10-Q 1 form10q_10809.txt FORM 10-Q (FOR PERIOD ENDED 06/30/2001) ================================================================================ 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, 2001 ------------- 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 --------- WESTCOAST 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 July 31, 2001, there were 12,948,396 shares of the Registrant's common stock outstanding. ================================================================================ WESTCOAST HOSPITALITY CORPORATION Form 10-Q For the Quarter Ended June 30,2001 INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: - Consolidated Balance Sheets -- June 30,2001 and December 31, 2000 3-4 - Consolidated Statements of Income -- Three and Six Months Ended June 30, 2001 and 2000 5-6 - Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2001 and 2000 7-8 - Notes to Consolidated Financial Statements 9-13 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14-21 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of 22 Security Holders Item 6 - Exhibits and Reports on Form 8-K 22 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, 2001 and December 31, 2000 (in thousands, except share data)
June 30, December 31, 2001 2000 ---------- ---------- ASSETS ------ Current assets: Cash and cash equivalents $ 2,934 $ 3,476 Accounts receivable 8,144 6,232 Income taxes refundable -- 5 Inventories 1,150 1,130 Prepaid expenses and deposits 1,959 733 ---------- ---------- Total current assets 14,187 11,576 Property and equipment, net 245,376 242,548 Intangible assets, net 28,469 28,897 Other assets, net 22,004 21,813 ---------- ---------- Total assets $ 310,036 $ 304,834 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 2,786 $ 3,432 Accrued payroll and related benefits 2,584 2,453 Income taxes payable 760 -- Accrued interest payable 921 708 Other accrued expenses 8,168 5,052 Long-term debt, due within one year 2,788 2,393 Capital lease obligations, due within one year 440 529 ---------- ---------- Total current liabilities 18,447 14,567 Long-term debt, due after one year 88,835 52,861 Notes payable to bank 64,800 106,500 Capital lease obligations, due after one year 447 657 Deferred income taxes 18,523 16,631 Minority interest in partnerships 2,971 2,881 ---------- ---------- Total liabilities 194,023 194,097 ---------- ----------
3 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED June 31, 2001 and December 31, 2000 (in thousands, except share data)
June 30, December 31, 2001 2000 ---------- ---------- Commitments and contingencies Stockholders' equity: Preferred stock - 5,000,000 shares authorized, $0.01 par value, -0- shares issued and outstanding $ -- $ -- Common stock - 50,000,000 shares authorized, $0.01 par value; 12,948,396 and 12,933,106 shares issued and outstanding 129 129 Additional paid-in capital 83,913 83,845 Retained earnings 31,971 26,763 ---------- ---------- Total stockholders' equity 116,013 110,737 ---------- ---------- Total liabilities and stockholders' equity $ 310,036 $ 304,834 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 4 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) for the three and six months ended June 30, 2001 and 2000 (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues: Hotels and Restaurants $ 27,373 $ 28,629 $ 50,317 $ 51,137 Franchise, Central Services and Development 795 831 1,463 1,727 TicketsWest 1,723 1,066 3,676 2,482 Real Estate Division 2,469 2,333 4,958 4,649 Corporate Services 58 172 156 244 ---------- ---------- ---------- ---------- 32,418 33,031 60,570 60,239 ---------- ---------- ---------- ---------- Operating expenses: Direct: Hotels and Restaurants 19,324 20,419 37,544 38,804 Franchise, Central Services and Development 416 311 754 559 TicketsWest 1,677 1,111 3,500 2,225 Real Estate Division 1,124 1,147 2,258 2,243 Corporate Services 45 91 84 135 Depreciation and amortization of tangible assets 2,535 2,400 5,028 4,744 Amortization of goodwill 214 219 428 433 ---------- ---------- ---------- ---------- Total direct expenses 25,335 25,698 49,596 49,143 Undistributed corporate expenses 588 579 1,172 1,178 ---------- ---------- ---------- ---------- Total expenses 25,923 26,277 50,768 50,321 ---------- ---------- ---------- ---------- Operating income 6,495 6,754 9,802 9,918 Other income (expense): Interest expense (2,994) (3,719) (6,351) (7,233) Interest income 60 77 142 129 Other income 3,787 9 4,808 13 Conversion expenses (3) (13) (5) (13) Equity in investments 18 15 27 22 Minority interest in partnerships (159) (60) (146) (2) ---------- ---------- ---------- ----------
5 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) for the three and six months ended June 30, 2001 and 2000 (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Income before income taxes $ 7,204 $ 3,063 $ 8,277 $ 2,834 Income tax provision 2,649 1,124 3,046 1,042 ---------- ---------- ---------- ---------- Income before extraordinary item 4,555 1,939 5,231 1,792 Extraordinary item, net of taxes (23) -- (23) -- Net income $ 4,532 $ 1,939 $ 5,208 $ 1,792 ========== ========== ========== ========== Net income per share - basic and diluted $ 0.35 $ 0.15 $ 0.40 $ 0.14 ========== ========== ========== ========== Weighted-average common shares outstanding -- basic 12,948 12,946 12,947 12,939 ========== ========== ========== ========== Weighed-average common shares outstanding -- diluted 13,244 13,242 13,243 13,235 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 6 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) for the six months ended June 30, 2001 and 2000 (in thousands)
2001 2000 ---------- ---------- Operating activities: Net income $ 5,208 $ 1,792 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,456 5,177 Gain on disposition of property & equipment (1,027) 13 Gain on insurance settlement (3,782) -- Deferred income tax provision 1,892 -- Extraordinary item 9 -- Minority interest in partnerships 146 2 Equity in investments (27) (22) Compensation expense related to stock issuance 8 165 Change in: Accounts receivable (1,888) (912) Inventories (20) 51 Prepaid expenses and deposits (1,219) (567) Income taxes receivable/payable 926 (1,515) Accounts payable (646) (1,907) Accrued payroll and related benefits 131 (498) Accrued interest payable 52 117 Other accrued expenses 3,116 (2,078) ---------- ---------- Net cash provided by (used in)operating activities 8,335 (182) ---------- ---------- Investing activities: Additions to property and equipment (3,749) (4,341) Cash paid for acquisitions -- (133) Proceeds from disposition of property and equipment 1,338 -- Cash received from partnership investments 66 -- Other, net (353) 72 ---------- ---------- Net cash used in investing activities (2,698) (4,402) ---------- ---------- Financing activities: Distribution to minority interest holders (56) (8) Proceeds from note payable to bank -- 15,137 Repayment of note payable to bank (41,700) (3,400) Proceeds from long-term debt 47,550 -- Repayment of long-term debt (11,181) (8,520) Proceeds from issuance of common stock under employee stock purchase plan 60 88 Principal payments on capital lease obligations (299) (330) Additions to deferred financing costs (553) (367) ---------- ---------- Net cash provided by (used in) financing activities (6,179) 2,600 ---------- ----------
7 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) for the six months ended June 30, 2001 and 2000 (in thousands)
2001 2000 ---------- ---------- Change in cash and cash equivalents: Net decrease in cash and cash equivalents $ (542) $ (1,984) Cash and cash equivalents at beginning of period 3,476 4,357 ---------- ---------- Cash and cash equivalents at end of period $ 2,934 $ 2,373 ========== ========== Supplemental disclosure of cash flow information: Noncash investing and financing activities: Acquisition of property through assumption of capital leases $ -- $ 87 Acquisition of property -- 277
The accompanying notes are an integral part of the consolidated financial statements. 8 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, 2000 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, 2000 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, 2001 and the consolidated results of operations for the three and six months ended June 30, 2001 and 2000 and cash flows for the six months ended June 30, 2001 and 2000. The results of operations for the periods presented may not be indicative of those which may be expected for a full year. 2. ORGANIZATION: As of June 30, 2001,the Company had ownership interests and operated 23 hotel properties, managed an additional 10 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, 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. 9 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. LONG-TERM DEBT AND LINE OF CREDIT: The Company obtained a $120 million revolving secured credit facility with a consortium of banks. In May 2001,in conjunction with refinancing a portion of the credit facility with long term debt, the Company lowered the total commitment to $90 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 325 basis points depending on the total funded debt levels. The credit facility matures in May 2003. At June 30, 2001, $64.8 million is outstanding under the credit facility. The Company was in compliance with all required covenants at June 30, 2001. 4. BUSINESS SEGMENTS: The Company has four operating segments: (1) Hotels and Restaurants; (2) TicketsWest (entertainment and e-commerce); (3) Real Estate Division and (4) Franchise, Central Services and Development. 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 has significant inter-segment revenues, which are eliminated in the consolidated financial statements. Management reviews and evaluates the operations of TicketsWest 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): 10 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. BUSINESS SEGMENTS, CONTINUED:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Hotels and Restaurants $ 27,373 $ 28,629 $ 50,317 $ 51,137 Franchise, Central Services and Development 795 831 1,463 1,727 TicketsWest 2,034 1,355 4,235 3,102 Less: inter-segment revenues (311) (289) (559) (620) Real Estate Division 2,469 2,333 4,958 4,649 Corporate Services and other 58 172 156 244 -------- -------- -------- -------- $ 32,418 $ 33,031 $ 60,570 $ 60,239 ======== ======== ======== ======== Operating income: Hotels and Restaurants $ 6,037 $ 6,324 $ 8,772 $ 8,560 Franchise, Central Services and Development 278 420 508 968 TicketsWest (61) (135) (36) 91 Real Estate Division 1,003 856 2,025 1,750 Corporate Services and other (762) (711) (1,467) (1,451) -------- -------- -------- -------- $ 6,495 $ 6,754 $ 9,802 $ 9,918 ======== ======== ======== ========
11 WESTCOAST HOSPITALITY CORPORATION 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 considered in the diluted EPS computation if they were not anti-dilutive.
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Numerator: Income before extraordinary item $ 4,555 $ 1,939 $ 5,231 $ 1,792 Extraordinary item (23) -- (23) -- -------- -------- -------- -------- Net income - basic 4,532 1,939 5,208 1,792 Income effect of dilutive OP Units 85 31 91 16 -------- -------- -------- -------- Net income - dilutive $ 4,617 $ 1,970 $ 5,299 $ 1,808 ======== ======== ======== ======== Denominator: Weighted-average shares outstanding - basic 12,948 12,946 12,947 12,939 Effect of dilutive common OP Units 286 296 286 296 Effect of dilutive common stock options (A) (A) (A) (A) -------- -------- -------- -------- Weighted-average shares outstanding - diluted 13,234 13,242 13,233 13,235 ======== ======== ======== ======== Earnings per share - basic and diluted: Net income per share - basic and diluted $ 0.35 $ 0.15 $ 0.40 $ 0.14 ======== ======== ======== ========
(A) At June 30, 2001 and 2000, 962,420 and 1,034,645 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 three and six months ended June 30, 2001 and 2000 because they are anti-dilutive. The effect of the shares which would be issued upon conversion of the convertible notes have been excluded from the calculation of diluted earnings per share because they are anti-dilutive. 12 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations". This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. There will be no effect on the Company's financial position, results of operations or cash flows of adopting SFAS 141. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company expects that adoption of SFAS 142 will increase annual operating income by approximately $856 thousand. 13 WESTCOAST HOSPITALITY CORPORATION 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 and six months ended June 30, 2001 and 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 filed by the Company for the year ended December 31, 2000. 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 84.4% of total revenue in the three months ended June 30, 2001 and decreased 4.4% to $27.4 million in 2001 from $28.6 million in 2000. The balance of the Company's revenues is derived from its Franchise, Central Services and Development, TicketsWest, 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. Franchise, Central Services and Development accounted for 2.5% of the Company's revenue for the three months ended June 30, 2001, TicketsWest accounted for 5.3% and Real Estate Division accounted for 7.6% 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 economic conditions, degree of competition with other hotels in their respective market areas and, in the case of occupancy levels, changes in travel patterns. 14 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 Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues Hotels & Restaurants 84.4% 86.7% 83.1% 84.9% Franchise, Central Services & Development 2.5 2.5 2.4 2.9 TicketsWest 5.3 3.2 6.1 4.1 Real Estate Division 7.6 7.1 8.2 7.7 Corporate Services & Other 0.2 0.5 0.2 0.4 ---------- ---------- ---------- ---------- Total Revenues 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== Direct Operating Expenses 78.2% 77.8% 81.9% 81.6% Undistributed Corporate Operating Expense 1.8 1.8 1.9 2.0 Operating Income 20.0 20.4 16.2 16.5 Interest Expense 9.2 11.3 10.5 12.0 Income Tax Provision 8.2 3.4 5.0 1.7 Net income 14.0% 5.9% 8.6% 3.0% Hotel Statistics (1) Hotels open at end of period 46 46 46 46 Available Rooms 8,607 8,789 8,607 8,789 REVPAR (2)(3) $ 60.11 $ 59.20 $ 54.99 $ 52.42 ADR (4) $ 91.61 $ 88.06 $ 89.80 $ 85.57 Occupancy (5) 65.6% 67.2% 61.2% 61.3%
(1) Hotel statistics for the three and six months ended June 30, 2001, and 2000, are presented for Combined Hotels. Combined Hotels includes hotels owned, managed, or franchised by the Company in the current period, with same hotel pro forma statistics for prior period. (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. 15 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 TO THE THREE MONTHS ENDED JUNE 30, 2000 Total revenues decreased $613 thousand, or 1.9%, to $32.4 million in 2001 from $33.0 million in 2000. This is attributed primarily to a decrease in hotel revenue of 4.4% which was partially offset with an increase in revenue from the TicketsWest division. Total hotel and restaurant revenues decreased $1.3 million, or 4.4%, to $27.4 million in 2001 from $28.6 million in 2000. Combined Hotel ADR increased $3.55, or 4.0%, to $91.61 in 2001 from $88.06 in 2000. Combined Hotel REVPAR increased $0.91, or 1.5%, to $60.11 in 2001 from $59.20 in 2000. Total Franchise, Central Services and Development revenues decreased $35 thousand, or 4.3% to $795 thousand in 2001 from $831 thousand in 2000. TicketsWest revenues increased $657 thousand, or 61.6%, to $1.7 million in 2001 from $1.1 million in 2000. TicketsWest revenue increased primarily from increased ticket sales revenue by the Company in Colorado, increased entertainment presentations and the addition of revenue from the expansion of the Company and the expansion of Internet services and fees. Real Estate Division revenue increased $137 thousand, or 5.9%, to $2.5 million in 2001 from $2.3 million in 2000 primarily from additional occupancy and lease income in the Company owned commercial office buildings. Direct operating expenses decreased $364 thousand, or 1.4 %, to $25.3 million in 2001 from $25.7 million in 2000. The decrease in direct expenses is primarily from reduced labor and operating expenses in the hotels and was offset partially by increased 800 Center and entertainment expenses in the TicketsWest Division. Direct operating expenses increased as a percentage of total revenues to 78.2 % in 2001 from 77.8% in 2000. Total undistributed corporate operating expenses increased $10 thousand, or 1.7%, to $588 thousand in 2001 from $579 thousand in 2000. Total undistributed corporate operating expenses as a percentage of total revenues was 1.8% in both periods. Operating income decreased $259 thousand, or 3.8%, to $6.5 million in 2001 from $6.8 million in 2000. As a percentage of total revenues, operating income decreased to 20.0% in 2001 from 20.4% in 2000. Interest expense decreased $726 thousand, or 19.5%, to $3.0 million in 2001 from $3.7 million in 2000. This decrease is primarily related to a reduction in the average interest rate paid on the Company's variable rate debt and reduced total debt outstanding. 16 Other income increased to $3.8 million in 2001 from $10 thousand in 2000. The other income in 2001 reflects a one time gain which is the result of the final settlement of insurance claims for a fire in the Lincoln Building. Income tax provision increased 135.6%, to $2.6 million in 2001 from $1.1 million in 2000, due to the increase in income before taxes. The effective income tax provision rate was 36.8% and 36.7% for 2001 and 2000,respectively. Net income increased $2.6 million, or 133.8%, to $4.5 million in 2001 from $1.9 million in 2000. Earnings per share before extraordinary item increased 133.3% to $0.35 in 2001 from $0.15 in 2000. Net income increased primarily from the one time gain from the insurance settlement and the reduction of interest expenses. Excluding the impact of the insurance settlement, the pro forma earnings per share would be $0.17 versus $0.15 in 2000, a 13% increase. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED JUNE 30, 1999 Total revenues increased $331 thousand, or 0.5%, to $60.6 million in 2001 from $60.2 million in 2000. Total hotel and restaurant revenues decreased $820 thousand, or 1.6%, to $50.3 million in 2001 from $51.1 million in 2000. Combined Hotel ADR increased $4.23, or 4.9%, to $89.80 in 2001 from $85.57 in 2000. Combined Hotel REVPAR increased $2.57, or 4.9%, to $54.99 in 2001 from $52.42 in 2000. Franchise, Central Services and Development revenues decreased $264 thousand, or 15.3%, to $1.5 million in 2001 from $1.7 million in 2000. TicketsWest revenues increased $1.2 million, or 48.1%, to $3.7 million in 2001 from $2.5 million in 2000. TicketsWest 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 in Colorado and the expansion of Internet services and fees. Real Estate Division revenue increased $309 thousand, or 6.7%, to $5.0 million in 2001 from $4.6 million in 2000 primarily from additional lease revenue from Company owned real estate. Direct operating expenses increased $453 thousand, or 0.9%, to $49.6 million in 2001 from $49.1 million in 2000, primarily due to the increased expenses to operate the TicketsWest Division in Colorado, increased 800 Center expenses and offset with reduced expenses in the Hotel and Restaurant Division which has improved its operating efficiencies. This represents an increase in direct operating expenses as a percentage of total revenues to 81.9% in 2001 to 81.6% in 2000. 17 Total undistributed corporate operating expenses decreased $6 thousand, or 0.5%, to $1.2 million in 2001. Total undistributed corporate operating expenses as a percentage of total revenues was 1.9%. Operating income decreased $116 thousand, or 1.2%, to $9.8 million in 2001 from $9.9 million in 2000. As a percentage of total revenues, operating income decreased to 16.2% in 2001 from 16.5% in 2000. Interest expense decreased $882 thousand, or 12.2%, to $6.4 million in 2001 from $7.2 million in 2000. This decrease is attributed to a decrease in the total debt outstanding and a decrease in the interest rates charged on the Company's variable rate debt. Income tax provision increased 192.3%, to $3.1 million in 2001 from $1.0 million in 2000, due to the increase in income before taxes. The effective income tax provision rate was 36.8% and 36.8 for 2001 and 2000 respectively. Net income increased $3.4 million, or 190.6%, to $5.2 million in 2001 from $1.8 million in 2000. Earnings per share before extraordinary item and cumulative effect of accounting change, increased to $0.40 in 2001 from $0.14 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. In May 2001, the Company refinanced a portion of the Revolving Credit Facility with 10 year fixed rate debt and reduced the commitment to $90 million. 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. 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. 18 At June 30, 2001, the Company had $2.9 million in cash and cash equivalents. The Company has made extensive capital expenditures over the last three years, $3.7 million, $8.5 million, $63.3 million and $123.6 million in owned and joint venture properties in the six months ended June 30, 2001, and the years ended December 31, 2000, 1999,and 1998. 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 2001 are expected to be approximately $6.0 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 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 19 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 June 30, 2001, the Company had $64.8 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, 2001. In addition to the Revolving Credit Facility, as of June 30, 2001, the Company had debt and capital leases outstanding of approximately $92.5 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 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, 2000, our revenues in the first through fourth quarters were 21.6%, 26.3%, 29.3% and 22.8%, respectively, of our total revenue for such year and our net income for the first through fourth quarters was (2.5)%, 33.3%, 63.3% and 5.9%, 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. 20 NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. There will be no effect on the Company's financial position, results of operations or cash flows of adopting SFAS 141. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company expects that adoption of SFAS 142 will increase annual operating income by approximately $856 thousand. 21 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 May 21, 2001, the following actions were taken: Total Outstanding Shares: 12,948,396 1. Election of Directors Votes Votes Name Votes For PCT Against Abstained ------------------ ---------- ----- --------- ----------- Donald K. Barbieri 12,135,278 93.7% 104,335 Ronald R. Taylor 12,135,278 93.7% 104,335 Arthur M. Coffey 12,135,278 93.7% 104,335 2. Ratification of PricewaterhouseCoopers LLP as independent auditors for the year ending December 31, 2001. Votes Votes Votes For PCT Against Abstained ---------- ----- --------- ----------- 12,235,687 94.5% 525 3,401 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - IDS-American Express Deed of Trust 10.2 - JP Morgan Deed of Trust 10.3 - Second Amendment to the Amended and Restated Credit Agreement (b) Reports on Form 8-K The Company filed a report on Form 8-K to show a change in the Registrant's Certifying Accountant on June 29, 2001. 22 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: August 14, 2001 By: /s/ Arthur M. Coffey ------------------------------------- Arthur M. Coffey, Executive Vice President and Chief Financial Officer 23