGANIZATION, CONTINUED:
operating segments: (1) Hotels and Restaurants,
(2) TicketsWest.com (entertainment and e-commerce), (3) Real Estate
Division and (4) Franchise, Central Services and Development.
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 consortium of banks. In February 1999, the
credit facility was increased to $100 million. In December 1999, in
connection with the WestCoast Hotels Inc. acquisition, the credit
facility was amended to increase the total amount available under the
facility to $120 million. The credit facility is collateralized by
certain property and requires that the Company maintain certain
financial ratios, minimum levels of cash flows and restricts the
payment of dividends. Any outstanding borrowings bear interest based on
the prime rate or LIBOR, plus 180 to 250 basis points depending on the
total funded debt levels. The credit facility matures in May 2003. At
March 31, 2000, $116,400,000 is outstanding under the credit facility.
The Company was in compliance with all required covenants at March 31,
2000.
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.
8
WESTCOAST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BUSINESS SEGMENTS:
The Company has four operating segments: (1) Hotels and Restaurants;
(2) TicketsWest.com (entertainment and e-commerce); (3) Real Estate
Division and (4) Franchise, Central Services and Development. The
Franchise, Central Services and Development segment represents the
franchise and marketing division of the Company, which was acquired
with the WestCoast Hotels, Inc. purchase in December 1999. Therefore no
operations are reported for this segment for the three months ended
March 31, 1999. Corporate services and other consists primarily of
miscellaneous revenues and expenses, cash and cash equivalents, certain
receivables and certain property and equipment, which are not
specifically associated with an operating segment.
TicketsWest.com has significant inter-segment revenues, which are
eliminated in the consolidated financial statements. Management reviews
and evaluates the operations of TicketsWest.com including the
inter-segment revenues. Therefore, the total revenues, including
inter-segment revenues are included in the segment information below.
Management reviews and evaluates the operating segments exclusive of
interest expense. Therefore, interest expense is not allocated to the
segments.
Selected information with respect to the segments is as follows (in
thousands):
Three Months Ended
March 31,
-------------------
1999 2000
---- ----
Revenues:
Hotels and Restaurants $ 18,980 $ 22,507
Franchise, Central Services and
Development -- 896
TicketsWest.com 858 1,747
Less: inter-segment revenues (180) (331)
Real Estate Division 2,366 2,317
Corporate Services and other 124 73
-------- --------
$ 22,148 $ 27,209
======== ========
Operating income:
Hotels and Restaurants $ 2,202 $ 2,234
Franchise, Central Services and
Development -- 547
TicketsWest.com 331 227
Real Estate Division 902 895
Corporate Services and other (515) (739)
-------- --------
$ 2,920 $ 3,164
======== ========
9
WESTCOAST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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,
-------------------
1999 2000
---- ----
Numerator:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle $ 495 $ (147)
Extraordinary item (10) --
Cumulative effect of accounting change (133) --
-------- --------
Net income (loss) - basic 352 (147)
Income (loss) effect of dilutive OP
Units 11 (16)
-------- --------
Net income (loss) - diluted $ 363 $ (163)
======== ========
Denominator:
Weighted-average shares outstanding -
basic 12,661 12,932
Effect of dilutive OP units 396 296
Effect of dilutive common stock options (A) (A)
-------- --------
Weighted-average shares outstanding -
diluted 13,057 13,228
======== ========
Earnings (loss) per share - basic and diluted:
Income (loss) per share before extra-
ordinary item and cumulative effect
of change in accounting principle $ 0.04 $ (0.01)
Extraordinary item nil --
Cumulative effect of accounting change (0.01) --
-------- --------
Net earnings (loss) per share - basic
and diluted $ 0.03 $ (0.01)
======== ========
(A) At March 31, 1999 and 2000, 986,143 and 1,085,881 stock options
were outstanding, respectively. 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 and 2000 because they are
anti-dilutive.
10
WESTCOAST HOSPITALITY CORPORATION
Part I - Financial Information
ITEM II. QUARTERLY INFORMATION: 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, 2000. 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, 1999, 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, third party management contracts,
and other sources, including telephone, guest services, banquet room rentals,
gift shops and other amenities. Hotel revenues accounted for 82.7% of total
revenue in the three months ended March 31, 2000 and increased 18.6% from $19.0
million in 1999 to $22.5 million in 2000. This increase was primarily the result
of the addition of the acquisition of WestCoast Hotels Inc., which had an
effective date of December 31, 1999. The balance of the Company's revenues is
derived from its Franchise, Central Services and Development, TicketsWest.com,
Real Estate Division, and Corporate Services divisions. These revenues are
generated from franchise fees, ticket distribution handling fees, Internet
services, real estate management fees, sales commissions and rents. In 1999
Franchise, Central Services and Development was not an operating segment of the
Company and was added as a business segment with the acquisition of WestCoast
Hotels Inc. Franchise, Central Services and Development accounted for 3.3% of
the Company's revenue for the three months ended March 31, 2000, TicketsWest.com
accounted for 5.2% and Real Estate Division accounted for 8.5% of total revenues
for the period.
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
11
economic conditions, degree of competition with other hotels in their respective
market areas and, in the case of occupancy levels, changes in travel patterns.
For the year ended December 31, 1999, the Company redefined
its operating segments as (1) Hotels and Restaurants; (2) TicketsWest.com
(entertainment and e-commerce); (3) Real Estate Division, and (4) Franchise,
Central Services and Development. The Franchise, Central Services and
Development segment represents the franchise and marketing division of the
Company, which was acquired with the WestCoast Hotels, Inc. purchase. Due to the
timing of the WestCoast Hotels, Inc. acquisition, no operations are reported for
this segment for the three months ended March 31, 1999. Subsequent to the fourth
quarter of 1999, the Company also identified most selling, general and
administrative costs, property operating costs and depreciation and amortization
expenses that were previously undistributed to the segments as costs of the
respective segments. Accordingly, the presentations of the consolidated
statements of operations for the three months ended March 31, 1999 presented
have been reclassified to reflect the 2000 classifications.
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,
1999 2000
Revenues
Hotels & Restaurants 85.7% 82.7%
Franchise, Central Services & Development -- 3.3
TicketsWest.com 3.1 5.2
Real Estate Division 10.7 8.5
Corporate Services 0.5 0.3
--------- ---------
Total Revenue 100.0% 100.0%
--------- ---------
Direct Operating Expenses 84.7% 86.2%
Undistributed Corporate Operating Expense 2.1 2.2
Operating Income 13.2 11.6
Interest Expense 10.3 12.9
Income Tax Provision (benefit) 1.2 (0.3)
Net Income (loss) 1.6% (0.5%)
Hotel Statistics (1)
Hotels open at end of period 19 46
Available Rooms 3,933 8,789
REVPAR (2)(3) $ 46.44 $ 46.98
ADR (4) $ 82.10 $ 83.51
Occupancy (5) 56.6% 56.3%
- -------------------
12
(1) Hotel statistics for the three months ended March 31, 2000, are presented
for Combined Hotels. Combined Hotels includes hotels owned, managed, or
franchised by the Company in the current period. March 1999 data is stated on a
pro forma same store basis.
(2) REVPAR represents the total room revenues divided by total available rooms,
net of rooms out of service due to significant renovations.
(3) Rooms, which were under renovation, were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the opinion of
management, excluding these rooms did not have a material impact on REVPAR and
average occupancy percentage.
(4) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(5) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of rooms
available multiplied by the number of days in the reported period.
13
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED MARCH
31, 1999
Total revenues increased $5.1 million, or 22.9%, from $22.1 million in
1999 to $27.2 million in 2000. This increase is attributed primarily to revenue
generated from the acquisition of WestCoast Hotels Inc. on December 31, 1999,
the acquisition of Oregon Ticket Company d.b.a. Fastixx, and Colorado
Neighborhood Box Office during the fourth quarter of 1999.
Total hotel and restaurant revenues increased $3.5 million, or 18.6%,
from $19.0 million in 1999 to $22.5 million in 2000. Combined Hotel ADR
increased $1.41, or 1.7%, from $82.10 in 1999 to $83.51 in 2000. Combined Hotel
REVPAR increased $0.54, or 1.2%, from $46.44 in 1999 to $46.98 in 2000. The
Company completed the acquisition of WestCoast Hotels, Inc., effective December
31, 1999 which adds 258,055 roomnights under ownership, and 1,511,830 room
nights which the Company has management or franchise contracts annually. Due to
the timing of the WestCoast Hotels, Inc. acquisition, it did not affect 1999
operating results.
Franchise, Central Services and Development revenues were $0.9 million
for the quarter and was a new operating segment in 2000.
TicketsWest.com revenues increased $0.7 million, or 109.1%, from $0.7
million in 1999 to $1.4 million in 2000. TicketsWest.com revenue increased
primarily from increased shows presented by the Company, increased attendance at
entertainment events and the addition of revenue from the expansion of the
Company through the acquisition of Fastixx, Colorado Neighborhood Box Office,
and the expansion of Internet services and fees.
Real Estate Division revenue decreased $49 thousand, or 2.1%, from $2.4
million in 1999 to $2.3 million in 2000 primarily from lease contracts
termination and renewal timing in the Company's office and retail buildings.
Direct operating expenses increased $ 4.7 million, or 24.9 %, from
$18.8 million in 1999 to $23.4 million in 2000, primarily due to the increase in
the number of hotel guests served, the addition of WestCoast Hotels Inc.
operating expenses and assimilation costs, and the increased costs of
entertainment presented by the TicketsWest.com division. This represents an
increase in direct operating expenses as a percentage of total revenues from
84.7 % in 1999 to 86.2% in 2000
Total undistributed corporate operating expenses increased $0.1
million, or 30.5%, from $0.5 million in 1999 to $0.6 million in 2000. Total
undistributed corporate operating expenses as a percentage of total revenues
increased 0.1 % from 2.1% in 1999 to 2.2 % in 2000.
Operating income increased $0.3 million, or 8.3 %, from $2.9 million in
1999 to $3.2 million in 2000. As a percentage of total revenues, operating
income decreased from 13.2 % in 1999 to 11.6 % in 2000. This decrease is
primarily due to the increase in direct operating expenses associated with the
assimilation and acquisition of WestCoast Hotels Inc..
14
Interest expense increased $1.2 million, or 54.1%, from $2.3 million in
1999 to $3.5 million in 2000. This increase is primarily related to borrowings
associated with the acquisition of WestCoast Hotels Inc. and an increase in the
weighted average interest rate charged the Company for its variable interest
debt.
Income tax provision declined 132.3%, from a provision of $0.3 million
in 1999 to a benefit of $0.1 million in 2000, due to the decrease in income
before taxes. The effective income tax provision rate was 34.0% and 36.0% for
1999 and 2000 respectively.
Net income decreased $0.5 million, or 141.7%, from $0.4 million in 1999
to a loss of $0.1 million in 2000. Earnings per share before extraordinary item
and cumulative effect of accounting change, decreased from $0.04 in 1999 to a
loss of $0.01 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of liquidity have been
cash on hand, cash generated by operations and borrowings under an $120.0
million revolving credit facility. Cash generated by operations in excess of
operating expenses is used for capital expenditures and to reduce amounts
outstanding under the Revolving Credit Facility.
The Company's short-term capital needs include food and beverage
inventory, payroll and the repayment of interest expense on outstanding mortgage
indebtedness. Historically, the Company has met these needs through internally
generated cash. The Company's long-term capital needs include funds for property
acquisitions, scheduled debt maturities and renovations and other non-recurring
capital improvements. The Company anticipates meeting its future long-term
capital needs through the additional debt financing secured by the Hotels, by
unsecured private or public debt offerings or by additional equity offerings or
the issuances of OP Units, along with cash generated from internal operations.
At March 31, 2000, the Company had $4.1 million in cash and cash
equivalents. The Company has made extensive capital expenditures over the last
three years, $6.2 million, $123.6 million, $63.3 million and $2.2 million in
owned and joint venture properties in 1997, 1998, 1999, and the three months
ended March 31, 2000 respectively. These expenditures included guest room,
lounge and restaurant renovations, public area refurbishment, telephone and
computer system upgrades, tenant improvements, property acquisitions,
construction, and corporate expenditures and were funded from the initial public
offering, issuance of operating partnership units, operating cash flow and debt.
The Company establishes reserves for capital replacement in the amount of 4.0%
of the prior year's actual gross hotel income to maintain the Hotels at
acceptable levels. Acquired hotel properties have a separate capital budget for
purchase, construction, renovation, and branding costs. Capital expenditures
planned for Hotels in 2000 are expected to be approximately $8.4 million.
Management believes the consistent renovation and upgrading of the Hotels and
other properties is imperative to its long-term reputation and customer
satisfaction.
15
To fund its acquisition program and meet its working capital needs, the
Company has a Revolving Credit Facility. The Revolving Credit Facility has a
term ending May 2003 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 325 basis points, depending on the Company's ratio
of EBITDA-to-total funded debt. The Revolving Credit Facility allows for the
Company to draw funds based on the trailing 12 months performance on a pro forma
basis for both acquired and owned properties. Funds from the Revolving Credit
Facility may be used for acquisitions, renovations, construction and general
corporate purposes. The Company believes the funds available under the Revolving
Credit Facility and additional debt instruments will be sufficient to meet the
Company's near term growth plans. The Operating Partnership is the borrower
under the Revolving Credit Facility. The obligations of the Operating
Partnership under the Revolving Credit Facility are fully guaranteed by the
Company. Under the Revolving Credit Facility, the Company is permitted to grant
new deeds of trust on any future acquired properties. Mandatory prepayments are
required to be made in various circumstances including the disposition of any
property, or future acquired property, by the Operating Partnership.
The Revolving Credit Facility contains various representations,
warranties, covenants and events of default deemed appropriate for a Credit
Facility of similar size and nature. Covenants and provisions in the definitive
credit agreement governing the Revolving Credit Facility include, among other
things, limitations on: (i) substantive changes in the Company's and Operating
Partnership's current business activities, (ii) liquidation, dissolution,
mergers, consolidations, dispositions of material property or assets involving
the Company and its affiliates or their assets, as the case may be, and
acquisitions of property or assets of others, (iii) the creation or existence of
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 provides 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,
2000, the Company had $116.4 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, 2000.
In addition to the Revolving Credit Facility, as of March 31, 2000, the
Company had debt and capital leases outstanding of approximately $58.6 million
consisting of primarily variable and fixed rate debt secured by individual
properties.
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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 seasonal in nature, with the months from May
through October generally accounting for a greater portion of annual revenues
than the months from November through April. For example, for the year ended
December 31, 1999, our revenues in the first through fourth quarters were 20.1%,
25.4%, 30.7% and 23.8%, respectively, of our total revenue for such year and our
net income for the first through fourth quarters was 4.4%, 37.5%, 48.9% and
9.2%, respectively, of our total net income for that year. Quarterly earnings
also may be adversely affected by events beyond our control, such as extreme
weather conditions, economic factors and other considerations affecting travel.
INFLATION
The effect of inflation, as measured by fluctuations in the Consumer
Price Index, has not had a material impact on the Company's revenues or net
income during the periods under review.
YEAR 2000 ASSESSMENT
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 Company completed its assessment, modification or replacement of
systems, which it determined would not be compliant prior to December 31, 1999.
We have not experienced any significant system failures from the Year 2000
problem and do not anticipate any significant problems will arise in the future.
The costs to complete the evaluation, modifications, and replacement of systems
not compliant with the Year 2000 were not significant. The main system that was
replaced was the Company's payroll system, which had been scheduled to be
replaced for reasons other than the Year 2000 problem.
Due to the complexity of the various computer systems, problems may
still arise related to the Year 2000 problem that have not been exposed or
anticipated. The risks associated with these potential system failures are
difficult to measure. The Company cannot guarantee that its efforts will prevent
all consequences and also relies on third party vendors to correct any problems
in their systems, which could affect the Company.
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Part II - Other Information
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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
The Company filed a report on Form 8-K on January 19, 2000 for
the acquisition of the stock of WestCoast Hotels Inc.
The Company filed a report of Form 8-K/a on March 20, 2000 that
provided the pro forma financial information for the acquisition
of the stock of WestCoast Hotels, Inc.
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WESTCOAST 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.
WESTCOAST HOSPITALITY CORPORATION
(Registrant)
Date: May 12, 2000 By: /s/ Arthur M. Coffey
-----------------------------------
Arthur M. Coffey, Executive Vice
President and Chief Financial
Officer