-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WMawoRI4G5t2Bj4Ld+GKpbE37MXBLR1/dX/IVl1IcU4uZUE1NrZhl25eO7Iu1b3z ORecCk2Zyk8H8cD0l+3wAQ== 0001052595-03-000028.txt : 20030331 0001052595-03-000028.hdr.sgml : 20030331 20030331160619 ACCESSION NUMBER: 0001052595-03-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTCOAST HOSPITALITY CORP CENTRAL INDEX KEY: 0001052595 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 911032187 STATE OF INCORPORATION: WA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13957 FILM NUMBER: 03630812 BUSINESS ADDRESS: STREET 1: 201 W NORTH RIVER DRIVE STREET 2: SUITE 100 CITY: SPOKANE STATE: WA ZIP: 99201 BUSINESS PHONE: 5094596100 FORMER COMPANY: FORMER CONFORMED NAME: CAVANAUGHS HOSPITALITY CORP DATE OF NAME CHANGE: 19980108 10-K 1 ar2002.txt 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 EX-3 3 ex32.txt Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF WESTCOAST HOSPITALITY CORPORATION ARTICLE 1 OFFICES Section 1.1 Principal Executive Office. The principal executive office (the "Principal Office") of the Corporation shall be located at 201 W. North River Drive, Suite 100, Spokane, Washington 99201 or such other locations as the Board of Directors shall determine. Section 1.2 Other Offices. The Corporation may also have offices at such other places both within and without the State of Washington as the Board of Directors may determine or as the business of the Corporation may require. ARTICLE 2 MEETING OF SHAREHOLDERS Section 2.1 Annual Meetings. The annual meeting of shareholders of the Corporation for the election of directors and the transaction of such other business as may be brought before the meeting in accordance with the Articles of Incorporation and these By-Laws shall be held on the date and at the time fixed from time to time by the Board of Directors within thirteen (13) months after the date of the preceding annual meeting. The annual meeting of shareholders of the Corporation shall not be called or held otherwise than as provided in the Articles of Incorporation or in these By-Laws. Section 2.2 Special Meetings. Special meetings of shareholders of the Corporation may be called only at the direction of (i) the Board of Directors by a resolution adopted by the affirmative vote of a majority of the Board of Directors, or (ii) the holders of not less than a majority in aggregate of the then issued and outstanding shares of stock of the Corporation entitled to vote thereat ("Voting Shares"), upon written request delivered to the Secretary of the Corporation. Special meetings of shareholders of the Corporation shall not be called or held otherwise than as provided in the Articles of Incorporation or in these By-Laws. Section 2.3 Place of Meeting. Meetings of the shareholders of the Corporation shall be held at such place, either within or without the State of Washington as the Board of Directors may determine. In the absence of any such designation, shareholders' meetings shall be held at the Principal Office. Section 2.4 Business Conducted at Annual Meeting. (1) At an annual meeting of shareholders, an item of business may be conducted, and a proposal may be considered and acted upon, only if such item or proposal is brought before the meeting (i) by, or at the direction of, the Board of Directors, or (ii) by any shareholder of the Corporation who is entitled to vote at the meeting and who complies with the procedures set forth in the remainder of this Section 2.4. This Section 2.4 shall not apply to matters of procedure that, pursuant to Section 7.12(a) of these By-Laws, are subject to the authority of the chairman of the meeting. (2) For an item of business or proposal to be brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the Principal Office (i) not less than one hundred twenty (120) days prior to the first anniversary of the date that the Corporation's proxy statement was first released to shareholders in connection with the previous year's annual meeting; (ii) a reasonable time before the Corporation begins to print and mail its proxy materials if the date of the current year's annual meeting has been changed by more than thirty (30) days from the date of the previous year's meeting; or (iii) not more than seven (7) days following the delivery to shareholders of the notice of annual meeting with respect to the current year's annual meeting, if the Corporation did not release a proxy statement to shareholders in connection with the previous year's annual meeting, or if no annual meeting was held during such year. (3) A shareholder's notice to the Secretary under Section 2.4(2) shall set forth, as to each item of business or proposal the shareholder intends to bring before the meeting (i) a brief description of the item of business or proposal and the reasons for bringing it before the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder and of any other shareholders that the shareholder knows or anticipates will support the item of business or proposal, (iii) the number and class of shares of stock of the Corporation that are beneficially owned on the date of such notice by the shareholder and by any such other shareholders, and (iv)any financial interest of the shareholder or any such other shareholders in such item of business or proposal. (4) The Board of Directors, or a designated committee thereof, may reject a shareholder's notice that is not timely given in accordance with the terms of Section 2.4(2). If the Board of Directors, or a designated committee thereof, determines that the information provided in a timely shareholder's notice does not satisfy the requirements of Section 2.4(3) in any material respect, the Secretary of the Corporation shall notify the shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with information previously provided, does not satisfy the requirements of Section 2.4(3c) in any material respect, then the Board of Directors or such committee may reject the shareholder's notice. (5) Notwithstanding the procedures set forth in Section 2.4(4), if a shareholder desires to bring an item of business or proposal before an annual meeting, and neither the Board of Directors nor any committee thereof has made a prior determination of whether the shareholder has complied with the procedures set forth in this Section 2.4 in connection with such item of business or proposal, then the chairman of the meeting shall determine and declare at the meeting whether the shareholder has so complied. If the chairman determines that the shareholder has so complied, then the chairman shall so state and ballots shall be provided for use at the meeting with respect to such item of business or proposal. If the chairman determines that the shareholder has not so complied, then, unless the chairman, in his or her sole and absolute discretion, determines to waive such compliance, the chairman shall state that the shareholder has not so complied and the item of business or proposal shall not be brought before the meeting. This Section 2.4 shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no item of business may be conducted, and no proposal may be considered and acted upon, unless there has been compliance with the procedures set forth in this Section 2.4 in connection therewith. Section 2.5 Notice. Except as otherwise provided by Washington Business Corporation Act, RCW Chapter 23B (hereafter "Act"), or unless lapse of time shall be waived, written notice of the time, date and place of any shareholders meeting, and, in the case or a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder at least ten (10) nor more than sixty (60) days before the date of such a meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the shareholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Section 2.6 Quorum. At any meeting of shareholders, the holders of record, present in person or by proxy, of a majority of the Corporation's issued and outstanding shares of stock entitled to vote at such meeting shall constitute a quorum for the transaction of business, except as otherwise provided by law. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Once a quorum is present, shareholders may continue to transact business at the meeting notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.7 Voting. When a quorum is present at any meeting, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action (taking into account those voting in person or by proxy at the meeting and entitled to vote on the subject matter unless the question is one upon which by express provision of law or of the Articles of Incorporation or of these By-Laws a different vote is require, and such approved action shall be the act of the shareholders. Section 2.8 Adjourned Meeting. Any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented in person or by proxy whether or not a quorum is present. When a shareholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting; however, if a record date for the adjourned meeting is or must be fixed in accordance with the Act, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. Section 2.9 Proxies. Every person entitled to vote for directors or any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy executed by, or delivered to the Corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the applicable provisions of the Act. Section 2.10 Shareholder Action by Consent. Without a meeting any action required or permitted to be taken at any meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting. Prompt notice of the taking of any such action shall be given to those shareholders who did not consent in writing. Any such consent in writing shall be filed with the minutes of proceedings of the shareholders. If the Act requires that notice of a proposed action be given to non-voting shareholders and the action is to be taken by unanimous consent of the voting shareholders, the Corporation must give its non-voting shareholders written notice of the proposed action at least 10 days before the action is taken. The notice must contain or be accompanied by the same material that would have been required to be sent to the non-voting shareholders in a notice of meeting at which the proposed action would have been submitted to such shareholders for action. Section 2.11 Waiver of Notice. A shareholder may waive any notice required to be given by these By-Laws, or the Articles of Incorporation of this Corporation, or any of the corporate laws of the State of Washington, before or after the meeting that is the subject of such notice. A valid waiver is created by any of the following three methods: (a) in writing, signed by the shareholder entitled to the notice and delivered to the Corporation for inclusion in its corporate records; (b) attendance at the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; or (c) failure to object at the time of presentation of a matter not within the purpose or purposes described in the meeting notice. ARTICLE 3 DIRECTORS Section 3.1 Powers. The Board of Directors shall be responsible for the entire management of the business of this Corporation. In addition to the powers and authorities by these By-Laws and the Articles of Incorporation expressly conferred upon it, the Board of Directors may exercise all such corporate powers and do all such lawful acts and things as are not otherwise prohibited by the Act or by the Articles of Incorporation or by these By-Laws. The Board of Directors may delegate the management of the day-to-day operations of the business of the Corporation to a management company or other person, provided that the business and affairs of the Corporation shall be managed and all corporate power shall be exercised under the ultimate direction of the Board of Directors. Section 3.2 Number; Board of Directors Divided in Classes. The number of directors of the Corporation which shall constitute the entire Board of Directors shall be such as from time to time shall be determined by a majority of the then authorized number of directors, but in no case shall the number be less than 3 nor more than 13. The directors shall be classified with respect to the time for which they severally hold office into classes, as nearly equal in number as possible (but with not less than one director in each class), as determined by the Board of Directors, one class to be elected for a term expiring at the first annual meeting of shareholders to be held after its election, another class to be elected for a term expiring at the second annual of shareholders to be held after its election, and another class to be elected for a term expiring at the third annual meeting of shareholders to be held after its election, with the members of each class to hold office until their successors have been elected and qualified. At each annual meeting of shareholders, the successors of the members of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Section 3.3 Nominations and Qualifications of Directors. (1) Nominations of candidates for election as directors at an annual meeting of shareholders may only be made (i) by, or at the direction of, the Board of Directors or (ii) by any shareholder of the Corporation who is entitled to vote at the meeting and who complies with the procedures set forth in the remainder of this Section 3.3. (2) If a shareholder proposes to nominate one or more candidates for election as directors at an annual meeting, the shareholder must have given timely notice thereof to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the Principal Office (i) not less than one hundred twenty (120) days prior to the first anniversary of the date that the Corporation's proxy statement was released to shareholders in connection with the previous year's annual meeting; (ii) a reasonable time before the Corporation begins to print and mail its proxy materials if the date of this year's annual meeting has been changed by more than thirty (30) days from the date of the previous year's meeting; or (iii) not more than seven (7) days following the delivery to shareholders of the notice of annual meeting with respect to the current year's annual meeting, if the Corporation did not release a proxy statement to shareholders in connection with the previous year's annual meeting, or if no annual meeting was held during such year. (3) A shareholder's notice to the Secretary under Section 3.3(2) shall set forth, as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the number and class of shares of stock of the Corporation that are beneficially owned on the date of such notice by such person and (iv) if the Corporation at such time has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any other information relating to such person required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Regulation 14A under the Exchange Act, including but not limited to information required to be disclosed by Schedule 14A of Regulation 14A, and any other information that the shareholder would be required to file with the Securities and Exchange Commission in connection with the shareholder's nomination of such person as a candidate for director or the shareholder's opposition to any candidate for director nominated by, or at the direction of, the Board of Directors. In addition to the above information, a shareholder's notice to the Secretary under Section 3.3(2) shall (A) set forth (i) the name and address, as they appear on the Corporation's books, of the shareholder and of any other shareholders that the shareholder knows or anticipates will support any candidate or candidates nominated by the shareholder and (ii) the number and class of shares of stock of the Corporation that are beneficially owned on the date of such notice by the shareholder and by any such other shareholders and (B) be accompanied by a statement in the form of a record, executed and acknowledged by each candidate nominated by the shareholder, that the candidate agrees to be so nominated and to serve as a director of the Corporation if elected at the annual meeting. (4) The Board of Directors, or a designated committee thereof, may reject any shareholder's nomination of one or more candidates for election as directors if the nomination is not made pursuant to a shareholder's notice timely given in accordance with the terms of Section 3.3(2). If the Board of Directors, or a designated committee thereof, determines that the information provided in a shareholder's notice does not satisfy the requirements of Section 3.3(3) in any material respect, the Secretary of the Corporation shall notify the shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with information previously provided, does not satisfy the requirements of Section 3.3(3) in any material respect, then the Board of Directors or such committee may reject the shareholder's notice. (5) Notwithstanding the procedures set forth in Section 3.3(4), if a shareholder proposes to nominate one or more candidates for election as directors at an annual meeting, and neither the Board of Directors nor any committee thereof has made a prior determination of whether the shareholder has complied with the procedures set forth in this Section 3.3 in connection with such nomination, then the chairman of the annual meeting shall determine and declare at the annual meeting whether the shareholder has so complied. If the chairman determines that the shareholder has so complied, then the chairman shall so state and ballots shall be provided for use at the meeting with respect to such nomination. If the chairman determines that the shareholder has not so complied, then, unless the chairman, in his or her sole and absolute discretion, determines to waive such compliance, the chairman shall state that the shareholder has not so complied and the defective nomination shall be disregard. (6) All directors of the Corporation shall be at least twenty-one years of age. Directors need not be shareholders or residents of the State of Washington. At each meeting of shareholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes cast shall be elected directors. Section 3.4 Meetings. (1) Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman of the Board, the President, the Vice President or two or more directors. Oral or written notice of each special meeting of the Board of Directors, stating the time and place of the meeting, shall (i) be given to each director not less than two days before such meeting or (ii) be delivered to the director personally by facsimile or by telephoning not less than one (1) day before the meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of the shareholders. Notice need not be given of regular meetings of the Board of Directors. (2) Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear each other. Such participation constitutes presence in person at such meeting. (3) Whenever notice is required to be given to any director pursuant to the Act, the Corporation's Articles of Incorporation or these By-Laws, a written waiver thereof, signed by such director, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.5 Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by the Act, the Articles of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Any meeting of the Board of Directors may be adjourned and continued at a later time, including a meeting at which a quorum is not present. Notwithstanding Section 4 of this Article, notice of the adjourned meeting or of the business to be transacted therein, other than by announcement at the meeting of which the adjournment is taken, shall not be necessary. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. Section 3.6 Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the full Board of Directors, designate from among its members an Executive Committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all the authority of the Board of Directors, except no such committee shall have the authority to (a) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors; (b) approve or propose to shareholders action which the corporate law requires to be approved by shareholders; (c) fill vacancies on the Board of Directors or on any of its committees; (d) amend Articles of Incorporation; (e) adopt, amend, or repeal By-Laws; (f) approve a plan of merger not requiring shareholder approval; or (g) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations on a class or series of shares, except that the Board of Directors may authorize a committee, or a senior executive officer of the Corporation, to do so within limits specifically prescribed by the Board of Directors. At such time as the stock of the Corporation may be publicly traded upon any exchange, there shall be an Audit Committee of one or more independent directors and a Compensation Committee of one or more independent directors. Section 3.7 Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or any committee, as the case may be, consent in writing to such action and the writing or writings are filed with the minutes or proceedings of the Board of Directors or committee, as the case may be. Section 3.8 Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. No such payment shall preclude any director from serving this Corporation in any other capacity and receiving compensation therefor. Section 3.9 Vacancies. Except as otherwise provided in these By-Laws, newly created directorships resulting from any increases in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even if such majority is less than a quorum of the Board of Directors, or by a sole remaining director. The term of office of any director so elected by the directors to fill a vacancy resulting from an increase in the number of directors or otherwise shall expire at the next meeting of shareholders at which directors are elected. The term of office of any director elected by the shareholders to succeed a director elected by the other directors (or to fill a vacancy on the Board of Directors which had not been filled by the vote of such other directors) shall expire at the annual meeting of shareholders at which the term of the class of which such director is a member shall expire. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 3.10 Resignation of Directors. Any director may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, and if no time be specified, shall take effect at the time of its receipt by the Chairman, the Chief Executive Officer or the Secretary of the Corporation. The acceptance of a resignation shall not be necessary to make it effective. No resignation shall discharge any accrued obligation or duty of a director. Section 3.11 Removal of Directors. A duly elected director of the Corporation may be removed from such position, with or without cause, only by the affirmative vote of the holders of a majority of the shares entitled to vote in the election of such director as provided in the Articles of Incorporation. Section 3.12 Chairman. The Board of Directors may select one of its members to be Chairman. The Chairman shall have such powers and perform such duties which are commonly associated with the office of Chairman, including, presiding at meetings of the Board of Directors and at shareholder meetings. The Chairman shall also have such powers and perform such duties as are set forth in these By-Laws and as may from time to time be assigned to him by the Board of Directors. Section 3.13 Vice Chairman of the Board. The Vice-Chairman of the Board, if there be any, shall be a member of the Board of Directors and shall have such powers and perform such duties as may from time to time be assigned to him or her by the Board of Directors. Section 3.14 Interested Directors and Officers. (1) Contracts and Transactions. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are also directors or officers, or have a financial interest, shall be void or voidable solely for such reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) Disclosure to Board. The material facts as to his interest and as to the contract or transaction are disclosed or known to the Board of Directors and the Board of Directors in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested director or directors, even though the disinterested directors be less than a quorum; or (b) Disclosure to Shareholders. The material facts as to his interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by a vote of the shareholders; or (c) Fairness. The contract or transaction is fair to the Corporation as of the time it is authorized, approved, or ratified, by the Board of Directors or the shareholders. (3) Quorum. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors which authorizes a contract or transaction in the preceding section. Section 3.15 Presumption of Assent. A director of this Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless: (a) the director objects at the beginning of the meeting, or promptly upon the director's arrival, to the holding of the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director shall file written dissent or abstention with the presiding officer of the meeting before such adjournment or to the Corporation within a reasonable time after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE 4 OFFICERS Section 4.1 Officers. The officers of the Corporation shall consist of a President, a Secretary, a Chief Financial Officer (Treasurer) and such other additional officers with such titles as the Board of Directors shall determine, all of whom shall be chosen by and shall serve at the pleasure of the Board of Directors. Any number of offices may be held by the same person. Such officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities of any officer of the Corporation may be suspended by the President with or without cause. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. No officer need be a shareholder of this Corporation. Section 4.2 Other Officers. The Board of Directors, at its discretion, may appoint, or empower the President to appoint, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, or such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as the Board of Directors or the President may from time to time determine. Section 4.3 Removal. Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights, if any, of an officer under an employment contract). Section 4.4 Resignation. Any officer may resign at any time by giving written notice to the Board of Directors, the President, or to the Secretary of the Corporation without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointments to such office. Section 4.6 Salaries. The salaries, if any, of the officers shall be fixed from time to time by the Board of Directors or the committee of the Board designated for that purpose. No officers shall be prevented from receiving such salary by reason of the fact that said officer is also a director of this Corporation. ARTICLE 5 INDEMNIFICATION Section 5.1 Indemnification Rights. To the fullest extent permitted by the Act, as the same may be amended and supplemented, the Corporation shall indemnify each current or former director or officer of the Corporation from and against any and all expenses, liabilities or other matters referred to in or covered by the Act, including, without limitation, by reason of his current or former position with the Corporation or by reason of the fact that he is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Section 5.2 Nonexclusivity. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Except as may otherwise be specifically provided in these By-Laws, no provision of these By-Laws is intended by the Corporation to be construed as limiting, prohibiting, denying or abrogating any of the general or specific powers or rights conferred under the Act upon the Corporation, upon its shareholders, bondholders and security holders, and upon its directors, officers, employees or agents, including in particular the power of the Corporation to furnish indemnification to directors, officers, employees and agents in the capacities defined and prescribed by the Act and prescribed rights of said persons to indemnification as the same are conferred by the Act. Section 5.3 Advancement of Expenses. The rights granted herein shall include the right to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of such expenses shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director, officer, employee or agent, to repay all amounts so advanced if it shall ultimately be determined that such director, officer, employee or agent is not entitled to indemnification. ARTICLE 6 SHARES AND SHAREHOLDERS Section 6.1 Share Certificates. (1) The Corporation may issue a certificate or certificates representing shares of its stock. No shares of this Corporation shall be issued unless authorized by the Board or a committee of the Board. Such authorization shall include the maximum number of shares to be issued, the consideration to be received, and a statement that the Board considers the consideration to be adequate. Certificates for shares of the Corporation shall be in such form as is consistent with the provisions of the Act and shall state: 1) The name of the Corporation and that the Corporation is organized under the laws of the State of Washington; 2)The name of the person to whom issued; and 3) The number and class of shares and the designation of the series, if any, which such certificate represents. Any or all of the signatures on the certificate may be a facsimile. The Board of Directors may appoint one or more transfer agents and registrars for its stock of any class or classes and may require stock certificates to be countersigned and registered by one or more of the transfer agents and registrars. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent of registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. The Corporation shall be entitled to issue shares of its capital stock without certificates representing such shares if the Board of Directors of the Corporation shall so resolve. (2) There shall be set forth on the face or back of a certificate which the Corporation may issue to represent a class or series of stock one of the following: (1) a statement of the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, or (2) a summary of the statement described in subsection 1.B.(1) above. If a security of the Corporation is subject to a restriction on the transfer or registration thereof, such restriction shall be noted, in writing, conspicuously upon the certificate representing the security. (3) The Corporation may, but shall not be required to, issue certificates representing a fraction of a share and, in this event, the holder thereof shall have all the rights appurtenant to ownership of that interest in the Corporation. If the Corporation elects not to issue certificates representing a fraction of a share to the persons entitled thereto, it shall, at its election, either: (4) Arrange for disposition of the fractional interest by those entitled thereto. (5) Pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined. (6) Issue scrip or warrants in registered or bearer which entitles the holder to receive a full share upon surrender of such scrip or warrants aggregating one or more full shares, which scrip or warrants may, if the Board of Directors elects, either become (i) void if not so surrendered on or before a specified date, or (ii) subject to such other conditions or limitations as may be designated by the Board of Directors. Section 6.2 Transfer of Certificates. Where a certificate for shares is presented to the Corporation or its transfer clerk or transfer agent with a request to register a transfer of shares, the Corporation is under a duty to register the transfer, cancel the certificate presented, and issue a new certificate if: (a) the certificate is endorsed or the instructions were originated by the appropriate person or persons; (b) reasonable assurance is given that those endorsements or instructions are genuine and effective; (c) the Corporation has no duty to inquire into adverse claims or has discharged any such duty; (d) any applicable law relating to the collection of taxes has been complied with; and (e) reasonable assurance is given that the transfer is in fact rightful or is to a bona fide purchaser. Section 6.3 Lost Certificates. Where a certificate is alleged to have been lost, destroyed or wrongfully taken, the Corporation shall issue a new certificate in place of the original if the owner: (a) so requests, in writing, before the Corporation has notice that the certificate has been acquired by a bona fide purchaser; and (b) if so requested by the Board of Directors, gives the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, destruction or wrongful taking of such certificate or the issuance of such new certificate. Except as provided above, no new certificate for shares shall be issued in lieu of an old certificate unless the Corporation is ordered to do so by a court judgment in an action brought in a court of appropriate jurisdiction. Section 6.4 Registration of Shares. The Corporation shall recognize the person or persons registered in its stock ledger as the exclusive owner and holder of the shares registered in his name and as the "shareholder" for all purposes herein with the exclusive rights inter alia to vote the shares, to receive dividends declared with respect to the shares, to transfer the shares to others, and to exercise any other rights of shareholders. The Corporation shall have no obligation to recognize any equitable or other claim or interest in any shares on the part of any person or persons other than the registered owner, as set forth in the stock ledger, whether or not the Corporation shall have any notice thereof, except as may otherwise be provided by the laws of the State of Washington. "Shares" for the purposes hereof, shall mean shares of the Corporation's stock authorized by its Articles of Incorporation and registered in the stock ledger as issued and outstanding, including any one or more classes of stock so authorized and whether or not such share is deemed to have voting or other privileges. It is the duty of every shareholder to notify this Corporation of the shareholder's post office address. Section 6.5 Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date in any case to be not more than seventy (70) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting. Section 6.6 Voting Record. The officer or agent having charge of the stock transfer books for shares of this Corporation shall make at least ten (10) days before each meeting of shareholders a complete record of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof. ARTICLE 7 GENERAL PROVISIONS Section 7.1 Notices. Whenever any statute, the Articles of Incorporation or these By-Laws requires notice to be given to any director or shareholder, such notice may be given in writing by mail, addressed to such director or shareholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Such notices shall be deemed to have been given when it is deposited in the United States mail. Notice to directors may also be given by facsimile or telephone. Section 7.2 Dividends and Reserves. The Board of Directors, from time to time, may determine whether any, and, if any, what part, of its net assets in excess of its capital available therefor pursuant to applicable law and the Articles of Incorporation shall be declared by it as dividends on the stock of the Corporation. The Board of Directors, in its discretion, in lieu of declaring any such dividend, may use and apply any of such net profits or net assets as a reserve for working capital, to meet contingencies, for the purpose of maintaining or increasing the property or business of the Corporation or for any other lawful purpose which it may think conducive to the best interests of the Corporation. Section 7.3 Seal. The corporate seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the year and state of its incorporation. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. Section 7.5 Record Date; Books and Records. (1) The Board of Directors may fix, in advance, a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. (2) The Corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, Board of Directors and committees of the Board of Directors and shall keep at its Principal Office or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. Such minutes shall be kept in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form. Section 7.6 Check, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 7.7 Authority to Execute Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, subject to the applicable laws of the State of Washington. Such authority may be general or confined to specific instances and, unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 7.8 Representation of Shares of Other Corporations. The President or any Vice President and the Secretary or any Assistant Secretary of this Corporation are authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority herein granted to said officers to vote or represent on behalf of this Corporation any and all shares held by this Corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 7.9 Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the Act shall govern the construction of these By-Laws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. Section 7.10 Books and Records. The Corporation shall keep as permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the shareholders or Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors exercising the authority of the Board of Directors on behalf of the Corporation; shall maintain appropriate accounting records; and the Corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each; and shall keep a copy of the following records at its Principal Office: (1) The Articles or Restated Articles of Incorporation and all amendments to them currently in effect; (2) The By-Laws or Restated By-Laws and all amendments to them currently in effect; (3) The minutes of all shareholders' meetings, and records of all actions taken by shareholders without a meeting, for the past three (3) years; (4) Its financial statements for the past three (3) years, including balance sheets showing in reasonable detail the financial condition of the Corporation as of the close of each fiscal year, and an income statement showing the results of its operations during each fiscal year prepared on the basis of generally accepted accounting principles or, if not, prepared on a basis explained therein; (5) All written communications to shareholders generally within the past three (3) years; (6) A list of the names and business addresses of its current directors and officers; and (7) Its most recent annual report delivered to the Corporations Division of the State of Washington. Section 7.11 Financial Statements. Not later than four (4) months after the close of its fiscal year, and in any event prior to the annual meeting of shareholders, the Corporation shall prepare a balance sheet and income statement as of the close of the fiscal year. Upon written request, the Corporation shall mail to any shareholder a copy of the most recent balance sheet and income statement. If the annual financial statements are reported upon by a public accountant, the accountant's report must accompany them. If not, the statements must be accompanied by the statement required by Washington law, which is signed by the President or a person responsible for the Corporation's accounting records. Section 7.12 Rules of Order. The rules contained in the most recent edition of Robert's Rules of Order, Revised, shall govern all meetings of shareholders and directors where those rules are not inconsistent with the Articles of Incorporation or these By-Laws, subject to the following: (a) The chairman of the meeting shall have absolute authority over matters of procedure, and there shall be no appeal from the ruling of the chairman. If the chairman in his or her absolute discretion deems it advisable to dispense with the rules of parliamentary procedure for any meeting or any part thereof, the chairman shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. (b) If disorder should arise which prevents continuation of the legitimate business of the meeting, or if the chairman should otherwise determine that it is desirable to do so, the chairman may quit the chair and announce the adjournment of the meeting. Upon so doing, the meeting shall be deemed immediately adjourned, subject to being reconvened in accordance with Section 2.8 of these By-Laws. (c) The chairman may ask or require that anyone not a bona fide shareholder or proxy leave the meeting of shareholders. (d) Without limiting the requirements of Section 2.4 and Section 3.3 of these By-Laws, a resolution or motion at a meeting of shareholders shall be considered for vote only if proposed by a shareholder or duly authorized proxy and seconded by an individual who is a shareholder or duly authorized proxy other than the individual who proposed the resolution or motion. ARTICLE 8 AMENDMENTS Subject to any limitations imposed by law or the Articles of Incorporation these By-Laws may be altered, amended, supplemented or repealed, or new By-Laws may be adopted, (a) at any annual or special meeting of the shareholders by affirmative vote of all shareholders or (b) at any regular or special meeting of the Board of Directors by affirmative vote of a majority of the Board of Directors. In either case, notice of the proposed amendment must be given in the Notice of the meeting. The undersigned, being the Secretary of WestCoast Hospitality Corporation, hereby certifies that the foregoing Amended and Restated By-Laws were adopted by the Board of Directors of the Corporation effective February 20, 2003. /S/__Richard L. Barbieri____________ Richard L. Barbieri, Secretary EX-21 4 ex21.txt Exhibit 21 WESTCOAST HOSPITALITY CORPORATION (WHC) SUBSIDIARIES A. Wholly Owned Subsidiaries Name State of Incorporation ================================================================================ Bellevue Inn, LLC (1) Washington North River Drive Company Washington Red Lion Hotels, Inc. Delaware Red Lion Properties, Inc. (2) Delaware Stewart Street Associates, Inc. (3) Washington TicketsWest.com, Inc. Washington WestCoast Bellevue Inn, Inc. (3) Washington WestCoast E.P. Acquisitions, Inc. (3) Washington WestCoast Hotels, Inc. Washington WestCoast Hotel Properties, Inc. (3) Washington WestCoast Vancouver Washington, Inc. (3), (4) Washington (1) 50% owned by WestCoast Hotels, Inc., which is wholly owned by WHC, and 50% owned by WHC. (2) Wholly owned by Red Lion Hotels, Inc., which is wholly owned by WHC. (3) Wholly owned by WestCoast Hotels, Inc., which is wholly owned by WHC. (4) Inactive. B. Partially Owned Subsidiaries Name State of Incorporation ================================================================================ Cowley Street Limited Partnership (1) Washington E.P. Acquisitions Limited Partnership (2) Washington Vance Hotel Associates Limited Partnership (3) Washington WestCoast Hospitality Limited Partnership (4) Delaware WHC804-M, LLC (5) Delaware WHC809-M, LLC (5) Delaware WHC820-M, LLC (5) Delaware WHC821-M, LLC (5) Delaware WHC804, LLC (6) Delaware WHC809, LLC (7) Delaware WHC820, LLC (8) Delaware WHC821, LLC (9) Delaware (1) 50% owned by WHC. (2) .33% owned by WestCoast E.P. Acquisitions, Inc., which is wholly owned by WestCoast Hotels, Inc., which is wholly owned by WHC. (3) .5% owned by Stewart Street Associates, Inc. which has a 15% participation, which is wholly owned by WestCoast Hotels, Inc., which is wholly owned by WHC. (4) 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. (5) Wholly owned by WestCoast Hospitality Limited Partnerhip, which is 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. (6) Wholly owned by WHC804-M, LLC, which is wholly owned by WestCoast Hospitality Limited Partnership, which is 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. (7) Wholly owned by WHC809-M, LLC, which is wholly owned by WestCoast Hospitality Limited Partnership, which is 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. (8) Wholly owned by WHC820-M, LLC, which is wholly owned by WestCoast Hospitality Limited Partnership, which is 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. (9) Wholly owned by WHC821-M, LLC, which is wholly owned by WestCoast Hospitality Limited Partnership, which is 97.3% owned by WHC, and .53% owned by North River Drive Company, which is wholly owned by WHC. EX-23 5 ex231.txt Exhibit 23.1 Consent of Independent Accountants WestCoast Hospitality Corporation Spokane, Washington We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-60791) of WestCoast Hospitality Corporation of our report dated February 5, 2003, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K. BDO Seidman, LLP Spokane, Washington March 31, 2003 EX-23 6 ex232.txt Exhibit 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Form S-8 (File No. 333-60791) of WestCoast Hospitality Corporation of our report dated February 1, 2001 relating to the consolidated financial statements, which appears in this annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Portland, Oregon March 31, 2003 EX-99.14 7 ex991.txt Exhibit 99.1 WESTCOAST HOSPITALITY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of WestCoast Hospitality Corporation (the "Company") on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald K. Barbieri, Chief Executive Officer, President and Chairman of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. 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 /s/ Donald K. Barbieri - ---------------------------------- Donald K. Barbieri Chief Executive Officer, President and Chairman March 31, 2003 EX-99.14 8 ex992.txt Exhibit 99.2 WESTCOAST HOSPITALITY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of WestCoast Hospitality Corporation (the "Company") on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Arthur M. Coffey, Chief Financial Officer, Executive Vice President and Director of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. 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 /s/ Arthur M. Coffey - ---------------------------------- Arthur M. Coffey Chief Financial Officer, Executive Vice President and Director March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----