10-Q 1 form10q_10884.txt WESTCOAST HOSPITALITY CORPORATION FORM 10-Q ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15)d OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 2001, there were 12,959,700 shares of the Registrant's common stock outstanding. ================================================================================ WESTCOAST HOSPITALITY CORPORATION Form 10-Q For the Quarter Ended September 30, 2001 INDEX Part I - Financial Information Item 1 - Financial Statements: - Consolidated Balance Sheets -- September 30, 2001 and December 31, 2000 3-4 - Consolidated Statements of Income -- Three and Nine Months Ended September 30, 2001 and 2000 5-6 - Consolidated Statements of Cash Flows -- Nine Months Ended September 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 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) September 30, 2001 and December 31, 2000 (in thousands, except share data) September 30, December 31, 2001 2000 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,587 $ 3,476 Accounts receivable 6,761 6,232 Income taxes refundable -- 5 Inventories 1,159 1,130 Prepaid expenses and deposits 1,355 733 -------- -------- Total current assets 12,862 11,576 Property and equipment, net 244,847 242,548 Intangible assets, net 28,255 28,897 Other assets, net 2,409 21,813 -------- -------- Total assets $308,373 $304,834 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,562 $ 3,432 Accrued payroll and related benefits 4,256 2,453 Income taxes payable 2,362 -- Accrued interest payable 798 708 Other accrued expenses 5,922 5,052 Long-term debt, due within one year 3,189 2,393 Capital lease obligations, due within one year 393 529 -------- -------- Total current liabilities 19,482 14,567 Long-term debt, due after one year 114,653 52,861 Notes payable to bank 33,100 106,500 Capital lease obligations, due after one year 365 657 Deferred income taxes 18,773 16,631 Minority interest in partnerships 3,009 2,881 -------- -------- Total liabilities 189,382 194,097 -------- -------- 3 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED September 30, 2001 and December 31, 2000 (in thousands, except share data) September 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; 12,959,700 and 12,933,106 shares issued and outstanding 130 129 Additional paid-in capital 83,966 83,845 Retained earnings 34,895 26,763 -------- -------- Total stockholders' equity 118,991 110,737 -------- -------- Total liabilities and stockholders' equity $308,373 $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 nine months ended September 30, 2001 and 2000 (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Hotels and Restaurants $ 28,224 $ 31,922 $ 78,541 $ 83,060 Franchise, Central Services and Development 1,108 866 2,571 2,593 TicketsWest 1,969 1,752 5,645 4,234 Real Estate Division 2,453 2,313 7,411 6,962 Corporate Services 90 57 246 301 -------- -------- -------- -------- 33,844 36,910 94,414 97,150 -------- -------- -------- -------- Operating expenses: Direct: Hotels and Restaurants 19,630 21,099 57,174 59,903 Franchise, Central Services and Development 500 297 1,254 868 TicketsWest 1,842 1,852 5,342 4,077 Real Estate Division 1,154 1,088 3,412 3,331 Corporate Services 48 48 132 183 Depreciation and amortization of tangible assets 2,609 2,401 7,637 7,147 Amortization of goodwill 214 215 642 647 -------- -------- -------- -------- Total direct expenses 25,997 27,000 75,593 76,156 Undistributed corporate expenses 584 319 1,756 1,486 -------- -------- -------- -------- Total expenses 26,581 27,319 77,349 77,642 -------- -------- -------- -------- Operating income 7,263 9,591 17,065 19,508 Other income (expense): Interest expense (2,961) (3,717) (9,312) (10,949) Interest income 61 72 203 201 Other income 325 135 5,133 148 Conversion expenses (25) (219) (30) (232) Equity in investments 49 75 76 97 Minority interest in partnerships (85) (111) (231) (113) -------- -------- -------- --------
5 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) for the three and nine months ended September 30, 2001 and 2000 (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Income before income taxes $ 4,627 5,826 12,904 8,660 Income tax provision 1,703 2,142 4,749 3,184 -------- -------- -------- -------- Income before extraordinary item 2,924 3,684 8,155 5,476 Extraordinary item, net of taxes -- -- (23) -- -------- -------- -------- -------- Net income $ 2,924 $ 3,684 $ 8,132 $ 5,476 ======== ======== ======== ======== Net income per share - basic and diluted $ 0.23 $ 0.28 $ 0.63 $ 0.42 ======== ======== ======== ======== Weighted-average common shares outstanding -- basic 12,960 12,964 12,951 12,948 ======== ======== ======== ======== Weighted-average common shares outstanding -- diluted 13,246 13,260 13,237 13,244 ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 6 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) for the nine months ended September 30, 2001 and 2000 (in thousands)
2001 2000 -------- -------- Operating activities: Net income $ 8,132 $ 5,476 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,279 7,794 (Gain) loss on disposition of property & equipment (1,353) 200 Gain on insurance settlement (3,782) -- Deferred income tax provision 2,142 -- Extraordinary item 9 -- Minority interest in partnerships 231 113 Equity in investments (76) (97) Compensation expense related to stock issuance 15 177 Change in: Accounts receivable (529) (2,000) Inventories (29) 18 Prepaid expenses and deposits (617) (303) Income taxes receivable/payable 2,368 601 Accounts payable (870) (2,413) Accrued payroll and related benefits 1,803 (55) Accrued interest payable 90 (21) Other accrued expenses 870 (1,415) -------- -------- Net cash provided by operating activities 16,683 8,075 -------- -------- Investing activities: Additions to property and equipment (5,573) (6,537) Cash paid for acquisitions -- (157) Proceeds from disposition of property and equipment 1,796 -- Cash received from partnership investments 67 -- Other, net (413) 348 -------- -------- Net cash used in investing activities (4,123) (6,346) -------- -------- Financing activities: Distribution to minority interest holders (102) (17) Proceeds from note payable to bank -- 15,137 Repayment of note payable to bank (73,400) (7,100) Proceeds from long-term debt 74,400 -- Repayment of long-term debt (11,812) (9,100) Proceeds from issuance of common stock under employee stock purchase plan 106 177 Principal payments on capital lease obligations (429) (519) Additions to deferred financing costs (1,212) (377) -------- -------- Net cash used in financing activities (12,449) (1,799) -------- --------
7 WESTCOAST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) for the nine months ended September 30, 2001 and 2000 (in thousands)
2001 2000 ------- ------- Change in cash and cash equivalents: Net increase (decrease) in cash and cash equivalents $ 111 $ (70) Cash and cash equivalents at beginning of period 3,476 4,357 ------- ------- Cash and cash equivalents at end of period $ 3,587 $ 4,287 ======= ======= Supplemental disclosure of cash flow information: Noncash investing and financing activities: Acquisition of property through assumption of capital leases $ -- $ 108 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 September 30, 2001 and the consolidated results of operations for the three and nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 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: At September 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. 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 an $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 $70 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 September 30, 2001, $33.1 million was outstanding under the credit facility. The Company was in compliance with all required covenants at September 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. 10 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. BUSINESS SEGMENTS, CONTINUED: Selected information with respect to the segments is as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Hotels and Restaurants $ 28,224 $ 31,922 $ 78,541 $ 83,060 Franchise, Central Services and Development 1,108 866 2,571 2,593 TicketsWest 2,230 2,141 6,488 5,242 Less: inter-segment revenues (261) (389) (843) (1,008) Real Estate Division 2,453 2,313 7,411 6,962 Corporate Services and other 90 57 246 301 -------- -------- -------- -------- $ 33,844 $ 36,910 $ 94,414 $ 97,150 ======== ======== ======== ======== Operating income: Hotels and Restaurants $ 6,556 $ 8,917 $ 15,329 $ 17,478 Franchise, Central Services and Development 506 469 1,014 1,424 TicketsWest -- (199) (37) (108) Real Estate Division 938 891 2,963 2,641 Corporate Services and other (737) (487) (2,204) (1,927) -------- -------- -------- -------- $ 7,263 $ 9,591 $ 17,065 $ 19,508 ======== ======== ======== ========
11 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. 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 Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Numerator: Income before extraordinary item $ 2,924 $ 3,684 $ 8,155 $ 5,476 Extraordinary item -- -- (23) -- -------- -------- -------- -------- Net income - basic 2,924 3,684 8,132 5,476 Income effect of dilutive OP Units 48 57 141 72 -------- -------- -------- -------- Net income - diluted $ 2,972 $ 3,741 $ 8,273 $ 5,548 ======== ======== ======== ======== Denominator: Weighted-average shares outstanding - basic 12,960 12,964 12,951 12,948 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 13,246 13,260 13,237 13,244 ======== ======== ======== ======== Earnings per share - basic and diluted: Net income per share - $ 0.23 $ 0.28 $ 0.63 $ 0.42 basic and diluted ======== ======== ======= =======
(A) At September 30, 2001 and 2000, 941,041 and 1,010,687 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 nine months ended September 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-dilutuve. 12 WESTCOAST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion and analysis addresses the results of operations for the Company for the three and nine months ended September 30, 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 83.4% of total revenue in the three months ended September 30, 2001 and decreased 11.6% to $28.2 million in 2001 from $31.9 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 3.3% of the Company's revenue for the three months ended September 30, 2001, TicketsWest accounted for 5.8% and Real Estate Division accounted for 7.2% 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 income as a percent of total revenues and certain other selected data:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Revenues: Hotels & Restaurants 83.4% 86.5% 83.2% 85.5% Franchise, Central Services & Development 3.3 2.4 2.7 2.7 TicketsWest 5.8 4.7 6.0 4.3 Real Estate Division 7.2 6.3 7.8 7.2 Corporate Services & Other 0.3 0.1 0.3 0.3 --------- --------- --------- --------- 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= Direct Operating Expenses 76.8 73.2% 80.0% 78.4% Undistributed Corporate Operating Expense 1.7 0.9 1.9 1.5 Operating Income 21.5 26.0 18.1 20.1 Interest Expense 8.7 10.1 9.9 11.3 Income Tax Provision 5.0 5.8 5.0 3.3 Net income 8.6% 10.0% 8.6% 5.6% Hotel Statistics (1) Hotels open at end of period 46 45 46 45 Available Rooms 8,607 8,681 8,607 8,681 REVPAR (2)(3) $62.07 $67.47 $57.37 $57.63 ADR (4) $90.27 $90.71 $89.97 $87.43 Occupancy (5) 68.8% 74.4% 63.8% 65.9%
(1) Hotel statistics for the three and nine months ended September 30, 2001, 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 SEPTEMBER 30, 2001 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues decreased $3.1 million, or 8.6%, to $33.8 million in 2001 from $36.9 million in 2000. This is attributed primarily to a decrease in hotel revenue of 11.6% which was partially offset with an increase in revenue from the TicketsWest division, the Franchise, Central Services and Development division and the Real Estate division. Total hotel and restaurant revenues decreased $3.7 million, or 11.6%, to $28.2 million in 2001 from $31.9 million in 2000. Included in hotel and restaurant revenues are revenues under hotel management contracts of $698 thousand and $670 thousand for the three months ended September 30, 2001 and 2000, respectively. Combined Hotel ADR decreased $0.44, or 0.5%, to $90.27 in 2001 from $90.71 in 2000. Combined Hotel REVPAR decreased $5.40, or 8.0%, to $62.07 in 2001 from $67.47 in 2000. The September 11, 2001 terrorist attacks had an impact on the ability and motivation of our customers to travel and utilize our hotels and restaurants. Franchise, Central Services and Development revenues increased $242 thousand, or 27.9%, to $1.1 million in 2001 from $866 thousand in 2000. TicketsWest revenues increased $217 thousand, or 12.4%, to $2.0 million in 2001 from $1.8 million in 2000. TicketsWest revenue increased primarily from increased tickets sales revenue by the Company in Colorado, increased entertainment presentations and addition of revenue from the expansion of the Company and the expansion of Internet services and fees. Real Estate Division revenue increased $140 thousand, or 6.1%, 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 $1.0 million, or 3.7%, to $26.0 million in 2001 from $27.0 million in 2000. The decrease in direct expenses is primarily from reduced labor and operating expenses in the hotels. Direct operating expenses increased as a percentage of total revenues to 76.8% in 2001 from 73.2% in 2000. Total undistributed corporate operating expenses increased $265 thousand, or 82.9%, to $584 thousand in 2001 from $319 thousand in 2000. Total undistributed corporate operating expenses as a percentage of total revenues increased 0.8 % to 1.7% in 2001 from 0.9% in 2000. Operating income decreased $2.3 million, or 24.3%, to $7.3 million in 2001 from $9.6 million in 2000. As a percentage of total revenues, operating income decreased to 21.5% in 2001 from 26.0% in 2000. This decrease is primarily due to the decrease in revenues from the Hotel and Restaurant division and the increase in direct operating expenses as a percentage revenue. 16 Interest expense decreased $756 thousand, or 20.3%, 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. Income tax provision decreased 20.5%, to $1.7 million in 2001 from $2.1 million in 2000, due to the decrease in income before taxes. The effective income tax provision rate was 36.8% for both 2001 and 2000. Net income decreased $760 thousand, or 20.6%, to $2.9 million in 2001 from $3.7 million in 2000. Earnings per share before extraordinary item and cumulative effect of accounting change, decreased to $0.23 in 2001 from $0.28 in 2000. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues decreased $2.7 million, or 2.8%, to $94.4 million in 2001 from $97.1 million in 2000. Total hotel and restaurant revenues decreased $4.5 million, or 5.4%, to $78.5 million in 2001 from $83.1 million in 2000. Included in hotel and restaurant revenues are revenues under hotel management contracts of $1.8 million and $1.7 million for the nine months ended September 30, 2001 and 2000, respectively. Combined Hotel ADR increased $2.54, or 2.9%, to $89.97 in 2001 from $87.43 in 2000. Combined Hotel REVPAR decreased $0.26, or 0.5%, to $57.37 in 2001 from $57.63 in 2000. Franchise, Central Services and Development revenues decreased $22 thousand, or 0.9%, to $2.56 million in 2001. TicketsWest revenues increased $1.4 million, or 33.3%, to $5.6 million in 2001 from $4.2 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 $449 thousand, or 6.5%, to $7.4 million in 2001 from $7.0 million in 2000 primarily from additional lease revenue from Company owned real estate. Direct operating expenses decreased $563 thousand, or 0.7%, to $75.6 million in 2001 from $76.2 million in 2000. This represents an increase in direct operating expenses as a percentage of total revenues to 80.1% in 2001 from 78.4% in 2000. Total undistributed corporate operating expenses increased $270 thousand, or 18.1%, to $1.8 million in 2001 from $1.5 million in 2000. Total undistributed corporate operating expenses as a percentage of total revenues increased 0.4% to 1.9% in 2001 from 1.5% in 2000. 17 Operating income decreased $2.4 million, or 12.5%, to $17.1 million in 2001 from $19.5 million in 2000. As a percentage of total revenues, operating income decreased to 18.1% in 2001 to 20.1% in 2000. Interest expense decreased $1.6 million, or 15.0%, to $9.3 million in 2001 from $10.9 million in 2000. This decrease is attributed primarily 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 49.2%, to $4.7 million in 2001 from $3.2 million in 2000 due to the increase in income before taxes. The effective income tax provision rate was 36.8% for 2001 and 2000. Net income increased $2.7 million, or 48.5%, to $8.1 million in 2001 from $5.5 million in 2000. Earnings per share increased to $0.63 in 2001 from $0.42 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 and August 2001, the Company refinanced a portion of the revolving credit facility with 10 year fixed rate debt and reduced the commitment to $70 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. At September 30, 2001, the Company had negative working capital of $6.6 million which was caused by the timing of certain expenses. The Company believes that its internally generated cash will be sufficient to meet normal ongoing operating cash flow needs. However, if needed, the Company has cash available under its Revolving Credit Facility. 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 September 30, 2001, the Company had $3.6 million in cash and cash equivalents. The Company has made extensive capital expenditures over the nine months and the last three years, $5.6 million, $8.5 million, $63.3 million, and $123.6 million in owned and joint venture properties in the nine months ended September 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 $4.1 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 19 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 September 30, 2001, the Company had $33.1 million outstanding under the Revolving Credit Facility and was in compliance with all required covenants. The Revolving Credit Facility restricted the Company from paying any dividends as of September 30, 2001. In addition to the Revolving Credit Facility, as of September 30, 2001, the Company had debt and capital leases outstanding of approximately $118.6 million consisting of primarily variable and fixed rate debt secured by individual properties. The Company believes that cash generated by operations will be sufficient to fund the Company's operating strategy for the foreseeable future, and that any remaining cash generated by operations, together with capital available under the Revolving Credit Facility (subject to 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 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. WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on our business, results of operations and financial condition. The recent terrorist attacks had an impact on the ability and motivation of our customers to travel and utilize our hotels and restaurants, which resulted in decreased revenues during the third quarter. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. 21 Part II - Other Information --------------------------- ITEMS 1, 2, 3, 4 and 5 of Part II are omitted from this report, as they are not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Column Financial Deed of Trust 10.2 - Column Financial Deed of Trust 10.3 - Column Financial Deed of Trust (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended September 30, 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: November 14, 2001 By: /s/ Arthur M. Coffey ----------------------------------- Arthur M. Coffey, Executive Vice President and Chief Financial Officer 23