Red Lion Hotels Corporation
CAVANAUGHS HOSPITALITY CORP(Form: 8-K/A, Received: 13 August 1998, 07:40:50 PM)    
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K/A
Amendment No. 1

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): June 1, 1998

CAVANAUGHS HOSPITALITY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

WASHINGTON

(State or Other Jurisdiction of Incorporation)

       001-13957                                        91-1032187
------------------------                           -------------------
(Commission File Number)                            (I.R.S. Employer
                                                   Identification No.)

201 W. North River Drive, Suite 100
Spokane, Washington 99201

(Address of Principal Executive Offices)

(Zip Code)

(509) 459-6100

(Registrant's Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)


The undersigned Registrant hereby amends, as and to the extent set forth below, the following items, financial statements, exhibits or other portions of the Current Report on Form 8-K for an event which occurred on June 1, 1998:

 
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits


 
EXHIBIT INDEX

99.1 Audited financial statements of Olympus Hotel and Conference Center ("Olympus" or "Olympus Hotel") as of and for the year ended December 31, 1997.

99.2 Unaudited condensed pro forma combined balance sheet of Cavanaughs Hospitality Corporation ("Cavanaughs" or "CHC") and Olympus as of October 31, 1997 and March 31, 1998 and condensed pro forma combined statements of income for the year ended October 31, 1997 and three months ended March 31, 1998.

99.3 Unaudited condensed financial statements of Olympus as of and for the three months ended March 31, 1998.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized.


Dated:  August 12, 1998            CAVANAUGHS HOSPITALITY CORPORATION
        -----------------------

                                   By  /s/ Art Coffey
                                       ------------------------------
                                       Executive Vice President/Chief
                                       Financial Officer



 

EXHIBIT 99.1

[PricewaterhouseCoopers LLP - Spokane, Washington letterhead]

Report of Independent Accountants

August 7, 1998

To the Members of
Stellar Lone Star Limited Liability Company:

In our opinion, the accompanying balance sheet and the related statements of income, changes in members' equity, and cash flows present fairly, in all material respects, the financial position of The Olympus Hotel and Conference Center ("The Olympus Hotel") as of December 31, 1997, and the results of its operations and its cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above.


/s/PricewaterhouseCoopers LLP



THE OLYMPUS HOTEL
BALANCE SHEET
as of December 31, 1997

ASSETS

Current assets:
  Cash and cash equivalents                              $   275,583
  Accounts receivable, less allowance for doubtful
    accounts of $12,500                                      389,146
  Inventories                                                 63,818
  Prepaid expenses                                           175,117
                                                         -----------
      Total current assets                                   903,664

Property and equipment, net                               19,747,631
Deferred loan fees, net                                       86,628
                                                         -----------
      Total assets                                       $20,737,923
                                                         ===========

             LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
  Accounts payable                                       $   173,604
  Accrued payroll and related benefits                       195,493
  Accrued interest payable                                   175,000
  Other accrued expenses                                      72,667
  Note payable, current portion                              102,114
                                                         -----------
      Total current liabilities                              718,878

Note payable, long-term portion                           16,977,886
                                                         -----------
      Total liabilities                                   17,696,764

Commitments (Note 6)

Members' equity                                            3,041,159
                                                         -----------
      Total liabilities and members' equity              $20,737,923
                                                         ===========

The accompanying notes are an integral part of the financial statements.


THE OLYMPUS HOTEL
STATEMENT OF INCOME
for the year ended December 31, 1997

Revenues:
  Hotel and restaurant:
    Rooms                                                $ 6,998,977
    Food and beverage                                      1,883,091
    Other                                                     54,649
                                                         -----------
        Total hotel and restaurant                         8,936,717

  Rental operations                                          131,391
                                                         -----------
        Total revenues                                     9,068,108
                                                         -----------
Operating expenses:
  Direct:
    Rooms                                                  1,293,475
    Food and beverage                                      1,430,366
                                                         -----------
        Total direct                                       2,723,841
                                                         -----------
  Indirect:
    Selling, general and administrative                    1,632,041
    Property operating costs                               1,483,956
    Depreciation and amortization                            847,966
                                                         -----------
        Total indirect                                     3,963,963
                                                         -----------
        Total operating expenses                           6,687,804
                                                         -----------
Operating income                                           2,380,304

Other expense:
  Interest                                                (1,643,298)
                                                         -----------
Net income                                               $   737,006
                                                         ===========

The accompanying notes are an integral part of the financial statements.


THE OLYMPUS HOTEL
STATEMENT OF CHANGES IN MEMBERS' EQUITY
for the year ended December 31, 1997

Balance, January 1, 1997                                 $ 3,054,153
  Net income                                                 737,006
  Distributions to members                                  (750,000)
                                                         -----------
Balance, December 31, 1997                               $ 3,041,159
                                                         ===========

The accompanying notes are an integral part of the financial statements.


THE OLYMPUS HOTEL
STATEMENT OF CASH FLOWS
for the year ended December 31, 1997

Operating activities:
  Net income                                             $   737,006
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                          847,966
      Change in:
        Accounts receivable                                  (31,101)
        Inventories                                           (3,453)
        Prepaid expenses                                     101,561
        Accounts payable                                     187,012
        Accrued payroll and related benefits                  32,079
        Other accrued expenses                                19,369
                                                         -----------
          Net cash provided by operating activities        1,890,439
                                                         -----------
Investing activities:
  Additions to property and equipment                     (1,113,574)
                                                         -----------
          Net cash used in investing activities           (1,113,574)
                                                         -----------
Financing activities:
  Distributions to members                                  (750,000)
                                                         -----------
          Net cash used in financing activities             (750,000)
                                                         -----------
Change in cash and cash equivalents:
  Net increase in cash and cash equivalents                   26,865
  Cash and cash equivalents at beginning of year             248,718
                                                         -----------
  Cash and cash equivalents at end of year               $   275,583
                                                         ===========
Supplemental disclosure of cash flow information:
  Cash paid during year for:
    Interest                                             $ 1,639,721

The accompanying notes are an integral part of the financial statements.


THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION:

On December 27, 1994, The Olympus Hotel ("Olympus Hotel" or "Company"), which is located in Salt Lake City, Utah, was purchased by Stellar Lone Star Limited Liability Company ("Stellar") from Olympus Hotel, L.C., a Utah limited liability company.

Stellar is a commercial real estate development and management company located in the state of Washington. Stellar owns properties other than Olympus Hotel. However, these financial statements only reflect the operations and activities of Olympus Hotel.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with remaining maturities at the time of purchase of three months or less. The Company places its cash and cash equivalents with high credit quality institutions. At times, cash balances may be in excess of federal insurance limits.

Inventories

Inventories consist primarily of room linens, food and beverage products, which are valued at the lower of average cost or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets or the lease term as follows:

Buildings 39 years Equipment, furniture and fixtures 7 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 aggregate net carrying value of property and equipment to determine whether there has been a permanent impairment in carrying value. At December 31, 1997, no such impairment was deemed to exist.


THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Deferred Loan Fees

Deferred loan fees are amortized using the interest method over the 20-year term of the related loan agreement.

Income Taxes

Olympus Hotel is wholly owned by Stellar Lone Star Limited Liability Company. Accordingly, Stellar's members are responsible for federal and state income taxes on Olympus Hotel's earnings. Therefore, no provision for income taxes is recorded in these financial statements.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Advertising Expenses

Advertising is expensed as incurred. The total amount of advertising expense was approximately $221,000 in 1997.

Concentration of Revenues

Approximately $1.44 million of room revenues in 1997 was generated from contracts with airlines, which are renewed every 1-2 years.

New Accounting Pronouncement

In June 1997, SFAS No. 130, "Reporting Comprehensive Income", (SFAS No. 130) was issued. SFAS No. 130 requires that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for the financial statement, but requires that an enterprise display net income as a component of comprehensive income in the financial statement. Comprehensive income is defined as the change in equity of a business enterprise arising from non- owner sources. The classifications of comprehensive income
THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

under current accounting standards include foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Management does not believe that the implementation of SFAS No. 130 will have a material impact on the presentation of its financial statements.

3. PROPERTY AND EQUIPMENT:

Property and equipment as of December 31, 1997 is as follows:

Land                                              $   824,634
Buildings and equipment                            18,914,184
Furniture and fixtures                              2,386,475
                                                  -----------
                                                   22,125,293
Less accumulated depreciation                      (2,377,662)
                                                  -----------
                                                  $19,747,631
                                                  ===========

4. LONG-TERM DEBT:

Long-term debt as of December 31, 1997 is as follows:

Mortgage note payable with interest at 9.25%, payable in monthly installments of $140,589 beginning February 1998 through November 2014, with the remaining unpaid principal due in December 2014, collateralized by real property. The fair value of the note approximates its carrying value. $17,080,000



THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS, CONTINUED

4. LONG-TERM DEBT, CONTINUED:

Contractual maturities for long-term debt outstanding at December 31, 1997, are summarized by year as follows:

Year Ending
December 31,
------------
    1998                                          $   102,114
    1999                                              121,688
    2000                                              133,434
    2001                                              146,314
    2002                                              160,436
 Thereafter                                        16,416,014
                                                  -----------
                                                  $17,080,000
                                                  ===========

5. OPERATING LEASE INCOME:

Operating lease income is generated from non-related businesses which rent space on the hotel property. The cost and accumulated depreciation of these rental properties at December 31, 1997 are approximately $165,000 and $22,000, respectively. The income for one of these leases is based on a minimum fixed rate per month or a percentage of the business' gross sales, whichever is greater. During the year ended December 31, 1997, the Company recognized approximately $131,000 of rental income which included $28,000 of rent, which was contingent upon the amount of gross sales.

Future minimum lease income under existing noncancellable leases at December 31, 1997 is as follows:

       Year Ending
       December 31,
       ------------
           1998                                          $    89,449
           1999                                               90,291
           2000                                               68,604
           2001                                               68,604
           2002                                               68,604
                                                         -----------
                                                         $   385,552
                                                         ===========



THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. COMMITMENTS:

The Company leases billboards and equipment under operating lease agreements. The leases are generally on a month-to-month or year-to-year basis. These leases generally contain provisions for automatic renewal at the end of each specified period unless written notice is given in advance in accordance with the agreement. Future minimum lease payments at December 31, 1997 are approximately $13,000 due in 1998.

The Company also pays approximately $20,000 per month to a management company to manage Olympus Hotel. The agreement is renewed annually. At December 31, 1997, this agreement was renewed on a month-to-month basis. In connection with the sale of Olympus Hotel in 1998 (see Note 9), this management agreement was terminated.

7. RELATED-PARTY TRANSACTIONS:

The Company has agreed to pay Stellar an annual fee of $96,000 for consulting. This agreement was terminated in connection with the sale of Olympus Hotel in 1998 (see Note 9).

8. EMPLOYEE BENEFITS:

The Company sponsors a self-insured health benefit plan which provides comprehensive medical, dental and prescription coverage for the employees of the Company and their covered family members. The Company carries an excess reimbursement policy which covers 100 percent of payments exceeding $20,000 during a 12-month period per individual. Total expense incurred by the Company for this plan was approximately $176,000 in 1997.

The Company has established a flexible reimbursement plan intended to constitute a "Cafeteria plan" within Section 125 of the Internal Revenue Code. The Company made no contribution to this plan in 1997.

The Company sponsors a 401(k) retirement plan for substantially all of its employees. The Company matches 15% of all eligible employee contributions. Company contributions to this plan were $3,300 in 1997.
The Company provides no benefits and incurs no costs associated with postemployment or postretirement benefits or pensions.


THE OLYMPUS HOTEL
NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. SUBSEQUENT EVENT:

Effective July 1, 1998, Cavanaughs Hospitality Corporation ("CHC"), located in the state of Washington, acquired all the Company's property and equipment, including the rental property of the Company. CHC also acquired the rights, title and interest in all hotel contracts, space leases, permits, equipment leases and inventories of the Company. CHC is a hotel operating company that owns, operates, acquires, develops, renovates and repositions full service hotels located in the Northwest.


 

EXHIBIT 99.2

CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION

The following condensed pro forma combined balance sheets and condensed pro forma combined statements of operations, collectively, the "Pro Forma Financial Statements", were prepared by Cavanaughs to illustrate the estimated effects of the business combination to be accounted for as a purchase under generally accepted accounting principles. Accordingly, the financial information of Cavanaughs and Olympus has been combined as if the acquisition occurred as of the beginning of the period presented for purposes of the condensed pro forma combined statements of income, and as of the balance sheet date, for purposes of the condensed pro forma combined balance sheets. There are no differences between Cavanaughs' and Olympus' accounting policies which are expected to have a material impact on the pro forma combined financial statements. The Pro Forma Financial Statements do not purport to represent what the combined financial position or results of operations would have been if the combination had occurred at the beginning of the period or to project the combined financial position or results of operations for any future date or period.

The Pro Forma Financial Statements should be read in conjunction with the historical consolidated financial statements, including the notes thereto, of Cavanaughs, which are included in Cavanaughs' Form S-1 (File No. 333-44491), Cavanaughs' Form 10-Q for the three months ended March 31, 1998 and of Olympus, which are included elsewhere in this document.

The Pro Forma Financial Statements are presented utilizing the purchase method of accounting whereby the excess of the total purchase price over the fair value of the assets acquired is recorded as property and equipment. The consolidated pro forma results of operations presented herein are not necessarily indicative of the future results of operations.


CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at October 31, 1997
(in thousands, except for share data)

                                        CHC          Olympus
                                        Historical   Historical
                                        (at          (at
                                        October 31,  December 31,   Pro Forma    Pro Forma
                                        1997)        1997)          Adjustments  Combined
                                        -----------  ------------   -----------  ----------
                 ASSETS

Current assets:
  Cash and cash equivalents              $   6,440     $      --    $      --    $   6,440
  Accounts receivable                        2,806            --           --        2,806
  Inventories                                  376            --           --          376
  Prepaid expenses and deposits              1,128            --           --        1,128
                                         ---------     ---------    ---------    ---------
        Total current assets                10,750            --           --       10,750

Property and equipment, net                109,954        19,748       11,852(A)   141,554
Other assets, net                            3,400            --           --        3,400
                                         ---------     ---------    ---------    ---------
        Total assets                     $ 124,104     $  19,748    $  11,852    $ 155,704
                                         =========     =========    =========    =========

  LIABILITIES AND STOCKHOLDERS' AND
        PARTNERS  EQUITY

Current liabilities:
  Payable to affiliates                  $   1,333     $      --    $      --    $   1,333
  Accounts payable                           2,263            --           --        2,263
  Accrued payroll and related benefits         843            --           --          843
  Accrued interest payable                     741            --           --          741
  Other accrued expenses                     3,618            --           --        3,618
  Long-term debt, due within one year        4,285            --           --        4,285
  Capital lease obligations, due within
    one year                                   499            --           --          499
                                         ---------     ---------    ---------    ---------
        Total current liabilities           13,582            --           --       13,582

Long-term debt, due after one year          93,771            --       31,600(B)   125,371
Capital lease obligations, due after
  one year                                   2,255            --           --        2,255
Deferred income taxes                        5,417            --           --        5,417
Minority interest                              553            --           --          553
                                         ---------     ---------    ---------    ---------
        Total liabilities                  115,578            --       31,600      147,178
                                         ---------     ---------    ---------    ---------


CONDENSED PRO FORMA COMBINED BALANCE SHEETS, CONTINUED
at October 31, 1997
(in thousands, except for share data)

                                        CHC          Olympus
                                        Historical   Historical
                                        (at          (at
                                        October 31,  December 31,   Pro Forma    Pro Forma
                                        1997)        1997)          Adjustments  Combined
                                        -----------  ------------   -----------  ----------
 LIABILITIES AND STOCKHOLDERS' AND
    PARTNERS  EQUITY, CONTINUED

Stockholders  and partners  equity:
  Preferred stock, $.01 par value,
    5,000,000 shares authorized; no
    shares issued and outstanding        $      --     $      --    $      --    $      --
  Common stock, $.01 par value,
    50,000,000 shares authorized;
      7,072,025 shares issued and
      outstanding                               71            --           --           71
  Partners' deficit                           (897)           --           --         (897)
  Additional paid-in capital                 3,935            --           --        3,935
  Retained earnings                          5,417        19,748      (19,748)       5,417
                                         ---------     ---------    ---------    ---------
        Total stockholders' and
          partners  equity                   8,526        19,748      (19,748)       8,526
                                         ---------     ---------    ---------    ---------
        Total liabilities and stock-
          holders' and partners
            equity                       $ 124,104     $  19,748    $  11,852    $ 155,704
                                         =========     =========    =========    =========

See notes to condensed pro forma combined balance sheets and statements of income.


CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at March 31, 1998
(in thousands, except for share data)


                                          CHC          Olympus
                                          Historical   Historical
                                          (at          (at
                                          March 31,    March 31,    Pro Forma    Pro Forma
                                          1998)        1998)        Adjustments  Combined
                                          ----------   ----------   -----------  ----------
              ASSETS

Current assets:
  Cash and cash equivalents               $   8,206    $      --    $      --    $   8,206
  Accounts receivable                         2,652           --           --        2,652
  Inventories                                   483           --           --          483
  Prepaid expenses and deposits               2,160           --           --        2,160
                                          ---------    ---------    ---------    ---------
        Total current assets                 13,501           --           --       13,501

Property and equipment, net                 137,559       19,645       11,955(A)   169,159
Other assets, net                             3,726           --           --        3,726
                                          ---------    ---------    ---------    ---------
        Total assets                      $ 154,786    $  19,645    $  11,955    $ 186,386
                                          =========    =========    =========    =========

  LIABILITIES AND STOCKHOLDERS  EQUITY

Current liabilities:
  Payable to affiliates                   $     933    $      --    $      --    $     933
  Note payable to bank                        3,000           --           --        3,000
  Accounts payable                            3,235           --           --        3,235
  Accrued payroll and related benefits        1,039           --           --        1,039
  Accrued interest payable                      832           --           --          832
  Other accrued expenses                      4,378           --           --        4,378
  Long-term debt, due within one year         1,241           --           --        1,241
  Capital lease obligations, due within
    one year                                    508           --           --          508
                                          ---------    ---------    ---------    ---------
        Total current liabilities            15,166           --           --       15,166

Long-term debt, due after one year          123,253           --       31,600(B)   154,853
Capital lease obligations, due after
  one year                                    2,023           --           --        2,023
Deferred income taxes                         5,415           --           --        5,415
Minority interest                               484           --           --          484
                                          ---------    ---------    ---------    ---------
        Total liabilities                   146,341           --       31,600      177,941
                                          ---------    ---------    ---------    ---------



CONDENSED PRO FORMA COMBINED BALANCE SHEETS, CONTINUED
at March 31, 1998
(in thousands, except for share data)

                                          CHC          Olympus
                                          Historical   Historical
                                          (at          (at
                                          March 31,    March 31,    Pro Forma    Pro Forma
                                          1998)        1998)        Adjustments  Combined
                                          ----------   ----------   -----------  ----------
 LIABILITIES AND STOCKHOLDERS  EQUITY,
              CONTINUED

Stockholders  equity:
  Preferred stock, $.01 par value,
    5,000,000 shares authorized; no
    shares issued and outstanding         $      --    $      --    $      --    $      --
  Common stock, $.01 par value,
    50,000,000 shares authorized;
      7,084,253 shares issued and
      outstanding                                71           --           --           71
  Additional paid-in capital                  3,056           --           --        3,056
  Retained earnings                           5,318       19,645      (19,645)       5,318
                                          ---------    ---------    ---------    ---------
        Total stockholders  equity            8,445       19,645      (19,645)       8,445
                                          ---------    ---------    ---------    ---------
        Total liabilities and stock-
          holders  equity                 $ 154,786    $  19,645    $  11,955    $ 186,386
                                          =========    =========    =========    =========

See notes to condensed pro forma combined balance sheets and statements of income.


CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
for the year ended October 31, 1997
(in thousands, except per share data)

                                          CHC           Olympus
                                          Historical    Historical
                                          (for the      (for the
                                          year ended    year ended
                                          October 31,   December 31,   Pro Forma    Pro Forma
                                          1997)         1997)          Adjustments  Combined
                                          -----------   ------------   -----------  ----------
Revenues:
  Hotels and restaurants:
    Rooms                                  $  25,147     $   6,999     $      --    $  32,146
    Food and beverage                         13,926         1,883            --       15,809
    Other                                      2,589            55            --        2,644
                                           ---------     ---------     ---------    ---------
        Total hotels and restaurants          41,662         8,937            --       50,599
  Entertainment, management and services       3,842            --            --        3,842
  Rental operations                            6,539           131            --        6,670
                                           ---------     ---------     ---------    ---------
        Total revenues                        52,043         9,068            --       61,111
                                           ---------     ---------     ---------    ---------
Operating expenses:
  Direct:
    Hotels and restaurants:
      Rooms                                    6,820         1,294            --        8,114
      Food and beverage                       11,483         1,430            --       12,913
      Other                                    1,066            --            --        1,066
                                           ---------     ---------     ---------    ---------
        Total hotels and restaurants          19,369         2,724            --       22,093
    Entertainment, management and
      services                                 2,052            --            --        2,052
    Rental operations                          1,506            --            --        1,506
                                           ---------     ---------     ---------    ---------
        Total direct expenses                 22,927         2,724            --       25,651
                                           ---------     ---------     ---------    ---------
  Undistributed operating expenses:
    Selling, general and administrative        8,188         1,632            --        9,820
    Property operating costs                   5,518         1,484          (306)(C)    6,696
    Depreciation and amortization              4,775           848          (121)(D)    5,502
                                           ---------     ---------     ---------    ---------
        Total undistributed operating
          expenses                            18,481         3,964          (427)      22,018
                                           ---------     ---------     ---------    ---------
        Total expenses                        41,408         6,688          (427)      47,669
                                           ---------     ---------     ---------    ---------
Operating income                              10,635         2,380           427       13,442

Other income (expense):
  Interest expense, net of amounts
    capitalized                               (8,817)       (1,643)         (739)(E)  (11,199)
  Interest income                                416            --            --          416
  Other income                                   348            --            --          348
  Minority interest in partnerships               59            --            --           59
                                           ---------     ---------     ---------    ---------
Income (loss) before income taxes              2,641           737          (312)       3,066
Income tax provision                             932                         141 (F)    1,073
                                           ---------     ---------     ---------    ---------
Net income                                 $   1,709     $     737     $    (453)   $   1,993
                                           =========     =========     =========    =========


CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME, CONTINUED
for the year ended October 31, 1997
(in thousands, except per share data)

                                          CHC           Olympus
                                          Historical    Historical
                                          (for the      (for the
                                          year ended    year ended
                                          October 31,   December 31,   Pro Forma    Pro Forma
                                          1997)         1997)          Adjustments  Combined
                                          -----------   ------------   -----------  ----------
Pro forma net income per share             $    0.24                                $    0.28
                                           =========                                =========
Number of shares used in the pro
  forma computation                            7,072                                    7,072
                                           =========                                =========

See notes to condensed pro forma combined balance sheets and statements of income.


CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME for the three months ended March 31, 1998
(in thousands, except per share data)


                                          CHC          Olympus      Pro Forma    Pro Forma
                                          Historical   Historical   Adjustments  Combined
                                          ----------   ----------   -----------  ----------
Revenues:
  Hotels and restaurants:
    Rooms                                 $   6,884    $   1,820    $      --    $   8,704
    Food and beverage                         4,175          524           --        4,699
    Other                                       782           43           --          825
                                          ---------    ---------    ---------    ---------
        Total hotels and restaurants         11,841        2,387           --       14,228
  Entertainment, management and services      1,018           --           --        1,018
  Rental operations                           1,776           32           --        1,808
                                          ---------    ---------    ---------    ---------
        Total revenues                       14,635        2,419           --       17,054
                                          ---------    ---------    ---------    ---------
Operating expenses:
  Direct:
    Hotels and restaurants:
      Rooms                                   2,091          384           --        2,475
      Food and beverage                       3,558          430           --        3,988
      Other                                     337           --           --          337
                                          ---------    ---------    ---------    ---------
        Total hotels and restaurants          5,986          814           --        6,800
    Entertainment, management and
      services                                  697           --           --          697
    Rental operations                           385           --           --          385
                                          ---------    ---------    ---------    ---------
        Total direct expenses                 7,068          814           --        7,882
                                          ---------    ---------    ---------    ---------
  Undistributed operating expenses:
    Selling, general and administrative       1,996          260           --        2,256
    Property operating costs                  1,796          390          (89)(C)    2,097
    Depreciation and amortization             1,338          211          (30)(D)    1,519
                                          ---------    ---------    ---------    ---------
        Total undistributed operating
          expenses                            5,130          861         (119)       5,872
                                          ---------    ---------    ---------    ---------
        Total expenses                       12,198        1,675         (119)      13,754
                                          ---------    ---------    ---------    ---------
Operating income                              2,437          744          119        3,300

Other income (expense):
  Interest expense, net of amounts
    capitalized                              (2,679)        (407)        (189)(E)   (3,275)
  Interest income                                70           --           --           70
  Minority interest in partnerships              40           --           --           40
                                          ---------    ---------    ---------    ---------
Income (loss) before income taxes              (132)         337          (70)         135
Income tax provision (benefit)                  (45)          --           91 (F)       46
                                          ---------    ---------    ---------    ---------
Net income (loss) and comprehensive
  income (loss)                           $     (87)   $     337    $    (161)   $      89
                                          =========    =========    =========    =========


CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME for the three months ended March 31, 1998
(in thousands, except per share data)


                                          CHC          Olympus      Pro Forma    Pro Forma
                                          Historical   Historical   Adjustments  Combined
                                          ----------   ----------   -----------  ----------
Net income (loss) per share - basic
  and diluted                             $   (0.01)                             $    0.01
                                          =========                              =========

Weighted average shares outstanding -
  basic and diluted                           7,084                                  7,084
                                          =========                              =========

See notes to condensed pro forma combined balance sheet and statement of income.


NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEETS AND STATEMENTS OF
INCOME

The following balance sheet adjustments were made to reflect the combination of Cavanaughs and Olympus as if it occurred October 31, 1997 and March 31, 1998:

(A) Represents the purchase price in excess of the historical carrying value of the property and equipment of Olympus. The total purchase price and the amount in excess of the historical carrying value of the property and equipment are calculated as follows (in thousands):

                                    October 31,   March 31,
                                    1997          1998
                                    -----------   -----------
Total purchase price                 $ 31,600       $ 31,600
Historical carrying value of
  assets acquired                     (19,748)       (19,645)
                                     --------       --------
Excess purchase price                $ 11,852       $ 11,955
                                     ========       ========

The purchase price has been allocated to the acquired land, building, furniture and fixtures as follows based upon the estimated fair value of the components (in thousands):

                                                  Depreciable
                                    Amount        Life
                                    ----------    ------------
Land                                 $ 10,876
Buildings                              18,840       35 years
Furniture and fixtures                  1,884       10 years
                                     --------
                                     $ 31,600
                                     ========

(B) Represents the amount of the purchase price of Olympus which will be financed by the Company's revolving line-of-credit agreement.


NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF
INCOME, CONTINUED

The following income statement adjustments were made to reflect the combination of Cavanaughs and Olympus as if it occurred at the beginning of the period presented. The combined pro forma results of operations presented herein are not necessarily indicative of the future results of operations of the combined companies.

(C) Represents the elimination of management fees associated with the management agreement between Olympus and an affiliated entity which will be terminated upon the acquisition by Cavanaughs.

(D) Represents the increase (decrease) in depreciation and amortization expense from the historical amounts based on the depreciation of the purchase price over the estimated remaining lives of the acquired assets (see Note A).

(E) Represents the additional interest expense which would be incurred by Cavanaughs based on the purchase price of Olympus, which will be financed under Cavanaughs' revolving line-of-credit agreement. The interest rate used in the pro forma adjustments was 7.538% based upon the current borrowing rate under Cavanaughs' line-of-credit agreement. If the rate increased or decreased by 0.25%, the Company s pro forma interest expense, net income and earnings per share for the 1997 fiscal year would increase or decrease by approximately $79,000, $51,000 and $0.01, respectively. If the rate increased or decreased by 0.25%, the Company s pro forma interest expense, net income and earnings per share for the quarter ended March 31, 1998 would increase or decrease by approximately $18,000, $12,000 and $-0-, respectively.

(F) Represents estimated income taxes related to Olympus' historical income before income taxes and the tax effects of pro forma adjustments. As Olympus was not a tax-paying entity, there is no income tax provision recorded on the historical Olympus financial statements.


 

EXHIBIT 99.3

THE OLYMPUS HOTEL
UNAUDITED FINANCIAL STATEMENTS
as of and for the three months ended March 31, 1998
THE OLYMPUS HOTEL
BALANCE SHEET
as of March 31, 1998 (Unaudited)

ASSETS

Current assets:
  Cash and cash equivalents                              $   129,932
  Accounts receivable                                        650,907
  Inventories                                                 60,279
  Prepaid expenses                                           168,396
                                                         -----------
      Total current assets                                 1,009,514

Property and equipment, net                               19,645,287
Deferred loan fees, net                                       85,627
                                                         -----------
      Total assets                                       $20,740,428
                                                         ===========

             LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
  Accounts payable                                       $   253,680
  Accrued payroll and related benefits                       181,400
  Other accrued expenses                                      96,902
  Note payable, current portion                              102,114
                                                         -----------
      Total current liabilities                              634,096

Note payable, long-term portion                           16,977,886
                                                         -----------
      Total liabilities                                   17,611,982

Members' equity                                            3,128,446
                                                         -----------
      Total liabilities and members' equity              $20,740,428
                                                         ===========


THE OLYMPUS HOTEL
STATEMENT OF INCOME
for the three months ended March 31, 1998 (Unaudited)



Revenues:
  Hotel and restaurant:
    Rooms                                                $ 1,820,157
    Food and beverage                                        524,496
    Other                                                     42,851
                                                         -----------
        Total hotel and restaurant                         2,387,504

  Rental operations                                           31,663
                                                         -----------
        Total revenues                                     2,419,167
                                                         -----------
Operating expenses:
  Direct:
    Rooms                                                    384,179
    Food and beverage                                        430,326
                                                         -----------
        Total direct                                         814,505
                                                         -----------
  Indirect:
    Selling, general and administrative                      259,405
    Property operating costs                                 389,854
    Depreciation and amortization                            211,350
                                                         -----------
        Total indirect                                       860,609
                                                         -----------
        Total operating expenses                           1,675,114
                                                         -----------
Operating income                                             744,053

Other expense:
  Interest                                                  (406,766)
                                                         -----------
Net income and comprehensive income                      $   337,287
                                                         ===========



THE OLYMPUS HOTEL
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1998 (Unaudited)



Operating activities:
  Net income                                             $   337,287
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                          211,350
      Change in:
        Accounts receivable                                 (261,761)
        Inventories                                            3,539
        Prepaid expenses                                       6,721
        Accounts payable                                     (94,924)
        Accrued payroll and related benefits                 (14,093)
        Other accrued expenses                                24,235
                                                         -----------
          Net cash provided by operating activities          212,354
                                                         -----------
Investing activities:
  Additions to property and equipment                       (108,005)
                                                         -----------
          Net cash used in investing activities             (108,005)
                                                         -----------
Financing activities:
  Distributions to members                                  (250,000)
                                                         -----------
          Net cash used in financing activities             (250,000)
                                                         -----------
Change in cash and cash equivalents:
  Net decrease in cash and cash equivalents                 (145,651)
  Cash and cash equivalents at beginning of period           275,583
                                                         -----------
  Cash and cash equivalents at end of period             $   129,932
                                                         ===========


THE OLYMPUS HOTEL
NOTES TO UNAUDITED FINANCIAL STATEMENTS
as of and for the three months ended March 31, 1998

1. QUARTERLY INFORMATION:

The unaudited financial statements included herein have been prepared by The Olympus Hotel ("Olympus Hotel" or "the Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. The Company believes that the disclosures included herein are adequate; however, these statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 1997 which are included elsewhere in this document.

In the opinion of management, these unaudited financial statements contain all of the adjustments normal and recurring in nature, necessary to present fairly the financial position of the Company at March 31, 1998 and the results of operations and cash flows for the three months ended March 31, 1998. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

2. INCOME TAXES:

Olympus Hotel is wholly owned by Stellar Lone Star Limited Liability Company. Accordingly, Stellar's members are responsible for federal and state income taxes on Olympus Hotel's earnings. Therefore, no provision for income taxes is recorded in these financial statements.