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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2002
OR
|_| Transition report PURSUANT TO Section 13 or 15(d) of the SECURITIES Exchange
Act OF 1934
For the transition period from _______ to _______
Commission File Number 001-13957
WESTCOAST HOSPITALITY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON
(State or Other Jurisdiction of Incorporation or Organization)
201 W. NORTH RIVER DRIVE, SUITE 100
SPOKANE WASHINGTON
(Address of Principal Executive Offices)
99201-2293
(Zip Code)
91-1032187
(I.R.S. Employer Identification No.)
Registrant's Telephone Number, Including Area Code:
(509) 459-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No ________
Page 1
The aggregate market value of the registrant's common stock held by
non-affiliates was $53,626,800 as of June 30, 2002. There were 12,994,163 shares
of the Registrant's common stock outstanding as of March 6, 2003.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the end of the Registrant's 2002
fiscal year is incorporated by reference herein in Part III.
TABLE OF CONTENTS
Part Item No. Description Page No.
I 1 Business.................................... 3
I 2 Properties.................................. 6
I 3 Legal Proceedings........................... 6
I 4 Submission of Matters to a Vote of Security
Holders .................................... 6
I 5 Market For Registrant's Common Equity and
Related Stockholder Matters ................ 7
II 6 Selected Financial Data..................... 8
II 7 Management's Discussion and Analysis Of
Financial Condition and Results of Operations 9
II 7A Quantitative and Qualitative Disclosures
About Market Risk .......................... 18
II 8 Financial Statements and Supplementary Data 19
II 9 Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure 43
III 10 Directors and Executive Officers Of
The Registrant ............................. 44
III 11 Executive Compensation ..................... 45
III 12 Security Ownership Of Certain Beneficial
Owners and Management ......................
III 13 Certain Relationships and Related Transactions 45
III 14 Controls and Procedures .................... 45
IV 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K .................... 45
Page 2
PART I
This Annual Report on Form 10-K contains forward looking statements within the
meaning of Section 12E of the Securities Exchange Act of 1934. Forward-looking
statements should be read with the cautionary statements and important factors
included in this Annual Report on Form 10-K at Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Safe Harbor for
Forward-Looking Statements." Forward-looking statements are all statements other
than statements of historical fact, including without limitation those that are
identified by the use of words such as, but not limited to, "will",
"anticipates", "seeks to", "estimates", "expects", "intends", "plans",
"predicts" and similar expressions. Such statements are inherently subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those expressed.
ITEM 1. BUSINESS
GENERAL INFORMATION
Operations
WestCoast Hospitality Corporation (the "Company") is primarily engaged in the
ownership, management, development, and franchising of mid scale, full service
hotels. As of December 31, 2002, the system contained 86 properties in 15
states, totaling over 15,000 rooms and over 717,000 square feet of meeting
space. The Company owned an interest in and operated 29 hotels, leased 14
hotels, managed seven hotels owned by others and franchised 36 hotels owned and
operated by third parties at December 31, 2002. The Company's hotel brands
include WestCoast(R) and Red Lion(R). All properties are located in the United
States.
The Company is also engaged in activities related or supplementary to the
operation of hotels. These activities include computerized ticketing services
and presenting entertainment productions through its TicketsWest division and
owning, leasing, developing and managing commercial and residential properties
through its G&B Real Estate division.
The Company was incorporated in the State of Washington on April 25, 1978. A
substantial portion of the Company's assets are held in WestCoast Hospitality
Limited Partnership ("WHLP"). WHLP was formed in the State of Delaware on
October 23, 1997. The Company is the sole general partner and approximately 98%
owner of WHLP and manages its operations. The Company's principal executive
offices are located at 201 W. North River Drive, Suite 100, Spokane, Washington
99201 and its telephone number is (509) 459-6100. The Company maintains internet
websites at www.redlion.com and www.westcoasthotels.com where annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports are available, without charge, as soon as reasonably
practicable following the time they are filed with or furnished to the
Securities Exchange Commission.
Recent Developments
In March 2003, the United States declared war. The Company's future operating
performance is affected by, among other things, international conflicts, the
effects of actual and threatened terrorist attacks and national and regional
economic conditions. Due to the war and the perception of a weak economy, the
Company gives no assurance that its future operating performance will provide
adequate cash flow for the Company's needs.
In March 2003, the Company's President and Chief Executive Officer, Donald K.
Barbieri, announced his retirement effective upon appointment of his successor
by the Company's Board of Directors. He will continue to serve as Chairman of
the Board of Directors.
In February 2003, the Company completed the transition of its Red Lion brand
into its system by re-branding 22 of its owned and managed hotels to Red Lion
and implementing a state-of-the-art central reservation system and guest loyalty
program that integrates service to its WestCoast and Red Lion brands.
In December 2002, three significant covenants under the Company's revolving
credit facility were amended: total funded debt ratio, recourse funded debt
ratio and fixed charge ratio to provide greater flexibility during the weaker
economic environment. As of December 31, 2002, the Company was in compliance
with its debt covenants.
In October 2002, the Company has entered into an agreement subject to various
contingencies for the sale a non-core asset. For additional information, refer
to "Property and Equipment" and "Assets Held for Sale" in the Notes to
Consolidated Financial Statements on page 29 and 34, respectively.
In May 2002, the Company implemented a refreshed quality assurance performance
measurement program.
In March 2002, the Company divested its majority interest in an office building.
In January 2002, the Company commenced a national sales strategy to promote
cross selling between hotel properties and entertainment events.
In December 2001, the Company acquired the capital stock of the Red Lion hotel
chain from Hilton Hotels Corporation. The Red Lion portfolio consisted of nine
owned, 12 leased and 26 franchised hotels on the consummation date.
For additional details surrounding recent developments, refer to "Hotel
Operations".
Page 3
Industry Segments
The Company operates in four reportable business segments: hotels and
restaurants; franchise, central service and development; ticketing services and
entertainment productions; and real estate. For additional information, refer to
"Business Segments" in the Notes to Consolidated Financial Statements on page
42.
HOTEL OPERATIONS
Hotel Properties
Owned Hotels
The Company owned or had an ownership interest in and operated 29 hotels
totaling 5,371 rooms with over 246,000 square feet of meeting space as of
December 31, 2002. The number of owned properties included three hotels for
which the underlying land is leased. The lease expiration dates range from 2014
to 2062, with certain leases containing renewal options. Under these land
leases, the Company is responsible for repairs and maintenance, operating
expenses and management of operations. For additional information, refer to
"Operating Lease Commitments" in the Notes to the Consolidated Financial
Statements on page 39.
Leased Hotels
As of December 31, 2002, the Company leased 14 hotels representing 2,292 rooms
and totaling over 111,000 square feet of meeting space. Under these leases, the
Company is responsible for hotel operations and management. The Company
recognizes revenues and associated expenses with leased hotel operations.
Furniture, fixtures and equipment are generally the owner's responsibility;
however, under certain leases the Company is obligated to replace these items on
an as needed basis. Lease terms typically require the Company to pay fixed
monthly rent and variable rent based on a percentage of revenue. In addition,
the Company is responsible for repairs and maintenance, operating expenses and
management of operations. Refer to "Operating Lease Commitments" in the Notes to
the Consolidated Financial Statements for additional information on page 39.
Managed Hotels
The Company managed seven hotels with 1,330 rooms and over 93,000 square feet of
meeting space as of December 31, 2002. These managed hotels are operated for the
owner's benefit under management agreements. Under the Company's management
agreements, the owner is responsible for operating and other related and/or
incidental expenses.
The management fee received by the Company is typically based on a percentage of
the hotel's gross revenue plus an incentive fee based on operating performance.
The Company is generally reimbursed for out-of-pocket costs. Management
agreements are for various terms and typically contain renewal options, subject
to certain termination rights.
Franchised Hotels
As of December 31, 2002, the Company franchised 36 hotels with 6,256 rooms and
meeting space totaling over 267,000 square feet. Franchised hotels are owned and
operated by third parties under brand names which are licensed to the owners by
the Company. In addition to the licensed use of brand names, the Company
provides certain services to franchised properties although it does not manage
or operate the franchise hotels. These services include reservations systems,
advertising and national sales, guest affinity programs, revenue management
tools, quality inspections and brand standards. The Company typically receives
royalty payments for use of the brand names and contributions to the central
services programs administered by the Company for the franchisees.
Hotel Brands
The Company's hotels primarily operate under the WestCoast(R) and the Red
Lion(R) brands. Recently, the Company re-branded 22 hotels to Red Lion Hotels(R)
bringing the 63 hotels under the Red Lion brand to its largest size in the
history of the Red Lion brand.
Page 4
Statistical Information
The following table provides certain information about the Company's hotel
portfolio as of and for the year ended December 31, 2002.
Hotels Rooms Mtg Space Average Occupancy % ADR RevPar
(Sq Ft) (1), (3), (6) (1), (4) (1), (5), (6)
----------- -------- ----------- -------------------- ------------ ----------
Owned (2) 29 5,371 246,217 56.2 $72.08 $40.47
Leased 14 2,292 110,756 58.6 $66.43 $38.90
Managed (7) 7 1,330 93,234 67.0 $89.94 $60.23
Franchised (7) 36 6,256 267,214 61.5 $87.39 $53.73
----------- -------- -----------
Total 86 15,249 717,421 59.4 $78.23 $46.44
=========== ======== ===========
(1) Average occupancy, average daily rate (ADR) and room revenue per available
room (RevPar) are for comparable hotels (owned, leased, managed, and franchised
by the Company since January 1, 2002) and include hotels in the Company's system
as of December 31, 2002.
(2) Owned properties include hotels owned by partnerships in which the Company
holds interest as of December 31, 2002 and one hotel property that is expected
to be sold in 2003.
(3) Average occupancy represents total paid rooms occupied divided by total
available rooms. Total available rooms represents the number of rooms available,
net of rooms under renovation, multiplied by the number of days in the reported
period.
(4) ADR represents total room revenues divided by the total number of paid rooms
occupied by hotel guests.
(5) RevPar represents total room and related revenues divided by total available
rooms, net of rooms under renovation.
(6) Rooms 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 or
average occupancy percentage.
(7) In early 2003, agreements related to 13 franchised hotels and one managed
property expire. Additionally, in early 2003, the Company entered into one
franchised license agreement and two pending applications for franchised hotels.
Refer to Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for additional
information.
Financial Information
The Company's financial information is disclosed in the consolidated financial
statements and notes thereto. The Company's working capital practices are
disclosed in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
Growth Plan
The Company continues to seek opportunities to expand both domestically and
internationally while maintaining its product quality. The Company intends to
grow its brand primarily through franchising and management contracts, but may
seek to acquire equity interests in hotel properties on a selective basis.
Additionally, the Company maintains a consistent quality level at hotels through
its maintenance, renovation and capital expenditure programs.
Loyalty Program
In February 2003, the Company integrated the best features of its Red Lion Club
and WestAwards frequency program in order to enhance guest services with a
single expanded guest loyalty program, GuestAwards. The Company continues to
promote guest loyalty by providing guests the flexibility to earn air miles with
each qualifying hotel stay or points for every eligible dollar charged to the
guest room. GuestAward points are redeemable for complimentary hotel stays, air
miles or travel, car rental, merchandise, entertainment and other incentives.
E-Business
In February 2003, the Company launched a new hotel reservation system. This
technology allows the Company to manage single image inventory through its
distribution channels, execute rate management strategies through channels of
distribution including voice, Global Distribution Systems and Internet sites,
craft individual property.
In addition, the Company provides effective and efficient guest service
including online hotel reservations, GuestAwards enrollment and ticketing of
TicketsWest events, through its various domain names (www.redlion.com,
www.westcoasthotels.com, www.guestawards.com, www.ticketswest.com).
Team Red
In February 2003, the Company launched "Team Red", an innovative community
outreach program designed to benefit local communities while rewarding employees
and guests for volunteer work. The Company continues to build on its long-term
commitment to assist and support its local communities through "Team Red" and
other civic initiatives.
Page 5
ADDITIONAL INFORMATION
Marketing
The Company's marketing strategy provides quality and value to its hotels
through its national reach and regional focus. Through consistent messaging in
high visibility markets, the Company targets the majority of market segments and
distribution channels for its hotel portfolio. In addition, the Company offers
intelligence tools such as rate management strategies, competitive set
benchmarking and market demand reports to the majority of its hotels to increase
its regional reach with individuality focused on the property's customer base.
Trademarks
The Company owns the following trademarks in the United States, Canada or
Mexico: Red Lion(R), WestCoast(R), WestAwards(R), TicketsWest(R), G&B(R) and
various derivatives of those usages. The Company has applied to register
GuestAwards as a trademark in the United States. The Company's trademarks and
associated name recognition are valuable to its business.
Non-core Asset Sales
The Company continues to divest its interest in non-core assets in order to
capture equity, pay down debt and adhere to its long term strategic plan. Refer
to "General Information - Recent Developments" for a description of assets sold
and held for sale in 2002.
Seasonality
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's revenues and profits are realized from May through October. The
Company's results for any quarter may not be indicative of the results that may
be achieved for the full fiscal year. In addition, results are affected by the
Company's rapid growth; national and regional economic conditions, including the
magnitude and duration of the current economic slowdown in the United States;
actual and threatened terrorist attacks and international conflicts and their
impact on travel; and weather conditions.
Competition
The lodging industry is highly competitive. Competition in the industry is
primarily based on service quality, range of services, brand name recognition,
convenience of location, room rates, guest amenities and quality of
accommodations. The Company competes with other national limited and full
service hotel companies, including various regional and local hotels. Many of
the Company's competitors have a larger network of locations and greater
financial resources than the Company. Additionally, new and existing competitors
may offer significantly lower rates, greater convenience, services and
amenities, expand or improve facilities, which may adversely impact the
Company's operations. Demographics and other changes in the Company's markets
may also adversely impact the convenience or desirability of the hotel location.
The Company strives to enhance its core business by its national Red Lion brand
name; expanded, multi-tiered guest loyalty program; new reservation software;
effective cost control; maximizing operating efficiencies; property
enhancements; and continued effort to create a feel of comfort, care and value
in its hotels.
Employees
As of December 31, 2002, the Company employed approximately 4,400 persons,
approximately 3,900 in hotel operations and the remainder in the Company's
administrative office and its TicketsWest and G&B Real Estate divisions.
Approximately 300 persons in hotel operations were covered by various collective
bargaining agreements providing, generally, for basic pay rates, working hours,
other conditions of employment and orderly settlement of labor disputes. The
Company believes its employee relations are satisfactory.
Item 2. PROPERTIES
The Company's hotel properties provide caring service and comfortable
accommodations at competitive prices consistent with the markets they serve. The
Company's hotel portfolio maintains consistent quality and offers valuable
services such as dining, fitness centers, business services and other unique
offerings at the majority of its locations. In addition, guest rooms are well
equipped with products important to both leisure and business travelers. Most
hotels offer flexible meeting space to service the group and convention markets.
The Company continues to invest in its hotel properties to maintain quality
condition. Refer to the Company's websites at www.redlion.com or
www.westcoasthotels.com for a complete listing of hotel properties.
Refer to Item 1 - "Hotel Operations - Statistical Information" for information
on the Company's owned, leased, managed and franchised hotel properties.
Item 3. LEGAL PROCEEDINGS
At any given time, the Company is subject to claims and actions incident to the
operation of its business. While the outcome of these proceedings cannot be
predicted, it is the opinion of management that none of such proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company's business, financial condition, cash flow or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
Page 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "WEH". The following table sets forth for the periods indicated
the high and low closing sale prices for the common stock on the NYSE.
High Low
2002:
Fourth Quarter (ended December 31, 2002) $5.80 $5.00
Third Quarter (ended September 30, 2002) $7.00 $5.40
Second Quarter (ended June 30, 2002) $7.75 $6.69
First Quarter (ended March 31, 2002) $8.00 $6.20
2001:
Fourth Quarter (ended December 31, 2001) $6.49 $5.93
Third Quarter (ended September 30, 2001) $7.98 $6.00
Second Quarter (ended June 30, 2001) $7.48 $5.08
First Quarter (ended March 31, 2001) $5.56 $4.95
The last reported sale price of the common stock on the NYSE on March 25, 2003
was $4.36. As of March 25, 2003, there were approximately 86 shareholders of
record of the common stock.
The Company does not anticipate paying any cash dividends on the common stock in
the foreseeable future. The Company intends to retain earnings to provide funds
for the continued growth and development of its business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Any determination to pay cash
dividends in the future will be at the discretion of the Board of Directors and
will depend upon, among other things, the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
by the Board. As of December 31, 2002, the Company was restricted from paying
dividends on its common stock under the terms and conditions of its Revolving
Credit Facility.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of WestCoast Hospitality Corporation are authorized for
issuance:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
Equity Compensation Plans
Approved by Security
Holders 537,895 $8.29 862,105
Equity Compensation Plans
not Approved by
Security Holders -0- N/A -0-
---------- ---------- ------------
Total 537,895 $8.29 862,105
========== ========== ============
Page 7
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for the years ended December 31, 1998, 1999, 2000, 2001 and
2002. The selected consolidated statement of operations and balance sheet data
are derived from the Company's audited financial statements. The audited
consolidated financial statements for certain of these periods are included
elsewhere in this Report.
The selected consolidated financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this Report.
Fiscal Year Ended
December 31
(in thousands except per share data)
2002 2001 2000 1999 1998
Statements of Operations Data:
Total revenues $ 194,171 $ 120,633 $ 125,806 $ 110,055 $86,333
Operating income 22,681 24,046 23,354 21,035 20,310
Net income (1) 8,007 7,579 5,821 8,029 7,508
Income applicable to common shareholders 5,430 7,579 5,821 8,029 7,508
Earnings per common share-basic 0.42 0.59 0.45 0.63 0.66
Earnings per common share-diluted 0.41 0.59 0.45 0.63 0.66
Balance Sheet Data(2):
Working capital (28,189) 14,090 (2,991) (12,105) 28
Total assets 356,710 359,649 304,834 309,132 244,903
Long-term debt and capital leases 101,206 167,795 160,018 159,882 128,378
Current portion, long-term debt and 57,257 4,137 2,922 8,068 2,172
capital leases
Other Data:
EBITDA (3) 30,032 30,121 33,754 28,967 26,425
Net cash provided by operating activities 15,133 17,490 11,954 19,067 14,271
Net cash used in investing activities (8,656) (22,928) (7,482) (13,572) (108,745)
Net cash provided by (used in) (9,511) 7,697 (5,353) (5,405) 93,786
financing activities
(1) The Company incurred extraordinary expense net of income taxes for the
write-off of prepayment penalties and deferred loan fees in connection with the
repayment of indebtedness of $23,000 in 2001, $10,000 in 1999 and $546,378 in
1998.
(2) The balance sheet data as of December 31, 1999 and 2001 reflects the
acquisitions of WestCoast Hotels, Inc. and Red Lion Hotels, Inc. on December 31,
1999 and December 31, 2001, respectively. However the results of operations of
these acquired entities are included in operations only from the acquisition
date forward.
(3) EBITDA represents income before income taxes, extraordinary item, cumulative
effect of accounting changes, interest expense (net of interest income),
depreciation, amortization, gain on asset disposal, equity in investments,
minority interests, and other income/expenses. EBITDA is not intended to
represent cash flow from operations as defined by generally accepted accounting
principles and such information should not be considered as an alternative to
net income, cash flow from operations or any other measure of performance
prescribed by generally accepted accounting principles. While not all companies
calculate EBITDA in the same fashion and therefore EBITDA as presented may not
be comparable to similarly titled measures of other companies, EBITDA is
included herein because management believes that certain investors find it to be
a useful tool for measuring the Company's ability to service debt. EBITDA is not
necessarily available for management's discretionary use due to restrictions
included in the Revolving Credit Facility and other considerations.
Page 8
The following is a reconciliation of EBITDA to its comparable measurement in
accordance with generally accepted accounting principles for each of the years
presented (in thousands):
Year ended December 31,
2002 2001 2000 1999 1998
EBITDA (as presented above) $ 30,032 $ 30,121 $ 33,754 $ 28,967 $ 26,425
Income tax provision (4,369) (4,503) (3,306) (3,737) (4,310)
Deferred income tax provision 1,921 2,240 1,524 2,392 934
Interest expense (10,717) (12,092) (14,660) (9,384) (8,127)
Interest and other income, net 392 247 449 388 356
Other non-cash operating activities 1,068 366 555 167 174
Change in working capital accounts (3,194) 1,111 (6,362) 274 (1,181)
------------ ---------- --------- --------- ----------
Net cash provided by operating activities $ 15,133 $ 17,490 $ 11,954 $ 19,067 $ 14,271
============ ========== ========= ========= ==========
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. The adoption of SFAS No. 142 on January
1, 2002, resulted in the elimination of goodwill amortization of $856,000 for
the year ended December 31, 2002.
Net income and earnings per share adjusted for goodwill amortization for 2001
and years prior compared to fiscal 2002 is as follows (in thousands):
2002 2001 2000 1999 1998
Reported net income to common shareholders $ 5,430 $ 7,579 $ 5,821 $ 8,029 $ 7,508
Add back: goodwill amortization, net of tax - 537 542 19 25
--------- ----------- ----------- ----------- ----------
Adjusted net income to common shareholders $ 5,430 $ 8,116 $ 6,363 $ 8,048 $ 7,533
========= =========== =========== =========== ==========
Basic earnings per share:
Reported net income $ 0.42 $ 0.59 $ 0.45 $ 0.63 $ 0.66
Goodwill amortization - 0.04 0.04 - -
--------- ----------- ----------- ----------- ----------
Adjusted earnings per share-basic $ 0.42 $ 0.63 $ 0.49 $ 0.63 $ 0.66
========= =========== =========== =========== ==========
Diluted earnings per share:
Reported net income $ 0.41 $ 0.59 $ 0.45 $ 0.63 $ 0.66
Goodwill amortization - 0.04 0.04 - -
--------- ----------- ----------- ----------- ----------
Adjusted earnings per share-diluted $ 0.41 $ 0.63 $ 0.49 $ 0.63 $ 0.66
========= =========== =========== =========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
The Company is primarily engaged in the ownership, management, development, and
franchising of mid scale, full service hotels. As of December 31, 2002, the
hotel system contained 86 properties in 15 states, totaling over 15,000 rooms
and over 717,000 square feet of meeting space. The Company's hotel brands
include WestCoast and Red Lion. In addition, the Company is engaged in
activities related or supplementary to the operation of hotels. These activities
include computerized ticketing services and presenting entertainment productions
and owning, leasing and/or managing commercial and residential properties.
The Company operates in four reportable segments: hotels and restaurants;
franchise, central service and development; computerized ticketing services and
presenting entertainment productions; and real estate. The hotels and
restaurants segment derives revenue primarily from room rentals and food and
beverage operations at the Company's owned and leased properties and management
fees charged to hotel owners. Management fees are typically based on a
percentage of the hotel's gross revenue plus an incentive fee based on operating
performance. The franchise, central service and development segment primarily
provides licensing of the Company's brand names to franchisees. This segment
generates revenue from royalty fees charged to hotel owners. Royalty fees are
generally based on a percent of room revenue in exchange for the use of the
Company's brand name and right to participate in central services programs to
include reservation system, guest affinity programs, national and regional
sales, revenue management tools, quality inspections, advertising and brand
standards. The ticketing and entertainment productions segment derives revenue
primarily from computerized event ticketing services and promotion of Broadway
shows and other special events. The real estate segment generates its revenue
from owning, managing, leasing and developing commercial and residential
properties.
Page 9
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States require the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. On an ongoing basis, the Company evaluates its estimates and
assumptions, including those related to valuation of long-lived assets, assets
held for sale, intangible assets, other assets, self-insurance reserves,
collectibility of accounts receivable, contingencies and litigation. The Company
bases its estimates and judgments on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. The Company
believes the following critical accounting policies, among others, affect its
more significant estimates and assumptions used in preparing its consolidated
financial statements. Actual results could differ from estimates and
assumptions.
Property and equipment are stated at cost less accumulated depreciation. The
Company also has investments in partnerships that own and operate hotel
properties. The assessment of long-lived assets for possible impairment requires
the Company to make judgments, regarding real estate values, estimated future
cash flow from the respective properties and other matters. The Company reviews
the recoverability of its long-lived assets when events or circumstances
indicate that the carrying amount of an asset may not be recoverable. For the
year ended December 31, 2002, the Company recognized an impairment loss of
approximately $73 thousand with respect to a partnership investment.
The Company accounts for assets held for sale in accordance with Statement of
Financial Accounting Standard No. 144 (SFAS 144). The Company's assets held for
sale are recorded at the lower of their historical carrying value (cost less
accumulated depreciation) or market value. Depreciation is terminated when the
asset is determined to be held for sale. If the assets are ultimately not sold
within the guidelines of SFAS 144, depreciation is reinstated for the period
they were held for sale. The Company believes that its assets held for sale will
be completed in 2003, unless circumstances arise that were previously considered
unlikely.
The Company's intangible assets include brands and goodwill. The Company
accounts for its brands and goodwill in accordance with Statement of Financial
Accounting Standard No. 142 (SFAS 142). The Company expects to receive future
benefits from previously acquired brands and goodwill over an indefinite period
of time and therefore, effective January 1, 2002, no longer amortizes its brands
and goodwill in accordance with SFAS 142. The annual impairment review requires
the Company to make certain judgments, including estimates of future cash flow
with respect to brands and estimates of the Company's fair value and its
components with respect to goodwill. The Company completed its impairment review
of brands, goodwill and other intangible assets which did not result in an
impairment loss during 2002.
The Company's other intangible assets include management, marketing and lease
contracts. The value of these contracts is amortized on a straight-line basis
over the weighted average life of the respective agreement. The assessment of
these contracts requires the Company to make certain judgments, including
estimated future cash flow from the applicable properties.
The Company is self-insured for various levels of general liability, workers'
compensation and employee medical and dental coverage. Insurance reserves
include the present values of projected settlements for claims. Projected
settlements are estimated based on, among other things, historical trends and
actuarial data.
The Company reviews accounts receivable for collectibility on a routine basis.
The Company records an allowance for doubtful accounts based on specifically
identified amounts that it believes to be uncollectible and amounts that are
past due beyond a certain date. The receivable is written off against the
allowance for doubtful accounts if collection attempts fail. The Company's
estimate for its allowance for doubtful accounts is impacted by, among other
things, national and regional economic conditions, including the magnitude and
duration of the economic downturn of the United States.
Effective January 1, 2002 the Company established the WestCoast Central Program
Fund (CPF), organized in accordance with various domestic franchise agreements.
The CPF is responsible for certain advertising services, frequent guest program
administration, reservation services, national sales promotions and brand and
revenue management services intended to increase sales and enhance the
reputation of the Company and its franchise owners including the WestCoast and
Red Lion branded properties. Contributions by the Company to the CPF for owned
and managed hotels and contributions by the franchisees, through the individual
franchise agreements, total up to 5% of room revenue or can be based on
reservation fees, frequent guest program dues and other services. While the
Company administers the functions of the CPF, the net assets and transactions of
the CPF are not commingled with the working capital of the Company. The net
assets and transactions of the CPF are, therefore, not included in the
accompanying financial statements in accordance with FASB No. 45, "Accounting
for Franchise Fee Revenue".
Page 10
LIQUIDITY AND CAPITAL RESOURCES
Overview
Net cash provided by operating activities totaled approximately $15.1 million,
$17.5 million and $12.0 million for the years ended December 31, 2002, 2001 and
2000, respectively. The decrease in 2002 compared to 2001 was primarily the
result of lower operating results and working capital variances. The increase in
2001 over 2000 was also primarily due to gains on property sales, insurance
recoveries and working capital variances offset by lower level of business at
the hotel properties.
Net cash used in investing activities decreased $14.3 million from approximately
$22.9 million in 2001 to $8.7 million in 2002 primarily due to the purchase of
Red Lion hotels in 2001, slightly offset by an increase in capital expenditures
in 2002. Net cash used in investing activities increased $15.4 million from
approximately $7.5 million in 2000 to $22.9 million in 2001 primarily due to the
purchase of Red Lion Hotels, offset by the proceeds from asset dispositions and
a lower level of capital expenditures in 2001.
Net cash used in financing activities totaled approximately $9.5 million in 2002
which generally relates to the pay down of debt and payment of preferred stock
dividends. Net cash provided by financing activities totaled $7.7 million in
2001 which consists primarily of revolving debt borrowings to fund the Red Lion
acquisition. Net cash used in financing activities totaled approximately $5.4
million in 2000 which consists primarily of debt repayment.
Cash and cash equivalents totaled $2.7 million at December 31, 2002, a decrease
of approximately $3.0 million from December 31, 2001. The Company believes that
its operating cash flow, ability to amend and refinance its revolving credit
facility with long-term non-recourse debt by securing mortgages on certain hotel
properties financing secured by hotels and proceeds from the sale of its
non-core assets will be sufficient to meet its liquidity needs. However,
projections of sources of working capital and future financial needs are subject
to uncertainty. Refer to "Other Matters - Safe Harbor for Forward Looking
Statements" for additional information of conditions that could affect future
financial needs and sources of working capital.
Financing
The Company has a revolving credit facility. In 2001, the Company refinanced a
portion of its revolving credit facility with long term fixed rate mortgages on
certain properties and lowered its commitment to $70 million. In December 2002,
the Company reduced its commitment to $58.5 million. As of December 31, 2002,
approximately $52.1 million of borrowings were outstanding under its $58.5
million revolver.
Although the revolving credit facility matures in June 2005, the Company
classified its outstanding borrowings under its $58.5 million revolver as
current debt as of December 31, 2002 due to an anticipatory breach of some of
the existing covenants in 2003, which have currently not been waived by the
lenders. If the Company breaches its covenants and the breach is not waived by
the lender one of the lender's remedies under the credit facility is to call the
debt due at that time.
The Company intends to refinance its revolving credit facility either with its
existing lender or other lenders into non-recourse and revolving debt.
Management believes that an adequate borrowing base exists to secure the
necessary financing. The Company is also pursuing the sale of certain non-core
real estate assets, some of which are included in assets held for sale discussed
in Note 5 of the Notes to Consolidated Financial Statements. Management has
implemented certain operational efficiencies and cost reduction plans that are
expected to improve covenant ratios. These actions are intended to reduce the
Company's dependence on the revolving credit facility.
The historical cash flow of the Company has been adequate to service all its
normal operating needs, service all interest and regularly scheduled principal
payments and capital improvements. Due to the war and the perception of a weak
economy there can be no assurance that future operating performance will provide
adequate cash flow for the Company's needs. The ability of the Company to
improve its working capital position through the refinance of its revolving
credit facility, improve operating results and disposal of non-core assets is
dependent upon lending market conditions, the achievement of future operating
efficiencies and the liquidity of the real estate market where the Company's
assets are located. There can be no assurance that these efforts will be
successful. For additional information, refer to "Financial Liquidity" in the
Notes to the Consolidated Financial Statements on page 33.
Provisions under the Company's revolving credit facility agreement require the
Company to comply with certain covenants which include limiting the amount of
outstanding indebtedness. The Company's revolving credit facility contains three
significant financial covenants: total funded debt ratio, recourse funded debt
ratio and fixed charge ratio which were amended in December 2002 to provide
greater flexibility during the softer economic environment. The Company is in
compliance with its debt covenants as of December 31, 2002.
In addition to the $52.1 million outstanding on the revolver, the Company has
debt and capital lease obligations of approximately $106 million as of December
31, 2002 primarily consisting of variable and fixed rate debt secured by
individual properties.
Page 11
In December 2001, the Company issued 303,771 of Class A and Class B preferred
shares, respectively, in connection with its acquisition of Red Lion Hotels,
Inc. As a result of cancelled franchise agreements in 2002, 2,456 shares of
Preferred Series A and B, respectively, were cancelled totaling approximately
$246 thousand. Dividends paid on Class A and Class B preferred shares were
$3.50/share and $5.00/share, respectively, for the year ended December 31, 2002,
totaling approximately $1.9 million. For additional information, refer to
"Stockholders' Equity" in the Notes of the Consolidated Financial Statements on
page 51.
The following table summarizes the Company's significant contractual obligations
as of December 31, 2002 (in thousands):
Contractual Obligations Payments Due by Period
Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
Long-term debt $ 158,195 $ 56,989 $ 15,740 $ 14,179 $ 71,287
Capital lease obligations 268 268 - - -
Operating leases (1) 103,953 7,113 16,989 11,326 68,525
Preferred stock dividend (2) 10,496 2,561 5,926 2,009 -
------------ -------------- ------------- -------------- -------------
Total contractual obligations $ 272,912 $ 66,931 $ 38,655 $ 27,514 $139,812
============ ============== ============= ============== =============
(1) Operating lease amounts are net of estimated annual sublease income totaling
$9.9 million. In early 2003, the Company anticipates entering into a sales
leaseback agreement for its hotel reservation system totaling approximately $4.1
million and believes this lease will be classified as an operating lease. The
anticipated sales leaseback obligation is not included in the above operating
lease obligations.
(2) Class A and Class B preferred stock quarterly dividends increase from 7% to
14% if not redeemed by January 2005 and from 10% to 20% if not redeemed by
January 2008, respectively. The above preferred stock dividend obligation
assumes Class A and Class B are redeemed in January 2005 and 2008, respectively.
For additional information, refer to "Stockholders' Equity" in the Notes to the
Consolidated Financial Statements on page 51.
Asset Dispositions
In March 2002, the Company sold a majority interest in an office building
resulting in net proceeds of approximately $1.7 million. The sale resulted in a
pre-tax gain of $5.8 million. The Company recognized approximately $3.2 million
of the gain for the year ended December 31, 2002. The remaining portion of the
gain is deferred over the six year lease term due to the Company's leaseback of
a portion of the building. Refer to "Property and Equipment" in the Notes to the
Consolidated Financial Statements on page 37 for additional information.
Assets Held for Sale
The Company continues to seek opportunities to divest its interest in its
non-core assets. The Company recently entered into an agreement subject to
various contingencies for the sale of an owned hotel property, a mall and excess
land. In addition, the Company has two office buildings with a net book value of
approximately $21.5 million classified as assets held for sale as of December
31, 2002. The Company anticipates completing the sale of these assets in 2003
and using the net proceeds of up to approximately $21 million to pay down its
revolving credit facility, if the transaction is consummated prior to the
Company's anticipated refinance of its $58.5 million revolver, and/or to further
expand operations. Two of these properties have been held for sale for a year.
There can be no assurance that the Company will be able to successfully sell
these properties. For further discussion, refer to the "Financing" section.
Capital Spending
The Company continues to invest in normal capital replacements to maintain a
consistent quality level at hotels. However, the Company may defer its capital
spending depending on economic conditions. The Company spent approximately $10.7
million on various capital expenditures in 2002 including routine improvements
and technology, public area, guest room, lounge and restaurant renovations at
owned and leased properties and a new central reservation system. The Company
anticipates spending approximately $9.6 million on capital expenditures in 2003.
The Company also anticipates exercising its lease option to purchase a hotel
property totaling approximately $5.2 million in 2003. Additionally, in early
2003, the Company anticipates entering into a sales leaseback agreement for its
hotel reservation system totaling approximately $4.1 million. The Company
believes the lease will be classified as an operating lease.
Development
The Company intends to grow its brands primarily through franchising and
management contracts, but may seek to acquire equity interests in hotel
properties on a selective basis.
In early 2003, franchise and management contracts related to 13 franchised
hotels and one managed hotel expired. Revenue related to these contracts totaled
approximately $1.6 million for the year ended December 31, 2002. Additionally,
in early 2003, the Company entered into one franchised license agreement and two
pending applications for franchised hotels.
The Company's ability to grow the number of franchised and managed hotels is
affected by, among other things, national and regional economic conditions,
including the magnitude and duration of current economic slowdown of the United
States; the effects of actual and threatened terrorist attacks and wars; credit
availability; relationships with franchisees and owners; and competition from
other hotel brands. For additional information, refer to "Other Matters - Safe
Harbor for Forward Looking Statements".
Page 12
RESULTS OF OPERATIONS
The Company operates in four reportable segments: hotels and restaurants;
franchise, central service and development; ticketing services and entertainment
productions; and real estate. The Company's results of operations are
significantly impacted by occupancy and room rates achieved by hotels, ability
to manage costs and the relative mix of owned, leased, managed and franchised
hotels. Future operating results could be adversely impacted by many factors
including those discussed in "Other Matters - Safe Harbor for Forward Looking
Statements".
Fiscal 2002 Compared With Fiscal 2001
A summary of the Company's consolidated results and hotel statistics for the
years ended December 31, 2002 and 2001 is as follows (dollars in thousands,
except per share amounts):
2002 2001 % Change
Hotels and Restaurants $ 173,320 $ 99,495 74%
Franchise, Central Services and Development 4,137 3,213 29%
TicketsWest 7,430 7,497 -1%
Real Estate Division 9,001 10,114 -11%
Corporate Services 283 314 -10%
------- ------- ----
Total Revenues 194,171 120,633 61%
Total Direct Expenses 169,373 94,691 79%
Undistributed Corporate Expenses 2,117 1,896 12%
Operating Income 22,681 24,046 -6%
Net Income 8,007 7,579 6%
Preferred Stock Dividend 2,577 - 100%
Basic EPS 0.42 0.59 -29%
Diluted EPS 0.41 0.59 -31%
Hotel Statistics (1)
2002 2001 % Change
Hotels at 12/31 (2) 86 93 -8%
Rooms at 12/31 15,249 16,095 -5%
REV PAR (3), (6) $ 50.40 $ 53.17 -5%
ADR (4) $ 85.19 $ 87.78 -3%
Ave. Occupancy (5), (6) 59.2% 60.6% -1.4%
(1) Hotel statistics include actual hotels and rooms at December 31, 2002 and
2001, respectively. Therefore, the 2001 number of hotels and rooms include the
hotels which the Company acquired from Red Lion Hotels, Inc. on December 31,
2001. However, revenue per available room (RevPar), average daily rate (ADR),
and average occupancy statistics do not include Red Lion Hotels, Inc. as this
acquisition was completed on December 31, 2001 and their results of operations
were not included in the consolidated revenues and hotel operating statistics
until 2002. Revpar, ADR and occupancy statistics in 2002 and 2001 are presented
for comparable hotels (owned, leased, managed and franchised by the Company for
more than one year).
(2) Agreements related to 13 franchised hotels and one managed property expired
in early 2003. Additionally, in early 2003, the Company entered into one
franchised license agreement and two pending applications for franchised hotels.
Refer to Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for additional
information.
(3) RevPar represents total room and related revenues divided by total available
rooms, net of rooms out of service due to significant renovations.
(4) ADR represents total room revenues divided by the total number of paid rooms
occupied by hotel guests.
(5) Average occupancy represents total paid 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.
(6) Rooms 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.
Revenues
Total revenues for 2002 were $194 million, an increase of approximately $74
million or 61% from 2001. Overall increase in revenues from 2001 to 2002 is
attributed to the following:
Hotel and restaurant revenues increased approximately $74 million or 74% from
$99.5 million in 2001 to $173.3 million in 2002. Approximately $79 million of
the increase in hotel and restaurant revenues resulted primarily from the
acquisition of Red Lion Hotels, Inc. which closed on December 31, 2001. This
overall increase was offset by a continued soft U.S. economy, resulting in a
decrease in demand throughout most segments. This continued sluggish demand in
2002 resulted in a lower room and occupancy rate which contributed to the
Company's decrease in RevPar, ADR and average occupancy over 2001.
Page 13
Franchise, central services and development revenues increased approximately
$900 thousand or 29% from $3.2 million in 2001 to $4.1 million in 2002.
Approximately 25% or $1.0 million of the increase was primarily from franchise
and management contracts acquired through the purchase of Red Lion Hotels, Inc.
in 2001. This increase was partially offset by a reduced franchise application
fee combined with system wide RevPar declines in 2002 compared to 2001 given the
continued softness of the U.S. economy.
TicketsWest revenues decreased approximately $67 thousand or 1% from $7.5
million in 2001 to $7.4 million in 2002. This decrease was primarily due to the
removal of call center service revenues and related expenses from the ticketing
and entertainment production division to a central program fund which is
administered by the Company effective January 2002. This decrease was offset by
an overall increase in operating revenue as a result of an increase in venues
and a favorable event mix in 2002 compared to 2001.
Real Estate Division revenues decreased approximately $1.1 million or 11% from
$10.1 million in 2001 to $9.0 million in 2002 primarily from reduced lease
revenue which resulted from the sale of the Company's majority interest in an
office building in March 2002.
Direct Expenses
Direct expenses increased approximately $75 million or 79% from $94.7 million in
2001 to $169.4 million in 2002. Approximately $73 million of the increase was
due to additional hotels operated by the Company given the acquisition of Red
Lion Hotels in December 2001. In addition, this increase was impacted by the
$1.9 million decrease in the net gain on asset dispositions and insurance
settlements in 2002 compared to 2001.
The overall increase is offset by reduced amortization expense of approximately
$855 thousand related to brand names and goodwill and reduced call center
expense due to the January 2002 move of call center services are provided by a
central program fund for franchisees.
Undistributed Corporate Expenses
Undistributed corporate expenses increased approximately $200 thousand or 12%
from $1.9 million in 2001 to $2.1 million in 2002. The increase was primarily
due to a one-time severance payment related to the integration of the Red Lion
acquisition.
Operating Income
Operating income decreased approximately $1.4 million or 6% from $24.0 million
in 2001 to $22.7 million in 2002. The decrease was primarily due to continued
soft market and weak U.S. economy resulting in rate and occupancy declines
combined with the approximate $1.9 million decrease related to the net gain on
asset dispositions in 2002 compared to 2001.
Interest Expense
Interest expense decreased approximately $1.4 million or 11% from $12.1 million
in 2001 to $10.7 million in 2002. The decrease was attributed to repayment of
outstanding borrowings and a decrease in interest rates charged on the Company's
variable rate debt.
Income Taxes
The effective income rate for 2002 decreased to 35% from 37% in 2001. The
decrease in the effective tax rate was primarily due to the elimination of in
goodwill amortization expense in 2002 compared to 2001.
Net Income
Net income increased approximately $400 thousand or 6% from $7.6 million in 2001
to $8.0 million in 2002.
Income applicable to common shareholders decreased approximately $2.1 million or
28% from $7.6 million in 2001 to $5.4 million in 2002 due to lower operating
results compared to 2001 combined with approximately $2.6 million of preferred
stock dividends in 2002 which did not occur in 2001 as they relate to the
acquisition of Red Lion Hotels, Inc. in December 2001.
Earnings Per Share
Basic earnings per share decreased approximately 29% from $.59 in 2001 to $.42
in 2002. Diluted earnings per share decreased approximately 31% from $.59 in
2001 to $.41 in 2002. These decreases were primarily attributed to lower
operating results given the continued soft U.S. economy in 2002 compared to
2001.
Page 14
Fiscal 2001 Compared With Fiscal 2000
A summary of the Company's consolidated results and hotel statistics for the
years ended December 31, 2001 and 2000 is as follows (dollars in thousands,
except per share amounts):
2001 2000 % Change
Revenues:
Hotels and Restaurants $ 99,495 $ 106,540 -7%
Franchise, Central Services and Development 3,213 3,643 -12%
TicketsWest 7,497 5,705 31%
Real Estate Division 10,114 9,540 6%
Corporate Services 314 378 -17%
--------- ---------- -----
Total Revenues 120,633 125,806 -4%
Total Direct Expenses 94,691 100,786 -6%
Undistributed Corporate Expenses 1,896 1,666 14%
Operating Income 24,046 23,354 3%
Net Income 7,579 5,821 30%
Basic and Diluted EPS 0.59 0.45 31%
Hotel Statistics (1)
2001 2000 % Change
Hotels at 12/31 93 45 107%
Rooms at 12/31 16,095 8,704 85%
REV PAR (2), (5) $ 53.26 $ 54.93 -3%
ADR (3) $ 88.08 $ 87.47 1%
Average Occupancy (4), (5) 60.5% 62.8% -2.3%
(1) Hotel statistics include actual hotels and rooms at December 31, 2001 and
2000, respectively. Therefore, the 2001 number of hotels and rooms include the
hotels which the Company acquired from Red Lion Hotels, Inc. on December 31,
2001. However, revenue per available room (RevPar), average daily rate (ADR),
and average occupancy statistics do not include Red Lion Hotels, Inc. as this
acquisition was completed on December 31, 2001 and their results of operations
were not included in the consolidated revenues and hotel operating statistics
until 2002. Revpar, ADR and occupancy statistics in 2001 and 2000 are presented
for comparable hotels (owned, leased, managed and franchised by the Company for
more than one year).
(2) RevPar represents total room and related revenues divided by total available
rooms, net of rooms out of service due to significant renovations.
(3) ADR represents total room revenues divided by the total number of paid rooms
occupied by hotel guests.
(4) Average occupancy represents total paid 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.
(5) Rooms 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.
Revenues
Total revenues decreased $5.2 million, or 4%, from $125.8 million in 2000 to
$120.6 million in 2001. This decrease is attributed primarily to general
economic conditions following the September 11 terrorist attacks, decreases in
total rooms occupied and REVPAR decreases at the Comparable Hotels (Hotels
owned, managed and franchised by the company for more than one year). REVPAR
decreased due to the decrease in occupied paid rooms.
Total hotel and restaurant revenues decreased $7.0 million or 7% to $99.5
million in 2001 from $106.5 million in 2000. Comparable Hotel ADR increased
$0.61 or 0.7% to $88.08 in 2001 from $87.47 in 2000. Comparable Hotel REVPAR
decreased $1.67 or 3% to $53.26 in 2001 from $54.93 in 2000.
The Company completed the acquisition of Red Lion Hotels, Inc. effective
December 31, 2001 which adds annually 1,180,775 room nights under ownership and
1,516,210 room nights for which the Company has management or franchise
contracts. Due to the timing of the Red Lion Hotels, Inc. acquisition, it did
not affect 2001 operating results. On a pro-forma basis including the Red Lion
hotels, comparable hotel ADR increased $1.53 or 1.9% to $81.26 in 2001 from
$79.73 in 2000. Comparable hotel pro forma REVPAR decreased $1.16 or 2.3% to
$49.50 in 2001 from $50.66 in 2000.
The franchise, central Services and development revenues decreased $0.4 million
or 11.8% to $3.2 million in 2001 from $3.6 million in 2000. The revenue decline
is primarily related to a decrease in fee income from central purchasing
services for franchised and third party owned hotels.
TicketsWest revenues increased $1.8 million, or 31.4%, to $7.5 million in 2001
from $5.7 million in 2000. TicketsWest revenue increased primarily due to the
expanded venues the Company services with its expansion into Colorado and the
increased shows presented by the Company and increased attendance at
entertainment events.
Page 15
Real Estate Division revenue increased $0.6 million, or 6.0%, to $10.1 million
in 2001 from $9.5 million in 2000 primarily due to increases in leasing income
at the company owned office buildings, and management income from additional
third party management contracts.
Direct Expenses
Direct expenses decreased $6.1 million, or 6%, to $94.7 million in 2001 from
$100.8 million in 2000, primarily due to gain on asset disposition and insurance
proceeds, and the decrease in the number of hotel guests served and enhanced
cost controls in the company owned hotels, partially offset by the increased
costs of increased transaction and sales by the TicketsWest division. This
represents a decrease in direct operating expenses as a percentage of total
revenues to 79% in 2001 from 80% in 2000. The increase in direct operating
expense percentages is primarily attributed to decreased hotel revenues and
increased depreciation for improvements placed in service during 2001.
Undistributed Corporate Expenses
Undistributed corporate operating expenses increased $0.2 million or 14%, to
$1.9 million in 2001 from $1.7 million in 2000. Total undistributed corporate
operating expenses as a percentage of total revenues increased 0.3% to 1.6% in
2001 from 1.3% in 2000.
Operating income increased $692 thousand, or 3%, to $24.0 million in 2001 from
$23.4 million in 2000. As a percentage of total revenues, operating income
increased to 20% in 2001 from 19% in 2000. This increase is primarily due to the
gain on asset dispositions and insurance settlement. The insurance settlement
related to the insurance recoveries in excess of the net book value of the
assets which were destroyed in the fire at one of the Company's commercial
office buildings.
Interest Expense
Interest expense decreased $2.6 million, or 18%, to $12.1 million in 2001 from
$14.7 million in 2000. This decrease is primarily related to lower interest
rates charged on the Company's variable rate debt, reduced borrowing due to debt
repayments made by the Company, and the lower borrowing cost of long term fixed
rate debt implemented during 2001.
Income Taxes
Income tax expense increased 36%, to $4.5 million in 2001 from $3.3 million in
2000, due to the increase in income before taxes. The effective income tax
provision rate was 37% for 2001 and 36% for 2000.
Net Income
Net income increased $1.8 million, or 30%, to $7.6 million in 2001 from $5.8
million in 2000.
Earnings Per Share
Basic and diluted earnings per share increased approximately 31% to $.59 in 2001
from $.45 in 2000.
OTHER MATTERS
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations," which amends SFAS No. 19. This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The requirements of this statement must be
implemented for fiscal years beginning after June 15, 2002; however, early
adoption is encouraged. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
The FASB also issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This Statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. The
adoption of this statement on January 1, 2002 did not have a material effect on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements, by rescinding SFAS No. 4, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion No. 30 will now be used to classify those
gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Finally, SFAS No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The provisions of SFAS No. 145
that amend SFAS No. 13 are effective for transactions occurring after May 15,
2002 with all other provisions of SFAS No. 145 being required to be adopted by
the Company on January 1, 2003. The adoption of SFAS No. 145 in 2003 has not had
a material impact on the Company's consolidated financial statements.
Page 16
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146
replaces the prior guidance that was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management currently believes that the adoption of SFAS No.
146 will not have a material impact on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in interim
financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. Management
currently believes that the adoption of SFAS No. 148 will not have a material
impact on the financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting for Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and rescission of FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation also incorporates
without consideration the guidance in FASB Interpretation No. 34, which is being
superseded. The adoption of FIN 45 will not have a material effect on the
consolidated financial statements and will be applied prospectively.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" ("FIN 46"). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51 to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The adoption of FIN 46 will not have a material effect on the consolidated
financial statements.
Inflation
Inflation has been moderate in recent years, as measured by fluctuations in the
Consumer Price Index, and has not had a significant impact on the Company's
business.
Safe Harbor for Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. The Company is
including the following cautionary statement to make applicable, and to take
advantage of, the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of,
the Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, projections of future events or performance, and
underlying assumptions (many of which are based, in turn, upon further
assumptions). Forward-looking statements are all statements other than
statements of historical fact, including without limitation those that are
identified by the use of words such as, but not limited to, "will,"
"anticipates," "seeks to," "estimates," "expects," "intends," "plans,"
"predicts," and similar expressions, but the absence of these words does not
mean a statement is not forward-looking. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements.
Page 17
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others:
o magnitude and duration of war, international conflicts, economic cycles,
including fluctuations in regional economic conditions and seasonality of
lodging industry
o actual and threatened terrorist attacks and international conflicts, and their
impacts on travel
o changes in future demand and supply for hotel rooms
o competitive conditions in the lodging industry
o relationships with franchisees and properties
o changes in energy, healthcare, insurance and other operating expenses
o impact of government regulations
o ability to obtain financing through debt and/or equity issuance
o ability to sell non-core assets
o ability to locate lessees for rental property and managing and leasing
properties owned by third parties
o dependency upon the ability and experience of executive officers and ability
to retain or replace such officers
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances that occur after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables summarize the financial instruments held by the Company at
December 31, 2002 and 2001, which are sensitive to changes in interest rates. At
December 31, 2002, approximately 40.2% of the Company's debt and capital lease
obligations are subject to changes in market interest rates and are sensitive to
those changes.
The following table presents principal cash flows for debt and capital leases
outstanding at December 31, 2002, by maturity date and the related average
interest rate (in thousands).
Outstanding Debt and Capital Lease Obligations
2003 2004 2005 2006 2007 There-after Total Fair Value
Note payable to bank (a) $52,100 $ - $ - $ - $ - $ - $52,100 $52,100
Long-term debt:
Fixed rate 4,044 2,985 6,832 3,069 3,298 74,222 94,450 94,450
Weighted-average
interest rate 7.78% 7.80% 7.81% 7.81% 7.83% 7.85%
Variable rate 845 893 949 1,012 702 7,244 11,645 11,645
Weighted-average
interest rate 5.48% 5.47% 5.47% 5.46% 5.45% 5.41%
Capital lease obligations 268 - - - - - 268 268
Weighted-average
interest rate 8.58% - % - % - % - % - %
(a) The interest rate on the note payable is based on LIBOR plus a variable
interest margin based on the Company's funded debt ratio. The interest margin
can vary from 205 - 350 basis points. At December 31, 2002, the interest margin
was 275 basis points.
The following table presents principal cash flows for debt and capital leases
outstanding at December 31, 2001, by maturity date and the related average
interest rate (in thousands).
Outstanding Debt and Capital Lease Obligations
2002 2003 2004 2005 2006 There-after Total Fair Value
Note payable to bank (a) $ - $54,250 $ - $ - $ - $ - $54,250 $54,250
Long-term debt:
Fixed rate 2,861 4,586 2,869 6,742 2,967 80,365 100,390 100,390
Weighted-average
interest rate 7.66% 7.67% 7.69% 7.70% 7.71% 7.73%
Variable rate 892 953 1,032 1,113 1,202 11,448 16,640 16,640
Weighted-average
interest rate 6.99% 7.02% 7.04% 7.06% 7.09% 7.13%
Capital lease obligations 384 268 - - - - 652 652
Weighted-average
interest rate 8.23% 8.59% - % - % - % - %
(a) The interest rate on the note payable is based on LIBOR plus a variable
interest margin based on the Company's funded debt ratio. The interest margin
can vary from 180 - 325 basis points. At December 31, 2001, the interest margin
was 250 basis points.
Page 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of this report for information with respect to the financial
statements filed as a part hereof, including financial statements filed pursuant
to the requirements of this Item 8.
Selected Quarterly Data
Unaudited - dollars in thousands except per share amounts
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002
Revenues $42,469 $51,623 $55,685 $44,394
Operating income 4,574 8,426 9,419 262
Income (loss) before income tax 1,654 5,842 6,971 (2,091)
Net income (loss) 1,070 3,780 4,510 (1,353)
Earnings (loss) per common share - Basic 0.03 0.24 0.30 (0.15)
Earnings (loss) per common share - Diluted 0.03 0.24 0.29 (0.15)
2001
Revenues $28,152 $32,418 $33,844 $26,219
Operating income 3,307 6,495 7,263 1,912
Income (loss) before tax 676 4,555 2,924 (553)
Net income (loss) 676 4,532 2,924 (553)
Earnings (loss) per common share - Basic & Diluted 0.05 0.35 0.23 (0.04)
Page 19
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
WestCoast Hospitality Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets of WestCoast
Hospitality Corporation and its subsidiaries as of December 31, 2002 and 2001
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WestCoast
Hospitality Corporation and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
BDO Seidman, LLP
February 5, 2003
Spokane, Washington
Page 20
Report of Independent Accountants
The Board of Directors and Stockholders
WestCoast Hospitality Corporation
In our opinion, the consolidated statements of income, of changes in
stockholders' equity and of cash flows for the year ended December 31, 2000
present fairly, in all material respects, the results of operations and cash
flows of WestCoast Hospitality Corporation and its subsidiaries for the year
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Portland, Oregon
February 1, 2001
Page 21
WestCoast Hospitality Corporation
Consolidated Balance Sheets
December 31, 2002 and 2001
(in thousands, except share data)
2002 2001
Assets:
Current assets:
Cash and cash equivalents $ 2,701 $ 5,735
Accounts receivable, net 9,559 9,101
Inventories 2,040 2,380
Assets held for sale 34,408 21,403
Prepaid expenses and other 2,693 1,410
------------------ ------------------
Total current assets 51,401 40,029
------------------ ------------------
Property and equipment, net 241,255 257,656
Goodwill 28,042 28,042
Other intangible assets, net 15,188 16,518
Other assets, net 20,824 17,404
------------------ ------------------
Total assets $ 356,710 $ 359,649
================== ==================
Liabilities:
Current liabilities:
Accounts payable $ 6,773 $ 4,756
Accrued payroll and related benefits 6,173 6,866
Accrued interest payable 695 777
Income taxes payable - 822
Advanced deposits 198 1,542
Other accrued expenses 8,494 7,039
Notes payable to bank 52,100 -
Long-term debt, due within one year 4,889 3,753
Capital lease obligations, due within one year 268 384
------------------ ------------------
Total current liabilities 79,590 25,939
------------------ ------------------
Long-term debt, due after one year 101,206 113,277
Notes payable to bank - 54,250
Capital lease obligations, due after one year - 268
Deferred income 2,626 -
Deferred income taxes 16,261 14,160
Minority interest in partnerships 2,911 2,940
------------------ ------------------
Total liabilities 202,594 210,834
------------------ ------------------
Commitments and contingencies (Notes 3, 14 and 15)
Stockholders' equity:
Preferred stock - 5,000,000 shares authorized; $0.01 par value;
$50 per share liquidation value:
Class A - 301,315 and 303,771 shares issued and outstanding 3 3
Class B - 301,315 and 303,771 shares issued and outstanding 3 3
Additional paid-in capital, preferred stock 30,125 30,371
Common stock - 50,000,000 shares authorized; $0.01 par value;
12,981,878 and 12,959,700 shares issued and outstanding 130 130
Additional paid-in capital, common stock 84,083 83,966
Retained earnings 39,772 34,342
------------------ ------------------
Total stockholders' equity 154,116 148,815
------------------ ------------------
Total liabilities and stockholders' equity $ 356,710 $ 359,649
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
Page 22
WestCoast Hospitality Corporation
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2002 2001 2000
Revenues:
Hotels and Restaurants $ 173,320 $ 99,495 $ 106,540
Franchise, Central Services and Development 4,137 3,213 3,643
TicketsWest 7,430 7,497 5,705
Real Estate Division 9,001 10,114 9,540
Corporate Services 283 314 378
---------------- ---------------- ----------------
Total revenues 194,171 120,633 125,806
---------------- ---------------- ----------------
Operating expenses:
Direct:
Hotels and Restaurants 148,675 74,560 78,626
Franchise, Central Services and Development 1,990 1,796 1,207
TicketsWest 6,343 7,258 5,702
Real Estate Division 4,778 4,734 4,378
Corporate Services 222 183 227
Depreciation and amortization 10,517 10,323 9,578
Amortization of goodwill - 855 874
Gain on asset dispositions including recoveries (3,166) (5,103) (52)
Conversion expense 14 85 246
---------------- ---------------- ----------------
Total direct expenses 169,373 94,691 100,786
Undistributed corporate expenses 2,117 1,896 1,666
---------------- ---------------- ----------------
Total expenses 171,490 96,587 102,452
---------------- ---------------- ----------------
Operating income 22,681 24,046 23,354
Other income (expense):
Interest expense, net of amounts capitalized (10,717) (12,092) (14,660)
Interest income 372 247 315
Other income 20 - 134
Equity in investments 28 92 100
Minority interest in partnerships (8) (188) (116)
---------------- ---------------- ----------------
Income before income taxes 12,376 12,105 9,127
Income tax provision 4,369 4,503 3,306
---------------- ---------------- ----------------
Income before extraordinary item 8,007 7,602 5,821
Extraordinary item, net of tax benefit - (23) -
---------------- ---------------- ----------------
Net income 8,007 7,579 5,821
Preferred stock dividend (2,577) - -
---------------- ---------------- ----------------
Income applicable to common shareholders $ 5,430 $ 7,579 $ 5,821
================ ================ ================
Page 23
WestCoast Hospitality Corporation
Consolidated Statements of Income, Continued
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2002 2001 2000
Earnings per common share:
Income per common share before extraordinary item $ 0.42 $ 0.59 $ 0.45
Extraordinary item - - -
------------ ------------ ----------
Earnings per share - basic $ 0.42 $ 0.59 $ 0.45
============ ============ ==========
Earnings per share - diluted $ 0.41 $ 0.59 $ 0.45
============ ============ ==========
Weighted-average shares outstanding - basic 12,975 12,953 12,941
============ ============ ==========
Weighted-average shares outstanding - diluted 13,285 13,239 13,237
============ ============ ==========
The accompanying notes are an integral part of the consolidated financial statements.
Page 24
WestCoast Hospitality Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
Preferred Stock Common Stock
----------------------------------- --------------------------------------
Additional Additional
Paid-In Paid-In Retained
Shares Amount Capital Shares Amount Capital Earnings
Balances, January 1, 2000 - $ - $ - 12,925,276 $ 129 $ 83,761 $ 20,942
Net income 5,821
Stock issued under employee
stock purchase plan 26,429 175
Stock issued to directors 1,578 12
Retirement of stock (20,177) (103)
----------------------------------------------------------------------------------------------
Balances, December 31, 2000 - - - 12,933,106 129 83,845 26,763
Net income 7,579
Stock issued under employee
stock purchase plan 24,139 1 106
Stock issued for acquisition
of subsidiaries 607,542 6 30,371
Stock issued to directors 2,455 15
----------------------------------------------------------------------------------------------
Balances, December 31, 2001 607,542 6 30,371 12,959,700 130 83,966 34,342
Net income 8,007
Preferred stock dividends:
Series A ($3.50 per share) (1,061)
Series B ($5.00 per share) (1,516)
Retirement of stock
Series A (2,456) - (123)
Series B (2,456) - (123)
Stock issued under employee
stock purchase plan 19,902 102
Stock issued to directors 2,276 15
----------------------------------------------------------------------------------------------
Balances, December 31, 2002 602,630 $ 6 $ 30,125 12,981,878 $ 130 $ 84,083 $ 39,772
==============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 25
WestCoast Hospitality Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
Operating activities:
Net income $ 8,007 $ 7,579 $ 5,821
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 10,517 11,178 10,452
(Gain) loss on disposition of property and equipment (3,166) (1,353) 194
Gain on insurance settlement - (3,782) -
Deferred income tax provision 1,921 2,240 1,524
Minority interest in partnerships 8 188 116
Equity in investments (28) (92) (100)
Extraordinary item, write-off of deferred loan fees - 9 -
Compensation expense related to stock issuance 15 15 12
Provision for doubtful accounts 1,053 397 297
Change in assets and liabilities, net of effects of
purchase of subsidiary:
Accounts receivable (1,556) (71) 1,019
Inventories 105 (7) (20)
Prepaid expenses, deposits and income taxes
refundable (1,322) (393) 145
Accounts payable and income taxes payable 1,046 129 (2,275)
Accrued payroll and related benefits (693) 1,448 (571)
Accrued interest payable (82) 69 (13)
Other accrued expenses and advance deposits (692) (64) (4,647)
------------ ------------ ------------
Net cash provided by operating activities 15,133 17,490 11,954
------------ ------------ ------------
Investing activities:
Additions to property and equipment (10,708) (6,769) (7,739)
Proceeds from disposition of property and equipment 1,845 1,792 -
Cash paid for acquisition of subsidiary, net of cash received - (17,816) -
Distribution from partnership investments 192 - -
Payment received on note receivable - 67 -
Other, net 15 (202) 257
------------ ------------ ------------
Net cash used in investing activities (8,656) (22,928) (7,482)
------------ ------------ ------------
Financing activities:
Distributions to minority owners (37) (129) (33)
Proceeds from note payable to bank 10,800 21,150 15,137
Repayment of note payable to bank (12,950) (73,400) (9,900)
Proceeds from long-term debt - 74,400 -
Repayment of long-term debt (4,257) (12,624) (9,707)
Proceeds from issuance of common stock under employee
stock purchase plan 102 107 175
Preferred stock dividend payments (1,937) - -
Principal payments on capital lease obligations (384) (534) (648)
Additions to deferred financing costs (848) (1,273) (377)
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,511) 7,697 (5,353)
------------ ------------ ------------
Change in cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (3,034) 2,259 (881)
Cash and cash equivalents at beginning of year 5,735 3,476 4,357
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,701 $ 5,735 $ 3,476
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 26
WestCoast Hospitality Corporation
Consolidated Statements of Cash Flows, Continued
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest (net of amount capitalized) $ 10,799 $ 12,023 $ 14,673
Income taxes $ 4,376 $ 1,424 $ 1,791
Noncash investing and financing activities:
Addition of note receivable on sale of building $ 2,607 $ - $ -
Investment in real estate venture exchanged for property $ 1,194 $ - $ -
Assignment of debt to purchaser of building $ 7,198 $ - $ -
Preferred stock dividends declared $ 2,577 $ - $ -
Retirement of preferred stock for refund of contracts $ (246) $ - $ -
Note payable for real estate $ 520 $ - $ -
Assumption of capital leases $ - $ - $ 108
Acquisitions of property through debt, liabilities or
reduction of note receivable $ - $ - $ 602
Issuance of stock for acquisition of subsidiary $ - $ 30,377 $ -
Redemption of stock for satisfaction of receivable $ - $ - $ 103
Page 27
WestCoast Hospitality Corporation
Notes to Financial Statements
1. Organization
WestCoast Hospitality Corporation (the "Company") is primarily engaged in the
ownership, management, development, and franchising of mid scale, full service
hotels. As of December 31, 2002, the system contained 86 properties in 15
states, totaling over 15,000 rooms and over 717,000 square feet of meeting
space. The Company owned an interest in and operated 29 hotels, leased 14
hotels, managed seven hotels owned by others and franchised 36 hotels owned and
operated by third parties at December 31, 2002. The Company's hotel brands
include WestCoast(R) and RedLion(R). All properties are located in the United
States.
The Company is also engaged in activities related or supplementary to the
operation of hotels. These activities include computerized ticketing services
and presenting entertainment productions through its TicketsWest division and
owning, leasing, developing and/or managing commercial and residential
properties through its G&B Real Estate division.
The Company was incorporated in the State of Washington on April 25, 1978. A
substantial portion of the Company's assets are held in WestCoast Hospitality
Limited Partnership ("WHLP"). WHLP was formed in the State of Delaware on
October 23, 1997. The Company is the sole general partner and approximately 98%
owner of WHLP and manages its operations.
The consolidated financial statements include the accounts of WestCoast
Hospitality Corporation, its wholly owned subsidiaries, its general and limited
partnership interest in WHLP, a 50% interest in a limited partnership and its
equity basis investment in two limited partnerships. All of these entities are
collectively referred to as "the Company" or "WestCoast". All significant
intercompany transactions and accounts have been eliminated in the consolidated
financial statements.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with remaining
maturities at time of purchase of three months or less. The Company places its
cash with high credit quality institutions. At times, cash balances may be in
excess of federal insurance limits.
The Company maintains several trust accounts for owners of real properties which
it manages. These cash accounts are not owned by the Company and therefore, are
not included in the consolidated financial statements. At December 31, 2002 and
2001, these accounts totaled approximately $2,140,000 and $1,753,000
respectively.
At December 31, 2002 and December 31, 2001, $1.9 million and $1.1 million,
respectively was reserved for the future payment of insurance, furniture and
fixtures and personal taxes for four specific hotel properties in accordance
with bank debt requirements.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically
identified amounts that the Company believes to be uncollectible and those
accounts that are past due beyond a certain date. If actual collections
experience changes, revisions to the allowance may be required. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.
The following schedule summarizes the activity in the allowance account for
trade accounts receivable for the past three years (in thousands):
2002 2001 2000
Balance, beginning of year $ 420 $ 49 $ 141
Additions to allowance 1,053 397 297
Addtions due to acquisitions - 181 -
Deductions, net of recoveries (886) (207) (389)
---------------- ---------------- ----------------
Balance, end of year $ 587 $ 420 $ 49
================ ================ ================
Inventories
Inventories consist primarily of food and beverage products held for sale at the
restaurants operated by the Company. Inventories are valued at the lower of
cost, determined on a first-in, first-out basis, or net realizable value.
Assets Held for Sale
The Company's buildings which are held for sale are recorded at the lower of
their historical carrying value (cost less accumulated depreciation) or market
value. Depreciation is terminated when the asset is determined to be held for
sale.
Page 28
In order to qualify as an asset held for sale in accordance with SFAS 144, the
asset is expected to qualify for recognition as a completed sale within one year
unless during the one year period, circumstances arise that previously were
considered unlikely and, as a result a long-lived asset previously classified as
held for sale is not sold by the end of that period and (1) during the initial
one year period the Company initiated actions necessary to respond to the change
in circumstances, (2) the asset is being actively marketed at a price that is
reasonable given the change in circumstances.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the lesser of the estimated useful lives of the
related assets or the lease term as follows:
Buildings 25-40 years
Equipment 3-20 years
Furniture and fixtures 5-15 years
Landscaping and land improvements 15 years
Major additions and betterments are capitalized. Costs of maintenance and
repairs which do not improve or extend the lives of the respective assets are
expensed currently. When items are disposed of, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized in operations. Management of the Company periodically reviews the net
carrying value of all properties to determine whether there has been a permanent
impairment of value and assesses the need for any write-downs in carrying value.
Interest Capitalization
The Company capitalizes interest costs during the construction period for
qualifying assets. During the years ended December 31, 2002, 2001, and 2000, the
Company capitalized approximately $84,000, $253,000 and $468,000 of interest
costs, respectively.
Brand Name, Goodwill and Other Intangible Assets
Brand name and goodwill are indefinite life intangible assets attributable to
the purchase prices of acquisitions, which were in excess of the estimated fair
values of net tangible and identifiable intangible assets acquired. Through
December 31, 2001 these assets were being amortized over 20 to 40 years.
Other intangible assets include lease, management and franchise contracts. The
costs of these contracts are amortized over the weighted-average remaining term
of approximately nine years. At December 31, 2002, the cost and accumulated
amortization of these contracts was $10.4 million and $2.1 million,
respectively. At December 31, 2001, the cost and accumulated amortization of
these contracts was $10.9 and $1.3 million, respectively. Amortization expense
related to these contracts for the years ended December 31, 2002, 2001 and 2000
was approximately $860,000, $649,000 and $631,000 respectively.
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. The Company evaluated the goodwill,
finite and indefinite life of intangible assets and determined that there was no
impairment during 2002.
The adoption of SFAS No. 142 on January 1, 2002, resulted in the elimination of
goodwill amortization of $855,000 for the year ended December 31, 2002.
Accumulated amortization at December 31, 2002 and 2001 remained the same at
approximately $2,079,000 since during 2002 there was no additional amortization.
Net income and earnings per share adjusted for goodwill amortization for 2001
and 2000 compared to fiscal 2002 is as follows (in thousands):
2002 2001 2000
Reported net income to common shareholders $ 5,430 $ 7,579 $ 5,821
Add back: goodwill amortization, net of tax - 537 542
---------- ---------- ---------
Adjusted net income to
common shareholders $ 5,430 $ 8,116 $ 6,363
========== ========== =========
Basic earnings per share:
Reported net income $ 0.42 $ 0.59 $ 0.45
Goodwill amortization - 0.04 0.04
---------- ---------- ---------
Adjusted earnings per share-basic $ 0.42 $ 0.63 $ 0.49
========== ========== =========
Diluted earnings per share:
Reported net income $ 0.41 $ 0.59 $ 0.45
Goodwill amortization - 0.04 0.04
---------- ---------- ---------
Adjusted earnings per share-diluted $ 0.41 $ 0.63 $ 0.49
Page 29
As of December 31, 2002, a summary of goodwill and other intangible assets is as
follows (in thousands):
Accumulated
Cost Amortization Net
-----------------------------------------------------------
Goodwill $ 28,042 (a) $ 28,042
Intangible assets:
Management and franchise contracts $ 6,007 $ (1,978) $ 4,029
Other intangible assets 66 (17) 49
Lease contracts 4,332 (144) 4,188
Brand name 6,878 (a) 6,878
Trademark 44 (a) 44
-----------------------------------------------------------
Total other intangible assets $ 17,327 $ (2,139) $ 15,188
===========================================================
(a) Goodwill and intangible assets with an indefinite life are not subject to amortization.
Estimated amortization expense for intangible assets over the next five years is
as follows (in thousands):
Years Ending
December 31,
---------------------------
2003 $ 783
2004 783
2005 783
2006 756
2007 522
Goodwill attributable to each of the Company's business segments at both
December 31, 2002 and 2001 is as follows (in thousands):
TicketsWest $ 3,161
Franchise, Central services
and Development 24,427
Hotels and Restaurants 454
------------------
Total $ 28,042
==================
There were no changes to goodwill during 2002
Valuation of Long-Lived Assets
The carrying value of the Company's long-lived assets are reviewed when events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If it is determined that an impairment loss has occurred
based on expected net future cash flows of the asset, then an impairment loss is
recognized in the income statement using a fair value based method.
Other Assets
Other assets primarily includes amounts expended for deferred loan fees,
purchase option payments, straight-line rental income, a minority interest in a
limited liability company, investments in partnerships and a note receivable.
Deferred loan fees are amortized using the interest method over the term of the
related loan agreement. The Company has deferred purchase option payments made
pursuant to purchase agreements for hotel properties which are currently being
leased and operated by the Company. If the options are exercised, the option
payments will be amortized as part of the purchase price of the hotels. If the
options are not exercised, the option payments will be charged to operations.
The Company's investment in the limited liability company is accounted for under
the cost method. Investment in a partnership over which the Company can exercise
significant influence is accounted for by the equity method, under which the
Company recognizes its proportionate share of partnership earnings and treats
distributions as a reduction in its investment.
The Company's $2.6 million note receivable at December 31, 2002 bears interest
at 7.36%. Monthly principal and interest is due until August 2007 when the note
is due in full.
Income Taxes
WestCoast Hospitality Corporation is a tax paying entity and accounts for income
taxes using the liability method, which requires that deferred tax assets and
liabilities be determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets and liabilities and
tax attributes using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
WHLP and the other partnerships which are partially or wholly owned by WestCoast
Hospitality Corporation are not tax paying entities. However, the income tax
attributes of these partnerships flow through to the respective partners of the
partnerships.
Page 30
Revenue Recognition
Revenue is generally recognized as services are performed. Hotel and restaurant
revenue primarily represent room rental and food and beverage sales from owned,
leased and consolidated joint venture hotels and are recognized at the time of
the hotel stay or sale of the restaurant services. Hotel and restaurant revenues
also include management fees the Company earns from managing third party owned
hotels. These fees totaled $1.9 million, $2.3 million and $2.2 million for the
years ended December 31, 2002, 2001 and 2000, respectively. Franchise, Central
Services and Development fees represent fees received in connection with the
franchise of the Company's brand name as well as central purchasing, development
and other fees. Franchise fees are recognized as earned in accordance with the
contractual terms of the franchise agreements. Other fees are recognized when
the services are provided.
Real Estate Division income represents both lease income on owned commercial and
retail properties as well as property management income, development fees and
leasing and sales commissions from residential and commercial properties managed
by the Company, typically under long-term contracts with the property owner.
Lease revenues are recognized over the period of the leases. The Company records
rental income from operating leases which contain fixed escalation clauses on
the straight-line method. The difference between income earned and lease
payments received from the tenants is included in other assets on the
consolidated balance sheets. Rental income from retail leases which is
contingent upon the lessees' revenues is recorded as income in the period
earned. Management fees, development fees and leasing and sales commissions are
recognized as these services are performed.
TicketsWest income includes primarily earnings from ticketing and entertainment
operations. Where the Company acts as an agent and receives a net fee or
commission, it is recognized as revenue in the period the services are
performed. When the Company is the promoter of an event and is at risk for the
production, revenues and expenses are recorded in the period of the event
performance.
Earnings Per Common Share
Net income per common share-basic is computed by dividing income applicable to
common shareholders by the weighted-average number of common shares outstanding
during the period. Net income per common share-diluted is computed by adjusting
income applicable to common shareholders by the effect of the minority interest
related to Operating Partnership Units (OP Units) and increasing the
weighted-average number of common shares outstanding by the effect of the OP
Units and the additional common shares that would have been outstanding if the
dilutive potential common shares (stock options and convertible notes) had been
issued, to the extent that such issuance would be dilutive.
Stock Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation", the Company has chosen to measure
compensation cost for stock-based employee compensation plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and to provide the
disclosure only requirements of SFAS 123.
On December 31, 2002, the Financial Accounting Standards Board (the "FASB")
amended the transition and disclosure requirements of SFAS No. 123 through the
issuance of FASB Statement No. 148, Accounting for Stock-Based Compensation -
Transistion and Disclosure ("SFAS No. 148"). SFAS No. 148 amends the existing
disclosures to make more frequent and prominent disclosure of stock-based
compensation expense beginning with financial statements for fiscal years ending
after December 15, 2002.
The Company has chosen not to record compensation expense using fair value
measurement provisions in the statement of income. Had compensation cost for
plans been determined based on the fair value at the grant dates for awards
under the plans, reported net income and income per share would have been
changed to the pro forma amounts indicated below (dollars in thousands, except
per share amounts):
Year Ended December 31,
-------------------------------------
2002 2001 2000
Reported net income applicable to common shareholders $ 5,430 $ 7,579 $ 5,821
Add back: Stock-based employee compensation
expense, net of related tax effects 10 9 8
Deduct: Total stock-based employee compensation
expense determined under fair valued based
method for all awards, net of related tax effects (304) (692) (824)
-------------------------------------
Pro forma $ 5,136 $ 6,896 $ 5,005
=====================================
Basic earnings per share:
Reported net income $ 0.42 $ 0.59 $ 0.45
Stock-based employee compensation, fair value (0.02) (0.06) (0.06)
-------------------------------------
Pro forma $ 0.40 $ 0.53 $ 0.39
=====================================
Diluted earnings per share:
Reported net income $ 0.41 $ 0.59 $ 0.45
Stock-based employee compensation, fair value (0.02) (0.06) (0.06)
-------------------------------------
Pro forma $ 0.39 $ 0.53 $ 0.39
=====================================
Page 31
Advertising and Promotion
The Company generally expenses all costs associated with its advertising and
promotional efforts as incurred. During the years ending December 31, 2002, 2001
and 2000 the Company incurred $6.3 million, $2.4 million, and $2.2 million,
respectively of advertising expenses.
Central Program Fund
Effective January 1, 2002 the Company established the WestCoast Central Program
Fund (CPF), organized in accordance with the various domestic franchise
agreements. The CPF is responsible for certain advertising services, frequent
guest program administration, reservation services, national sales promotions
and brand and revenue management services intended to increase sales and enhance
the reputation of the Company and its franchise owners including the WestCoast
and Red Lion branded properties.
Contributions by the Company to the CPF for owned and managed hotels and
contributions by the franchisees, through the individual franchise agreements,
total up to 5% of room revenue or can be based on reservation fees, frequent
guest program dues and other services. While the Company administers the
functions of the CPF, the net assets and transactions of the CPF are not
commingled with the working capital of the Company. The net assets and
transactions of the CPF are, therefore, not included in the accompanying
financial statements in accordance with FASB No. 45, "Accounting for Franchise
Fee Revenue".
For the year ended December 31, 2002, the Company contributed $5.7 million to
the CPF with respect to its owned and managed properties, which was recognized
in direct operating expenses. At December 31, 2002, the Company has a net
current receivable from the CPF of approximately $223 thousand.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations," which amends SFAS No. 19. This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The requirements of this statement must be
implemented for fiscal years beginning after June 15, 2002; however, early
adoption is encouraged. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
The FASB also issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This Statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. The
adoption of this statement on January 1, 2002 did not have a material effect on
the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements, by rescinding SFAS No. 4, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion No. 30 will now be used to classify those
gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Finally, SFAS No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The provisions of SFAS No. 145
that amend SFAS No. 13 are effective for transactions occurring after May 15,
2002 with all other provisions of SFAS No. 145 being required to be adopted by
the Company on January 1, 2003. The adoption of SFAS No. 145 in 2003 has not had
a material impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities. "SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146
replaces the prior guidance that was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). "SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management currently believes that the adoption of SFAS No.
146 will not have a material impact on the Company's consolidated financial
statements.
Page 32
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in interim
financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. Management
currently believes that the adoption of SFAS No. 148 will not have a material
impact on the financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting for Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and rescission of FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation also incorporates
without consideration the guidance in FASB Interpretation No. 34, which is being
superseded. The adoption of FIN 45 will not have a material effect on the
consolidated financial statements and will be applied prospectively.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" ("FIN 46"). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51 to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The adoption of FIN 46 will not have a material effect on the consolidated
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2002
presentation. These reclassifications had no effect on net income or retained
earnings as previously reported.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could materially differ from those
estimates.
3. Financial Liquidity
At December 31, 2002 the Company has a deficit working capital position of $28.8
million. This position is a direct result of the classification of $52.1 million
of obligations outstanding under the Company's primary revolving credit facility
with a bank as a current liability. As further discussed in Note 10, the
classification is due to the anticipatory breach of certain financial covenants
to be measured in June, September and December 2003.
The Company intends to refinance its revolving credit facility either with its
existing lender or other lenders into non-recourse and revolving debt.
Management believes that an adequate borrowing base exists to secure the
necessary financing. The Company is also pursuing the sale of certain non-core
real estate assets, some of which are included in assets held for sale discussed
in Note 5. Management has implemented certain operational efficiencies and cost
reduction plans that are expected to improve covenant ratios. These actions are
intended to reduce the Company's dependence on the revolving credit facility.
The historical cash flow of the Company has been adequate to service all its
normal operating needs, service all interest and regularly scheduled principal
payments and capital improvements. Due to the war and the perception of a weak
economy there can be no assurance that future operating performance will provide
adequate cash flow for the Company's needs. The ability of the Company to
improve its working capital position through the refinance of its revolving
credit facility, improve operating results and dispose of non-core assets is
dependent upon lending market conditions, the achievement of future operating
efficiencies and the liquidity of the real estate market where the Company's
assets are located. There can be no assurance that these efforts will be
successful.
Page 33
4. Acquisition
Effective December 31, 2001, the Company completed the purchase of Red Lion
Hotels, Inc. (Red Lion) from Hilton Hotels Corporation (Hilton) including 9
owned hotels, 12 leased hotels, 4 licensed hotels and 22 franchised operating
hotels. The acquisition was made to add critical mass to the Company's hotel
portfolio and expand the Company's presence in additional markets. The hotels
were acquired for $20,252,000 in cash, 303,771 Class A preferred shares and
303,771 Class B preferred shares for total consideration of approximately
$52,600,000 including the cost of acquisition. The source of cash consideration
for the transaction was the Company's available cash and advances under the
Company's existing credit facility. The value of the preferred shares was
determined based on its stated redemption value, as discussed in Note 11.
The acquisition of Red Lion was accounted for using the purchase method of
accounting. As the acquisition occurred on the last day of the year ended
December 31, 2001, the results of operations of the acquired entity are not
included in the consolidated statements of income or cash flows.
The following table presents the allocation of the purchase price to the
acquired assets and liabilities (in thousands):
Estimated allocation at Purchase price Final allocation at
December 31, 2002 adjustments December 31, 2002
------------------------- ----------------- ----------------------
Cash $ 2,640 $ - $ 2,640
Accounts receivable 3,195 (46) 3,149
Prepaid expenses 284 - 284
Inventories 1,243 (180) 1,063
------------------------- ----------------- ----------------------
Total current assets 7,362 (226) 7,136
Property and equipment 35,328 651 35,979
Brand name 6,879 6,879
Lease contracts 4,332 4,332
Franchise contracts 809 809
Deferred tax asset 4,711 (180) 4,531
------------------------- ----------------- ---------------------
Total assets 59,421 245 59,666
Accounts payable (1,932) - (1,932)
Other current liabilities (4,960) (245) (5,205)
------------------------- ----------------- ---------------------
Total liabilities (6,892) (245) (7,137)
------------------------- ----------------- ---------------------
Net assets acquired $ 52,529 $ - $ 52,529
========================= ================= =====================
The lease and franchise contracts are being amortized over the terms of the
respective agreements of 30 years and nine years, respectively.
5. Assets Held for Sale
In connection with the Company's decision in 2001 to sell non-core assets, on
October 10, 2002, the Company and American Capital Group, LLC entered into a
purchase and sale agreement for the WestCoast Kalispell Hotel and Kalispell
Center Mall. The agreement is subject to due diligence and is scheduled to close
in 2003. After the close, the WestCoast Kalispell Center Hotel will remain under
the WestCoast Hospitality Corporation brand and management, while American
Capital Group, LLC will oversee management for the mall. The net book value of
the hotel and mall was $12.9 million at December 31, 2002.
Additionally, two office buildings owned by the Company have been marketed for
sale which the Company expects to sell in 2003. The total net book value of
these buildings as of December 31, 2002 of $21.5 million is classified as assets
held for sale. These two buildings were initially classified as assets held for
sale at December 31, 2001. At December 31, 2002, the Company's management
evaluated the accounting criteria set forth in SFAS 144 and determined the
assets were still appropriately classified as assets for sale.
Page 34
6. Property and Equipment
Property and equipment at December 31, 2002 and 2001 is summarized as follows
(in thousands):
2002 2001
Buildings and equipment $ 202,411 $ 219,729
Furniture and fixtures 20,530 21,413
Equipment acquired under capital leases 2,342 2,796
Landscaping and land improvements 2,355 2,216
---------------- ----------------
227,638 246,154
Less accumulated depreciation and amortization (53,302) (56,368)
---------------- ----------------
174,336 189,786
Land 60,012 64,387
Construction in progress 6,907 3,483
---------------- ----------------
$ 241,255 $ 257,656
================ ================
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $8.9 million, $8.9 million, and $8.3 million, respectively.
In the first quarter of 2002, the Company entered into an agreement for the sale
of an 80.1% interest in the WHC Building, while retaining the management of the
building, its lease of space, and the remaining ownership interest. At the time
of the sale the cost and accumulated depreciation of this building was $10.6
million and $4.0 million, respectively. The sale of the building resulted in a
pre-tax gain of $5.8 million, of which $3.0 million was recognized as a gain on
asset disposition in 2002. Due to retaining a partial lease of the building, a
portion of the gain is being deferred over the six-year lease term. During 2002,
the Company recognized $215,000 of the deferred gain. As of December 31, 2002,
the total deferred gain remaining is $2.6 million.
7. Other Investments
The Company has a 6% interest in a limited liability company, which is accounted
for under the cost method. Accordingly the Company's investment is increased or
decreased by contributions, distributions, or impairments only.
The Company also has a 0.5% general partnership interest in one hotel property,
which is accounted for under the equity method of accounting. As of March 2002,
the Company also has a 19.9% interest in the WHC Building (see Note 6), which is
also accounted for under the equity method of accounting. Therefore, the Company
records its proportionate share of the earnings and losses of these entities in
the consolidated statements of income. The Company wrote-off its 0.3% interest
($73,000) in another hotel partnership, because the primary asset was sold in
November 2002.
At December 31, 2002 and 2001, the Company's recorded investment in these
investments was $2.25 million and $1.3 million, respectively. The underlying
assets, liabilities and operations of these entities are not recorded in the
consolidated financial statements. The Company does not share in any
non-recourse debt that may be held by these entities in which equity interests
are held. Summarized unaudited financial information with respect to these
separate entities as of and for the years ended December 31, 2002 and 2001 are
as follows (in thousands):
2002 2001
------------- --------------
Current assets $ 5,371 $ 5,768
Total assets $ 25,887 $ 15,852
Current liabilities $ 4,836 $ 4,692
Total liabilities $ 23,620 $ 20,747
Total equity (deficit) $ 2,078 $ (4,895)
Revenues $ 10,178 $ 9,452
Net income $ 2,819 $ 665
The Company has recorded income from these investments during the years ended
December 31, 2002, 2001, and 2000 of $62,000, $92,000, and $100,000
respectively. Additionally the Company has recorded revenues from managing these
properties of $374,000, $382,000 and $317,000 during the years ended December
31, 2002, 2001 and 2000 respectively.
Page 35
8. Long-Term Debt
Long-term debt consists of mortgage notes payable and notes and contracts
payable, collateralized by real property, equipment and the assignment of
certain rental income. Long-term debt as of December 31, 2002 and 2001 is as
follows (amounts outstanding in thousands):
2002 2001
Note payable in monthly installments of $276,570, including
interest at 7.93%, through June 2011, collateralized by
real property $ 35,429 $ 35,880
Note payable in monthly installments of $108,797, including
interest at 8.08%, through September 2011, collateralized by
real property 13,791 13,959
Note payable in monthly installments of $91,871 including interest
at 7.39%, through June 2011, collateralized by real property 11,101 11,372
Note payable in monthly installments of $55,817 including interest
at 7.36%, through August 2007, collateralized by assignment
of certain rental income - 7,233
Note payable in monthly installments of $52,844, including
interest at 8.08%, through September 2011, collateralized by
real property 6,698 6,780
Note payable in monthly installments of principal and interest at
7.00%, through January 2010 convertible into common stock of
the Company at $15 per share 5,435 6,362
Note payable in monthly installments of $47,772, including
interest at a variable rate (4.875% at December 31, 2002 and
6.375% at December 31, 2001), through May 2008, collateralized
by real property 6,205 6,454
Note payable in monthly installments of $46,695, including
interest at 8.00%, through October 2011, collateralized by
real property 5,965 6,039
Industrial revenue bonds payable in monthly installments of
$66,560 including interest at 5.90%, through October 2011,
collateralized by real property 5,522 5,980
Note payable in monthly installments of $53,517, including interest
at 8.00%, through July 2005, collateralized by real property 4,575 4,840
Note payable in monthly installments of $45,407, including interest
at a variable rate (9.00% at December 31, 2002 and 2001),
through April 2010, collateralized by real property 4,051 4,222
Note payable in monthly installments of $18,629, including interest
at a variable rate (5.125% at December 31, 2002 and 8.25% at
December 31, 2001), through January 2008, collateralized by
real property 2,345 2,444
Industrial revenue bonds payable in monthly installments of
$22,917 including interest at a variable rate (5.00% at
December 31, 2002 and 4.75% at December 31, 2001), through
January 2007, collateralized by real property 1,270 1,535
Note payable in monthly installments of $18,462 including interest
at an index rate plus 1.50%, subject to a minimum of 9.50%
and a maximum of 12.00% (9.50% at December 31, 2002
and 2001), through December 2011, collateralized
by real property 1,330 1,419
Note payable in monthly installments of $10,430, including interest
at 7.42%, through December 2003 1,329 1,353
Note payable in monthly installments of $8,373, including interest
at a variable rate (5.06% at December 31, 2002 and 6.57% at
December 31, 2001), through November 2009, collateralized
by certain equipment and furniture and fixtures 496 566
Other 553 592
--------------- ----------------
106,095 117,030
Less current portion (4,889) (3,753)
--------------- ----------------
Non current portion $ 101,206 $ 113,277
=============== ================
Page 36
Some of the above debt agreements require the Company maintain a cash reserve
account for insurance, taxes, and furniture and fixture replacement. At December
31, 2002, this reserve was $1.9 million.
During the year ended December 31, 2001, the Company refinanced some of its real
property by obtaining long-term debt and paying down the Company's revolving
line of credit agreement (see note 10). During the year ended December 31, 2001,
deferred loan fees associated with the debt repayments were charged to
operations as an extraordinary item on the consolidated statements of income.
Contractual maturities for long-term debt outstanding at December 31, 2002 are
summarized by year as follows (in thousands):
Years Ending
December 31,
---------------------
2003 $ 4,889
2004 3,878
2005 7,781
2006 4,081
2007 4,000
Thereafter 81,466
----------------
$ 106,095
================
9. Capital Lease Obligations
The Company leases certain equipment under capital leases. The imputed interest
rates on the leases range from 7.06% to 8.64%. Cost and accumulated amortization
of this equipment as of December 31, 2002 are approximately $2,342,000 and
$1,717,000, respectively. Cost and accumulated amortization of the equipment as
of December 31, 2001 are approximately $2,796,000 and $1,813,000, respectively.
The remaining minimum lease payments including interest of $277,000 are due
under these leases during 2003.
10. Notes Payable to Bank
During 2001, in connection with the refinancing of certain properties under
long-term debt facilities the Company's revolving credit facility was amended
and reduced to $70 million. At December 31, 2002 and 2001, $52.1 million and
$54.3 million, respectively was outstanding under the credit facility. Any
outstanding borrowings bear interest based on the prime rate or LIBOR plus a
variable interest margin. At December 31, 2002, the interest rate on outstanding
borrowings ranged from 3.94% to 4.75%. At December 31, 2001, the interest rate
was 4.84%. The weighted-average interest rate on outstanding borrowings was
3.97% and 4.87% at December 31, 2002 and 2001, respectively. Interest only
payments are due monthly. The credit facility matures on June 30, 2005. The
credit facility requires the initial payment of a 1% fee plus an annual standby
fee of 0.50% in 2002, fees ranged from 0.25% to 0.50% in 2001. The credit
facility is collateralized by certain properties and requires the Company to
maintain certain financial ratios, minimum levels of cash flows and restricts
the payment of dividends. On December 23, 2002, the debt agreement was amended
and the credit facility was reduced to $58.5 million and three of the financial
covenants were modified such that compliance with them shall not be required
until June 30, 2003. The Company was in compliance with all required financial
covenants at December 31, 2002. The entire outstanding balance at December 31,
2002 has been classified as a current liability due to anticipatory breach of
some of the existing covenants in June, September and December 2003, which
currently have not been waived. If the Company breaches its covenants and the
breach is not waived by the lender, one of the lenders remedies under the credit
facility is to call the debt due at that time. The debt agreement allows the
Company to pay dividends as long as certain minimum financial ratios are
maintained. At December 31, 2002 and 2001, the Company was restricted from
paying any dividends on common stock.
11. Stockholders' Equity
The Articles of Incorporation of the Company authorize 50 million common shares
and 5 million preferred shares. The preferred stock rights, preferences and
privileges will be determined by the Board of Directors.
As discussed in Note 4, as part of the Red Lion acquisition WestCoast issued
303,771 shares of Class A Preferred Stock and 303,771 of Class B Preferred Stock
on December 31, 2001. Both the Class A and Class B preferred shares have $0.01
par, a $50 stated value, and give the holder certain preferences upon any
liquidation of the Company, including payment of $50 per share plus any unpaid
dividends before any payment is made to common stockholders.
In addition, the Class A shares include a quarterly dividend requirement,
cumulative at 7%, and are redeemable at WestCoast's option for $50 per share
plus unpaid dividends. The dividend requirement increases to 12% if the Company
misses two dividend payments, or to 14% upon the violation of certain
restrictive covenants or after January 30, 2005, if they have not been redeemed.
The Class B shares include a quarterly dividend requirement, cumulative at 10%,
and are redeemable at WestCoast's option for $50 per share plus unpaid
dividends. The dividend requirement increases to 15% if the Company misses two
dividend payments, or to 20% upon the violation of certain restrictive covenants
or after January 30, 2008, if they have not been redeemed.
Page 37
As a result of cancelled franchise agreements in 2002, 2,456 shares of Preferred
Series A and B, respectively, were cancelled totaling approximately $246
thousand.
12. Income Taxes
Major components of the Company's income tax provision for the years ended
December 31, 2002, 2001 and 2000 are as follows (in thousands):
2002 2001 2000
Current:
Federal $ 2,108 $ 2,118 $ 1,677
State 160 145 105
Deferred 2,101 2,240 1,524
--------------- ---------------- ----------------
$ 4,369 $ 4,503 $ 3,306
=============== ================ ================
The income tax provisions shown in the consolidated statements of income differ
from the amounts calculated using the federal statutory rate applied to income
before income taxes as follows (in thousands):
2002 2001 2000
----------------------- ----------------------- -------------------------
Amount % Amount % Amount %
----------- ----------- ----------- ---------- ---------- -----------
Provision at federal
statutory rate $ 4,208 34.0 $ 4,116 34.0 $ 3,103 34.0
Effect of tax credits (186) (1.5) (68) (0.6) (77) (0.9)
State taxes, net of
federal benefit 106 0.9 96 0.8 69 0.8
Goodwill amortization - - 261 2.2 262 2.9
Other 241 1.9 98 0.8 (51) (0.6)
----------- ----------- ----------- ---------- ---------- -----------
$ 4,369 35.3 $ 4,503 37.2 $ 3,306 36.2
=========== =========== =========== ========== ========== ===========
Components of the net deferred tax assets and liabilities at December 31, 2002
and 2001 are as follows (in thousands):
2002 2001
--------------------------------- --------------------------------
Assets Liabilities Assets Liabilities
-------------- ----------------- -------------- ----------------
Property and equipment $ - $ 12,434 $ - $ 10,162
Rental income - 606 - 660
Management contracts - 1,399 - 1,536
Brand name - 2,463 - 2,463
Other 641 - 661 -
-------------- ----------------- -------------- ----------------
$ 641 $ 16,902 $ 661 $ 14,821
============== ================= ============== ================
13. Operating Lease Income
The Company leases shopping mall space to various tenants over terms ranging
from one to ten years. The leases generally provide for fixed minimum monthly
rent as well as tenants' payments for their pro rata share of taxes and
insurance, common area maintenance and expenses associated with the shopping
mall. In addition, the Company leases commercial office space over terms ranging
from one to eighteen years. The cost and accumulated depreciation of these
properties at December 31, 2002 was approximately $29,807,000 and $8,313,000,
respectively. The cost and accumulated depreciation of the commercial office
properties at December 31, 2001 was approximately $29,635,000 and $8,313,000,
respectively. In March 2002, the Company sold one of these properties with a
cost and accumulated depreciation of $10.6 million and $4.0 million,
respectively (see note 6).
Future minimum lease income under existing noncancellable leases as of December
31, 2002 including properties held for sale, is as follows (in thousands):
Years Ending
December 31,
- -----------------------------
2003 $ 6,158
2004 5,955
2005 4,753
2006 3,838
2007 3,186
Thereafter 6,731
-------------
$ 30,621
=============
Page 38
Rental income for the years ended December 31, 2002, 2001 and 2000 was
approximately $8,000,000, $9,301,000 and $8,896,000 respectively, which included
contingent rents of approximately $155,000, $174,000 and $200,000, respectively.
14. Operating Lease Commitments
The Company has various operating leases, the most significant are:
In October 1997, the Company began operating a hotel in Yakima, Washington under
an operating lease and purchase option agreement. The lease agreement is for a
period of 15 years with two five-year renewal options. The Company pays all
operating costs of the hotel plus monthly lease payments of $35,000 through
September 2003. Commencing October 2003, the monthly lease requirement will be
$52,083 and monthly payments shall increase by $5,208 each year thereafter. The
Company agreed to a $1.0 million option payment which allows the purchase of
this hotel at a fixed price. One-half of this option payment was paid in cash
and the remaining $500,000 was paid in August 2002. The option is exercisable by
the Company between March and September 2003 for a total purchase price of
$6,250,000. If the Company exercises its purchase option, the option payments
made by the Company will be applied against the total purchase price.
The Company began operating a hotel in Bellevue, Washington in January 2000 with
an operating lease and purchase option agreement. The lease agreement expires on
December 31, 2003. The Company pays monthly lease payments of $27,951 plus
"additional rent" as defined in the agreement. Additional rent includes hotel
operating and other costs. The purchase option is exercisable from July 2002
through January 31, 2004 at the Company's option. The total purchase price of
the hotel under option is $12 million.
At December 31, 2001, the Company assumed a master lease agreement which covered
17 hotel properties including 12 which were part of the Red Lion acquisition.
The Company has entered into a sublease with Doubletree DTWC Corporation whereby
Doubletree DTWC Corporation will sublease 5 of these hotel properties from the
Company. The master lease agreement requires minimum monthly payments of $1.25
million plus contingent rents based on gross receipts from the 17 hotels. The
lease agreement expires in December 2020, but the Company has the option to
extend the term for three additional 5 year terms.
Assuming the Company exercises its purchase options for the Bellevue hotel in
December 2003 and the Yakima hotel in September 2003, total payments due under
all of the Company's leases at December 31, 2002 are as follows (in thousands):
Years Ending
December 31,
- ----------------------------
2003 $ 7,113
2004 5,663
2005 5,663
2006 5,663
2007 5,663
Thereafter 74,188
----------------
$ 103,953
================
The above amounts are net of $9.9 million of sublease income annually through
2020.
Total rent expense net of sublease income under the leases for the years ended
December 31, 2002, 2001, and 2000 was $7,662,000, $1,816,000 and $1,816,000,
respectively.
15. Related-Party Transactions
The Company had the following transactions with related parties:
o The Company recorded management fee and other income of approximately
$129,000, $154,000 and $145,000 during the years ended December 31, 2002, 2001
and 2000, respectively, for performing management and administrative functions
for entities which are owned by key stockholders and management of the Company.
The net assets and transactions of these entities are excluded from the
Company's consolidated financial statements.
o The Company received commissions for real estate sales from entities which are
owned or partially owned by key stockholders and management of the Company
totaling $54,000, $109,000 and $110,000 for the years ended December 31, 2002,
2001 and 2000, respectively. The net assets and transactions of these entities
are excluded from the Company's consolidated financial statements.
o During 2002, 2001, and 2000, the Company held certain cash and investment
accounts in a bank and had notes payable to the same bank. The bank's chairman
and chief executive officer is a director of the Company. At December 31, 2002
and 2001, total cash and investments of approximately $3,496,000 and $466,000,
respectively, and a note payable totaling approximately $5,522,000 and
$5,980,000, respectively, were outstanding with this bank. Total interest income
of $7,000, $18,000 and $41,000, respectively, and interest expense of $174,000,
$367,000 and $391,000, respectively, was recorded related to this bank during
the years ended December 31, 2002, 2001 and 2000. Additionally, the Company is
the real estate manager for the bank's corporate office building. During the
years ended December 31, 2002, 2001 and 2000, the Company recognized management
fee income of $117,000, $114,000 and $111,000, respectively.
Page 39
o For the year ending December 31, 2002, the Company received $51,000 in
management fees and $24,000 in leasing fees from the WHC building, which as of
March 2002, the Company owns a 19.9% interest in the building.
16. Employee Benefit and Stock Plans
1998 Stock Incentive Plan
The 1998 Stock Incentive Plan (the Plan) was adopted by the Board of Directors
in 1998. The Plan authorizes the grant or issuance of various option or other
awards. The Company amended the Plan in 2000 to increase the maximum number of
shares which may be awarded under the Plan from 1,200,000 to 1,400,000 shares,
subject to adjustment for stock splits, stock dividends and similar events. The
Compensation Committee of the Board of Directors administers the Plan and
establishes to whom, the type and the terms and conditions, including the
exercise period, the awards are granted.
Nonqualified stock options may be granted for any term specified by the
Compensation Committee and may be granted at less than fair market value, but
not less than par value on the date of grant. Incentive stock options may be
granted only to employees and must be granted at an exercise price at least
equal to fair market value on the date of grant and have a ten year exercise
period. The maximum fair market value of shares which may be issued pursuant to
incentive stock options granted under the Plan to any individual in any calendar
year may not exceed $100,000. Stock Appreciation Rights (SARs) may also be
granted in connection with stock options or other awards. SARs typically will
provide for payments to the holder based upon increases in the price of the
common stock over the exercise price of the related option or award, but
alternatively may be based upon other criteria such as book value. Other awards
such as restricted stock awards, dividend equivalent awards, performance awards
or deferred stock awards may also be granted under the Plan by the Compensation
Committee.
All options granted have been designated as nonqualified options, with an
exercise price equal to or in excess of fair market value on the date of grant
and for a term of ten years. For substantially all options granted, fifty
percent of each recipients' options will vest on the fourth anniversary of the
date of grant and the remaining 50% will vest on the fifth anniversary of the
date of grant. The vesting schedule will change if, beginning one year after the
option grant date, the stock price of the common stock reaches the following
target levels (measured as a percentage increase over the exercise price) for 60
consecutive trading days:
Stock Price Percent of Option
Increase Shares Vested
- --------------------------------------------------------------
25% 25%
50% 50%
75% 75%
100% 100%
Stock option transactions are summarized as follows:
Number Weighted-Average Exercise Price Expiration
of Shares Exercise Price Per Share Date
------------ ------------------- ----------------- --------------
Balance, December 31, 1999 977,749 $ 14.30 $ 7.50-15.00 2008-2009
Options granted 109,395 9.18 8.31-15.00 2010
Options forfeited (89,319) 14.21 10.94-15.00
------------
Balance, December 31, 2000 997,825 13.75 7.50-15.00 2008-2010
Options granted 360,785 6.07 6.07 2011
Options forfeited (81,991) 13.89 8.31-15.00
-------------
Balance, December 31, 2001 1,276,619 11.57 6.07-15.00 2008-2011
Options granted 6,500 7.67 7.50-7.95 2012
Options forfeited (173,563) 10.67 6.07-15.00
Options cancelled (571,661) 15.00 15.00
------------- ------------------ -----------------
Balance, December 31, 2002 537,895 $ 8.29 $ 6.07-15.00 2008-2012
============= ================== =================
Page 40
Remaining options available for grant at December 31, 2002 were 862,105. At
December 31, 2002 and 2001, options totaling 40,773 and 27,000 respectively are
exercisable at a weighted average exercise price of $15.00.
In July 2002, the Company offered eligible option holders the opportunity to
exchange certain options for new options. The new options offered were issued at
fair market value of the stock on or after the first business day that is six
months and one day after the date the original options were cancelled in the
exchange. On July 31, 2002, 571,661 options were cancelled pursuant to the terms
of the offer. In February 2003, the Company granted 261,251 new non-qualified
options. There was no impact on the Company's financial condition and results of
operations in 2002 as a result of this transaction.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000:
2002 2001 2000
Dividend yield 0% 0% 0%
Expected volatility 25% 22% 33%
Risk free interest rates 4.60% 4.07% 5.71%
Expected option lives 4 years 4 years 4 years
The weighted-average life of options outstanding at December 31, 2002 was 7.83
years. The weighted-average fair value of all options granted during 2002, 2001
and 2000 was $2.17, $1.37 and $4.12 per share, respectively. The
weighted-average fair value and exercise price for options granted at market
value and for those options granted above market value on the date of grant in
2002, 2001 and 2000 are as follows:
Weighted-Average Weighted-Average
Fair Value Exercise Price
-------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------
Options granted at market price $ 2.17 $ 1.37 $ 4.32 $ 7.67 $ 6.07 $ 8.31
Options granted above market price $ - $ - $ 2.76 $ - $ - $ 15.00
In connection with the Company's initial public offering in 1998, the Company
also granted 55,000 restricted shares of common stock to certain members of
senior management. Twenty percent of these shares were issued in 1998 and 1999.
Twenty percent were to be issued in each subsequent year provided such employee
was an employee of the Company at that time. Management stock grants in 2002,
2001 and 2000 were canceled and paid in cash. The Company recorded compensation
expense of approximately $80,000, $56,000 and $55,000 during the years ended
December 31, 2002, 2001 and 2000, respectively, associated with these grants.
Employee Stock Purchase Plan
In 1998, the Company adopted the Employee Stock Purchase Plan to assist
employees of the Company in acquiring a stock ownership interest in the Company.
A maximum of 300,000 shares of common stock is reserved for issuance under this
plan. The Employee Stock Purchase Plan permits eligible employees to purchase
common stock at a discount through payroll deductions. No employee may purchase
more than $25,000 worth of common stock under this plan in any calendar year.
During the years ended December 31, 2002, 2001 and 2000, 19,902, 24,139 and
26,429 shares were purchased under this plan for approximately $102,000,
$107,000 and $175,000, respectively.
Defined Contribution Plan
The Company and employees contribute to the WestCoast Hospitality Corporation
Amended and Restated Retirement and Savings Plan. The defined contribution plan
was created for the benefit of substantially all employees of the Company. The
Company makes contributions of up to 3% of an employee's compensation based on a
vesting schedule and eligibility requirements set forth in the plan document.
Company contributions to the plan for the years ended December 31, 2002, 2001
and 2000 were approximately $435,000, $225,000 and $240,000, respectively.
17. Fair Value of Financial Instruments
The following estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, accounts receivable, current
liabilities and variable rate long-term debt are reasonable estimates of their
fair values. The fair values of fixed-rate long-term debt and capital lease
obligations are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for debt or capital
lease obligations with similar remaining maturities.
Page 41
The estimated fair values of financial instruments at December 31, 2002 and 2001
are as follows (in thousands):
2002 2001
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 2,701 $ 2,701 $ 5,735 $ 5,735
Accounts receivable $ 9,559 $ 9,559 $ 9,101 $ 9,101
Financial liabilities:
Current liabilities, excluding debt $ 22,333 $ 22,333 $ 21,802 $ 21,802
Notes payable to bank $ 52,100 $ 52,100 $ 54,250 $ 54,250
Long-term debt $ 106,095 $ 106,095 $ 117,030 $ 117,030
Capital lease obligations $ 268 $ 268 $ 652 $ 652
18. Business Segments
The Company has four operating segments: (1) Hotels and Restaurants; (2)
TicketsWest; (3) Real Estate Division and (4) Franchise, Central Services and
Development. Due to the timing of the Red Lion acquisition on December 31, 2001,
identifiable assets and capital expenditures related to this acquisition are
reported at December 31, 2001. However, no operations were reported until 2002.
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 had significant inter-segment revenues which were 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 in not allocated to
the segments.
Selected information with respect to the segments is as follows for the years
ended December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
---------------- ---------------- ----------------
Revenues:
Hotels and Restaurants $ 173,320 $ 99,495 $ 106,540
Franchise, Central Services and Development 4,137 3,213 3,643
TicketsWest 7,551 8,539 6,908
Less: inter-segment revenues (121) (1,042) (1,203)
Real Estate Division 9,001 10,114 9,540
Corporate Services and other 283 314 378
---------------- ---------------- ----------------
$ 194,171 $ 120,633 $ 125,806
================ ================ ================
Operating income (loss):
Hotels and Restaurants $ 15,921 $ 16,738 $ 20,105
Franchise, Central Services and Development 1,810 6,115 2,035
TicketsWest 768 (237) (407)
Real Estate Division 7,098 3,954 3,845
Corporate Services and other (2,916) (2,524) (2,224)
---------------- ---------------- ----------------
$ 22,681 $ 24,046 $ 23,354
================ ================ ================
Capital expenditures:
Hotels and Restaurants $ 5,742 $ 48,634 $ 6,623
Franchise, Central Services and Development 2,056 2,672 299
TicketsWest 349 542 912
Real Estate Division 193 2,910 310
Corporate Services and other 2,368 203 316
---------------- ---------------- ----------------
$ 10,708 $ 54,961 $ 8,460
================ ================ ================
Depreciation and amortization:
Hotels and Restaurants $ 8,712 $ 8,112 $ 7,615
Franchise, Central Services and Development 337 405 401
TicketsWest 319 476 410
Real Estate Division 291 1,426 1,317
Corporate Services and other 858 759 709
---------------- ---------------- ----------------
$ 10,517 $ 11,178 $ 10,452
================ ================ ================
Identifiable assets:
Hotels and Restaurants $ 273,991 $ 276,297 $ 232,762
Franchise, Central Services and Development 40,589 39,474 32,577
TicketsWest 4,934 6,403 6,239
Real Estate Division 23,203 29,941 25,216
Corporate Services and other 13,993 7,534 8,040
---------------- ---------------- ----------------
$ 356,710 $ 359,649 $ 304,834
================ ================ ================
Page 42
19. Earnings Per Share
The following table presents a reconciliation of the numerators and denominators
used in the basic and diluted earnings per common share computations for the
years ended December 31, 2002, 2001 and 2000 (in thousands, except per share
amounts). Also shown is the number of dilutive securities (stock options and
convertible notes) that would have been included in the diluted EPS computation
if they were not anti-dilutive.
2002 2001 2000
------------- ------------- -------------
Numerator:
Income applicable to common shareholders before
extraordinary item $ 5,430 $ 7,602 $ 5,821
Extraordinary item - (23) -
------------- ------------- -------------
Income available to common stockholders 5,430 7,579 5,821
Income effect of dilutive OP Units 44 232 71
------------- ------------- -------------
Net income-diluted $ 5,474 $ 7,811 $ 5,892
============= ============= =============
Denominator:
Weighted-average shares outstanding - basic 12,975 12,953 12,941
Effect of dilutive OP Units 286 286 296
Effect of dilutive common stock options and
convertible notes 24 (A) (A)
------------- ------------- -------------
Weighted-average shares outstanding - diluted 13,285 13,239 13,237
============= ============= =============
Earnings per share - basic and diluted:
Income per share before extraordinary item $ 0.42 $ 0.59 $ 0.45
Extraordinary item - - -
------------- ------------- -------------
Earnings per share - basic $ 0.42 $ 0.59 $ 0.45
============= ============= =============
Earnings per share - diluted $ 0.41 $ 0.59 $ 0.45
============= ============= =============
(A) At December 31, 2002, 537,895 stock options are outstanding of which 514,085
stock options have been excluded from the calculation of diluted earnings per
share because they are anti-dilutive. At December 31, 2001 and 2000, 1,276,619,
and 997,825 stock options are 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 because they are
anti-dilutive.
The effects 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
Page 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Peter F. Stanton, age 46, has been a director of the Company since April 1998.
Mr. Stanton is the Chairman and Chief Executive Officer of Washington Trust
Bank. Mr. Stanton has been with Washington Trust Bank since 1982, served as its
President from 1990 to March of 2000, Chief Executive Officer since 1993 and
Chairman since 1997. Mr. Stanton is also Chief Executive Officer, President and
a director of W.T.B. Financial Corporation (a bank holding company). In addition
to serving on numerous civic boards, Mr. Stanton was president of the Washington
Bankers Association from 1995 to 1996 and served as State Chairman of the
American Bankers Association in 1997 and 1998.
Stephen R. Blank, age 57, has been a director of the Company since May of 1999.
Mr. Blank is presently Senior Fellow, Finance, for the Urban Land Institute, a
non-profit education and research institute that studies land use and real
estate development policy and practice, where he is responsible for the
Institute's real estate capital markets information and education programs. Mr.
Blank earned a B.A. in History at Syracuse University and continued on in
graduate school at Adelphi University where he earned a MBA in Finance. From
November 1993 to November 1998, Mr. Blank was the Managing Director, Real Estate
Investment Banking, for CIBC Oppenheimer Corp in New York. From 1989 to 1993, he
was Managing Director, Real Estate Investment Banking, for Cushman & Wakefield,
Inc. and from 1979 to 1989 he was Managing Director, Real Estate Investment
Banking, for Kidder, Peabody & Co., Inc. Mr. Blank is a director of the
Ramco-Gershenson Properties Trust, BNP Residential Properties, Inc., and
Atlantic Realty Trust. Mr. Blank is also adjunct Professor of Real Estate in the
Executive MBA program for Columbia University's Graduate School of Business.
Ronald R. Taylor, age 55, has been a director of the Company since April 1998.
He has been a private investor since 2002 From 1998 to 2002, Mr. Taylor was a
General Partner of Enterprise Partners, a venture capital firm. From 1996 to
1998, Mr. Taylor worked as an independent business consultant. From 1987 to
1996, Mr. Taylor was chairman, president and chief executive officer of Pyxis
Corporation (a health care service provider), which he founded in 1987. Prior to
founding Pyxis, he was an executive with both Allergan Pharmaceuticals and
Hybritech, Inc. Mr. Taylor received a B.A. from the University of Saskatchewan
and an M.A. from the University of California, Irvine. He is currently a
director of Watson Pharmaceuticals, Inc. (a pharmaceutical manufacturer), and is
Chairman of the Board of two privately held companies.
Donald K. Barbieri, age 57, has been President and Chief Executive Officer and a
director of the Company since 1978 and Chairman of the Board since 1996. Mr.
Barbieri joined the Company in 1969 and is responsible for the Company's
development activities in hotel, entertainment and real estate areas. In March
2003, Mr. Barbieri announced his retirement effective upon appointment of his
successor by the Company's Board of Directors. He will continue to serve as
Chairman of the Board of Directors. Mr. Barbieri is currently a member of the
Washington Economic Development Commission. Mr. Barbieri is the immediate past
chair for the Spokane Regional Chamber of Commerce. Mr. Barbieri served as
president of the Spokane Chapter of the Building Owners and Managers Association
from 1974 to 1975 and served as president of the Spokane Regional Convention and
Visitors Bureau from 1977 to 1979. He also served on the Washington Tourism
Development Council from 1983 to 1985 and the Washington Economic Development
Board while chairing the State of Washington's Quality of Life Task Force from
1985 to 1989. Mr. Barbieri is the brother of Richard L. Barbieri.
Arthur M. Coffey, age 47, has been a director of the Company since 1990 and
Chief Financial Officer and Executive Vice President of the Company since June
1997. He is currently president of the Company's WestCoast Hotels division. Mr.
Coffey served as Chief Operating Officer of the Company from 1990 to June 1997.
Mr. Coffey has been in the hotel business since 1971 and joined the Company in
1981. Mr. Coffey is currently a director of the Association of Washington
Business, served as a trustee of the Spokane Area Chamber of Commerce, served as
a director of the Washington State Hotel Association from 1996 to 1997, served
as director of the Spokane Regional Convention and Visitors Bureau from 1982 to
1985 and served as president of the Spokane Hotel Association from 1989 to 1990.
Richard L. Barbieri, age 61, is currently an Executive Vice President and
General Counsel of the Company. Mr. Barbieri has been a Vice President of the
Company and full-time General Counsel of the Company since 1994 and a director
of the Company since 1978. From 1978 to 1995, Mr. Barbieri served as legal
counsel and Secretary of the Company, during which time he was engaged in the
private practice of law at Edwards and Barbieri, a Seattle law firm, and then at
Riddell Williams, a Seattle law firm, where he chaired the real estate practice
group. Mr. Barbieri has also served as chairman of various committees of the
State and County Bar Association and as a member of the governing board of the
County Bar Association. He also served as vice chairman of the Citizens'
Advisory Committee to the Major League Baseball Stadium Public Facilities
District in Seattle in 1996 and 1997. Mr. Barbieri is the brother of Donald K.
Barbieri.
Page 44
Sharon Sanchez, age 40, has been Executive Vice President of Hotel Operations
since January 2002 when she joined the Company. Ms. Sanchez came to the Company
from Hilton Hotels Corporation where she held the position of Vice President of
Operations and helped guide the Red Lion Hotel chain through its successful
growth. Preceding that, she held the position of Director of Operations through
the progression of mergers prior to Hilton's acquisition of Red Lion for Promus
Hotels and Doubletree Hotels. With extensive hospitality experience, she has
held hotel operations and sales management positions in convention, leisure and
corporate based hotels, corporate positions in operations and brand management,
and marketing leadership in the residential property management sector.
Peter P.Hausback, age 43, has been the Corporate Controller and Principal
Accounting Officer since September 2002 when he joined the Company. Mr. Hausback
is responsible for directing the Company's financial reporting activities. Mr.
Hausback came to the Company from BriteSmile, Inc. where he served as Vice
President and Chief Financial Officer from 2001 to 2002. From 1992 to 2001, he
served in various management positions for Il Fornaio (America) Company, leaving
the Company in 2001 as Vice President of Finance and Chief Financial Officer.
From 1987 to 1992, Mr. Hausback was with Price Waterhouse LLP in San Francisco.
Mr. Hausback has over 20 years of financial management experience.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 2003 Annual Meeting of
Shareholders under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 2003 Annual Meeting of
Shareholders under the caption "Security Ownership of Certain Beneficial Owners
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained, and incorporated by
reference from, the Proxy Statement for the Company's 2003 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A. List of documents filed as part of this report.
1. Index to WestCoast Hospitality Corporation financial statements:
Page #
a. Consolidated Balance Sheets 22
b. Consolidated Statements of Income 23
c. Consolidated Statements of Changes in Stockholders' Equity 25
d. Consolidated Statements of Cash Flows 26
e. Notes to Consolidated Financial Statements 28
2. Index to financial statement schedules:
All schedules for which provisions are made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable or the information is contained in the
Financial Statements and therefore has been omitted.
Page 45
3. Index to exhibits:
EXHIBIT NO. DESCRIPTION
3.1 (1) Amended and Restated Articles of Incorporation of the Company
3.2 Amended and Restated By-Laws of the Company
4.1 (2) Specimen Common Stock Certificate Executive Compensation Plans and
Agreements
10.1 (3) Employment Agreement between the Company and Arthur M. Coffey
10.2 (3) Employment Agreement between the Company and Richard L. Barbieri
10.3 (2) Employee Stock Purchase Plan of Cavanaughs Hospitality Corporation
10.4 (4) 1998 Stock Incentive Plan
10.5 (2) Form of Restricted Stock Award Agreement
10.6 (3) Form of Nonqualified Stock Option Agreement Other Material Contracts
10.7 (5) Amended and Restated Agreement of Limited Partnership of Cavanaughs
Hospitality Limited Partnership
10.8 (6) Purchase and Sale Agreement re: WC Holdings, Inc.
10.9 (6) Membership Interest Purchase Agreement re: October Hotel Investors, LLC
10.10 (6) First Amendment to Membership Interest Purchase Agreement re: October
Hotel Investors, LLC
10.11 (7) Amended and Restated Credit Agreement
10.12 (8) Second Amendment to the Amended and Restated Credit Agreement
10.13 (9) Third Amendment to the Amended and Restated Credit Agreement
10.14 (10) Fourth Amendment to the Amended and Restated Credit Agreement
10.15 (8) Deed Of Trust and Security Agreement dated as of June 14, 2001,
with WHC809, LLC, as grantor, and Morgan Guaranty Trust Company
of New York, as beneficiary
10.16 (9) Purchase and Sale Agreement dated December 21, 2001 among WestCoast
Hospitality Corporation, Hilton Hotels Corporation and Doubletree
Corporation
10.17 (9) Registration Rights Agreement 2001 between WestCoast Hospitality
Corporation and Doubletree Corporation
21 List of Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Donald K. Barbieri - Certification - pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002
99.2 Arthur M. Coffey - Certification - pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-K on April 1, 2002.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form S-1 on January 20, 1998.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form S-1/A on March 10, 1998.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-Q on May 15, 2001.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form S-1/A on February 27, 1998.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 8-K on January 19, 2000.
(7) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-K on March 30, 2000.
(8) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-Q on August 14, 2001.
(9) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 8-K on January 15, 2002.
(10) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-Q on August 14, 2002.
B. Reports on Form 8-K.
On October 29, 2002, the Company filed a current report on Form 8-K disclosing
that it had issued a press release announcing the conversion of more than twenty
of its hotels to the Red Lion brand.
Page 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WestCoast Hospitality Corporation
- --------------------------------------------------------------
Registrant
By: /s/ Donald K. Barbieri
- --------------------------------------------------------------
Donald K. Barbieri
Chief Executive Officer, President and Chairman
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Arthur M. Coffey
- --------------------------------------------------------------
Arthur M. Coffey
Chief Financial Officer, Executive Vice President and Director
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Peter P. Hausback
- --------------------------------------------------------------
Peter P. Hausback
Controller and Principal Accounting Officer
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Richard L. Barbieri
- --------------------------------------------------------------
Richard L. Barbieri
Executive Vice President, General Counsel and Director
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Ronald R. Taylor
- --------------------------------------------------------------
Ronald R. Taylor
Director
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Stephen R. Blank
- --------------------------------------------------------------
Stephen R. Blank
Director
March 31, 2003
- --------------------------------------------------------------
Date
By: /s/ Peter F. Stanton
- --------------------------------------------------------------
Peter F. Stanton
Director
March 31, 2003
- --------------------------------------------------------------
Date
Page 47
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Donald K. Barbieri, Chief Executive Officer, President and Chairman of
WestCoast Hospitality Corporation certify that:
1. I have reviewed this annual report on Form 10-K of WestCoast Hospitality
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request
Date: March 31, 2003
/s/ Donald K. Barbieri
Chief Executive Officer, President and Chairman
Page 48
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Arthur M. Coffey, Chief Financial Officer, Executive Vice President and
Director of WestCoast Hospitality Corporation certify that:
1. I have reviewed this annual report on Form 10-K of WestCoast Hospitality
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Date: March 31, 2003
/s/ Arthur M. Coffey
Chief Financial Officer, Executive Vice President and Director
Page 49