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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 March 31, 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 May 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
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- -----------
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 52,775 $ 77,881
Hotels under construction 101,880 48,289
Other costs 8,353 7,973
--------- ---------
163,008 134,143
Accumulated depreciation and amortization (554) (1,228)
--------- ---------
Net investment in hotels 162,454 132,915
Cash and cash equivalents (including $1,446 and $1,510 of
restricted cash, respectively) 18,060 35,355
Deposits 9,199 8,594
Accounts and other receivables 6,192 3,266
Other assets 1,907 1,677
--------- ---------
Total assets $ 197,812 $ 181,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 61,724 $ 63,416
Accounts payable and other accrued expenses 32,334 16,040
Deferred gain on sale of hotels 7,833 6,807
Other liabilities 1,524 1,494
--------- ---------
Total liabilities 103,415 87,757
Redeemable, convertible preferred stock (Series "A"), $1,000
par value, 65,000 shares authorized and outstanding,
net of offering costs 61,339 61,461
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
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 (2,302) (2,771)
--------- ---------
Total stockholders' equity 33,058 32,589
--------- ---------
Total liabilities and stockholders' equity $ 197,812 $ 181,807
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
REVENUES:
Hotel operations $ 6,917 $ 539
Other income 174 --
----------- -----------
Total hotel operating revenues 7,091 539
Proceeds from sale of hotels, net of deferred
gain of $7,126 48,922 --
Gain recognized on sale of hotels 40 --
----------- -----------
Total Revenues 56,053 539
----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 4,409 535
Corporate operating expenses 808 411
Rent expense on leased hotels 1,422 --
Depreciation and amortization 347 191
----------- -----------
Total operating costs and expenses 6,986 1,137
Cost of hotels sold 48,922 --
----------- -----------
145 (598)
Interest income 362 375
Interest expense (38) (151)
----------- -----------
Net income (loss) 469 (374)
Preferred stock dividends (1,202) --
----------- -----------
Net loss available to common stockholders $ (733) $ (374)
=========== ===========
Net loss per share of common stock - basic and
diluted $ (0.08) $ (0.04)
=========== ===========
Weighted average shares outstanding - basic and
diluted 9,025,000 9,025,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 469 $ (374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 347 191
Change in:
Deposits (605) --
Accounts receivable (996) (51)
Opening costs (122) (126)
Other assets (241) (65)
Accounts payable and other accrued expenses 1,796 (568)
Other liabilities 131 96
-------- --------
Net cash provided by (used) in operating
activities 779 (897)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
construction (71,944) (15,016)
Increase in acquisition costs (258) (1,365)
Purchase of intangible assets (4) (1)
-------- --------
Cash used in investing activities (72,206) (16,382)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of hotels 56,047 --
Payments on mortgages and notes payable (31,913) --
Proceeds from mortgages and notes payable 30,221 7,085
Expenditures for private placement (122) --
Payments on capital leases (101) --
-------- --------
Net cash provided by financing activities 54,132 7,085
-------- --------
Net increase (decrease) in cash and cash
equivalents (17,295) (10,194)
Cash and cash equivalents at beginning of period 35,355 33,792
-------- --------
Cash and cash equivalents at end of period $ 18,060 $ 23,598
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 above-discussed 1996
Reorganization, and various wholly-owned LLCs which own 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 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.
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
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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.
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 due to required support obligations under the operating lease
agreements until operations meet stipulated levels. 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 asset and 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.
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.
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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.
Note 2: Notes Payable
The Company has entered into building loan agreements with GMAC
Commercial Mortgage Corporation for 19 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,
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%. 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 under the note. 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. 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 March 31, 1998, $42.9 million was
outstanding under these 19 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. The terms of the promissory
note provide for advances, generally on a monthly basis, based on construction
costs incurred to date. 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%. Principal amortization payments based on a 25-year term begin in
September, 1998, and will continue until February, 2001. 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 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
March 31, 1998, $3.8 million was outstanding under the note.
The Company has a five-year, $15.0 million subordinated credit facility
with Doubletree Corporation all of which was outstanding at March 31, 1998.
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: Redeemable, Convertible Preferred Stock
In order to help finance the continued nationwide development of
Company-owned hotels, in October of 1997, the Company completed a $65.0 million
private placement (the "Private Placement") of 65,000 shares of Series "A"
Preferred Stock (the "Preferred Stock") at an offering price of $1,000
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per share (the "Stated Value"). The net proceeds to the Company were
approximately $61.3 million, after deducting commissions and expenses of $3.7
million.
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
quarterly, including up to the date of conversion; thereafter, dividends are
paid 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.
Preferred Stockholders have certain voting rights related to the
nomination and election of directors as defined in the stock purchase 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 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, and nine hotels in the first quarter of 1998. The
total sales price of the nine hotels sold during the first quarter of 1998 was
$56 million.
Terms of the sale are all cash at the close of escrow for hotels sold.
The lease term for the noncancelable operating lease is 14 years, with three
15-year renewal options at the election of the Company. The lease calls for
monthly lease payments and a security deposit equal to one year's lease
payments.
The agreement also provides for the Company to support cash flows until
defined operating cash flows exceed the annual lease payments by 150% for 12
consecutive months. In connection with this support obligation, the Company was
required to place $5 million on deposit with HPT, upon the closing of the first
five hotels, refund of which will be made to the Company if and when cash flows
from operations exceed required lease payments by 140% of defined cash flows
from operations. Accordingly, the $5 million has been charged to cost of sales
for hotels sold. Upon attainment of the required coverage ratios, any portion of
the $5 million refunded to the Company will be recognized in income in
accordance with generally accepted accounting principles beginning in the period
such funds are received.
As of March 31, 1998, the Company had completed the sale of 14 of the 15
hotels. The cumulative sales price for the 14 hotels is $92 million with a total
deferred gain on the sale of the hotels of $7.8 million, after adjustment for
the $5 million charge to cost of hotels sold. Such gain will be recognized into
income as required support obligations stipulated in the operating lease
agreement are met. The Company completed the sale of the final hotel in the
second quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company owns, develops, manages and franchises hotels serving
mid-market extended-stay business travelers. The Company began operations in
October, 1995, and opened it's first hotel in May, 1996. At the end of 1997, the
Company operated 21 hotels located in 16 different states. During the first
quarter of 1998, the Company opened two new company-operated hotels and two new
franchised hotels. At the end of the quarter, the Company had a total of 23
company-operated hotels and five franchised hotels in operation. The Company
also began construction on ten additional company-owned properties and one new
franchised property during the quarter. At the end of the quarter, the Company
had a total of 30 company-owned hotels and five franchised hotels under
construction, and was performing market-feasibility due diligence with respect
to 38 potential development sites under contract. 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.
In order to fully utilize the Company's financial resources and
accelerate the roll-out of hotels, the Company has agreed to sell and leaseback
certain of its hotels from HPT. This and future sale-leaseback transactions, if
any, are anticipated to enable the Company to operate, as lessee, on a long-term
basis, hotels which it has developed or will develop. The provisions of the
transaction allow the Company to retain a portion of improved hotel economics
under certain circumstances. Quarterly results from operations for the three
months ended March 31, 1998, reflect the ongoing transaction with HPT. For this
reason, care should be exercised when drawing comparison to 1997 results. In
place of depreciation and amortization of assets and interest expense, the
Company has recorded rent expense on hotels leased back from HPT under an
operating lease agreement. Proceeds from the sale of hotels is recorded net of
the deferred gain on sale. The gain is deferred due to required support
obligations under the operating lease agreement until operations meet stipulated
levels. At such time, the deferred gain will be recognized in earnings over the
remaining lease term.
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 12 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.
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Results of Operations
Comparison of fiscal quarters ended March 31, 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 $6.9
million for the quarter ended March 31, 1998, compared to $539,000 for the
quarter ended March 31, 1997. The increase in room revenue was a result of the
operations of the 23 hotels open at March 31, 1998, compared to the operations
of the three hotels open at March 31, 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 60%
for the quarter ended March 31, 1998, compared to 48% for the quarter ended
March 31, 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 March 31, 1998, the average daily room rate was $53.83
compared to $45.98 for the quarter ended March 31, 1997. The increase in average
daily room rate reflects the Company's entry into higher priced markets and the
gradual increase in rates for certain hotels which had completed or were near
completion of their ramp-up phase. Revenue per available room (RevPAR) was
$32.30 for the quarter ended March 31, 1998, compared to $22.11 for the quarter
ended March 31, 1997, and was positively impacted by the Company's entry into
higher priced markets and the gradual increase in occupancy percentages for
certain hotels which had completed or were near completion of their ramp-up
phase.
Hotel operating expenses for the quarter ended March 31, 1998, totaled
$4.4 million, compared to $535,000 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 March 31,
1998, the Company had 23 hotels in operation, compared to three hotels at March
31, 1997, and the increase in hotel operating expenses in the first 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 March 31, 1998, totaled $290,000, compared to $161,000 for
the quarter ended March 31, 1997. The increase in depreciation and amortization
expense in the first 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. 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 March 31, 1998, totaled $174,000 and
consisted primarily of franchise fees and royalty fees from franchise hotels and
management fees received from a managed hotel, Cambridge Suites, located in
Wichita, Kansas. In the quarter ended March 31, 1997, no other revenues were
recorded as no franchised hotels were open and no third-party hotels were
managed.
The Company sold nine additional hotels to HPT during the first quarter
of 1998 for a total sales price of $56 million. A deferred gain of $7.1 million
was recorded on the sale. The Company recognized $40,000 in earnings from gain
on sale of hotels sold in the fourth quarter of 1997 as hotel operations
performance met levels stipulated in the operating lease agreement. The Company
also
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incurred rent expense on leased hotels of $1.4 million on the 14 hotels sold to
HPT as of March 31, 1998. There was no sale-leaseback activity recorded in the
three month period ended March 31, 1997.
Corporate operating expenses for the quarter ended March 31, 1998,
totaled $808,000 compared to $411,000 for the quarter ended March 31, 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. 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 March 31, 1998, totaled $57,000, compared to $30,000 for the
quarter ended March 31, 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 $362,000 of interest income during the quarter ended
March 31, 1998, which resulted principally from short-term investment of excess
funds. For the quarter ended March 31, 1997, the Company earned $375,000 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
quarter ended March 31, 1998, compared to $151,000 for the quarter ended March
31, 1997. The decrease in interest expense was a result of the use of the
proceeds from the Private Placement to fund the Company's expansion in 1998
rather than the use of borrowed funds. Prior to the Private Placement, the
Company obtained its financing primarily through the use of proceeds from the
initial public offering, term and construction loans and an outstanding
subordinated promissory note.
The Company has not paid dividends on its Common Stock. The Preferred
Stock accumulates dividends and is payable in cash initially on August 31, 1998.
The Company currently does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. For the three months ended March 31,
1998, $1.2 million was set aside for future payment of preferred dividends.
Since issuance, $2.5 million has been set aside for the initial preferred
dividend payment. 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.
Liquidity and Capital Resources
At March 31, 1998, the Company had commitments to complete construction
of 30 extended-stay properties with a total cost of approximately $233 million.
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), together with its subordinated credit facility and
construction loan guarantees from Doubletree, and additional sources of
liquidity will be sufficient to provide capital for development and operations
into the third quarter of 1998. There can be no assurance that changes will not
occur that will require the Company to seek additional capital or financing at
an earlier date. The Company has announced its intention to raise approximately
$50
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million through a private placement of convertible preferred stock or other
equity-linked securities, however, there can be no assurance that additional
financing will be available when needed or upon terms acceptable to the Company.
During the three months ended March 31, 1998, net cash provided by
operating activities totaled $779,000 compared to the three months ended March
31, 1997 when the Company used $897,000 in operating activities. For the 1998
period, increases in cash resulted from an increase in accounts payable and
accrued expenses of $1.8 million related to the 23 hotels in operation and the
30 hotels under construction. This amount was partially offset by a $1 million
increase in accounts receivable associated with the increase in the number of
operating hotels. In the 1997 period, the decrease in cash resulted from a
$568,000 decrease in accounts payable and accrued expenses and an increase in
opening costs of $126,000.
Net cash used in investing activities for the three months ended March
31, 1998, totaled $72.2 million, compared to $16.4 million for the three months
ended March 31, 1997, reflecting the expenditures for completion of the nine
hotels that were sold and the increase in the number of properties open and
under construction. In the 1997 period, uses of cash resulted from expenditures
for open hotels and hotels under construction of $15 million and acquisition
costs of $1.4 million. The Company commenced construction of ten hotels during
the first quarter of 1998, bringing the total number of hotels under
construction to 30 at March 31, 1998, compared to 17 hotels under construction
at March 31, 1997.
Net cash provided by financing activities for the three months ended
March 31, 1998, totaled $54.1 million, compared to $7.1 million for the three
months ended March 31, 1997. The increase in cash reflects the $56 million
proceeds from the sale of the nine hotels in 1998. In the 1997 period, the cash
provided by financing activities was related to proceeds from mortgages and
notes payable.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Based on its
recent assessment, management of the Company does not anticipate that any
significant modification or replacement of the Company's software will be
necessary for its computer systems to properly utilize dates beyond December 31,
1999, or that the Company will incur significant operating expenses to make any
such computer system improvements. The Company is in the process of contacting
its suppliers, lenders, and service providers regarding their need to make any
software modifications or replacements. The Company is not able to determine,
however, whether their failure to make such software corrections will have an
effect on the Company's operations or financial condition.
Impact of New Accounting Standards
In April, 1998, the American Institute of Certified Public Accountants
issued a Statement of Position (SOP), 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 March 31, 1998, totaled $2.0 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.
13
<PAGE> 14
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.
14
<PAGE> 15
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 January 7, 1998, the Company filed Report on Form 8-K, Acquisition
or Disposition of Assets, reporting the Sale / Leaseback Transaction
entered into with HPT on December 24, 1997.
On March 6, 1998, the Company filed Report on Form 8-K/A, Acquisition
or Disposition of Assets, amending the Form 8-K filed on January 7,
1998. This filing consisted of the pro forma financial information
required to be reported for the Sale / Leaseback Transaction.
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: May 13, 1998 By: /s/ Jack P. DeBoer
------------ ----------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: May 13, 1998 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. (1)
3.2 Bylaws of the Company. (1)
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. (3)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Stockholders Agreement, dated as of September 22, 1997. (3)
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 Employment Agreement between the Company and Jack P. DeBoer dated
as of September 1, 1996. (1)
10.4 Credit Facility Agreement between the Company and Doubletree
Corporation dated as of November 11, 1996. (2)
10.5 Subordinated Promissory Note from the Company to Doubletree
Corporation dated as of November 11, 1996. (2)
10.6 Employment Agreement between the Company and James Roos dated as
of June 2, 1997. (4)
10.7 Series A Cumulative Convertible Preferred Stock Purchase Agreement
dated as of August 27, 1997. (3)
10.8 Registration Rights Agreement dated as of September 22, 1997. (3)
10.9 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)
10.10 Agreement to Lease, dated as of November 19, 1997, by and between
the Company and HPT. (6)
10.11 Lease Agreement, dated as of December 24, 1997, by and between
HPTCW, as landlord, and Candlewood Leasing No. 1, Inc., as
tenant. (6)
10.12 Guaranty Agreement, dated as of December 24, 1997, by the Company
for the benefit of HPTCW and HPT. (6)
10.13 Stock Pledge Agreement, dated as of December 24, 1997, by the
Company for the benefit of HPTCW. (6)
11.1 Statement re Computation of Per Share Earnings - not applicable.
27.1 Financial Data Schedule.
</TABLE>
(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.
17
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,060,000
<SECURITIES> 0
<RECEIVABLES> 6,192,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,252,000
<PP&E> 163,008,000
<DEPRECIATION> (554,000)
<TOTAL-ASSETS> 197,812,000
<CURRENT-LIABILITIES> 32,334,000
<BONDS> 61,724,000
61,339,000
0
<COMMON> 90,000
<OTHER-SE> 35,270,000
<TOTAL-LIABILITY-AND-EQUITY> 197,812,000
<SALES> 0
<TOTAL-REVENUES> 56,415,000
<CGS> 48,922,000
<TOTAL-COSTS> 6,986,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,000
<INCOME-PRETAX> 469,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,000
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
