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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-21583
Candlewood Hotel Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Lakepoint Office Park
9342 E. Central
Wichita, Kansas 67206
(Address of principal executive offices)
(316) 631-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,679,634 $ 33,497,118
Marketable securities 5,899,896 --
Accounts receivable 925,317 142,584
Pre-opening costs, net of accumulated amortization
of $318,468 and $80,370, respectively 321,208 154,711
Prepaid expenses 133,181 116,568
-------------- --------------
Total current assets 14,959,236 33,910,981
-------------- --------------
Construction in progress - hotel properties 54,173,789 11,199,765
Property and equipment, net of accumulated
depreciation of $628,726 and $142,490, respectively 31,940,310 3,961,987
Intangible assets, net of accumulated
amortization of $37,338 and $23,057, respectively 216,196 223,286
Pre-acquisition costs 2,742,601 1,397,473
Other assets, net 6,244,345 980,451
-------------- --------------
$ 110,276,477 $ 51,673,943
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable - current portion $ 347,921 $ 21,290
Accounts payable 1,986,540 2,182,843
Accrued expenses 1,241,789 252,219
Deferred franchise fee revenue 466,800 375,800
-------------- --------------
Total current liabilities 4,043,050 2,832,152
-------------- --------------
Notes payable 50,064,162 15,435,819
Commitments
Redeemable preferred stock, net of offering costs
and subscriptions receivable 23,652,272 --
Stockholders' equity:
Preferred stock -- --
Common stock 90,250 90,250
Additional paid-in capital 35,269,891 35,269,891
Accumulated deficit (2,843,148) (1,954,169)
-------------- --------------
Total stockholders' equity 32,516,993 33,405,972
-------------- --------------
$ 110,276,477 $ 51,673,943
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Hotel operations $ 1,692,319 $ 262,555 $ 3,448,860 $ 382,593
Other revenues 77,531 -- 137,694 --
----------- ----------- ----------- -----------
Total revenues 1,769,850 262,555 3,586,554 382,593
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 836,429 126,205 1,811,353 212,400
Corporate operating expenses 1,036,552 295,946 2,375,255 1,044,294
Depreciation and amortization 360,915 89,420 833,680 160,179
----------- ----------- ----------- -----------
Total operating costs and expenses 2,233,896 511,571 5,020,288 1,416,873
----------- ----------- ----------- -----------
Loss from operations (464,046) (249,016) (1,433,734) (1,034,280)
Interest income 120,250 17,553 743,182 29,049
Interest expense (8,064) -- (198,427) --
----------- ----------- ----------- -----------
Net loss $ (351,860) $ (231,463) $ (888,979) $(1,005,231)
=========== =========== =========== ===========
Net loss per share $ (0.04) $ (0.04) $ (0.10) $ (0.19)
=========== =========== =========== ===========
Weighted average shares outstanding 9,025,000 5,175,000 9,025,000 5,175,000
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (888,979) $ (1,005,231)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 833,680 160,179
Change in:
Accounts receivable (782,733) (142,813)
Pre-opening costs (404,595) (117,277)
Prepaid expenses (16,613) (61,209)
Other assets (287,536) (2,000)
Accounts payable (290,345) 342,891
Accrued expenses 989,570 117,702
Deferred franchise fee revenue 91,000 151,200
------------ ------------
Net cash used in operating activities (756,551) (556,558)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in marketable securities (5,899,896) --
Expenditures for property and equipment (71,344,542) (7,533,325)
Expenditures for pre-acquisition costs (1,345,128) (654,905)
Increase in other assets (1,133,299) (105,949)
------------ ------------
Net cash used in investing activities (79,722,865) (8,294,179)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 34,995,275 --
Principal payments on notes payable (40,302) --
Capitalized loan fees (3,945,313) (124,638)
Proceeds from private placement of redeemable preferred stock, net 23,652,272 --
Deferred costs of public offering -- (203,987)
Members' capital contributions -- 10,189,383
Minority interest -- 73,327
------------ ------------
Net cash provided by financing activities 54,661,932 9,934,085
------------ ------------
Net increase (decrease) in cash and cash equivalents (25,817,484) 1,083,348
Cash and cash equivalents at beginning of period 33,497,118 123,384
------------ ------------
Cash and cash equivalents at end of period $ 7,679,634 $ 1,206,732
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of Candlewood Hotel
Company, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements have been
omitted. The accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring adjustments and including eliminations of
all significant intercompany transactions and accounts) which the Company
believes are necessary for the fair presentation of the Company's financial
position and results of operations. The condensed consolidated balance sheet
data at December 31, 1996 was derived from the Company's audited financial
statements. These interim financial statements should be read in conjunction
with the Company's 1996 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for interim periods are not
necessarily indicative of the results which may be expected for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
2. Organization
The Company's current business of developing, owning, operating,
franchising and managing extended-stay hotels originated in November 1995 with
the formation of Candlewood Hotel Company, L.L.C., a Delaware limited liability
company ("Candlewood LLC"). The Company was incorporated in the State of
Delaware in August 1996, and in November 1996, the Company succeeded to the
business of Candlewood LLC and completed an initial public offering of its
common stock (collectively, the "Reorganization").
3. Marketable Securities
At September 30, 1997, the Company held certain marketable securities,
with maturities greater than 90 days, which were principally investment-grade
corporate notes and securities. These securities were purchased as temporary
investments for a portion of the proceeds from the Company's private placement
of preferred stock (see Note 5) and are classified as available-for-sale as
defined by Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115). Securities
available-for-sale are reported at fair value, which approximates cost at
September 30, 1997.
4. Notes Payable
The Company has entered into mortgage note agreements with GMAC Commercial
Mortgage Corporation (GMAC) in connection with the Company's Jeffersontown, KY
and Blue Ash, OH hotels. Each agreement was entered into by a separate
wholly-owned subsidiary of the Company which owns the related property and
hotel. The terms of the mortgage note agreements provide for interest-only
payments each month, in arrears, from July 1, 1997 through May 1, 1998, at which
time monthly principal and interest payments are required. Interest is
calculated at a variable rate per annum equal to LIBOR plus 4.25%, adjusted
monthly. Principal payments are calculated based on a 25-year term using a 10%
fixed interest rate. The notes mature in June 2000 and provide for two 12-month
extension periods. Upon maturity, the Company expects to be able to refinance
each of the mortgage notes with permanent loans having a term of 25 years and an
interest rate equal to the long-term fixed rate then being offered by the lender
for loans of this type. Amounts borrowed under the mortgage notes are secured by
the respective hotels, the land on which they are constructed and certain funds
deposited in demand deposit accounts assigned to GMAC and are guaranteed by the
Company and certain other of the Company's
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wholly-owned subsidiary LLCs. The amounts borrowed under the mortgage notes are
further partially guaranteed by Doubletree Corporation. At September 30, 1997,
the amounts outstanding under these two loans totaled $6.4 million.
The Company has entered into building loan agreements with GMAC for 13
of the Company's hotels. Each agreement was entered into by a separate
wholly-owned subsidiary of the Company which owns the related property and
hotel. The terms of the building loan agreements provide for advances, generally
on a monthly basis, based on construction costs incurred to date. Interest on
the loans is payable monthly, in arrears, commencing on the first day of the
first full calendar month after the date of each agreement and continuing for 18
months thereafter, at which time monthly principal and interest payments are
required. Interest is calculated at a variable rate per annum equal to LIBOR
plus 4.25%, adjusted monthly. Principal payments are calculated based on a
25-year term using a 10% fixed interest rate. The notes mature on the first day
of the first full calendar month after the fourth anniversary and provide for
two 12-month extension periods. Upon maturity, the Company expects to be able to
refinance each of the notes with permanent loans having a term of 25 years and
an interest rate equal to the long-term fixed rate then being offered by the
lender for loans of this type. Amounts borrowed under the building loan
agreements are secured by the respective hotels, the land on which they are
constructed and certain funds deposited in demand deposit accounts assigned to
GMAC and are guaranteed by the Company and certain other of the Company's
wholly-owned subsidiary LLCs. The amounts borrowed under the building loan
agreements are further partially guaranteed by Doubletree Corporation. At
September 30, 1997, $16.4 million was outstanding under these 13 building loan
agreements.
The Company has entered into term loan agreements and promissory notes
for the Company's Wichita, Kansas and Omaha, Nebraska hotels with NationsBank of
Texas, N.A. ("NationsBank"). Each agreement was entered into by a wholly-owned
subsidiary of the Company which owns the related property and hotel. The terms
of the loan agreements require monthly interest payments at a variable rate per
annum equal to the lesser of the bank's prime rate plus 0.5% or LIBOR plus
2.75%. Principal amortization payments based on a 25-year term began in June
1997 for the Wichita, Kansas hotel and will begin in March 1998 for the Omaha,
Nebraska hotel and will continue until March 1999 and September 1999,
respectively. The loans may be extended for one additional year if certain
conditions are met and upon payment of a specified extension fee. During the
one-year extension period, the Company will be required to continue to make
interest payments and principal amortization payments based on a 25-year term.
Amounts borrowed under the loans are secured by the hotels and the land on which
they are constructed and certain funds deposited in demand deposit accounts
assigned to NationsBank and are guaranteed by the Company and certain other of
the Company's wholly-owned subsidiary LLCs. At September 30, 1997, the amounts
outstanding under these two loans totaled $6.8 million.
The Company has entered into construction loan agreements and promissory
notes with NationsBank of Texas, N.A. ("NationsBank") relating to the Company's
Englewood, Colorado and Overland Park, Kansas hotels. Each agreement was entered
into by a wholly-owned subsidiary of the Company which owns the related property
and hotel. The terms of the construction loans provide for advances, generally
on a monthly basis, based on construction costs incurred to date. Interest on
the loans is payable monthly at a variable rate per annum equal to the lesser of
the bank's prime rate plus 0.5% or LIBOR plus 2.75%. Principal amortization
payments based on a 25-year term begin in April and September 1998 and will
continue until June and November 1999, respectively. The loans may be extended
for one year if certain conditions are met and upon payment of a specified
extension fee. During the one-year extension period, the Company will be
required to continue to make interest payments and principal amortization
payments based on a 25-year term. Amounts borrowed under the loans are secured
by the hotels and the land on which they are constructed and certain funds
deposited in demand deposit accounts assigned to NationsBank and are guaranteed
by the Company and certain other of the Company's wholly-owned subsidiary LLCs.
At September 30, 1997, $5.1 million was outstanding under these two loans.
In July 1997, the Company increased the borrowings under its five-year,
$15.0 million subordinated credit facility by $2.5 million, bringing the total
outstanding to $15.0 million at September 30, 1997.
5. Preferred Stock
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On September 23, 1997, the Company completed an initial closing of $25.0
million, before offering costs, of its private placement of Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock"). The second closing of an
additional $40.0 million, before offering costs, occurred on October 3, 1997,
for which stock subscriptions receivable existed at September 30, 1997. The
Company intends to use the proceeds for the continued development of its
extended-stay hotels and other general corporate purposes. The purchase price of
the Preferred Stock was $1,000 per share. The holders of the Preferred Stock are
entitled to receive a 7.5% annual dividend and to convert the Preferred Stock
into common stock of the Company at $9.50 per share. The Company is entitled to
redeem the Preferred Stock after August 31, 1999 under certain circumstances and
will be required to redeem the Preferred Stock on August 31, 2004, if not
earlier converted or redeemed.
6. Per Share Information
Per share information for the period prior to the Company's
Reorganization is presented on a pro forma basis as if (i) the Company had
operated as a taxable entity (C Corporation) for the period and (ii) the
reorganization had been effective at the beginning of the period and the shares
of common stock issued in conjunction with the reorganization had been issued
and outstanding for the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Candlewood Hotel Company, Inc. (the "Company") owns, develops, manages
and franchises value oriented business extended-stay hotels. The Company's first
corporate hotel opened in Wichita, Kansas, on May 5, 1996. In February 1997, the
Company opened its second and third corporate hotels, located in the Omaha,
Nebraska and Denver, Colorado areas, respectively. In May 1997, the Company
opened its fourth and fifth corporate hotels, located in the Louisville,
Kentucky and Cincinnati, Ohio areas, respectively. In September, the Company
opened its sixth corporate hotel, located in the Norfolk-Hampton, Virginia area.
In June 1997, the Company's first franchised hotel was opened in Hillsboro,
Oregon. In August, the Company's second franchised hotel was opened, in the
Pleasanton, California area. At September 30, 1997, the Company had six
Company-owned and two franchised hotels open, and an additional 29 Company-owned
and four franchised hotels under construction in 21 states. At September 30,
1997, the Company had under contract, and was performing due diligence with
respect to, an additional 32 sites. The contracts into which the Company enters
for the purchase of potential hotel sites provide for numerous investigations
and other diligence, including environmental studies and title reports, prior to
the closing of the sale of the real property. The Company reserves the right to
terminate each contract if it is not satisfied with the results of the
investigations and diligence. There can be no assurance that the Company will
acquire properties or complete the development and construction of hotels or
that any such development or construction will be completed on time or within
budget.
The Company's operating results are significantly influenced by several
factors including (i) the demand for and supply of extended-stay lodging in the
Company's markets, (ii) occupancy and average daily rates, (iii) the
effectiveness of hotel operations and (iv) the cost at which the Company can
develop additional extended-stay lodging properties. The Company's overall
occupancy and average daily rates during any period are further influenced by
the number of hotels in their first twelve months of operation, during which
occupancy rates are typically lower. Capital and credit market conditions which
affect the Company's cost of capital may influence future operating results, as
well. The results of operations for this period are not necessarily indicative
of the future results of operations of these hotels or of other Company-owned
hotels.
Results of Operations
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Comparison of fiscal quarters ended September 30, 1997 and 1996
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue, totaled $1.7 million for the quarter ended September 30, 1997 compared
to $262,555 for the quarter ended September 30, 1996. Room revenue for the
quarter ended September 30, 1997 was $1.6 million, compared to $253,025 for the
quarter ended September 30, 1996. The increase in room revenue was a result of
the operations of the six hotels open at September 30, 1997 compared to
September 30, 1996, when the Company had only one hotel in operation. The
Company's average occupancy rate, which is determined by dividing the number of
guest rooms occupied on a daily basis by the total number of guest rooms
available for the period, was 62% for the quarter ended September 30, 1997
compared to 53% for the quarter ended September 30, 1996, and was positively
impacted by the increasing occupancy of hotels in their ramp-up phase during the
1997 quarter, partially offset by a reduction in occupancy resulting from a
temporary increase in daily room rates. During the quarter ended September 30,
1997, the length of stay at the Company's six hotels averaged approximately 17
days, and the average daily room rate was $55.54, compared to 14 days and $47.58
for the quarter ended September 30, 1996. The increase in average daily room
rate reflects the Company's entry into higher priced markets and the gradual
increase in rates for hotels in their ramp-up phase during the 1997 quarter. In
addition, for the last two months of the 1997 third quarter, the Company
temporarily raised rates in certain markets to determine the proper mix of rate
and occupancy percent. Revenue per available room (RevPAR) was $34.19 for the
quarter ended September 30, 1997, compared to $25.14 for the quarter ended
September 30, 1996, and was positively impacted by the Company's entry into
higher priced markets and the gradual increase in occupancy percentages for
hotels in their ramp-up phase during the 1997 quarter. Other revenue from hotel
operations for the quarter ended September 30, 1997 was $46,463, compared to
$9,530 for the quarter ended September 30, 1996, and consisted of guest
telephone, vending and pay-per-view movie revenues.
Hotel operating expenses for the quarter ended September 30, 1997
totaled $836,429, compared to $126,205 for the same period in 1996, and
consisted of all expenses directly applicable to the operation of the hotels.
Hotel operating expenses do not include any allocation of corporate operating
expenses. The largest portion of hotel operating expenses consisted of salaries,
wages and fringe benefits. The balance of hotel operating expenses was comprised
of normal operating items, such as electricity, gas and other utilities,
property taxes, insurance, cleaning supplies, promotional materials, maintenance
items and similar expenses. At September 30, 1997, the Company had six hotels in
operation, compared to one at September 30, 1996, and the increase in hotel
operating expenses in the third quarter of 1997 compared to 1996 was a result of
this growth.
Depreciation and amortization expense applicable to hotel operations for
the quarter ended September 30, 1997 totaled $324,250, compared to $69,890 for
the quarter ended September 30, 1996, and related to the building, furniture,
fixtures, equipment and capitalized pre-opening expenses of the hotels. The
increase in depreciation and amortization expense in the third quarter of 1997
compared to 1996 was a result of the increase in the number of hotels in
operation during the 1997 period. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years, except in the case of pre-opening expenses,
which are amortized over no more than the first twelve months of operations.
Corporate Operations
Other revenues for the quarter ended September 30, 1997 totaled $77,531
and resulted primarily from the recognition of franchise fee revenue earned upon
the opening in August 1997 of the Company's second franchised hotel, located in
Pleasanton, California. Other revenues also included management fees received
from the Company's managed hotel, Cambridge Suites by Candlewood located in
Wichita, Kansas. In the quarter ended September 30, 1996, no other revenues were
recorded as no franchised hotels were open and no third-party hotels were
managed.
Corporate operating expenses for the quarter ended September 30, 1997
totaled $1,036,552 compared to $295,946 for the quarter ended September 30, 1996
and included all expenses not directly related to the
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development or operations of specific hotels. The largest portion of corporate
operating expenses consisted of salaries, wages and fringe benefits. The balance
of other corporate operating expenses was comprised of normal operating costs,
such as office space lease, travel, telephone, utilities, advertising,
professional fees and similar expenses. The increase over the prior period is
principally attributable to the salaries, wages, fringe benefits and travel for
additional employees required to support the Company's increase in hotels in
operation, under construction and under contract. The total amount of these
expenses is expected to increase in the future with the development of
additional properties.
Depreciation and amortization applicable to corporate operations for the
quarter ended September 30, 1997 totaled $36,665, compared to $19,530 for the
quarter ended September 30, 1996, and related to the furniture, equipment and
intangible assets of the corporate office. The increase in depreciation and
amortization is a result of an increase in the number of employees required to
support the Company's increase in the number of hotels in operation, under
construction and under contract. Depreciation expense is calculated using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to twenty years. Amortization expense for intangible assets
is computed using the straight-line method over the life of the corresponding
asset.
The Company earned $120,250 of interest income during the quarter ended
September 30, 1997, which resulted principally from short-term investment of
excess funds. During the quarter ended September 30, 1996, the Company earned
$17,553 of interest income. The increase in interest income was attributable to
the temporary investment of excess funds which stemmed from the initial public
offering of the Company's common stock in November 1996. The Company had
interest expense of $8,064 during the quarter ended September 30, 1997 and no
interest expense in the third quarter of 1996. Interest expense, net of
capitalized interest, resulted from the Company's secured term and construction
loans and outstanding subordinated promissory note. The Company had no
outstanding loans or notes during the quarter ended September 30, 1996.
Comparison of nine months ended September 30, 1997 and 1996
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue, totaled $3.4 million for the nine months ended September 30, 1997
compared to $382,593 for the period from May 5, 1996 (commencement of hotel
operations) to September 30, 1996. Room revenue for the nine months ended
September 30, 1997 was $3.3 million, compared to $369,138 for the period from
May 5, 1996 (commencement of hotel operations) to September 30, 1996. The
increase in room revenue was a result of the operations of the six hotels open
as of September 30, 1997 compared to the 1996 period when the Company had only
one hotel in operation. The Company's average occupancy rate, which is
determined by dividing the number of guest rooms occupied on a daily basis by
the total number of guest rooms available for the period, was 57% for the nine
months ended September 30, 1997 compared to 51% for the period from May 5, 1996
(commencement of hotel operations) to September 30, 1996, and was positively
impacted by the increasing occupancy of hotels in their ramp-up phase during the
1997 period, partially offset by a reduction in occupancy resulting from a
temporary increase in daily room rates. During the nine months ended September
30, 1997, the length of stay at the Company's six hotels averaged approximately
15 days, and the average daily room rate was $51.61, compared to 12 days and
$47.78 for the period from May 5, 1996 (commencement of hotel operations) to
September 30, 1996. The increase in average daily room rate reflects the
Company's entry into higher priced markets and the gradual increase in rates for
hotels in their ramp-up phase during the 1997 period. In addition, for the
months of August and September 1997, the Company temporarily raised rates in
certain markets to determine the proper mix of rate and occupancy percent.
Revenue per available room (RevPAR) was $29.57 for the nine months ended
September 30, 1997, compared to $24.20 for the period from May 5, 1996
(commencement of hotel operations) to September 30, 1996 and was positively
impacted by the Company's entry into higher priced markets and the gradual
increase in occupancy percentages for hotels in their ramp-up phase during the
1997 period. Other revenue from hotel operations for the nine months ended
September 30, 1997 was $112,607, compared to $13,455 for the period from May 5,
1996 (commencement of hotel operations) to September 30, 1996, and consisted of
guest telephone, vending and pay-per-view movie revenues.
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Hotel operating expenses for the nine months ended September 30, 1997
totaled $1,811,353, compared to $212,400 for the period from May 5, 1996
(commencement of hotel operations) to September 30, 1996, and consisted of all
expenses directly applicable to the operation of the hotels. Hotel operating
expenses do not include any allocation of corporate operating expenses. The
largest portion of hotel operating expenses consisted of salaries, wages and
fringe benefits. The balance of hotel operating expenses was comprised of normal
operating items, such as electricity, gas and other utilities, property taxes,
insurance, cleaning supplies, promotional materials, maintenance items and
similar expenses. At September 30, 1997, the Company had six hotels in
operation, compared to one at September 30, 1996, and the increase in hotel
operating expenses in the first nine months of 1997 compared to the period from
May 5, 1996 (commencement of hotel operations) to September 30, 1996 was a
result of this growth.
Depreciation and amortization expense applicable to hotel operations for
the nine months ended September 30, 1997 totaled $737,220, compared to $118,946
for the period from May 5, 1996 (commencement of hotel operations) to September
30, 1996, and related to the building, furniture, fixtures, equipment and
capitalized pre-opening expenses of the hotels. The increase in depreciation and
amortization expense in the first nine months of 1997 compared to the period
from May 5, 1996 (commencement of hotel operations) to September 30, 1996 was a
result of the increase in the number of hotels in operation during the 1997
period. Depreciation expense is computed using the straight-line method over the
estimated useful lives of the respective assets, ranging from three to forty
years, except in the case of pre-opening expenses, which are amortized over no
more than the first twelve months of operations.
Corporate Operations
Other revenues for the nine months ended September 30, 1997 totaled
$137,694 and resulted primarily from the recognition of franchise fee revenue
earned upon the June 1997 opening of the Company's first franchised hotel,
located in Hillsboro, Oregon, and the August 1997 opening of the Company's
second franchised hotel, located in Pleasanton, Oregon. Other revenues also
included management fees received from the Company's managed hotel, Cambridge
Suites by Candlewood located in Wichita, Kansas. In the nine months ended
September 30, 1996, no other revenues were recorded as no franchised hotels were
open and no third-party hotels were managed.
Corporate operating expenses for the nine months ended September 30,
1997 totaled $2.4 million compared to $1.0 million for the nine months ended
September 30, 1996 and included all expenses not directly related to the
development or operations of specific hotels. The largest portion of corporate
operating expenses consisted of salaries, wages and fringe benefits. The balance
of other corporate operating expenses was comprised of normal operating costs,
such as office space lease, travel, telephone, utilities, advertising,
professional fees and similar expenses. Professional, legal and other public
company costs for the 1997 period, which resulted from having become a public
company in November 1996, accounted for approximately $125,000 of the increase
over the corresponding period in 1996, when no such costs were incurred. The
balance of the increase over the prior period is principally attributable to the
salaries, wages, fringe benefits and travel for additional employees required to
support the Company's increase in hotels in operation, under construction and
under contract. The total amount of these expenses is expected to increase in
the future with the development of additional properties.
Depreciation and amortization applicable to corporate operations for the
nine months ended September 30, 1997 totaled $96,460, compared to $41,233 for
the nine months ended September 30, 1996, and related to the furniture,
equipment and intangible assets of the corporate office. The increase in
depreciation and amortization is a result of an increase in the number of
employees required to support the Company's increase in the number of hotels in
operation, under construction and under contract. Depreciation expense is
calculated using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to twenty years. Amortization expense for
intangible assets is computed using the straight-line method over the life of
the corresponding asset.
The Company earned $743,182 of interest income during the nine months
ended September
11
<PAGE> 12
30, 1997, which resulted principally from short-term investment of excess funds.
During the nine months ended September 30, 1996, the Company earned $29,049 of
interest income. The increase in interest income was attributable to the
temporary investment of excess funds which stemmed from the initial public
offering of the Company's common stock in November 1996. The Company had
interest expense of $198,427 during the nine months ended September 30, 1997,
and no interest expense in the nine months ended September 30, 1996. Interest
expense, net of capitalized interest, resulted from the Company's secured term
and construction loans and outstanding subordinated promissory note. The Company
had no outstanding loans or notes during the nine months ended September 30,
1996.
Liquidity and Capital Resources
In two closings, on September 23, 1997 and October 3, 1997, the Company
completed a private placement (the "Private Placement") whereby the Company
issued 65,000 shares of its Series A Cumulative Convertible Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), at a price of $1,000 per share.
On September 23, 1997, the Company issued 25,000 shares of Preferred Stock and
received proceeds of $25.0 million, and on October 3, 1997, the Company issued
40,000 shares of Preferred Stock and received proceeds of $40.0 million. In
connection with the Private Placement, the Company paid cash in the aggregate
amount of $3,152,500 to Donaldson, Lufkin & Jenrette Securities Corporation and
Schroder & Company Inc. as a placement fee and incurred other placement-related
costs. The Company intends to use the net proceeds of the Private Placement to
support the Company's national expansion through the development of
Company-owned Candlewood hotels and for general working capital purposes.
The holders of the Preferred Stock are entitled to a preferential
quarterly dividend equal to 7.5% of the Stated Value (initially $1,000 per
share, subject to adjustment), payable quarterly beginning on August 31, 1998.
The Preferred Stock may be converted into Common Stock of the Company, upon the
election of the holders, at a price of $9.50 per share of Common Stock, subject
to certain anti-dilution adjustments (the "Conversion Price"). The Preferred
Stock will automatically convert into Common Stock subsequent to August 31, 1999
at the then applicable Conversion Price upon the occurrence of certain events.
Holders of Preferred Stock have a liquidation preference equal to $1,000 per
share (the "Liquidation Preference Price"). With certain limited exceptions, in
the event of a change of control of the Company, the Company shall offer to
purchase all of the outstanding shares of Preferred Stock at the greater of (i)
175% of the Stated Value or (ii) the Liquidation Preference Price. The Company
is required to redeem the Preferred Stock on August 31, 2004 for the Liquidation
Preference Price and may redeem after August 31, 1999, at its election, for 200%
of the Stated Value.
At September 30, 1997, the Company had commitments to complete
construction of 29 extended-stay properties with a total cost of approximately
$97.7 million. The Company believes that a combination of the net proceeds from
the Preferred Stock, selected sale/leaseback transactions, its cash and cash
equivalents, its marketable securities, construction financing from NationsBank
of Texas, N.A. and GMAC Commercial Mortgage Corporation along with construction
loan guarantees from Doubletree (if approved on an individual basis) and
additional sources of liquidity will be sufficient to meet the Company's working
capital and capital expenditure needs into the fourth quarter of 1998. However,
there can be no assurance that such financing will be available on acceptable
terms, if at all, or that changes will not occur that will require the Company
to seek additional capital or financing at an earlier date.
The Company's sources of liquidity on a long-term basis include cash
flow from operating Candlewood hotels, secured and unsecured borrowings, future
sale/leaseback arrangements and the issuance of debt or equity securities.
Additional capital resources will be needed to fund the Company's planned
development. In the event that such capital or financing is unavailable on
acceptable terms or at all, the Company may not be able to develop additional
hotels.
During the nine months ended September 30, 1997, net cash used in
operating activities totaled $756,551 compared to net cash used in operating
activities of $556,558 for the nine months ended September 30, 1996. At
September 30, 1997, the Company had six hotels in operation, compared to one at
September 30, 1996, and the increase in net cash used in operating activities in
the first nine months of 1997 compared to the period from May 5, 1996
(commencement of hotel operations) to September 30, 1996 was a result of this
growth. For the 1997
12
<PAGE> 13
period, cash used in operating activities of $1.8 million resulted from an
increase in accounts receivable and prepaid expenses associated with the
increase in the number of operating hotels, an increase in capitalized
pre-opening costs and other assets related to the increase in the number of
Company hotels under construction together with a decrease in accounts payable.
This amount was partially offset by increases in accrued expenses and deferred
franchise fee revenue during the period totaling $1.1 million and non-cash
depreciation and amortization expense of $833,680.
Net cash used in investing activities for the nine months ended
September 30, 1997 totaled $79.7 million, compared to $8.3 million for the nine
months ended September 30, 1996, reflecting the increase in the number of
properties open and under construction. The Company invested $5.9 million in
investment-grade marketable securities during the nine months ended September
30, 1997, representing that portion of the initial proceeds from the sale of
Preferred Stock that was invested in marketable securities having maturities in
excess of 90 days. Expenditures for property and equipment totaled $71.3 million
in the 1997 period, compared to $7.5 million in the 1996 period, and primarily
related to the construction of new hotels. The Company opened five hotels and
commenced construction of 27 additional hotels during the nine months ended
September 30, 1997, bringing the total number of hotels open to six and the
number under construction to 29 at September 30, 1997. In the 1996 period, only
one hotel was open and four were under construction. Increases in
pre-acquisition costs and other assets resulted in decreases in cash totaling
$2.5 million for the nine months ended September 30, 1997, compared to $760,854
for the nine months ended September 30, 1996.
Net cash provided by financing activities for the nine months ended
September 30, 1997 totaled $54.7 million, compared to $9.9 million for the nine
months ended September 30, 1996. In the 1997 period, net increases in cash
resulted primarily from increases in notes payable of $35.0 million and proceeds
from the first closing on the sale of redeemable preferred stock of $23.7
million, net of offering costs, partially offset by an increase in capitalized
loan fees of $3.9 million. In the 1996 period, the net cash provided by
financing activities resulted primarily from members' capital contributions of
$10.2 million.
Impact of New Accounting Standards
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128") which
replaces the current accounting standard regarding computation of earnings per
share. Statement 128 requires a dual presentation of basic earnings per share
(based on the weighted average number of common shares outstanding) and diluted
earnings per share which reflects the potential dilution that could occur if
contracts to issue securities (such as stock options) were exercised. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. The Company believes that adoption of FAS 128 will not have a material
effect on the earnings per share amounts for the three and nine month periods
ended September 30, 1997 and 1996 as presented in the accompanying financial
statements.
In April 1997, the American Institute of Certified Public Accountants
issued a proposed Statement of Position (SOP), Reporting on the Costs of
Start-up Activities. The proposed SOP requires that entities expense costs of
start-up activities as they are incurred. The proposed SOP, if adopted, would be
effective for financial statements for fiscal years beginning after December 15,
1998, with earlier application encouraged. The initial application of the SOP is
to be reported as a cumulative effect of a change in accounting principle. The
Company currently capitalizes hotel pre-opening costs and amortizes such costs,
commencing on the date a property is opened, over the shorter of the estimated
period of benefit or 12 months. Pre-opening costs capitalized, net of
accumulated amortization, at September 30, 1997 totaled $321,208. While the
one-time recording of the cumulative effect of the change in accounting
principle could be material, the on-going effect of the proposed new accounting
principle would be dependent upon the number and timing of new hotels opened.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
13
<PAGE> 14
This Form 10-Q contains certain forward-looking statements, including
without limitation statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: adverse changes
in national or local economic conditions, competition from other lodging
properties, changes in real property tax rates and in the availability, cost and
terms of financing, the impact of present or future environmental legislation
and compliance with environmental laws, the ongoing need for capital
improvements, changes in operating expenses, adverse changes in governmental
rules and fiscal policies, civil unrest, acts of God, including earthquakes and
other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other factors referenced in this Form 10-Q.
Certain of these factors are discussed in more detail elsewhere in the Company's
filings with the Securities and Exchange Commission. Given these uncertainties,
undue reliance should not be placed on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to announce
publicly the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In two closings, on September 23, 1997 and October 3, 1997, the
Company completed a private placement whereby the Company issued
65,000 shares of its Series A Cumulative Convertible Preferred Stock,
par value $0.01 per share (the "Preferred Stock"), at a price of
$1,000 per share. The purchasers of the Preferred Stock consisted of
a group of institutional investors and individuals who are
"accredited investors" within the meaning of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Act"). The sales
were made in reliance on an exemption from registration pursuant to
Section 4(2) of the Act, as transactions by an issuer not involving a
public offering. The contents of the Company's current report on form
8-K filed on October 8, 1997 are incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The contents of the Company's current report on Form 8-K filed on
October 8, 1997 are incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
15
<PAGE> 16
SIGNATURES
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 thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: November 12, 1997 By:/s/ Jack P. DeBoer
----------------- ------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: November 12, 1997 By:/s/ Warren D. Fix
----------------- -----------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
3.3 Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of Series A
Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc.***
4.1 Specimen Certificate of Common Stock.*
4.2 Stockholders Agreement, dated as of September 22,
1997.***
10.1 Form of Indemnification Agreement for executive officers and directors.*
10.2 1996 Equity Participation Plan and form of stock option agreements.*
10.3 Employment Agreement between the Company and Jack P. DeBoer
dated as of September 1, 1996.*
10.5 Credit Facility Agreement between the Company and
Doubletree Corporation dated as of November 11,
1996.**
10.6 Subordinated Promissory Note from the Company to
Doubletree Corporation dated as of November 11,
1996.**
10.7 Employment Agreement between the Company and James Roos dated
as of June 2, 1997.****
10.8 Series A Cumulative Convertible Preferred Stock
Purchase Agreement dated as of August 27, 1997.***
10.9 Registration Rights Agreement dated as of September
22, 1997.***
27.1 Financial Data Schedule.
</TABLE>
- ----------------------
* Incorporated by reference pursuant to Rule 12b-32 from the Company's
Registration Statement on Form S-1 (Registration No. 333-12021).
** Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
*** Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 8, 1997.
**** Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,679,634
<SECURITIES> 5,899,896
<RECEIVABLES> 925,317
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,959,236
<PP&E> 86,742,825
<DEPRECIATION> 628,726
<TOTAL-ASSETS> 110,276,477
<CURRENT-LIABILITIES> 4,043,050
<BONDS> 50,064,162
23,652,272
0
<COMMON> 90,250
<OTHER-SE> 32,426,743
<TOTAL-LIABILITY-AND-EQUITY> 110,276,477
<SALES> 0
<TOTAL-REVENUES> 1,769,850
<CGS> 0
<TOTAL-COSTS> 2,233,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,064
<INCOME-PRETAX> (351,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> (351,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (351,860)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
