<PAGE> 1
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, 1998
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 13, 1998
- ---------------------------- --------------------------------
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, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 88,473 $ 75,589
Hotels under construction 120,214 46,320
Other costs 20,864 7,973
--------- ---------
229,551 129,882
Accumulated depreciation and amortization (1,966) (1,109)
--------- ---------
Net investment in hotels 227,585 128,773
Cash and cash equivalents (including $1,200 and $1,510 of
restricted cash, respectively) 20,021 35,355
Deposits 21,060 8,594
Accounts and other receivables 4,620 3,266
Other assets 9,723 5,819
--------- ---------
Total assets $ 283,009 $ 181,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 95,552 $ 63,416
Accounts payable and other accrued expenses 41,634 16,040
Deferred gain on sale of hotels 12,704 6,807
Other liabilities 2,424 1,494
--------- ---------
Total liabilities 152,314 87,757
Redeemable, convertible preferred stock ("Series A"),
$1,000 stated value, 65,000 shares authorized
and outstanding, net of offering costs 61,339 61,461
Redeemable, convertible preferred stock ("Series B"),
$1,000 stated value, 42,000 shares authorized
and outstanding, net of offering costs 39,434 --
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized, 9,025,000 issued and outstanding 90 90
Additional paid-in capital 35,270 35,270
Accumulated deficit (5,438) (2,771)
--------- ---------
Total stockholders' equity 29,922 32,589
--------- ---------
Total liabilities and stockholders' equity $ 283,009 $ 181,807
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine-Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel operations $ 14,120 $ 1,691 $ 31,367 $ 3,448
Other income 106 78 394 138
----------- ----------- ----------- -----------
Total hotel operating revenues 14,226 1,769 31,761 3,586
Proceeds from sale of hotels, net
of deferred gain of $9,130 30,216 -- 134,730 --
Gain recognized on sale of hotels 104 -- 298 --
----------- ----------- ----------- -----------
Total revenues 44,546 1,769 166,789 3,586
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 7,478 1,095 17,545 2,472
Corporate operating expenses 819 777 2,556 1,714
Rent expense on leased hotels 3,662 -- 7,708 --
Depreciation and amortization 1,232 361 2,031 834
----------- ----------- ----------- -----------
Total operating costs and expenses 13,191 2,233 29,840 5,020
Cost of hotels sold 30,216 -- 134,730 --
----------- ----------- ----------- -----------
1,139 (464) 2,219 (1,434)
Interest income 451 120 937 743
Interest expense -- (8) (38) (198)
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,590 (352) 3,118 (889)
Income tax (636) -- (866) --
----------- ----------- ----------- -----------
Net income (loss) 954 (352) 2,252 (889)
Preferred stock dividends (1,898) -- (4,315) --
----------- ----------- ----------- -----------
Net loss available to common stockholders $ (944) $ (352) $ (2,063) $ (889)
=========== =========== =========== ===========
Net loss per share of common
stock - basic and diluted $ (0.10) $ (0.04) $ (0.23) $ (0.10)
=========== =========== =========== ===========
Weighted average shares outstanding -
basic and diluted 9,025,000 9,025,000 9,025,000 9,025,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,252 $ (889)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,031 834
Change in:
Hotels completed and under construction -
held for sale 4,653 --
Deposits (12,466) --
Accounts receivable (2,377) (782)
Opening costs (2,115) (404)
Other assets (1,526) (615)
Accounts payable and other accrued expenses 3,278 793
Deferred gain on sale of hotels 5,897 --
Other liabilities 1,137 91
--------- ---------
Net cash provided by (used in) operating
activities 764 (972)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
construction (71,606) (75,386)
Increase in acquisition costs (10,776) (1,346)
Purchase of intangible assets (38) (7)
--------- ---------
Cash used in investing activities (82,420) (76,739)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 111,028 34,995
Payments on mortgages and notes payable (78,892) (40)
Net proceeds from issuance of preferred stock 39,312 23,652
Preferred stock dividends (4,919) --
Payments on other liabilities (207) --
--------- ---------
Net cash provided by financing activities 66,322 58,607
--------- ---------
Net increase (decrease) in cash and cash equivalents (15,334) (19,104)
Cash and cash equivalents at beginning of period 35,355 33,792
--------- ---------
Cash and cash equivalents at end of period $ 20,021 $ 14,688
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
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").
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. The statements include the accounts of Candlewood Hotel Company, Inc. and
its subsidiaries, including Candlewood LLC, which was the entity through which
business was conducted until completion of the Reorganization, and various
wholly-owned LLCs which own or lease certain hotels. 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, 1997 was derived from
the Company's audited financial statements. These interim financial statements
should be read in conjunction with the Company's 1997 Annual Report on Form
10-K, as amended, 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.
B. Investment in Hotels Completed and Under Construction
Hotels Completed. Hotels completed are stated at cost and include the
related furniture, fixtures and equipment. Once the hotels are completed,
depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Maintenance and
repairs are charged to operations as incurred.
Hotels Under Construction. Hotels under construction represents costs
incurred in the acquisition and development of hotels. Such costs include land
acquisition costs, construction costs, capitalized interest and construction
overhead. Interest costs for the construction of hotels are capitalized. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to hotels completed and depreciated over the asset's useful life for
company-owned properties. Approximately $40.0 million of hotels under
construction at September 30, 1998, are being held for sale and will not be
depreciated.
Other Costs. Other costs include opening and acquisition costs. Opening
costs are costs incurred prior to the opening of a hotel and are related to the
hiring and training of hotel personnel, such as compensation, travel and
relocation. Such costs are capitalized and amortized, commencing on the date a
property is opened, over the shorter of the estimated period of benefit or
twelve months. Acquisition costs are costs related to the acquisition of
property sites. These costs are added to the costs of the hotels under
construction when the site is acquired and construction at the hotel begins.
Costs associated with a particular site are expensed to operations when the
Company determines it will no longer pursue the site.
6
<PAGE> 7
C. Cash and Cash Equivalents
The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
D. Restricted Cash
Restricted cash represents cash that, under the terms of certain letters
of credit, has been set aside for pending land acquisitions. These funds are
applied as payments upon the closing of escrow of related acquisitions.
E. Revenue Recognition
Room revenue and other revenue are recognized when earned. Recognition
of franchise fee revenue, included in other income, is deferred until all
material services or conditions relating to the respective franchise have been
substantially performed or satisfied by the Company.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds. Related
profit is deferred under generally accepted accounting principles until
operating performance levels are achieved. At such time, the deferred gain is
recognized in earnings over the remaining lease term.
F. Income Taxes
The Company is taxed as a corporation as defined in subchapter "C" under
the Internal Revenue Code for federal and state income tax purposes and accounts
for any temporary differences under the liability method.
G. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements. The assumed conversion of the Company's Series A and Series B
Preferred Stock and the outstanding options and warrants to purchase the
Company's common stock would be antidilutive and, therefore, are not included
in the reported diluted earnings per share calculation.
H. Use of 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 at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from such estimates.
I. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform with the current period presentation. Such reclassifications have no
effect on the operations or equity as originally presented.
7
<PAGE> 8
Note 2: Mortgages and Notes Payable
As of September 30, 1998, the Company had entered into separate building
loan agreements with GMAC Commercial Mortgage Corporation for 27 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; however,
each loan is cross-defaulted. 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, beginning on the
first day of the first full calendar month after the date of each agreement.
Interest payments are calculated at a variable rate per annum, adjusted monthly,
at rates ranging from LIBOR plus 3.40% to 4.25% (9.05% to 9.90% as of September
30, 1998). Based on the individual note, principal payments commence either 12
months following related hotel opening or 18 months from related loan closing.
Depending on the terms of the individual notes, principal payments are
calculated based on a 25-year amortization schedule using either a 10% fixed
interest rate or the prevailing interest rate as defined in the note. Each note
matures on the first day of the first full calendar month after the fourth
anniversary of loan closing and provides for two 12-month extension periods.
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. Certain
amounts borrowed under the building loan agreements are further partially
guaranteed by Doubletree Corporation, a wholly-owned subsidiary of Promus Hotel
Corporation. At September 30, 1998, $76.6 million was outstanding under these 27
building loan agreements.
The Company has entered into a promissory note with NationsBank of
Texas, N.A. ("NationsBank") relating to the Company's Overland Park, Kansas
hotel. The agreement was entered into by a wholly-owned subsidiary of the
Company which owns the related property and hotel. Interest on the loan 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% (8.50% as of September 30, 1998).
Principal amortization payments based on a 25-year term began in September 1998,
and will continue until February 2000, at which time the note matures. The loan
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 loan are secured by
the hotel and the land on which the hotel is constructed, certain funds
deposited in demand deposit accounts assigned to NationsBank, as well as a
guarantee by the Company and certain other of the Company's wholly-owned
subsidiary LLCs. At September 30, 1998, $4.0 million was outstanding under the
note.
The Company had $15.0 million in unsecured indebtedness outstanding as
of September 30, 1998, with Doubletree Corporation, evidenced by two promissory
notes. Interest is payable quarterly at rates ranging from 7.0% to 15.0%, with
principal of $12.5 million and $2.5 million payable at maturity in November
2001, and July 2002, respectively.
Note 3: Preferred Stock
General
The Company has authorized "blank check" preferred stock in the amount
of 5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of issuance
of any of the preferred stock, the Company determines whether the stock is
redeemable and the appropriate classification of the stock on the balance sheet.
At September 30, 1998, as more fully described below, the Company had 65,000 and
42,000 shares, respectively, of Series A and Series B redeemable preferred stock
issued and outstanding.
Series A Preferred Stock Offering
In October 1997, the Company completed a $65.0 million private placement
of 65,000 shares of Series A Cumulative Convertible Preferred Stock at an
offering price of $1,000 per share ("Stated Value"). The net proceeds to the
Company were approximately $61.3 million, after deducting commissions and
expenses of $3.7 million.
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<PAGE> 9
The Preferred Stock accumulates dividends at a rate of 7.5% of the
Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Preferred Stockholders will have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.50 per
share. Subsequent to August 31, 1999, the Preferred Stock will be redeemable in
cash, in whole or part, at the option of the Company at 200% of the Stated
Value. At August 31, 2004, the Preferred Stock will be redeemed under a
mandatory redemption clause, at the Stated Value plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Series B Preferred Stock Offering
On August 3, 1998, the Company completed the private placement of $42.0
million of its Series B Cumulative Convertible Preferred Stock and warrants to
purchase its common stock. In total, 42,000 shares of Series B Preferred Stock
were issued at an offering price of $1,000 per share ("Stated Value"). Preferred
stockholders were also issued, at no additional cost, warrants to purchase
336,000 shares of common stock at $12.00 per share. These warrants expire on
July 13, 2005. The net proceeds to the Company were approximately $39.4 million,
after deducting commissions and expenses of $2.6 million.
The Series B Preferred Stock accumulates dividends at a rate of 7.5% of
the Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Series B Preferred Stockholders will have the right to convert, at any
time at their option into shares of Common Stock at the conversion price of
$9.50 per share. Subsequent to September 30, 1999, the Series B Preferred Stock
will be redeemable in cash, in whole or part, at the option of the Company at
200% of the Stated Value. At September 30, 2004, the Series B Preferred Stock
will be redeemed under a mandatory redemption clause, at the Stated Value plus
unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Note 4: Sale-Leaseback
In November, 1997, the Company entered into an agreement with
Hospitality Properties Trust ("HPT"), to sell 15 hotels for a total purchase
price of $100.0 million, and to lease the hotels back from the buyer under a
noncancelable operating lease. The Company completed the sale and leaseback of
five hotels in December 1997, nine hotels in the first quarter of 1998, and one
hotel in the second quarter of 1998.
In May, 1998, the Company announced a second agreement with HPT to sell
and leaseback 17 hotels for a total purchase price of $141.4 million. The
Company completed the sale and leaseback of four hotels in the second quarter of
1998 and six hotels in the third quarter of 1998. As of September 30, 1998, 10
of the 17 hotels had been sold. The remainder of the transaction is expected to
close during the first quarter of 1999.
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<PAGE> 10
Terms of the sales are all cash at the close of escrow for hotels sold.
The lease term for the noncancelable operating leases is 14 years for the 15
hotels in the first transaction and 13 years for the 17 hotels in the second
transaction. The leases call for monthly lease payments and a security deposit
equal to one year's lease payments.
The agreements also provide for the Company to guarantee the payment of
rent until defined operating cash flows exceed the annual lease payments by 150%
for 12 consecutive months. In connection with this obligation, the Company was
required to place a 5% guaranty deposit with HPT, upon the initial closing of
each transaction, the deposit will be refunded to the Company when cash flows
from operations exceed required lease payments by 140% of defined cash flows
from operations. The guaranty deposit is charged to cost of sales as the hotels
are sold. Upon attainment of the required coverage ratios, the portion of the
guaranty deposit refunded to the Company will be recognized in income in
accordance with generally accepted accounting principles beginning in the period
such funds, if any, are received.
As of September 30, 1998, the Company had completed the sale of 25
hotels, 20 of which have been sold in 1998. The cumulative sales price for the
25 hotels is $179.8 million with a total deferred gain on the sale of the hotels
of $12.7 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company owns, develops, operates, manages and franchises hotels
serving mid-market extended-stay business travelers. The Company's overall
results of operations and financial position are significantly influenced by its
development activity. The following tables set forth the Company's hotel
openings and development comparison for the periods indicated:
1998 Year To Date Hotel Openings:
<TABLE>
<CAPTION>
1998
As of ----------------------------------------------------
12/31/97 1ST Qtr. 2nd Qtr. 3rd Qtr. As of 9/30/98
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Open Hotels
- -----------
Company - Operated 21 2 10 5 38
Franchised 3 2 -- 2 7
-- -- -- -- --
Total 24 4 10 7 45
== == == == ==
</TABLE>
Hotels opened in the third quarter were located in the following areas:
Company-Operated:
o Charlotte, NC
o Arlington, TX
o Garden Grove, CA
o Irvine, CA
o Albuquerque, NM
Franchised:
o Syracuse, NY
o Bellevue, WA
Development Comparison:
<TABLE>
<CAPTION>
Number of Hotels
September 30,
--------------- Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Open Hotels
- -----------
Company - Operated 38 6 32
Franchised 7 2 5
--- --- ---
Total 45 8 37
=== === ===
Under Construction
- ------------------
Company - Owned 27 29 (2)
Franchised 3 4 (1)
--- --- ---
Total 30 33 (3)
=== === ===
Under Contract
- --------------
Company - Owned 28 32 (4)
</TABLE>
At the end of 1997, the Company had a total of 21 company-operated
hotels and three franchised hotels located in 19 different states. At September
30, 1998, the Company had a total of 38 company-operated hotels and seven
franchised hotels in operation located in 22 different states. In addition, at
the end of the third quarter of 1998, the Company had a total of 27
company-owned hotels and three franchised hotels under construction, and was
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performing market-feasibility due diligence with respect to 28 potential
development sites. The contracts into which the Company enters for the purchase
of potential hotel sites provide for numerous investigations and other due
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 due 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 has entered into agreements to sell and leaseback certain of
its hotels from HPT. The provisions of the sale-leaseback transaction allow the
Company to operate, as lessee, over a defined lease term, hotels which it has
developed or will develop. Quarterly and year to date results from operations
for the three months and nine months ended September 30, 1998, reflect the
transactions with HPT. For this reason, care should be exercised when drawing
comparison to 1997 results. The Company has recorded rent expense on hotels
leased back from HPT under an operating lease agreement. No depreciation and
amortization or interest expense has been recorded for these hotels. Proceeds
from the sale of hotels is recorded net of the deferred gain on sale. The gain
is deferred under generally accepted accounting principles until operating
performances levels are achieved. At such time, the deferred gain will be
recognized in earnings over the remaining lease term. The following table sets
forth the Company's operating property portfolio as of September 30, 1997 and
1998.
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
September 30, September 30,
---------------- Increase ------------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Company Operated:
- -----------------
Company Owned 13 6 7 1,455 620 835
Leased 25 -- 25 2,777 -- 2,777
--- --- --- ----- ---- -----
Total 38 6 32 4,232 620 3,612
=== === === ===== ==== =====
Franchised 7 2 5 813 252 561
--- --- --- ----- ---- ------
Total System 45 8 37 5,045 872 4,173
=== === === ===== ==== =====
</TABLE>
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, (iv) the cost at which the Company can
develop additional extended-stay lodging properties, (v) the availability of
financing and the cost of capital, and (vi) other factors discussed in the
Company's Annual Report on Form 10-K. The Company's overall occupancy and
average daily rates during any period are further influenced by the number of
hotels in their first 12 months of operation, during which occupancy rates and
average daily rates are typically lower. Newly opened properties typically
experience lower occupancies during their first 12 months of operation and as a
result average occupancy rates are impacted by the ratio of newly opened
properties to total properties. 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.
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Results of Operations
Comparison of fiscal quarters ended September 30, 1998 and 1997
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue (e.g. guest telephone, vending, pay-per-view movie rental), totaled
$14.1 million for the quarter ended September 30, 1998, compared to $1.7 million
for the quarter ended September 30, 1997. The increase in room revenue was a
result of the operations of the 38 hotels open at September 30, 1998, compared
to the operations of the six hotels open at September 30, 1997. 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 71% for the quarter ended September 30, 1998, compared to 62%
for the quarter ended September 30, 1997, and was positively impacted by the
increasing occupancy of hotels which had completed or were near completion of
their ramp-up phase. During the quarter ended September 30, 1998, the average
daily room rate was $54.26 compared to $55.54 for the quarter ended September
30, 1997. The decrease in average daily room rate primarily reflects the number
of new hotel openings in 1998. Of the 38 hotels open at September 30, 1998, 17
had been open less than six months at the beginning of the quarter. Revenue per
available room (RevPAR) was $38.31 for the quarter ended September 30, 1998,
compared to $34.19 for the quarter ended September 30, 1997. The increase in
RevPAR reflects the gradual increase in occupancy percentages for certain hotels
which had completed or were near completion of their ramp-up phase and offsets
the slight decrease in rates.
<TABLE>
<CAPTION>
Third Quarter Ended September 30,
----------------------------------
1998 1997 Change
------ ------ -------
<S> <C> <C> <C>
Occupancy 71% 62% 9%
ADR $54.26 $55.54 $(1.28)
RevPAR $38.31 $34.19 $ 4.12
</TABLE>
Hotel operating expenses for the quarter ended September 30, 1998,
totaled $7.5 million, compared to $1.1 million for the same period in 1997, and
consisted of all expenses directly applicable to the operation of the hotels.
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 utilities, property taxes, insurance, supplies,
promotional materials, maintenance items and similar expenses. At September 30,
1998, the Company had 38 hotels in operation, compared to six hotels at
September 30, 1997, and the increase in hotel operating expenses in the third
quarter of 1998 compared to 1997 was a result of this growth.
Depreciation and amortization expense applicable to hotel operations
(e.g. building, furniture, fixtures, equipment and capitalized opening costs)
for the quarter ended September 30, 1998, totaled $1.2 million, compared to
$324,000 for the quarter ended September 30, 1997. The increase in depreciation
and amortization expense in the third quarter of 1998 compared to 1997 was a
result of the increase in the number of company-owned hotels in operation during
the 1998 period. In accordance with generally accepted accounting principles,
the Company did not depreciate assets held for sale during the quarter ended
September 30, 1998. 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 opening costs, which are amortized
over no more than the first twelve months of operations.
Corporate Operations
Other income for the quarter ended September 30, 1998, totaled $106,000,
compared to $78,000 for the quarter ended September 30, 1997. Other income
consists primarily of franchise fees and royalty fees from franchise hotels,
management fees received from a managed hotel (Cambridge Suites, located in
13
<PAGE> 14
Wichita, Kansas) and equity income from a joint venture hotel in Rockford,
Illinois. At September 30, 1998, the Company had seven franchised hotels in
operation, compared to two hotels at September 30, 1997. The growth in other
income in the third quarter of 1998 compared to 1997 primarily reflects an
increase in royalty, franchise fee and management fee income, partially offset
by the Company's equity in the net loss of the Rockford, Illinois joint venture
hotel.
The Company sold four additional hotels to HPT during the third quarter
of 1998 for a total sales price of $32.9 million. For the quarter ended
September 30, 1998 the Company recognized $104,000 in earnings from gain on
hotels sold based on hotel operating performance. The Company also incurred rent
expense in the third quarter of $3.7 million on the 25 hotels sold to HPT as of
September 30, 1998. There was no sale-leaseback activity recorded in the three
month period ended September 30, 1997.
Corporate operating expenses for the quarter ended September 30, 1998,
totaled $819,000 compared to $777,000 for the quarter ended September 30, 1997,
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, 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 properties
on which the Company was performing due diligence.
Depreciation and amortization applicable to corporate operations for the
quarter ended September 30, 1998, totaled $77,000, compared to $36,000 for the
quarter ended September 30, 1997, and related to the furniture, equipment and
intangible assets of the corporate office. The increase in depreciation and
amortization reflects the increase in furniture, fixtures and equipment required
as the corporate office support staff expands to meet the Company's growth
needs. 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 (e.g. operating rights,
trademarks, logos) is computed using the straight-line method over the life of
the corresponding asset.
The Company earned $451,000 of interest income during the quarter ended
September 30, 1998, which resulted principally from short-term investment of
excess funds received from the Series B private placement. For the quarter ended
September 30, 1997, the Company earned $120,000 of interest income related to
the temporary investment of excess funds which stemmed from the initial public
offering of the Company's common stock. Due to development activity, the Company
capitalized all interest incurred for the quarter ended September 30, 1998,
compared to $8,000 which was expensed for the quarter ended September 30, 1997.
For the quarter ended September 30, 1998, the Company incurred interest of $2.2
million, all of which was capitalized to hotels under construction.
14
<PAGE> 15
Comparison of nine months ended September 30, 1998 and 1997
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue (e.g. guest telephone, vending, pay-per-view movie rental), totaled
$31.4 million for the nine months ended September 30, 1998, compared to $3.4
million for the nine months ended September 30, 1997. The increase in room
revenue was a result of the operations of the 38 hotels open at September 30,
1998, compared to the operations of the six hotels open at September 30, 1997.
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 68% for the nine months ended September 30, 1998,
compared to 57% for the nine months ended September 30, 1997, and was positively
impacted by the increasing occupancy of hotels which had completed or were near
completion of their ramp-up phase. During the nine months ended September 30,
1998, the average daily room rate was $53.79 compared to $51.61 for the nine
months ended September 30, 1997. Revenue per available room (RevPAR) was $36.36
for the nine months ended September 30, 1998, compared to $29.57 for the nine
months ended September 30, 1997. The increase in average daily room rate and
RevPAR was positively impacted by the Company's entry into higher priced markets
and the gradual increase in rates and occupancy percentages for certain hotels
which had completed or were near completion of their ramp-up phase.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-------------------------------------
1998 1997 Change
------ ------ ------
<S> <C> <C> <C>
Occupancy 68% 57% 11%
ADR $53.79 $51.61 $2.18
RevPAR $36.36 $29.57 $6.79
</TABLE>
Hotel operating expenses for the nine months ended September 30, 1998,
totaled $17.5 million, compared to $2.5 million for the same period in 1997, and
consisted of all expenses directly applicable to the operation of the hotels.
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 utilities, property taxes, insurance, supplies,
promotional materials, maintenance items and similar expenses. The increase in
hotel operating expenses was primarily due to the additional number of hotels in
operation during the nine months ended September 30, 1998.
Depreciation and amortization expense applicable to hotel operations
(e.g. building, furniture, fixtures, equipment and capitalized opening costs)
for the nine months ended September 30, 1998, totaled $1.8 million, compared to
$737,000 for the nine months ended September 30, 1997. The increase in
depreciation and amortization expense in 1998 compared to 1997 was a result of
the increase in the number of company-owned hotels in operation during the 1998
period. In accordance with generally accepted accounting principles, the Company
did not depreciate assets held for sale during the nine months ended September
30, 1998. 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 opening costs, which are amortized over no more
than the first twelve months of operations.
15
<PAGE> 16
Corporate Operations
Other income for the nine months ended September 30, 1998, totaled
$394,000, compared to $138,000 for the nine months ended September 30, 1997.
Other income consists primarily of franchise fees and royalty fees from
franchise hotels, management fees received from a managed hotel (Cambridge
Suites, located in Wichita, Kansas) and equity income from a joint venture hotel
in Rockford, Illinois. At September 30, 1998, the Company had seven franchised
hotels in operation, compared to two hotels at September 30, 1997. The growth in
other income in 1998 compared to 1997 reflects an increase in royalty, franchise
fee and management fee income, partially offset by the Company's equity in the
net loss of the Rockford, Illinois joint venture hotel.
The Company sold 20 additional hotels to HPT during the nine months
ended September 30, 1998 for a total sales price of $143.9 million. A deferred
gain of $9.1 million was recorded on the sale. For the nine months ended
September 30, 1998, the Company recognized $298,000 in earnings from gain on
hotels sold, based on hotel operating performance. The Company also incurred
rent expense on leased hotels of $7.7 million on the 25 hotels sold to HPT as of
September 30, 1998. There was no sale-leaseback activity recorded in the nine
month period ended September 30, 1997.
Corporate operating expenses for the nine months ended September 30,
1998, totaled $2.6 million compared to $1.7 million for the nine months ended
September 30, 1997, 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, 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 properties on which the Company was performing due
diligence.
Depreciation and amortization applicable to corporate operations for the
nine months ended September 30, 1998, totaled $200,000, compared to $96,000 for
the nine months ended September 30, 1997, and related to the furniture,
equipment and intangible assets of the corporate office. The increase in
depreciation and amortization reflects the increase in furniture, fixtures and
equipment required as the corporate office support staff expands to meet the
Company's growth needs. 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
(e.g. operating rights, trademarks, logos) is computed using the straight-line
method over the life of the corresponding asset.
The Company earned $937,000 of interest income during the nine months
ended September 30, 1998, which resulted principally from short-term investment
of excess funds received in the Series A and B private placements. For the nine
months ended September 30, 1997, the Company earned $743,000 of interest income
related to the temporary investment of excess funds which stemmed from the
initial public offering of the Company's common stock. The Company had interest
expense, net of capitalized interest, of $38,000 for the nine months ended
September 30, 1998, compared to $198,000 for the nine months ended September 30,
1997. The decrease in interest expense was a result of the use of the proceeds
from the preferred stock placements and the proceeds from the sale of hotels to
fund the Company's expansion in 1998 rather than the use of borrowed funds.
Liquidity and Capital Resources
In May 1998, the Company announced a second agreement with HPT to sell
17 hotels for a total purchase price of $141.4 million. As of September 30,
1998, 10 of the 17 hotels had been sold for a total purchase price of $79.8
million. The remainder of the transaction is expected to close during the first
quarter of 1999.
In two closings, on July 13, 1998 and August 3, 1998, the Company
completed a private placement whereby the Company issued 42,000 shares of its
Series B Cumulative Convertible Preferred Stock), par value $.01 per share, at a
price of $1,000 per share. In addition, the Company issued 336,000 warrants to
purchase Common Stock at $12.00 per share. In total, $42.0 million in proceeds
was received, before placement fees and other placement-related costs. The
Company is using the net proceeds from the private placement to support the
continued development of the Company's extended-stay hotels and other general
corporate purposes.
16
<PAGE> 17
The Company had cash and cash equivalents of $20.0 million and $35.4
million at September 30, 1998 and December 31, 1997, respectively. At September
30, 1998, the Company had 27 extended-stay properties under construction with a
total estimated cost of approximately $222.0 million. Of this amount, the
Company has secured financing on 19 hotels in the amount of $106.2 million. The
Company is currently processing loans with a third-party lender with respect to
the eight remaining properties under construction which, if approved, will
provide an estimated $56.1 million of additional financing. The Company's total
equity requirement for these properties is $59.7 million, all of which had been
funded as of September 30, 1998. The Company anticipates that approximately
$16.4 million of equity will be returned to the Company through the sale of the
seven remaining hotels. In addition to hotels under construction, the Company
had 28 properties under contract at September 30, 1998, with an estimated total
project cost of $270.0 million. As of September 30, 1998, the Company had
incurred costs of approximately $6.0 million on these projects. These costs
include deposits and fees for surveys, legal services, environmental studies,
and architectural drawings. The Company believes that a combination of its cash
and cash equivalents and cash from operations, borrowed funds from third party
lenders (if approved on an individual basis) and construction loan guarantees
from Promus will be sufficient to provide capital for development of projects
currently under construction and operations through 1999. Substantial capital
resources in addition to those discussed above will be necessary for the Company
to continue to develop the properties under contract. The Company is actively
pursuing a number of financing alternatives, including credit facilities, the
issuance of debt and joint ventures. There can be no assurance that the Company
will be able to obtain financing on a timely basis, on acceptable terms or at
all. Failure to obtain such financing could result in the delay or abandonment
of some or all of the Company's development and expansion plans, losses of
deposits or other committed capital, and could have a material adverse effect on
the Company.
During the nine months ended September 30, 1998, net cash provided by
operating activities totaled $764,000 compared to the nine months ended
September 30, 1997 when the Company used $1.0 million in operating activities.
For the 1998 period, increases in deposits of $12.5 million resulted from the
deposits required for the additional 20 hotels sold in 1998 pursuant to lease
agreements with HPT. Additional uses of cash resulted from an increase in
accounts receivable, opening costs and other assets of $6.0 million associated
with the increase in the number of operating hotels. This amount was offset by a
reduction of $4.7 million in the amount of assets held for sale, a $5.9 million
increase in the deferred gain on sale of hotels to HPT, an increase of $4.4
million in accounts payable and other liabilities, and non-cash depreciation and
amortization expense of $2.0 million.
Net cash used in investing activities for the nine months ended
September 30, 1998, totaled $82.4 million, compared to $76.7 million for the
nine months ended September 30, 1997, reflecting the expenditures for completion
of hotels that were not sold as well as hotels under construction and properties
under contract.
Net cash provided by financing activities for the nine months ended
September 30, 1998, totaled $66.3 million, compared to $58.6 million for the
nine months ended September 30, 1997. For the 1998 period, the increase in cash
reflects the $39.3 million in proceeds from the Series B preferred stock
issuance and proceeds from mortgages and notes payable. In the 1997 period, the
cash provided by financing activities was related to proceeds from mortgages and
notes payable and the initial closing of the Series A preferred stock placement.
The Company has not paid dividends on its Common Stock. The Company
currently does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future. The initial dividend payment on the Series A and Series
B Preferred Stock was made on August 31, 1998, in the amount of $4.9 million.
Subsequent to August 31, 1998, the dividends accumulate and are payable in cash
quarterly, when and if declared by the board of directors. Quarterly dividend
payments on the Company's Preferred Stock are expected to be approximately $2.0
million. After payment of dividends on the Preferred Stock, the Company intends
to retain any future earnings for reinvestment in the development and expansion
of its business.
17
<PAGE> 18
Impact of the Year 2000 Issue
A. General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
The Company has established a plan to resolve the Year 2000 Issue which
involves the following four phases: assessment, remediation, testing, and
implementation. The Company began its assessment in early 1998 of all systems,
both IT and non-IT, that could be significantly affected by the Year 2000 and
substantially completed its initial assessment in the third quarter of 1998. IT
systems include the Company's core financial system and the hotel property
management system. Non-IT systems include the Company's operating equipment such
as hotel elevator equipment, energy management system, card-key entry system,
and related robotic technologies used in various aspects of hotel operations.
Due to the rapid growth experienced by the Company since November 1996,
management made the decision in 1997 to replace the current accounting software
with a new system capable of handling the increased volume. The software chosen
to meet our demand for increased capacity has been Year 2000 certified by an
independent agency, Information Technology Association of America (ITAA). As for
the hotel property management system, management's initial assessment indicates
that the system is Year 2000 compliant and should not be affected. The
assessment has indicated that software and hardware (embedded chips) used in the
Company's operating equipment may also be at risk. All these systems were
purchased from third parties. In order to fully assess these products, the
Company has gathered information about the Year 2000 compliance status of its
significant suppliers and subcontractors and continues to monitor their
compliance.
B. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
For its information technology exposures, to date the Company is
approximately 50% complete on the remediation phase and expects to complete the
software reprogramming and replacement no later than March 31, 1999. Once
software is reprogrammed or replaced for a system, the Company begins testing
and implementation. These phases run concurrently for different systems. To
date, the Company has completed approximately 25% of its testing for remediated
systems. Although our assessment indicated that the hotel property management
system is Year 2000 compliant, the Company intends to perform additional testing
as verification. Completion of the testing phase for all significant systems is
expected by June 30, 1999, with full implementation and 100% completion targeted
for September 30, 1999.
The remediation of operating equipment is significantly more difficult
than the remediation of the information technology systems as these systems have
been purchased from third parties or subcontractors. As such, the Company is
approximately 25% complete in the remediation phase of its operating equipment.
Testing of this equipment is also more difficult than the testing of the
information technology systems. As a result, testing to date has been limited to
third party representations. The Company expects to complete its remediation
efforts by June 30, 1999. Testing and implementation of any known affected
equipment will be completed by September 30, 1999.
C. Nature and Level of Importance of Third Parties and their Exposure to the
Year 2000
The Company has queried and continues to query its significant suppliers and
subcontractors that do not share information systems with the Company (external
agents). In addition, the Company has begun to require representation of Year
2000 compliance in any contracts signed with third parties. To date, the Company
is not aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.
18
<PAGE> 19
D. Costs
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated to be
less than $100,000 and is being funded through operating cash flows.
E. Risks
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company believes
it would be able to effectively conduct operations at the hotels and corporate
office, however, there can be no assurance that changes will not occur that will
require the Company to perform additional review. In addition, disruptions in
the economy and the operations of third party suppliers and subcontractors
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The Company could be subject to litigation for computer systems
product failure, for example, equipment shutdown or failure to properly date
business records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
F. Contingency Plans
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds and adjusting staffing strategies.
Impact of New Accounting Standards
In April 1998, the American Institute of Certified Public Accountants
issued a Statement of Position (SOP 98-5), Reporting on the Costs of Start-up
Activities. The SOP requires that entities expense costs of start-up activities
as they are incurred. Except for certain entities, this SOP is 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 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. Opening costs capitalized, net of accumulated
amortization, at September 30, 1998, totaled $3.4 million. Candlewood expects to
adopt the SOP in the fourth quarter of 1998, at which time a cumulative effect
of the change in accounting principle will be recorded.
19
<PAGE> 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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
other 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.
20
<PAGE> 21
PART II. OTHER INFORMATION
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
On August 6, 1998, the Company filed Report on Form 8-K/A, amending
the Form 8-K filed on June 9, 1998. This filing disclosed certain
amendments and the pro forma financial information relating to the
Sale / Leaseback Transaction.
On August 10, 1998, the Company filed Report on Form 8-K, reporting
the issuance of the Company's Series B Cumulative Convertible
Preferred Stock.
21
<PAGE> 22
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 13, 1998 By: /s/ JACK P. DEBOER
----------------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: November 13, 1998 By: /s/ Warren D. Fix
---------------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
3.3 Amended Bylaws of the Company.(10)
3.4 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.(3)
3.5 Certificate of Amendment of Certificate of Designations
of Series A Preferred Stock.(10).
3.6 Certificate of Destinations, Preferences and Relative
Participating, Optional Land Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof
of Series B Cumulative Convertible Preferred Stock of
Candlewood Hotel Company, Inc.(10).
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Warrant.(9)
4.3 Amended and Restated Stockholders Agreement dated as
of July 10, 1998.(10)
10.1 Form of Indemnification Agreement for executive officers
and directors.(5)
10.2 1996 Equity Participation Plan and form of stock option
agreements.(5)
10.3 First Amendment to the 1996 Equity Participation Plan
effective as of May 18, 1998.
10.4 Employment Agreement between the Company and Jack P. DeBoer
dated as of September 1, 1996.(1)
10.5 Credit Facility Agreement between the Company and
Doubletree Corporation dated as of November 11,
1996.(2)
10.6 Subordinated Promissory Note from the Company to
Doubletree Corporation dated as of November 11,
1996.(2)
10.7 Employment Agreement between the Company and James
Roos dated as of June 2, 1997.(4)
10.8 Series A Cumulative Convertible Preferred Stock
Purchase Agreement dated as of August 27, 1997.(3)
10.9 Amended and Restated Registration Rights Agreement
dated as of July 10, 1998.(10).
10.10 Purchase and Sale Agreement, dated as of November 19, 1997,
by and among the Company and certain of its affiliates,
as sellers, and HPT, as purchaser.(6)
10.11 Agreement to Lease, dated as of November 19, 1997,
by and between the Company and HPT.(6)
10.12 Lease Agreement, dated as of December 24, 1997, by
and between HPTCW, as landlord, and Candlewood Leasing
No. 1, Inc., as tenant.(6)
10.13 Guaranty Agreement, dated as of December 24, 1997,
by the Company for the benefit of HPTCW and HPT.(6)
10.14 Stock Pledge Agreement, dated as of December 24,
1997, by the Company for the benefit of HPTCW.(6)
10.15 Purchase and Sale Agreement, dated as of May 14,
1998, by and among the Company and certain of its
affiliates, as sellers, and HPT, as purchaser.(7)
10.16 Agreement to Lease, dated as of May 14,1998, by and
between the Company and HPT.(7)
10.17 Lease Agreement, dated as of May 21, 1998, by and between
HPTCW, as landlord, and Candlewood Leasing No. 2, Inc.,
as tenant.(7)
10.18 Guaranty Agreement, dated as of May 14, 1998 by the
Company for the benefit of HPTCW and HPT.(7)
10.19 Stock Pledge Agreement, dated as of May 27, 1998, by the
Company for the benefit of HPTCW.
10.20 Second Amendment to Purchase and Sale Agreement,
Agreement to Lease, Lease Agreement and Incidental
Documents dated as of July 31, 1998.(9)
10.21 Securities Purchase Agreement dated as of June 30,
1998.(10)
11.1 Statement re Computation of Per Share Earnings not applicable.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 24
- ----------------
(1) Incorporated by reference pursuant to Rule 12b-32 from the Company's
Registration Statement on Form S-1 (Registration No. 333-12021).
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 8, 1997.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(6) Incorporated by reference from the Company's Current Report on Form 8-K
filed January 7, 1998.
(7) Incorporated by reference from the Company's Current Report on Form 8-K
filed June 9, 1998.
(8) Incorporated by reference from the Company's Annual Report on From 10-K/A
for the fiscal year ended December 31, 1997 filed July 30, 1998.
(9) Incorporated by reference from the Company's Current Report of Form 8-K/A
filed August 6, 1998.
(10) Incorporated by reference from the Company's Current Report of Form 8-K
filed August 10, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 4,620,000
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<PP&E> 229,551,000
<DEPRECIATION> (1,966,000)
<TOTAL-ASSETS> 283,009,000
<CURRENT-LIABILITIES> 41,634,000
<BONDS> 95,552,000
100,773,000
0
<COMMON> 90,000
<OTHER-SE> 35,270,000
<TOTAL-LIABILITY-AND-EQUITY> 283,009,000
<SALES> 0
<TOTAL-REVENUES> 167,726,000
<CGS> 134,730,000
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<EPS-PRIMARY> (0.23)
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