<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 June 30, 1999
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.)
8621 E. 21st Street North, Suite 200
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 August 12, 1999
- ---------------------------- ------------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value, stated value and share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
----------- ------------
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 215,971 $ 150,401
Hotels under construction 32,627 67,447
Other costs 15,282 16,591
--------- ---------
263,880 234,439
Accumulated depreciation and amortization (4,851) (1,907)
--------- ---------
Net investment in hotels 259,029 232,532
Cash and cash equivalents (including $331 and $521 of
restricted cash, respectively) 18,230 23,155
Deposits 26,334 23,847
Accounts and other receivables 5,865 3,566
Other assets 12,455 10,258
--------- ---------
Total assets $ 321,913 $ 293,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 165,010 $ 114,742
Accounts payable and other accrued expenses 23,300 40,277
Deferred gain on sale of hotels 18,258 16,771
Other liabilities 1,194 1,449
--------- ---------
Total liabilities 207,762 173,239
Redeemable, convertible, cumulative preferred stock ("Series A"),
$1,000 stated value, 65,000 shares authorized and outstanding,
net of offering costs 61,339 61,339
Redeemable, convertible, cumulative preferred stock ("Series B"),
$1,000 stated value, 42,000 shares authorized and outstanding,
net of offering costs 39,350 39,398
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 (21,898) (15,978)
--------- ---------
Total stockholders' equity 13,462 19,382
--------- ---------
Total liabilities and stockholders' equity $ 321,913 $ 293,358
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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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>
For the
For the Quarter Ended Six-Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Hotel operations $ 26,906 $ 10,330 $ 48,173 $ 17,247
Other income 236 114 443 288
----------- ----------- ----------- -----------
Total hotel operating revenues 27,142 10,444 48,616 17,535
Proceeds from sale of hotels, net of deferred
gain of $2,315 and 6,446, respectively -- 55,592 24,285 104,514
Deferred gain recognition on sales of hotels 328 154 509 194
----------- ----------- ----------- -----------
Total revenues 27,470 66,190 73,410 122,243
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 15,084 5,658 28,144 10,067
Corporate operating expenses 1,228 929 2,468 1,737
Rent expense on leased hotels 6,218 2,624 12,354 4,046
Hotel opening costs 212 -- 797 --
Abandoned site costs 863 -- 863 --
Depreciation and amortization 2,106 452 3,595 799
----------- ----------- ----------- -----------
Total operating costs and expenses 25,711 9,663 48,221 16,649
Cost of hotels sold -- 55,592 24,285 104,514
----------- ----------- ----------- -----------
1,759 935 904 1,080
Interest income 310 124 592 486
Interest expense (1,934) -- (3,414) (38)
----------- ----------- ----------- -----------
Income (loss) before income taxes 135 1,059 (1,918) 1,528
Income tax -- (230) -- (230)
----------- ----------- ----------- -----------
Income (loss) before preferred dividends 135 829 (1,918) 1,298
Preferred stock dividends (2,001) (1,215) (3,980) (2,417)
----------- ----------- ----------- -----------
Net loss available to common stockholders $ (1,866) $ (386) $ (5,898) $ (1,119)
=========== =========== =========== ===========
Net loss per share of common
stock - basic and diluted $ (0.20) $ (0.04) $ (0.65) $ (0.12)
=========== =========== =========== ===========
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.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,918) $ 1,298
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,595 799
Deferred gain recognition on sales of hotels (509) (194)
Abandoned site costs 863 --
Change in:
Hotels completed and under construction - held
for sale 20,776 3,647
Deposits (2,487) (10,501)
Accounts receivable (3,067) (1,854)
Opening costs 718 (640)
Other assets (1,601) (743)
Accounts payable and other accrued expenses (3,722) 4,779
Deferred gain on sale of hotels 1,996 5,302
Other liabilities (120) 194
-------- --------
Net cash provided by operating activities 14,523 2,087
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
construction (65,260) (35,249)
Payments for site acquisition costs (272) (606)
Purchase of intangible assets -- (25)
-------- --------
Net cash used in investing activities (65,532) (35,880)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 53,529 71,674
Payments on mortgages and notes payable (3,260) (61,277)
Preferred stock dividends (4,002) --
Other liabilities (135) (102)
Expenditures for private placement (48) (122)
-------- --------
Net cash provided by financing activities 46,084 10,173
-------- --------
Net decrease in cash and cash equivalents (4,925) (23,620)
Cash and cash equivalents at beginning of period 23,155 35,355
-------- --------
Cash and cash equivalents at end of period $ 18,230 $ 11,735
======== ========
</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 owning, operating, managing,
developing and franchising 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 consolidated 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, 1998 was derived from the Company's audited financial statements. These
interim financial statements should be read in conjunction with the Company's
1998 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 that 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. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to hotels completed and, except for hotels held for sale,
depreciated over the asset's useful life.
Other Costs
Other costs consist of acquisition costs. 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.
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C. 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 revenues are recognized when earned. Recognition
of franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue when recognized is included in other
income.
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. Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") which was effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports beginning in the second year of
implementation. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 did not affect the results of operations or financial position
of the Company.
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<PAGE> 8
The Company has two reportable segments, the operation of hotels and
the sale of hotels. Information related to the Company's reportable segments is
as follows:
<TABLE>
<CAPTION>
Six months ended June 30, 1999
- ---------------------------------------------------------------------------------
(In thousands) Operation of Sale of
hotels hotels Total
------------ -------- --------
<S> <C> <C> <C>
Revenues from external customers $ 48,616 $ 24,285 $ 72,901
Interest expense 3,414 -- 3,414
Depreciation expense 3,294 -- 3,294
Segment profit 4,824 509 5,333
Hotels assets:
Hotels completed and under construction 248,598 -- 248,598
Trade accounts receivable 3,302 2,419 5,721
Six months ended June 30, 1998
- ---------------------------------------------------------------------------------
(In thousands) Operation of Sale of
hotels hotels Total
------------ -------- --------
Revenues from external customers $ 17,535 $104,514 $122,049
Interest expense 38 -- 38
Depreciation expense 676 -- 676
Segment profit 2,746 194 2,940
Hotels assets:
Hotels completed and under construction 130,229 41,006 171,235
Trade accounts receivable 714 3,590 4,304
</TABLE>
Corporate expenses account for the difference between segment profit
and net income. These expenses are not specific to the Company's reportable
segments.
H. Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training hotel personnel, such as travel,
compensation and relocation.
During the fourth quarter of 1998, the Company elected early adoption
of Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
(SOP 98-5). SOP 98-5 requires hotel opening costs to be expensed as incurred.
I. 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.
J. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation. Such reclassifications have no
effect on the operations or equity as originally presented.
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Note 2: Mortgages and Notes Payable
- ------------------------------------
As of June 30, 1999, the Company had entered into separate building
loan agreements with GMAC Commercial Mortgage Corporation for 29 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% (8.34% to 9.22% as of June 30,
1999). Based on the individual note, principal payments commence either 12
months following the related hotel opening or 18 months from the related loan
closing. Depending on the terms of the individual notes, principal payments are
calculated based on a 25-year amortization schedule using 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. Maturity dates
currently range from March 2001 to April 2003. 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. At June 30, 1999, $143.3 million was
outstanding under these 29 building loan agreements.
The Company has entered into loan agreements with various local and
regional banks for two of the Company's hotels. Each of the agreements was
entered into by wholly-owned subsidiaries of the Company that own the related
hotel and land. Interest on the loans is payable monthly at either a fixed or
variable rate per annum depending on the note. As of June 30, 1999, interest on
the loans ranged from 7.83% to 8.75% with maturity dates ranging from February
2000 to June 2001. Principal amortization payments are made monthly and based on
terms ranging from 20 to 25 years. These payments will continue until maturity.
Each of the loans may be extended for one year if certain conditions are met and
upon payment of a specified extension fee. During the one-year extension period,
the Company will be required to continue to make interest payments and principal
amortization payments based on the original amortization term. Amounts borrowed
under the loans are secured by the hotel and the land on which the hotel is
constructed, certain funds deposited in demand deposit accounts assigned to the
bank, as well as a guarantee by the Company and certain other of the Company's
wholly-owned subsidiary LLCs. At June 30, 1999, $6.7 million was outstanding
under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as
of June 30, 1999 with Promus Hotel Corporation, evidenced by two promissory
notes. Interest is payable quarterly at rates ranging from 10.0% to 15.0%, with
principal of $12.5 million and $2.5 million payable at maturity in November 2001
and July 2002, respectively.
Certain amounts borrowed under the building loan agreements are further
partially guaranteed by Promus Hotel Corporation. Promus has agreed to guarantee
the portions of certain loans made to the Company and its franchisees. The
guarantee applies to loans that exceed 56.25% of the hotel cost but not in
excess of 80% of such costs of hotels that the Company manages and 75% of the
costs of hotels not managed by the Company. It is anticipated that the guarantee
will remain in effect until the loan has been repaid. Upon an event of default,
Promus will have the option to meet any shortfalls or pay down the loan
principal. In exchange for the guarantee, Promus will receive a 5% interest in
the cash flows of the hotels and a 0.25-0.50% fee on the total loan amount
outstanding. In the event a loan is refinanced, Promus will receive a fee equal
to 5% of the increase in proceeds attributable to the refinancing. In the event
the loan is extinguished through the sale of the underlying property, Promus
will receive as a fee 5% of the gain on sale resulting from the transaction.
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Note 3: Redeemable, Convertible 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 June 30, 1999, 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 Redeemable, Convertible, Cumulative
Preferred Stock (the "Series A Preferred Stock") at an offering price of $1,000
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
thereafter, dividends are paid quarterly, up to the date of conversion, when and
if declared by the board of directors.
Series A Preferred Stockholders have the right to convert their shares
of Series A Preferred Stock 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 Series A 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 Series A Preferred Stock will be redeemed under a mandatory redemption
clause, at the Stated Value plus unpaid dividends.
Certain of the Series A Preferred Stockholders have voting rights
related to the nomination and election of directors as defined in a stockholders
agreement. Each Series A 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 the Series A 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 Redeemable, Convertible, Cumulative Preferred Stock (the
"Series B 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 (the "Stated Value"). The Series B Preferred Stockholders were
also issued, at no additional cost, warrants to purchase an aggregate of 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 $39.3 million, after
deducting commissions and expenses of $2.7 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, dividends are paid quarterly, up to the date of conversion, when and
if declared by the board of directors.
Series B Preferred Stockholders have the right to convert their shares
of Series B Preferred Stock 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.
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<PAGE> 11
Certain of the Series B Preferred Stockholders have voting rights
related to the nomination and election of directors as defined in a stockholders
agreement. Each Series B 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 the Series B Preferred Stockholders, as a
single class, is required.
Note 4: Sale-Leaseback
- -----------------------
In November 1997, the Company entered into an agreement with an
affiliate of 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 December 1998, the Company
agreed to sell two additional hotels to HPT under the terms of the 1997
transaction for $18.5 million. These hotels were sold in January 1999.
In May 1998, the Company entered into a second agreement with HPT to
sell and leaseback 17 hotels for a total purchase price of $142.4 million, as
amended. The Company completed the sale and leaseback of six hotels in the
second quarter of 1998, four hotels in the third quarter of 1998, and six hotels
in the fourth quarter of 1998. The remaining hotel was sold in January 1999.
Terms of the sales are all cash at the close of escrow for hotels sold.
The lease term for the noncancelable operating leases is approximately 14 years
for the 17 hotels in the first transaction and 13 years for the 17 hotels in the
second transaction, with all leases expiring on December 31, 2011. The leases
call for monthly lease payments and require the Company to place a security
deposit with HPT for each property equal to one year's lease payments. The
security deposit will be released to the Company at the end of the lease term.
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% 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 deposit is charged to cost of sales as the hotels are sold. Upon
attainment of the required coverage ratios, the portion of the deposit refunded
to the Company will be recognized in income beginning in the period such funds,
if any, are received.
As of June 30, 1999, the Company had completed the sale of all 34
hotels. The cumulative sales price for the three hotels sold in 1999 was $26.6
million with a total deferred gain on the sale of the hotels of $2.3 million.
The cumulative sales price for the 34 hotels sold to HPT was $260.9 million with
a total gain on the sales of the hotels of $19.3 million, of which $18.3 million
is deferred as of June 30, 1999. Such gain has been deferred and will be
recognized in income as noted in the Company's accounting policies (Note 1). The
Company has recognized $509,000 of deferred gain in income in 1999. Sale
proceeds, net of the deferred gain and related cost of the Hotels sold, are
presented on the statement of operations.
Note 5: Related Party Transactions
- -----------------------------------
The Company manages two hotels in which the Company's chairman and
chief executive officer has a majority interest. Under the terms of the
management agreement, the Company advances funds to the managed properties as a
normal course of business. Any amounts advanced are of a short-term duration,
unsecured, non-interest bearing, and payable in full upon demand. At June 30,
1999, the Company had advanced the managed properties a total of $947,000, which
is included in accounts and other receivables on the balance sheet. The majority
of this amount consists of pre-opening expenses and furniture and equipment
related to the opening of one of the managed properties. The entire amount has
been repaid to the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.
GENERAL
- -------
Candlewood owns, operates, manages, develops and franchises hotels
serving mid-market extended-stay business travelers. Our overall results of
operations and financial position are significantly influenced by our
development activity. The following tables set forth the Company's hotel
openings and development comparison for the periods indicated:
1999 Year to Date Hotel Openings:
<TABLE>
<CAPTION>
1999
------------------------------------------
As of 12/31/98 1ST Qtr. 2nd Qtr. As of 6/30/99
-------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Open Hotels
Company - Operated 53 5 5 63
Franchised 9 1 -- 10
-- -- -- --
Total 62 6 5 73
</TABLE>
We opened five company-operated hotels in the second quarter of 1999 in the
following areas:
o Chicago, Illinois (Hoffman Estates)
o Cleveland, Ohio
o Columbus, Ohio
o Oklahoma City, Oklahoma
o Philadelphia, Pennsylvania (Mt. Laurel)
Development Comparison:
<TABLE>
<CAPTION>
Number of Hotels
June 30,
--------------------------------------------
Increase /
1999 1998 (Decrease)
------ ------ ----------
<S> <C> <C> <C>
Open Hotels
Company - Operated 63 33 30
Franchised 10 5 5
--- --- ---
Total 73 38 35
Under Construction
Company - Owned 5 29 (24)
Franchised 2 5 (3)
--- --- ---
Total 7 34 (27)
Properties Owned and Under
Contract to Purchase
Company - Owned 8 33 (25)
</TABLE>
At the end of 1998, we had a total of 53 company-operated hotels and
nine franchised hotels located in 26 different states. At June 30, 1999, we had
a total of 63 company-operated hotels and 10 franchised hotels in operation
located in 29 different states. In addition, at June 30, 1999, we had a total of
five company-owned hotels
12
<PAGE> 13
and two franchise hotels under construction. Our portfolio also included five
properties that we had acquired previous to or during the second quarter of
1999. We are currently working to secure financing for construction of two of
these projects. In addition, we are considering the potential sale of the
remaining three properties. We are also performing market-feasibility due
diligence with respect to three potential development sites. The contracts into
which we enter 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. We have the right to terminate
each contract if we are not satisfied with the results of the investigations and
due diligence. We are unable to assure that we 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 addition, if we
abandon a contract, we may write-off certain costs that would otherwise be
capitalized. During the quarter ended June 30, 1999, we wrote off $863,000 of
costs on development projects we abandoned. We intend to continue developing
hotels and are evaluating various financing arrangements, however, we are unable
to assure that financing will be available and, if available, under terms
acceptable to us. We will continue to perform periodic evaluations of our
development projects and make adjustments to our development strategy as
warranted.
We believe that a significant element of our future growth and
expansion will be provided through the franchising of hotels. In May 1999, we
took steps to increase our franchise sales efforts by hiring a Vice President of
Franchise Sales. The next step towards achieving our goal was the recruitment of
experienced franchise sales personnel that would be located throughout the
country. As of June 30, 1999, we had completed our recruiting efforts and all
personnel were in place. We believe this provides us with the resources we need
to launch an aggressive franchise sales effort going into 2000.
In two separate sale-leaseback transactions, we have sold and leased
back certain of our hotels from HPT, a real estate investment trust. The
provisions of the transactions allow us to operate, as lessee, over a defined
lease term, hotels that we developed or will develop. The transactions were
closed in stages, beginning in 1997 and ending in early 1999. Five hotels were
sold and leased back in 1997 and 26 hotels sold and leased back during 1998. The
remaining three hotels were sold and leased back in January 1999. The results
from operations for 1999 and 1998 reflect the transactions. As a result of the
sale-leaseback transactions, we have recorded rent expense on the hotels leased
back from HPT. As the hotels are leased and not owned, the financial statements
do not reflect any depreciation and amortization or interest expense for these
hotels after the date of sale. The proceeds from the sale of the hotels is
recorded net of the deferred gain on sale. Under generally accepted accounting
principles, the gain must be deferred and not recognized into earnings until
certain operating performance levels are achieved.
The following table sets forth our operating property portfolio as of
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
June 30, June 30,
------------- -------------
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Company Operated:
Company Owned 29 12 17 3,401 1,292 2,109
Leased 34 21 13 3,891 2,315 1,576
----- ----- ----- ----- ----- -----
Total 63 33 30 7,292 3,607 3,685
Franchised 10 5 5 1,119 595 524
----- ----- ----- ----- ----- -----
Total System 73 38 35 8,411 4,202 4,209
</TABLE>
Our results are dependent upon our revenue per available room (RevPAR)
which is a function of occupancy and room rate. Accordingly, we intend to remain
focused on occupancy levels at each of our hotels until such time as the
occupancy levels reach stabilization. Due to our rapid expansion, the overall
occupancy rate has been negatively impacted by the lower occupancy typically
experienced during the pre-stabilization period for newly opened facilities.
This negative impact on occupancy is expected to diminish as the ratio of new
property openings during a period to total properties in operation at the end of
the period decreases. Once our hotels'
13
<PAGE> 14
occupancy levels have stabilized, we review the nightly pricing rates of our
hotels. We believe that this practice is a prevailing standard in the lodging
industry.
RESULTS OF OPERATIONS
- ---------------------
Comparison of fiscal quarters ended June 30, 1999 and 1998
- ----------------------------------------------------------
Hotel Operations
Hotel Operations Revenue
Hotel operations revenue, which includes room revenue and other revenue
(e.g., guest telephone, vending and pay per view movie rental), totaled $26.9
million for the quarter ended June 30, 1999, compared to $10.3 million for the
quarter ended June 30, 1998. The increase in revenue reflects the increase in
the number of hotels in operation during the second quarter of 1999 as compared
to the second quarter of 1998. The following table sets forth our operating
statistics for the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1999 1998 Change
--------- -------- ---------
<S> <C> <C> <C>
Occupancy 67.8% 69.4% (1.6)%
Average Daily Rate $ 60.11 $ 53.15 $ 6.96
Revenue per available room $ 40.75 $ 36.88 $ 3.87
</TABLE>
Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 67.8% for the quarter ended June 30, 1999, compared to 69.4%
for the quarter ended June 30, 1998. Occupancy in the second quarter continued
to be negatively impacted as a result of our efforts to increase rates at some
of our more established properties. This was partially offset by the increase in
occupancy experienced by those hotels that had completed or were near completion
of their ramp-up phase. It is our practice to continuously review individual
markets to assess the impact of competition on local supply and demand and
establish rates that balance occupancy to produce optimal revenue.
The average daily room rate for the quarter ended June 30, 1999 was
$60.11, compared to $53.15 for the quarter ended June 30, 1998. Average daily
room rates are determined by dividing room revenue by the number of guestrooms
occupied on a daily basis for the applicable period. The increase in average
daily rate was largely due to increases in rates charged at previously opened
properties and higher introductory rates for new hotel openings. Other factors
that influenced average daily room rates included:
o stays of less than one week, which are charged at a higher nightly rate,
o higher rates for our one-bedroom suites, and
o higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $40.75 for the quarter ended June 30,
1999, compared to $36.88 for the quarter ended June 30, 1998.
We cannot predict whether current occupancy and room rates can be
maintained. Future occupancy and room rates may be impacted by a number of
factors including:
o the number and geographic location of new hotels,
o the season in which new hotels open,
o competition,
o market acceptance of our hotels, and
o general economic conditions.
14
<PAGE> 15
We consider a property to have completed its initial ramp-up phase
somewhere between six and twelve months following hotel opening. The initial
ramp-up phase is dependent on the supply and demand characteristics of
individual markets as well as the effectiveness of our local sales efforts. The
following table sets forth the performance of hotels open greater than nine
months as of April 1, 1999 and 1998:
<TABLE>
<CAPTION>
For the three months ended June 30,
----------------------------------
1999 1998 Change
------- -------- -------
<S> <C> <C> <C>
Number of hotels 33 5 28
Average age (in months) 15.5 13.2 2.3
Occupancy 70.6% 76.4% (5.8)%
Average Daily Rate $61.16 $50.96 $10.20
Revenue per available room $43.18 $38.93 $ 4.25
</TABLE>
Hotel Operating Expenses
Hotel operating expenses for the quarter ended June 30, 1999 totaled
$15.1 million, compared to $5.7 million for the quarter ended June 30, 1998.
Hotel operating expenses consist of all expenses directly applicable to the
operation of the hotels. The largest portion of hotel operating expenses was
made up 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 is largely due to the
increased number of hotels in operation during the second quarter of 1999 as
compared to the second quarter of 1998.
Rent Expense on Leased Hotels
We incurred rent expense in the second quarter of 1999 of $6.2 million
for the 34 hotels leased as of June 30, 1999, compared to $2.6 million of
expense in the second quarter of 1998 for the 21 hotels leased as of June 30,
1998. The increase in rent expense reflects the sale and leaseback of 13
additional hotels since June 30, 1998 and the pro-rated effect on rent expense
of the timing of previous hotel sales transactions.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. During the fourth quarter of 1998, we elected early
adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires opening costs to be expensed as
incurred. Prior to adoption of SOP 98-5, we capitalized and amortized opening
costs using the straight-line method over a period of twelve months.
Amortization expense on opening costs for 1998 is included in depreciation and
amortization on the statement of operations. Opening costs for the quarter ended
June 30, 1999 totaled $212,000. There were no hotel opening costs for the
quarter ended June 30, 1998; however, we did record $148,000 of amortization
expense in the quarter for opening costs that had been capitalized. These costs
were written off in full in December 1998 as a result of our adoption of SOP
98-5.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations (e.g.,
building, furniture, fixtures and equipment) for the quarter ended June 30, 1999
totaled $1.9 million, compared to $386,000 for the quarter ended June 30, 1998.
Depreciation and amortization expense for 1998 included amortization of
capitalized opening costs prior to the adoption of SOP 98-5. The increase in
depreciation and amortization expense in the second quarter of 1999, compared to
1998, was a result of the increase in the number of company-owned hotels in
operation. In accordance with generally accepted accounting principles, the
Company does not depreciate assets held for sale. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to forty years.
15
<PAGE> 16
Corporate Operations
--------------------
Other Income
Other income for the quarter ended June 30, 1999 totaled $236,000,
compared to $114,000 for the quarter ended June 30, 1998. Other income consists
primarily of franchise fees and royalty fees from franchise hotels and
management fees received from managed hotels. At June 30, 1999, we had 10
franchised hotels in operation, compared to five hotels at June 30, 1998. The
growth in other income in 1999, compared to 1998, reflects an increase in
royalty, franchise fee and management fee income.
We did not sell any hotels in the second quarter of 1999; however, we
did recognize gain on hotels that were previously sold. For the quarter ended
June 30, 1999, we recognized $328,000 of gain on hotels sold, compared to
$154,000 in the quarter ended June 30, 1998.
Corporate Operating Expenses
Corporate operating expenses for the second quarter of 1999 totaled
$1.2 million, compared to $929,000 for the second quarter of 1998, 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 in 1999 is due to increases in general personnel and field information
system support costs. These increases were needed to provide support and
services to the increased number of hotels in operation.
Abandoned Site Costs
We recorded $863,000 of abandoned site costs in the quarter ended June
30, 1999. There were no abandoned site costs recorded in the second quarter of
1998. Abandoned site costs represent costs related to certain development sites
that we have decided not to develop.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for
the quarter ended June 30, 1999 totaled $176,000, compared to $66,000 for the
quarter ended June 30, 1998. The increase in depreciation and amortization
reflects the leasehold improvements and furnishings purchased in 1999 for the
new corporate offices and the depreciation of new systems hardware and
peripheral equipment. 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) is computed using the straight-line method over
the life of the corresponding asset.
Interest Income and Expense
We earned $310,000 of interest income during the second quarter of
1999, compared to $124,000 in the second quarter of 1998. Interest income in
both quarters resulted primarily from the temporary investment of proceeds
received from the sale-leaseback transaction.
We had interest expense, net of capitalized interest, of $1.9 million
for the quarter ended June 30, 1999. There was no interest expense recorded in
the second quarter of 1998 as interest was capitalized as part of our
development activity. The interest expense in the second quarter of 1999 was a
direct result of the slowdown in our development activity during the second
quarter of 1999. We had fewer projects under construction in the second quarter
of 1999 thereby limiting the amount of interest that could be capitalized.
16
<PAGE> 17
Sales of Hotels
---------------
In two separate sale-leaseback transactions, we have sold and leased
back 34 hotels from HPT. The transactions were completed in several phases from
December 1997 to January 1999. In accordance with generally accepted accounting
principles, a deferred gain was recorded on the sales, a portion of which has
been recorded in income in 1998 and 1999. The following table sets forth the
activity for the three months ended June 30, 1999 and June 30, 1998 (in
thousands, except number of hotels):
<TABLE>
<CAPTION>
For the three months
ended June 30,
----------------------
1999 1998
------- -------
<S> <C> <C>
Number of hotels sold - quarter -- 7
Proceeds from sales of hotels,
net of deferred gain $ -- $55,592
Rent expense on leased hotels $ 6,218 $ 2,624
Gain recognized into earnings $ 328 $ 154
</TABLE>
Comparison of six months ended June 30, 1999 and 1998
- -----------------------------------------------------
Hotel Operations
----------------
Hotel Operations Revenue
For the six months ended June 30, 1999, hotel operations revenue
totaled $48.2 million, compared to $17.2 million for the six months ended June
30, 1998. The increase in revenue reflects the increase in the number of hotels
in operation. The following table sets forth our operating statistics for the
six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the six months
ended June 30,
---------------------
1999 1998 Change
------ ------ -------
<S> <C> <C> <C>
Occupancy 64.1% 65.3% (1.2)%
Average Daily Rate $59.75 $53.42 $ 6.33
Revenue per available room $38.32 $34.88 $ 3.44
</TABLE>
Average occupancy rate was 64.1% for the six months ended June 30,
1999, compared to 65.3% for the six months ended June 30, 1998. In 1999 we made
an effort to increase rates in certain markets. As a result, the occupancy rate
at certain of our hotels has been negatively impacted. The negative impact
associated with the increase in pricing was largely offset by the increasing
occupancy of hotels that had completed or were near completion of their ramp-up
phase.
For the six months ended June 30, 1999, our average daily rate was
$59.75, compared to $53.42 for the six months ended June 30, 1998. The increase
in average daily rate was largely due to increases in rates charged at
previously opened properties and higher introductory rates for new hotel
openings. Revenue per available room was $38.32 for the six months ended June
30, 1999, compared to $34.88 for the six months ended June 30, 1998.
The following table sets forth the performance for the six months ended
June 30, 1999 and June 30, 1998 of hotels open greater than nine months as of
April 1, 1999 and 1998:
<TABLE>
<CAPTION>
For the six months
ended June 30,
---------------------
1999 1998 Change
------ ------ -------
<S> <C> <C> <C>
Number of hotels 33 5 28
Average age (in months) 15.5 13.2 2.3
Occupancy 68.8% 71.3% (2.5)%
Average Daily Rate $60.98 $50.97 $10.01
Revenue per available room $41.93 $36.33 $ 5.60
</TABLE>
17
<PAGE> 18
Hotel Operating Expenses
Hotel operating expenses for the six months ended June 30, 1999 totaled
$28.1 million, compared to $10.1 million for the six months ended June 30, 1998.
The increase in hotel operating expenses was largely due to the increased number
of hotels in operation at June 30, 1999.
Rent Expense on Leased Hotels
For the six months ended June 30, 1999, we incurred rent expense of
$12.4 million for leased hotels, compared to $4.0 million for the six months
ended June 30, 1998. The increase in rent expense reflects the sale and
leaseback of 13 additional hotels since June 30, 1998 and the pro-rated effect
on rent expense of the timing of previous hotel sales transactions.
Hotel Opening Costs
For the six months ended June 30, 1999, opening costs totaled $797,000.
There were no hotel opening costs for the six months ended June 30, 1998;
however, we did record $279,000 of amortization expense in the period for
opening costs that had been capitalized. These costs were written off in full in
December 1998 when we elected early adoption of SOP 98-5.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
for the six months ended June 30, 1999 totaled $3.3 million, compared to
$676,000 for the six months ended June 30, 1998. Depreciation and amortization
expense for 1998 included amortization of capitalized opening costs prior to the
adoption of SOP 98-5. The increase in depreciation and amortization expense for
the six months ended June 30, 1999, compared to 1998, was a result of the
increase in the number of company-owned hotels in operation.
Corporate Operations
--------------------
Other Income
Other income for the six months ended June 30, 1999 totaled $443,000,
compared to $288,000 for the six months ended June 30, 1998. The growth in other
income in 1999, compared to 1998, reflects an increase in royalty, franchise fee
and management fee income.
In addition, during the first quarter of 1999, we sold three additional
hotels as part of a sale-leaseback transaction. The total sales price for these
hotels was $26.6 million. A deferred gain of $2.3 million was recorded on the
sales. For the six months ended June 30, 1999, we recognized $509,000 of gain on
hotels sold compared to $194,000 for the six months ended June 30, 1998.
Corporate Operating Expenses
For the six months ended June 30, 1999, corporate operating expenses
totaled $2.5 million compared to $1.7 million for the six months ended June 30,
1998. The increase in 1999 is due to an increase in general personnel and
information system support costs. These increases were needed to provide support
and services to the increased number of hotels in operation.
Abandoned Site Costs
Abandoned site costs totaled $863,000 for the six months ended June 30,
1999, all of which was recorded in the second quarter. There were no abandoned
site costs recorded for the six months ended June 30, 1998.
18
<PAGE> 19
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations
totaled $300,000 for the six months ended June 30, 1999, compared to $123,000
for the six months ended June 30, 1998. As previously noted, the increase in
depreciation and amortization reflects the leasehold improvements and
furnishings purchased in 1999 for the new corporate offices and the depreciation
of new systems hardware and peripheral equipment.
Interest Income and Expense
Interest income totaled $592,000 for the six months ended June 30,
1999, compared to $486,000 for the six months ended June 30, 1998. Interest
income for the six months ended June 30, 1999 resulted primarily from the
short-term investment of excess funds received from the sale-leaseback
transaction and the Series B Preferred Stock offering. For the six months ended
June 30, 1998, interest income related primarily to the temporary investment of
excess funds that stemmed from the Series A Preferred Stock offering and
proceeds from the sale-leaseback transaction.
Interest expense, net of capitalized interest, totaled $3.4 million for
the six months ended June 30, 1999, compared to $38,000 for the six months ended
June 30, 1998. The increase in interest expense was the result of the slowdown
in our development activity during 1999. We began construction of fewer projects
in 1999 thereby limiting the amount of interest that could be capitalized.
Sales of Hotels
---------------
Beginning in December 1997 and ending in January 1999, we sold and leased
back 34 hotels from HPT. The cumulative sales price for the hotels sold was
$260.9 million. A deferred gain of $19.3 million was recorded on the sales of
which $1.1 million has been recognized in income during 1998 and 1999. The
following table sets forth the activity for the six months ended June 30, 1999
and June 30, 1998 (in thousands, except number of hotels):
<TABLE>
<CAPTION>
For the six months
ended June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Number of hotels sold - six months 3 16
Number of hotels sold - total 34 21
Proceeds from sales of hotels, net of
deferred gain $ 24,285 $104,514
Rent expense on leased hotels $ 12,354 $ 4,046
Gain recognized into earnings $ 509 $ 194
</TABLE>
Liquidity and Capital Resources
- -------------------------------
We had cash and cash equivalents of $18.2 million at June 30, 1999,
compared to $11.7 million at June 30, 1998. Net cash provided by operating
activities totaled $14.5 million for the six months ended June 30, 1999,
compared to $2.1 million for the six months ended June 30, 1998. The primary
sources of cash for the six month period ended June 30, 1999 were the reduction
of $20.8 million in the amount of hotels held for sale, an increase of $2.0
million in deferred gain on sale of hotels and $3.6 million of non-cash
depreciation and amortization expense. Uses of cash consisted of $1.9 million in
net loss from operations, a decrease of $3.7 million in accounts payable and
accrued expenses, an increase of $3.1 million in accounts receivable, and a $2.5
million increase in the amount of deposits relating to the sale-leaseback of
certain of our hotels. The primary sources of cash for the six months ended June
30, 1998 were a $5.3 million increase in deferred gain on sale of hotels, a $4.8
million increase in accounts payable and accrued expenses and a $3.6 million
reduction in the amount of hotels held for sale. The 1998 sources of cash were
partially offset by an increase of $10.5 million in the amount of deposits
pursuant to the sale-leaseback transaction.
19
<PAGE> 20
Net cash used in investing activities for the six months ended June 30,
1999 totaled $65.5 million, compared to $35.9 million for the six months ended
June 30, 1998. Our expenditures for property and equipment in connection with
the completed hotels, the construction of new hotels, acquisition costs for
properties under contract, and the costs of hotels sold accounted for the
majority of the cash used. For the six months ended June 30, 1999, we expended
approximately $65.3 million on construction, compared to $35.2 million for the
six months ended June 30, 1998.
For the six months ended June 30, 1999, net cash provided by financing
activities was $46.1 million. This amount primarily consisted of $53.5 million
in proceeds from mortgages and notes payable, partially offset by $4.0 million
in preferred stock dividend payments and $3.3 million of principal payments on
notes. The principal payments primarily related to the payoff of promissory note
balances for the hotels sold as part of the sale-leaseback transaction in
January 1999. For the six months ended June 30, 1998, net cash provided by
financing activities was $10.1 million as the amount of proceeds from mortgages
and notes payable exceeded the amount of payments on the notes. These payments
primarily related to the payoff of promissory note balances for certain of our
hotels pursuant to the sale-leaseback transaction.
At June 30, 1999, we had five hotels under construction with a total
estimated cost of approximately $70.1 million. Our total equity requirement for
these properties is $21.4 million, all of which had been funded as of June 30,
1999. At June 30, 1999, we had secured financing on four hotels in the amount of
$40.3 million and were processing loans with a third-party lender with respect
to the remaining property which, if approved, would provide an estimated $8.4
million of additional financing. Two of the properties under construction are
part of a joint venture development agreement we have with Boston Capital
Institutional Advisors. These properties represent the first two of the 10 to 15
hotels we plan to develop with Boston Capital.
In addition to hotels under construction, we had eight properties that
we had acquired or were under contract to purchase at June 30, 1999. Of these
eight properties, five represent properties we had acquired but not yet placed
under construction and three represent properties that we were under contract to
purchase. The total project cost for these eight properties is estimated at
$87.6 million. As of June 30, 1999, we had incurred costs of approximately $14.8
million on these projects. These costs include land acquisition costs, deposits
and fees for surveys, legal services, environmental studies, and architectural
drawings. Four of the eight properties have been designated as part of our joint
venture development agreement with Boston Capital. In addition, we have a
contract with an existing franchisee to sell two of the properties we have
acquired. We expect for this transaction to be completed in the third quarter of
1999, however, we are unable to assure that this transaction will be completed.
We believe that a combination of our cash and cash equivalents, cash
from operations, cash from sales of properties, 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 June 2000. Substantial
capital resources in addition to those discussed above will be necessary for us
to continue to develop the properties under contract. In addition, from time to
time we will consider strategic acquisitions as a means of growth, which would
similarly require additional capital. We are actively considering and/or
pursuing a number of financing alternatives, including credit facilities, the
issuance of debt and joint ventures. We are unable to assure that we 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 our development and expansion plans, losses of deposits or other
committed capital, and could have a material adverse effect on our business and
results of operations.
We have not paid dividends on our Common Stock. We currently do not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Dividend payments on the Series A and Series B Preferred Stock are paid
quarterly and in preference to the Common Stock. These payments are
approximately $2.0 million per quarter. After payment of dividends on the Series
A and Series B Preferred Stock, we intend to retain any future earnings for
reinvestment in the development and expansion of our business.
20
<PAGE> 21
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. Any of our
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.
We have established a plan to resolve the Year 2000 issue. The plan
consists of four phases: assessment, remediation, testing, and implementation.
A. Assessment - We have completed our assessment of all systems, both
information technology and non-information technology, that could be
significantly affected by the Year 2000 issue. The results of the assessment of
our systems are as follows:
1) Our core financial systems - All hardware and software were
replaced in 1998 as part of the successful implementation of a
new accounting system. The new system has been certified to be
fully compliant with the Year 2000 issue by the vendor.
2) Other corporate office systems, including the local area
network, phone systems, E-mail, imaging systems, word
processing, spreadsheets, and scheduling software have all
been evaluated and tested and found to be in compliance.
3) Hotel property management system - Our initial assessment
found our property management system not to be Year 2000
compliant. National Guest Systems has written an upgrade to
the IS4 software to make it Year 2000 compliant. This upgrade
was installed in the hotels in January of 1999. National Guest
Systems has represented to us that the software is now fully
compliant. We will perform further testing on this software in
phase three of our plan.
4) Other hotel systems purchased from third-party vendors - These
systems include the elevators, voice mail, energy management
and HVAC system, phone switches, room key systems, fire and
security systems, and any other equipment or systems that have
an "embedded" chip that records the date. We have requested
and obtained written verification from all of our major
vendors that their product is Year 2000 compliant.
Furthermore, the plans given to our contractors specify that
all systems are Year 2000 compliant.
B. Remediation - As previously mentioned, our assessment indicated that only one
of our systems was not Year 2000 compliant. This is our property management
software purchased from National Guest Systems. National Guest Systems has
since modified the software, adding a four-digit year instead of the
two-digit year previously used. This modification has been installed in our
hotels and is currently in use. National Guest Systems has represented to us
that the software is now fully Year 2000 compliant. No other issues have been
detected in any of our systems.
C. Testing - The testing phase of our plan involves actually using the software
with dates into the next year and testing the results. During the second
quarter of 1999, we began testing on our field systems, including the
property management system. As of June 30, 1999, this process was 80%
complete. We anticipate completion by September 30, 1999. We believe that
this schedule will allow sufficient time to remedy any problems that we
identify.
D. Implementation - The final phase of our plan is scheduled for completion
during the fourth quarter of 1999. We anticipate that all systems will be
modified, tested and in place by that date.
To date the only costs we have incurred as a result of the Year 2000
issue have been the internal costs of labor to perform the assessment and
testing of our systems. We do not anticipate incurring any other costs as a
result of the Year 2000 issue. We estimate that the total amount of internal
labor incurred by us to assess, remedy and test the systems will be less than
$100,000.
We have contingency plans for certain critical applications and are
working on such plans for others. These contingency plans involve, among other
actions, data backup and retrieval, manual workarounds and adjustments to
staffing strategies.
21
<PAGE> 22
Failure to address the Year 2000 issue by third-party vendors that we
rely upon could have a material adverse effect on our business and results of
operations. Examples of third-party vendors include utility providers, phone
service providers, and banks and data processing providers. Disruptions in the
operation of airlines and central reservation systems, as well as a general
disruption in the national or regional economy, would also have an adverse
impact on our business and results of operations. We are unable to estimate the
likelihood or impact of these events.
Impact of New Accounting Standards
- ----------------------------------
There have not been any new accounting standards or pronouncements
issued that would have an impact on our business and results of operations.
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Our earnings are affected by changes in interest rates as a portion of
our outstanding indebtedness is at variable rates based on LIBOR. If interest
rates change by .01 percent, the market value of our mortgages and notes
payable, based on the outstanding balance at June 30, 1999, would change by
approximately $15,000. Additionally, we have market risk on our short-term
investments, which are considered cash equivalents, due to changes in interest
rates. If interest rates increase by .01 percent, the market value of our
short-term investments, based on the outstanding balance at June 30, 1999, would
change by approximately $1,000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Form
10-Q as well as some of our statements in periodic press releases and some oral
statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as "believes," "anticipates," "estimates,"
"expects" or similar expressions. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:
o adverse changes in national or local economic conditions,
o competition from other lodging properties,
o changes in real property tax rates,
o changes in the availability, cost and terms of financing,
o the impact of present or future environmental legislation,
o the ongoing need for capital improvements,
o changes in operating expenses,
o adverse changes in governmental rules and fiscal policies,
o civil unrest,
o acts of God, including earthquakes and other natural disasters (which may
result in uninsured losses),
o acts of war, and
o adverse changes in zoning laws.
Certain of these factors are discussed in more detail elsewhere in this Form
10-Q and the Company's other filings with the Securities and Exchange
Commission.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 17, 1999, the Company held its 1999 Annual Meeting of
Stockholders to elect the Company's board of directors. The number
of shares entitled to vote was 9,025,000 shares of the Company's
Common Stock, 65,000 shares of the Company's Series A Preferred
Stock and 42,000 shares of the Company's Series B Preferred Stock.
On an as-converted basis, the total number of shares of Common
Stock available to vote was 20,288,158. The total number of shares
represented in person or by proxy to vote was 11,403,280. Each of
the current directors was re-elected. Messrs. Costley, Cresci,
DeBoer, Ferris, Fix, Keltner, Morris, Nielsen, Pados, Perocchi,
Salazar and Storey were re-elected with 11,368,285 affirmative
votes and 34,995 votes against. No other matters were put to a
vote of stockholders at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
23
<PAGE> 24
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: August 13, 1999 By: /s/ Jack P. DeBoer
-------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: August 13, 1999 By: /s/ Warren D. Fix
-------------------------------
Warren D. Fix, Executive Vice
President and Chief Financial
Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Candlewood Hotel Company, Inc. (1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc. (11)
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)
3.4 Certificate of Amendment of Certificate of Designations of Series A Preferred Stock. (10)
3.5 Certificate of Designations, Preferences and Relative, Participating, Optional and 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 Indemnification Agreement Schedule. (11)
10.3 1996 Equity Participation Plan and Form of Stock Option Agreements. (5)
10.4 First Amendment to the 1996 Equity Participation Plan effective as of May 18, 1998. (11)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and Jack P. DeBoer dated as of September
1, 1996. (1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc. and Doubletree Corporation dated as
of November 11, 1996. (2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc. to Doubletree Corporation dated as
of November 11, 1996. (2)
10.8 Employment Agreement between Candlewood Hotel Company, Inc. and James Roos dated as of June 2, 1997.
(4)
10.9 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of August 27, 1997. (3)
10.10 Amended and Restated Registration Rights Agreement dated as of July 10, 1998. (10)
10.11 Purchase and Sale Agreement, dated as of November 19, 1997, by and among Candlewood Hotel Company,
Inc. and certain of its affiliates, as sellers, and HPT, as purchaser. (6)
10.12 First Amendment to Purchase and Sale Agreement and Agreement to
Lease and Fourth Amendment to Lease Agreement and Incidental
Documents, dated as of January 7, 1999, by and among Candlewood
Hotel Company, Inc., Candlewood Leasing No. 1, Inc., HPT and HPT
CW, and seventeen entities which are parties thereto. (11)
10.13 Agreement to Lease, dated as of November 19, 1997, by and between Candlewood Hotel Company, Inc. and
HPT. (6)
10.14 Lease Agreement, dated as of December 24, 1997, by and between HPTCW, as landlord, and Candlewood
Leasing No. 1, Inc., as tenant. (6)
10.15 Guaranty Agreement, dated as of December 24, 1997, by Candlewood Hotel Company, Inc. for the benefit
of HPTCW and HPT. (6)
10.16 Stock Pledge Agreement, dated as of December 24, 1997, by Candlewood Hotel Company, Inc. for the
benefit of HPTCW. (6)
10.17 Purchase and Sale Agreement, dated as of May 14, 1998, by and among Candlewood Hotel Company, Inc.
and certain of its affiliates, as sellers, and HPT, as purchaser. (7)
10.18 First Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and Incidental
Documents, dated as of June 18, 1998, by and among Candlewood Hotel Company, Inc., Candlewood Leasing
No. 2, Inc., HPT and HPT CW II. (11)
10.19 Second Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and Incidental
Documents, dated as of July 31, 1998, by and among Candlewood Hotel Company, Inc., Candlewood Leasing
No. 2, Inc., HPT and HPT CW II. (9)
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C>
10.20 Third Amendment to Purchase and Sale Agreement and Agreement to
Lease and Sixth Amendment to Lease Agreement and Incidental
Documents, dated as of December 23, 1998, by and among Candlewood
Hotel Company, Inc., Candlewood Leasing No. 2, Inc., HPT, HPT CW
II and seventeen entities which are parties thereto. (11)
10.21 Agreement to Lease, dated as of May 14, 1998, by and between Candlewood Hotel Company, Inc. and HPT.
(7)
10.22 Lease Agreement, dated as of May 21, 1998, by and between HPTCW, as landlord, and Candlewood Leasing
No. 2, Inc., as tenant. (7)
10.23 Guaranty Agreement, dated as of May 14, 1998, by Candlewood Hotel Company, Inc. for the benefit of
HPTCW and HPT. (7)
10.24 Stock Pledge Agreement, dated as of May 27, 1998, by Candlewood Hotel Company, Inc. for the benefit
of HPTCW. (7)
10.25 Securities Purchase Agreement dated as of June 30, 1998. (10)
10.26 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel Company, Inc. and Vantage Point
Properties, Inc. (11)
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 Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1997.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997 filed
July 30, 1998.
(9) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(11) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
26
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,230,000
<SECURITIES> 0
<RECEIVABLES> 5,865,000
<ALLOWANCES> (224,000)
<INVENTORY> 0
<CURRENT-ASSETS> 24,095,000
<PP&E> 263,880,000
<DEPRECIATION> (4,851,000)
<TOTAL-ASSETS> 321,913,000
<CURRENT-LIABILITIES> 23,300,000
<BONDS> 165,010,000
100,689,000
0
<COMMON> 90,000
<OTHER-SE> 35,270,000
<TOTAL-LIABILITY-AND-EQUITY> 321,913,000
<SALES> 0
<TOTAL-REVENUES> 74,002,000
<CGS> 24,285,000
<TOTAL-COSTS> 48,221,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,414,000
<INCOME-PRETAX> (1,918,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,918,000)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
