Red Lion Hotels Corporation
CAVANAUGHS HOSPITALITY CORP(Form: 8-K/A, Received: 14 October 1998, 04:42:27 AM)    
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: July 31, 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)


ITEM 2.

The undersigned Registrant hereby amends, as and to the extent set forth below the following item, financial statements, exhibits or other portions of the Current Report on Form 8-K for an event which occurred on July 31, 1998.

 
ITEM 7. Financial Statements and Exhibits

(a) Financial Statements of the property acquired

See Exhibits 99.1 and 99.2.

(b) Pro forma financial information

See Exhibit 99.3.

(c) Exhibits

Exhibit 99.1: Audited combined financial statements of Boise Park Suites, Best Western Colonial Park, Best Western Canyon Springs and Quality Inn as of July 31, 1998 and for the period from October 15, 1997 to July 31, 1998.

Exhibit 99.2: Unaudited combined financial statements of Boise Park Suites, Best Western Colonial Park, Best Western Canyon Springs and Quality Inn as of June 30, 1998 and for the six months ended June 30, 1998 and 1997.

Exhibit 99.3: Pro forma unaudited combined financial statements of Cavanaughs Hospitality Corporation and Boise Park Suites, Best Western Colonial Park, Best Western Canyon Springs and Quality Inn as of June 30, 1998 and October 31, 1997 and for the six months ended June 30, 1998 and the year ended October 31, 1997.


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: October 13, 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

September 25, 1998

To the Members of Sunstone Hotels, L.L.C.:

In our opinion, the accompanying combined balance sheet and the related combined statements of income and comprehensive income, changes in members' equity, and cash flows present fairly, in all material respects, the financial position of Boise Park Suites, Best Western Colonial Park, Best Western Canyon Springs and Quality Inn ("The Hotels") at July 31, 1998, and the results of their operations and their cash flows for the period October 15, 1997 to July 31, 1998, in conformity with generally accepted accounting principles. The Hotels were owned by Sunstone Hotels, L.L.C. ("Sunstone"). These financial statements are the responsibility of Sunstone'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 HOTELS
COMBINED BALANCE SHEET
at July 31, 1998

ASSETS

Current assets:
  Cash and cash equivalents                              $   263,967
  Accounts receivable, less allowance for doubtful
    accounts of $6,292                                       316,451
  Receivable from affiliate                                  206,968
  Inventories                                                 79,096
  Prepaid expenses                                            78,562
                                                         -----------
      Total current assets                                   945,044

Property and equipment, net                               33,322,864
Other assets, net                                             63,247
                                                         -----------
      Total assets                                       $34,331,155
                                                         ===========

             LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
  Accounts payable                                       $    91,216
  Accrued expenses                                            46,745
  Accrued property taxes                                     381,400
                                                         -----------
      Total current liabilities                              519,361

Commitment (Note 5)

Members' equity                                           33,811,794
                                                         -----------
      Total liabilities and members' equity              $34,331,155
                                                         ===========

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


THE HOTELS
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
for the period October 15, 1997 to July 31, 1998

Revenues:
  Hotels and restaurants:
    Rooms                                                $ 7,201,560
    Food and beverage                                      3,382,690
    Other                                                    429,790
                                                         -----------
        Total hotels and restaurants revenues             11,014,040
                                                         -----------
Operating expenses:
  Direct:
    Rooms                                                  1,859,814
    Food and beverage                                      2,666,058
    Other                                                    240,125
                                                         -----------
        Total direct                                       4,765,997
                                                         -----------
  Indirect:
    Selling, general and administrative                    1,840,510
    Property operating costs                               1,583,187
    Depreciation and amortization                          1,062,269
                                                         -----------
        Total indirect                                     4,485,966
                                                         -----------
        Total operating expenses                           9,251,963
                                                         -----------
Net income and comprehensive income                      $ 1,762,077
                                                         ===========

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


THE HOTELS
STATEMENT OF CHANGES IN MEMBERS' EQUITY
for the period October 15, 1997 to July 31, 1998

Balance, October 15, 1997                                $34,131,283
  Net income                                               1,762,077
  Contributions from members                                 648,609
  Distributions to members                                (2,730,175)
                                                         -----------
Balance, July 31, 1998                                   $33,811,794
                                                         ===========

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


THE HOTELS
STATEMENT OF CASH FLOWS
for the period October 15, 1997 to July 31, 1998

Operating activities:
  Net income                                             $ 1,762,077
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                        1,062,269
      Change in:
        Accounts receivable                                  (36,050)
        Inventories                                          (18,135)
        Prepaid expenses                                     (66,957)
        Accounts payable                                     (43,910)
        Accrued expenses                                     (44,273)
        Accrued property taxes                               (64,807)
                                                         -----------
          Net cash provided by operating activities        2,550,214
                                                         -----------
Investing activities:
  Additions to property and equipment                       (195,239)
  Acquisition of franchise rights                            (53,544)
                                                         -----------
          Net cash used in investing activities             (248,783)
                                                         -----------
Financing activities:
  Distributions to members                                (2,730,175)
  Contributions from members                                 648,609
                                                         -----------
          Net cash used in financing activities           (2,081,566)
                                                         -----------
Change in cash and cash equivalents:
  Net increase in cash and cash equivalents                  219,865
  Cash and cash equivalents at beginning of period            44,102
                                                         -----------
  Cash and cash equivalents at end of period             $   263,967
                                                         ===========

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


THE HOTELS
NOTES TO FINANCIAL STATEMENTS

1. OWNERSHIP AND FINANCIAL STATEMENT PRESENTATION:

On October 15, 1997, Sunstone Hotels, L.L.C. ("Sunstone" or "the Company") acquired all of the outstanding stock of Kahler Realty Corporation ("Kahler"). The acquisition was accounted for as a purchase. Therefore, the fair value of the assets acquired and liabilities assumed were recorded by Sunstone. At the date of acquisition, Kahler owned 17 hotels, including the following hotels:

-- Boise Park Suites (Boise, Idaho) -- Best Western Colonial Park (Helena, MT) -- Best Western Canyon Springs (Twin Falls, Idaho) -- Quality Inn (Pocatello, Idaho)

These four hotels, collectively referred to as "The Hotels", were sold to Cavanaughs Hospitality Limited Partnership effective July 31, 1998. Sunstone owns properties other than The Hotels; however, the combined financial statements presented herein reflect the operations and activities only of The Hotels. The statement of income presented herein includes all of the related costs of doing business including an allocation of certain general corporate expenses of Sunstone which were not directly related to The Hotels including certain corporate executives' salaries and other corporate expenses. These allocations were based on a variety of factors, dependent upon the nature of the costs being allocated, including revenues and number of available rooms. Management believes these allocations were made on a reasonable basis. No corporate debt incurred by Sunstone has been allocated to The Hotels. Therefore, no debt or associated interest expense is included in these combined 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 the time of purchase of three months or less. The Hotels place their 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 food and beverage products which are valued at the lower of average cost or net realizable value.

THE HOTELS
NOTES TO FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

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 as follows:

Buildings 5-35 years Equipment, furniture and fixtures 7-12 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.

When the Company acquired Kahler, the total purchase price was allocated to the 17 acquired hotels based upon the estimated fair value of each individual hotel. 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 July 31, 1998, no such impairment was deemed to exist.

Franchise Fees

Franchise fees, which are included in other assets, are stated at cost and amortized using the straight-line method over the franchise contract life of 10 years. Accumulated amortization at July 31, 1998 was $1,297.

Income Taxes

The Hotels are owned by Sunstone Hotels, L.L.C., a limited liability corporation. Sunstone's members are responsible for federal and state income taxes on The Hotels' earnings. Therefore, no provision for income taxes is recorded in these combined 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.
THE HOTELS
NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. PROPERTY AND EQUIPMENT:

Property and equipment as of July 31, 1998 is as follows:

Land                                              $ 3,211,810
Buildings and improvements                         29,298,012
Equipment, furniture and fixtures                   1,874,014
                                                  -----------
                                                   34,383,836
Less accumulated depreciation                       1,060,972
                                                  -----------
                                                  $33,322,864
                                                  ===========

4. OPERATING LEASE INCOME:

Operating lease income is generated from non-related businesses which rent space on the hotel property. During the period ended July 31, 1998, approximately $50,000 was recognized as lease income.

Future minimum lease income under existing noncancellable leases at July 31, 1998 is as follows:

Year EndingJuly 31,
-----------
    1999                                              $33,822
    2000                                               12,000
    2001                                                2,000
                                                      -------
                                                      $47,822
                                                      =======


5. COMMITMENT:

The Hotels pay approximately one percent of gross revenues per month to an affiliated management company to manage The Hotels. The agreement is renewed annually. Total management fee expense incurred by The Hotels was approximately $83,000 for the period ended July 31, 1998. In connection with the sale of The Hotels (see Note 7), this management agreement was terminated.


THE HOTELSNOTES TO FINANCIAL STATEMENTS, CONTINUED

6. EMPLOYEE BENEFITS:

Sunstone sponsors a 401(k) retirement plan for substantially all of their employees. Sunstone matches 25% of all eligible employee contributions up to 6% of compensation. Contributions to this plan by Sunstone of approximately $13,000 in 1998 were allocated to The Hotels.

Sunstone also sponsors a bonus/profit-sharing plan whereby a bonus may be earned by certain employees and management basedupon guest service scores. Contributions to this plan were approximately $166,000 in 1998.

7. SALE OF THE HOTELS:

Effective July 31, 1998, Cavanaughs Hospitality Limited Partnership ("CHLP") acquired all The Hotels' property and equipment. CHLP also acquired the rights, title and interest in all hotel contracts, space leases, permits, equipment leases and inventories of The Hotels. The sole general partner of CHLP, Cavanaughs Hospitality Corporation ("CHC") is located in the state of Washington. CHC is a hotel operating company that owns, operates, acquires, develops, renovates and repositions full- service hotels located in the Northwest.


 

EXHIBIT 99.2

UNAUDITED COMBINED FINANCIAL STATEMENTS OF
BOISE PARK SUITES, BEST WESTERN COLONIAL PARK,
BEST WESTERN CANYON SPRINGS AND QUALITY INN ("THE HOTELS")
as of June 30, 1998 and for the six months ended June 30, 1998 and 1997
THE HOTELS
BALANCE SHEET
at June 30, 1998 (Unaudited)

ASSETS

Current assets:
  Cash and cash equivalents                              $   330,174
  Accounts receivable, less allowance for doubtful
    accounts of $6,292                                       437,368
  Receivable from affiliate                                  400,745
  Inventories                                                109,100
  Prepaid expenses                                            37,738
                                                         -----------
      Total current assets                                 1,315,125

Property and equipment, net                               33,429,848
Other assets                                                  85,500
                                                         -----------
      Total assets                                       $34,830,473
                                                         ===========

             LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
  Accounts payable                                       $   165,777
  Accrued payroll and related benefits                       453,201
  Accrued expenses                                           108,207
  Accrued property taxes                                     364,684
                                                         -----------
      Total current liabilities                            1,091,869
                                                         -----------
      Total liabilities                                    1,091,869

Members' equity                                           33,738,604
                                                         -----------
      Total liabilities and members' equity              $34,830,473
                                                         ===========


THE HOTELS
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

for the six months ended June 30, 1998 and 1997(Unaudited)

                                             1998         1997
                                             ----------   ----------
Revenues:
  Hotels and restaurants:
    Rooms                                    $4,678,267   $4,747,304
    Food and beverage                         2,145,053    2,405,424
    Other                                       273,768      213,766
                                             ----------   ----------
        Total hotels and restaurants
          revenues                            7,097,088    7,366,494
                                             ----------   ----------
Operating expenses:
  Direct:
    Rooms                                     1,219,991    1,126,980
    Food and beverage                         1,672,434    1,730,256
    Other                                       153,858      100,663
                                             ----------   ----------
        Total direct                          3,046,283    2,957,899
                                             ----------   ----------
  Indirect:
    Selling, general and administrative       1,226,869    1,802,223
    Property operating costs                  1,054,767      503,762
    Depreciation and amortization               636,927      697,500
                                             ----------   ----------
        Total indirect                        2,918,563    3,003,485
                                             ----------   ----------
        Total operating expenses              5,964,846    5,961,384
                                             ----------   ----------
Operating income                              1,132,242    1,405,110

Other expense:
  Interest                                           --   (1,202,835)
                                             ----------   ----------
Income before income taxes                    1,132,242      202,275
Provision for income taxes                           --      (80,910)
                                             ----------   ----------
Net income and comprehensive income          $1,132,242   $  121,365
                                             ==========   ==========



THE HOTELS
STATEMENTS OF CASH FLOWS

for the six months ended June 30, 1998 and 1997 (Unaudited)

                                             1998         1997
                                             ----------   ----------
Operating activities:
  Net income                                 $1,132,242   $  121,365
  Adjustments to reconcile net income
    to net cash provided by operating
    activities:
      Depreciation and amortization             636,927      697,500
      Change in:
        Accounts receivable                     (90,074)     (76,748)
        Inventories                             186,468       (1,464)
        Prepaid expenses                         50,407        2,214
        Other assets                             28,348
        Accounts payable                       (438,912)      12,725
        Accrued payroll and related
          benefits                               69,140       58,186
        Accrued property taxes and other
          expenses                              289,942      145,655
                                             ----------   ----------
            Net cash provided by
              operating activities            1,864,488      959,433
                                             ----------   ----------
Investing activities:
  Additions to property and equipment          (195,239)    (107,869)
  Acquisition of franchise rights               (53,544)
                                             ----------   ----------
            Net cash used in investing
              activities                       (248,783)    (107,869)
                                             ----------   ----------
Financing activities:
  Net distributions to members               (1,551,037)
  Payments on amounts due affiliates                        (852,737)
                                             ----------   ----------
            Net cash used in financing
              activities                     (1,551,037)    (852,737)
                                             ----------   ----------
Change in cash and cash equivalents:
  Net change in cash and cash equivalents        64,668       (1,173)
  Cash and cash equivalents at beginning
    of period                                   265,506       74,085
                                             ----------   ----------
  Cash and cash equivalents at end of
    period                                   $  330,174   $   72,912
                                             ==========   ==========


THE HOTELS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
as of and for the six months ended June 30, 1998

1. OWNERSHIP AND FINANCIAL STATEMENT PRESENTATION:

On October 15, 1997, Sunstone Hotels, L.L.C. ("Sunstone" or "the Company") acquired all of the outstanding stock of Kahler Realty Corporation ("Kahler"). The acquisition was accounted for as a purchase. Therefore, the fair value of the assets acquired and liabilities assumed were recorded by Sunstone. At the date of acquisition, Kahler owned 17 hotels, including the following hotels:

-- Boise Park Suites (Boise, Idaho) -- Best Western Colonial Park (Helena, MT) -- Best Western Canyon Springs (Twin Falls, Idaho) -- Quality Inn (Pocatello, Idaho)

These four hotels, collectively referred to as "The Hotels", were sold to Cavanaughs Hospitality Limited Partnership effective July 31, 1998. Sunstone and Kahler owned properties other than The Hotels; however, the combined financial statements presented herein reflect the operations and activities only of The Hotels. The statement of income presented herein includes all of the related costs of doing business including an allocation of certain general corporate expenses of Sunstone in 1998 and Kahler in 1997 which were not directly related to The Hotels including certain corporate executives' salaries and other corporate expenses. These allocations were based on a variety of factors, dependent upon the nature of the costs being allocated, including revenues and number of available rooms. Management believes these allocations were made on a reasonable basis.

Due to the ownership change, the statements of income and cash flows for the six months ended June 30, 1998 and 1997 are not comparable. During the 1997 period, Kahler allocated debt to The Hotels, and therefore, interest expense is recorded for the six months ended June 30, 1997. However, no corporate debt incurred by Sunstone has been allocated to The Hotels. Therefore, no debt or associated interest expense is included during the six months ended June 30, 1998.


THE HOTELS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS, CONTINUED

2. INTERIM INFORMATION:

The unaudited combined financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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. Management believes that the disclosures included herein are adequate; however, these combined statements should be read in conjunction with the combined financial statements and the notes thereto for the period ended July 31, 1998 which are included elsewhere in this document.

In the opinion of management, these unaudited combined financial statements contain all of the adjustments normal and recurring in nature, necessary to present fairly the financial position of The Hotels at June 30, 1998 and the results of their operations and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

3. INCOME TAXES:

For the six months ended June 30, 1998, The Hotels were owned by Sunstone. Sunstone is a limited liability corporation. Sunstone's members are responsible for federal and state income taxes on The Hotels' earnings. Therefore, no provision for income taxes is recorded in these combined financial statements for the six months ended June 30, 1998.

For the six months ended June 30, 1997, The Hotels were owned by Kahler. Income taxes have been provided in the statement of income for the six months ended June 30, 1997 based upon the estimated effective tax rate applicable to Kahler applied to income before income taxes.


 

EXHIBIT 99.3

CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION

The following condensed pro forma combined balance sheets and condensed pro forma combined statements of income, collectively, the "Pro Forma Financial Statements", were prepared by Cavanaughs Hospitality Corporation ("Cavanaughs") to illustrate the estimated effects of the business combinations to be accounted for as a purchase under generally accepted accounting principles. Cavanaughs acquired the Olympus Hotel and Conference Center ("Olympus") on July 1, 1998; however, Cavanaughs leased Olympus effective June 1, 1998. Effective July 31, 1998, Cavanaughs acquired the Boise Park Suites, Best Western Colonial Park, Best Western Canyon Springs and Quality Inn (collectively, "The Hotels"). A Form 8-K/A, which included audited financial statements as of and for the year ended December 31, 1997 and pro forma financial statements as of and for the year ended October 31, 1997 and as of and for the three months ended March 31, 1998, was filed with the Securities and Exchange Commission on August 13, 1998 to reflect the Olympus acquisition.

The financial information of Cavanaughs, Olympus and The Hotels has been combined as if the acquisitions 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', Olympus' and The Hotels' 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 present the combined financial position or results of operations 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 six months ended June 30, 1998, Olympus, which are included in Cavanaughs' Form 8-K/A filed August 13, 1998, and of The Hotels, 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 combined pro forma results of operations presented herein are not necessarily indicative of the future results of operations.

CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at June 30, 1998(in thousands)
                                                          CHC          Olympus      The Hotels   Pro Forma     Pro Forma
                                                          Historical   Historical   Historical   Adjustments   Combined
                                                          -----------  ----------   -----------  -----------   ---------
                       ASSETS
Current assets:
  Cash and cash equivalents                                $  6,227                                             $  6,227
  Accounts receivable                                         4,762                                                4,762
  Note receivable                                            17,112                                               17,112
  Inventories                                                   545                                                  545
  Prepaid expenses and deposits                                 370                                                  370
                                                           --------     --------     --------    --------       --------
        Total current assets                                 29,016                                               29,016

Property and equipment, net                                 152,701     $ 19,436     $ 33,430    $ (3,104)(A)    214,627
                                                                                                   12,164 (B)
Other assets, net                                             6,351                                                6,351
                                                           --------     --------     --------    --------       --------
        Total assets                                       $188,068     $ 19,436     $ 33,430    $  9,060       $249,994
                                                           ========     ========     ========    ========       ========
         LIABILITIES AND STOCKHOLDERS', MEMBERS'
                 AND PARTNERS' EQUITY

Current liabilities:
  Accounts payable                                         $  3,701                                             $  3,701
  Accrued payroll and related benefits                        1,693                                                1,693
  Accrued interest payable                                      454                                                  454
  Other accrued expenses                                      3,429                                                3,429
  Long-term debt, due within one year                         1,374                                                1,374
  Capital lease obligations, due within one year                519                                                  519
                                                           --------     --------     --------    --------       --------
        Total current liabilities                            11,170                                               11,170

Long-term debt, due after one year                           72,691                              $ 30,326(C)     134,617
                                                                                                   31,600(D)
Capital lease obligations, due after one year                 2,079                                                2,079
Deferred income taxes                                         5,415                                                5,415
Minority interest                                             4,246                                                4,246
                                                           --------     --------     --------    --------       --------
        Total liabilities                                    95,601                                61,926        157,527

Stockholders', members' and partners' equity                 92,467     $ 19,436     $ 33,430     (52,866)        92,467
                                                           --------     --------     --------    --------       --------
        Total liabilities and stockholders', members'
          and partners' equity                             $188,068     $ 19,436     $ 33,430    $  9,060       $249,994
                                                           ========     ========     ========    ========       ========

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

CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at October 31, 1997(in thousands)
                                          CHC Pro Forma
                                          (After Olympus Acquisition)  The Hotels Historical     Pro Forma     Pro Forma
                                          at October 31, 1997 (E)      at October 14, 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                          141,554                 $  35,654           $ (5,328)(A)    171,880
Other assets, net                                      3,400                                                       3,400
                                                    --------                 ---------           --------       --------
        Total assets                                $155,704                 $  35,654           $ (5,328)      $186,030
                                                    ========                 =========           ========       ========
  LIABILITIES AND STOCKHOLDERS',
  MEMBERS' 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                   125,371                                     $ 30,326(C)     155,697
Capital lease obligations, due after
  one year                                             2,255                                                       2,255
Deferred income taxes                                  5,417                                                       5,417
Minority interest                                        553                                                         553
                                                    --------                 ---------           ---------      --------
        Total liabilities                            147,178                                       30,326        177,504

Stockholders', members' and partners' equity           8,526                 $  35,654            (35,654)         8,526
                                                    --------                 ---------           --------       --------
        Total liabilities and stockholders',
          members' and partners' equity             $155,704                 $  35,654           $ (5,328)      $186,030
                                                    ========                 =========           ========       ========

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

CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
for the six months ended June 30, 1998
(in thousands, except per share data)

                                                          CHC          Olympus (F)  The Hotels   Pro Forma     Pro Forma
                                                          Historical   Historical   Historical   Adjustments   Combined
                                                          ----------   ----------   ----------   -----------   ---------
Revenues:
  Hotels and restaurants:
    Rooms                                                  $ 18,552     $  2,845     $  4,678                   $ 26,075
    Food and beverage                                         9,858          787        2,145                     12,790
    Other                                                     1,747          151          274                      2,172
                                                           --------     --------     --------    --------       --------
        Total hotels and restaurants                         30,157        3,783        7,097                     41,037
  Entertainment, management and services                      2,026                                                2,026
  Rental operations                                           3,514                                                3,514
                                                           --------     --------     --------    --------       --------
        Total revenues                                       35,697        3,783        7,097                     46,577
                                                           --------     --------     --------    --------       --------
Operating expenses:
  Direct:
    Hotels and restaurants:
      Rooms                                                   5,045          650        1,220                      6,915
      Food and beverage                                       8,160          730        1,672                     10,562
      Other                                                     777                       154                        931
                                                           --------     --------     --------    --------       --------
        Total hotels and restaurants                         13,982        1,380        3,046                     18,408
    Entertainment, management and services                    1,415                                                1,415
    Rental operations                                           732                                                  732
                                                           --------     --------     --------    --------       --------
        Total direct expenses                                16,129        1,380        3,046                     20,555
                                                           --------     --------     --------    --------       --------
  Undistributed operating expenses:
    Selling, general and administrative                       5,065          491        1,227                      6,783
    Property operating costs                                  3,977          652        1,055    $    (71)(G)      5,455
                                                                                                     (158)(H)
    Depreciation and amortization                             2,736          351          637        (286)(I)
                                                                                                       12 (J)      3,450
                                                           --------     --------     --------    --------       --------
        Total undistributed operating expenses               11,778        1,494        2,919        (503)        15,688
                                                           --------     --------     --------    --------       --------
        Total expenses                                       27,907        2,874        5,965        (503)        36,243
                                                           --------     --------     --------    --------       --------
Operating income                                              7,790          909        1,132         503         10,334


CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME, CONTINUED
for the six months ended June 30, 1998
(in thousands, except per share data)

                                                          CHC          Olympus (F)  The Hotels   Pro Forma     Pro Forma
                                                          Historical   Historical   Historical   Adjustments   Combined
                                                          ----------   ----------   ----------   -----------   ---------
Other income (expense):
  Interest expense, net of amounts capitalized             $ (4,054)    $   (572)    $           $ (1,143)(K)   $ (6,388)
                                                                                                     (619)(L)
  Interest income                                               196                                                  196
  Minority interest in partnerships                             (45)                                                 (45)
                                                           --------     --------     --------    --------       --------
Income (loss) before income taxes                             3,887          337        1,132      (1,259)         4,097
Income tax provision                                          1,322                                    71 (M)      1,393
                                                           --------     --------     --------    --------       --------
Income before extraordinary item                              2,565          337        1,132      (1,330)         2,704
Extraordinary item - write-off of
  deferred loan fees, net of tax                               (530)                                                (530)
                                                           --------     --------     --------    --------       --------
Net income and comprehensive income                        $  2,035     $    337     $  1,132    $ (1,330)      $  2,174
                                                           ========     ========     ========    ========       ========
Income per share before extraordinary item                 $   0.26                                             $   0.27
                                                           ========                                             ========
Net income per share:
  Basic                                                    $   0.21                                             $   0.22
                                                           ========                                             ========
  Diluted                                                  $   0.21                                             $   0.22
                                                           ========                                             ========
Weighted average shares outstanding:
  Basic                                                       9,836                                                9,836
                                                           ========                                             ========
  Diluted                                                    10,077                                               10,077
                                                           ========                                             ========


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


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

                                          CHC Pro Forma
                                          (After Olympus Acquisition)  The Hotels Historical
                                          for the year ended           for the twelve months     Pro Forma     Pro Forma
                                          October 31, 1997 (A)         ended October 14, 1997    Adjustments   Combined
                                          ---------------------------  -----------------------   -----------   ----------
Revenues:
  Hotels and restaurants:
    Rooms                                           $ 32,146                 $   9,475                          $ 41,621
    Food and beverage                                 15,809                     4,567                            20,376
    Other                                              2,644                       411                             3,055
                                                    ---------                ---------           --------       --------
        Total hotels and restaurants                  50,599                    14,453                            65,052
  Entertainment, management and services               3,842                                                       3,842
  Rental operations                                    6,670                                                       6,670
                                                    --------                 ---------           --------       --------
        Total revenues                                61,111                    14,453                            75,564
                                                    --------                 ---------           --------       --------
Operating expenses:
  Direct:
    Hotels and restaurants:
      Rooms                                            8,114                     2,262                            10,376
      Food and beverage                               12,913                     3,425                            16,338
      Other                                            1,066                       200                             1,266
                                                    --------                 ---------           --------       --------
        Total hotels and restaurants                  22,093                     5,887                            27,980
    Entertainment, management and services             2,052                                                       2,052
    Rental operations                                  1,506                                                       1,506
                                                    --------                 ---------           --------       --------
        Total direct expenses                         25,651                     5,887                            31,538
                                                    --------                 ---------           --------       --------
  Undistributed operating expenses:
    Selling, general and administrative                9,820                     3,595                            13,415
    Property operating costs                           6,696                     1,139           $   (434)(G)      7,401
    Depreciation and amortization                      5,502                     1,330               (628)(I)      6,204
                                                    --------                 ---------           --------      ---------
        Total undistributed operating
          expenses                                    22,018                     6,064             (1,062)        27,020
                                                    --------                 ---------           --------      ---------
        Total expenses                                47,669                    11,951             (1,062)        58,558
                                                    --------                 ---------           --------      ---------
 Operating income                                     13,442                     2,502              1,062         17,006


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

                                          CHC Pro Forma
                                          (After Olympus Acquisition)  The Hotels Historical
                                          for the year ended           for the twelve months     Pro Forma     Pro Forma
                                          October 31, 1997 (A)         ended October 14, 1997    Adjustments   Combined
                                          --------------------------   -----------------------   -----------   ----------
Other income (expense):
  Interest expense, net of amounts
    capitalized                                     $(11,199)                $  (2,345)          $     59 (N)   $(13,485)

  Interest income                                        416                                                         416
  Other income                                           348                                                         348
  Minority interest in partnerships                       59                                                          59
                                                    --------                 ---------           --------      ---------
Income (loss) before income taxes                      3,066                       157              1,121          4,344
Income tax provision                                   1,073                        63                448(O)       1,584
                                                    --------                 ---------           --------      ---------
Net income                                          $  1,993                 $      94           $    673       $  2,760
                                                    ========                 =========           ========      =========

Pro forma net income per share                      $   0.28                                                    $   0.39
                                                    ========                                                    ========
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.


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

Cavanaughs leased the Olympus Hotel and Conference Center ("Olympus") effective June 1, 1998 and purchased the hotel on July 1, 1998. Cavanaughs filed a Form 8-K/A with the Securities and Exchange Commission on August 13, 1998 which included the audited financial statements of Olympus as of and for the year ended December 31, 1997. The pro forma combined financial statements as of and for the year ended October 31, 1997 and as of and for the quarter ended March 31, 1998 were also included in the Form 8-K/A.

Cavanaughs acquired The Hotels effective July 31, 1998. The acquisitions of Olympus and The Hotels have been accounted for as purchases.

The pro forma combined balance sheets presented herein reflect the combination of Cavanaughs, Olympus and The Hotels as if they occurred October 31, 1997 and June 30, 1998.

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

                                    October 31,   June 30,
                                    1997          1998
                                    -----------   -----------
Total purchase price                 $ 30,326       $ 30,326
Historical carrying value of
  assets acquired                     (35,654)       (33,430)
                                     --------       --------
Carrying value in excess
  of purchase price                  $ (5,328)      $ (3,104)
                                     ========       ========

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                                 $ 10,311
Buildings                              18,195       35 years
Furniture and fixtures                  1,820       10 years
                                     --------
                                     $ 30,326
                                     ========


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

(B) 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 at June 30, 1998 are as follows (in thousands):

Total purchase price                                $ 31,600
Historical carrying value of assets acquired         (19,436)
                                                    --------
Excess purchase price                               $ 12,164
                                                    ========

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
                                     ========

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

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

(E) The "CHC Pro Forma" amounts represent the historical financial statements of Cavanaughs Hospitality Corporation as of and for the year ended October 31, 1997 as adjusted for the acquisition of Olympus which occurred in July 1998. (See the Company's Form 8-K/A which was filed with the Securities and Exchange Commission on August 13, 1998.)

The following income statement adjustments were made to reflect the combination of Cavanaughs, Olympus and The Hotels as if they 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.

(F) Represents the historical results of operations of Olympus for the five months ended May 31, 1998. The results of operations of Olympus for the month of June 1998 are included in the "CHC Historical" amounts due to CHC leasing the Olympus Hotel as of June 1, 1998.


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

(G) Represents the elimination of management fees associated with the management agreement between The Hotels and an affiliated entity which was terminated upon the acquisition by Cavanaughs.

(H) Represents the elimination of management fees for the five months ended May 31, 1998 associated with the management agreement between Olympus and an affiliated entity which was terminated at June 1, 1998 when Cavanaughs leased Olympus.

(I) Represents the change in depreciation and amortization expense from the historical amounts for The Hotels based on the depreciation of the purchase price over the estimated remaining lives of the acquired assets (see Note A).

(J) Represents the increase in depreciation and amortization expense from the historical amounts for Olympus based on the depreciation of the purchase price over the estimated remaining lives of the acquired assets (see Note B).

(K) Represents the additional interest expense which would be incurred by Cavanaughs based on the purchase price of The Hotels, 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 six months ended June 30, 1998 would increase or decrease by approximately $38,000, $23,000 and $-0-, respectively.

(L) 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 six months ended June 30, 1998 would increase or decrease by approximately $40,000, $24,000 and $-0-, respectively.

(M) Represents estimated income taxes at 34% related to The Hotels' and Olympus' historical income before income taxes and the tax effects of pro forma adjustments. As The Hotels and Olympus were not tax-paying entities, there is no income tax provision recorded on the historical financial statements of The Hotels or Olympus.


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

(N) Represents the reduction in interest expense which would be incurred by Cavanaughs based on the purchase price of The Hotels, 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 $76,000 $45,000 and $.01, respectively.

(O) Represents estimated income taxes at 40% related to the pro forma adjustments.