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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-12708
CANDLEWOOD HOTEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8621 East 21st Street North, Suite 200, Wichita, Kansas 67206
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (316) 631-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 17, 1999 was $26,101,228 based on the closing sales
price of such stock on such date.
The number of shares outstanding of the registrant's common stock, as of
March 17, 1999 was 9,025,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders to be held on May 17, 1999 are incorporated by this reference into
Part III as set forth herein.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Candlewood Hotel Company, Inc. is in the business of operating,
managing, developing and franchising Candlewood business hotels. As of December
31, 1998, we operated 53 Candlewood hotels and were constructing 12 additional
hotels. Additionally, as of December 31, 1998, franchisees had opened nine
franchised hotels and had an additional two under construction. Including hotels
open and under construction, we had hotels in 26 states as of December 31, 1998.
Candlewood hotels and their amenities are designed to appeal to business
travelers seeking extended-stay accommodations by combining the convenience of a
hotel with many of the comforts of an apartment. For all guests, Candlewood
provides well appointed, high quality lodging at affordable prices. We are
developing and franchising Candlewood hotels to develop a leading national brand
within the mid-priced segment of the market, which we believe is characterized
by average daily rates of approximately $45 to $75. We believe that the
experience of our senior management team is and will continue to be instrumental
in executing our growth strategy. Jack P. DeBoer, our founder, Chairman and
Chief Executive Officer, is credited by the lodging industry with creating the
extended-stay concept as the founder of Residence Inns.
Our principal executive offices are located at 8621 East 21st Street
North, Suite 200, Wichita, Kansas 67206, telephone (316) 631-1300.
CANDLEWOOD HOTELS
The Candlewood brand is built on the foundation of providing exceptional
value to all guests. Candlewood hotels offer upscale, spacious accommodations at
competitive rates that we believe are attractive to both conventional and
extended-stay guests. Candlewood hotels contain approximately 75 to 135 rooms,
comprised of studios and one-bedroom suites, both of which contain business and
other amenities consistent with amenities found in upscale, full-service hotels.
We believe that the 350 square foot studio suites are larger than most
full-service hotel rooms. Up to 25% of the rooms in a standard Candlewood hotel
are one-bedroom suites, which are approximately 525 square feet, and are
designed to accommodate guests who desire a bedroom separated from the kitchen
and office area.
Candlewood hotels offer the accommodations and amenities desired by
guests staying six nights or longer. Each Candlewood hotel is equipped with the
following amenities:
- an exercise room;
- a complimentary guest laundry facility;
- a convenient dry cleaning drop, with same-day service;
- free local calls and 25 cent-per-minute long distance calls;
- the self-service "Candlewood Cupboard" featuring value-priced
packaged foods and 25 cent beverages; and
- a free "First Night Kit" complete with items such as breakfast bars,
coffee and popcorn.
In addition, each Candlewood studio and one-bedroom suite offers amenities
designed to accommodate the needs of the business traveler. These amenities
include the following:
- two telephones, with two incoming direct dial lines and computer
connections;
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- an oversized executive desk with a quad-outlet to accommodate office
equipment needs, an executive chair, a bulletin board, a guest chair
and personalized remote accessible telephone mail;
- a 25-inch television, video cassette player, and compact disk player;
- an iron and ironing board; and
- a fully equipped kitchen, including a full-size refrigerator,
full-size microwave oven, dishwasher, two burner stovetop, coffee
maker, toaster, and a complete set of utensils and cookware.
We believe the majority of industry defined extended-stay hotels are
either in the upscale sector or economy sector of the market. Upscale hotel
chains include Residence Inn, Homewood Suites, Hawthorn Suites and Summerfield
Suites. We believe that average daily rates for these chains exceed $90. The
economy sector includes Suburban Lodge, Extended-Stay America, Homestead Village
and Villager Lodge. Most of these chains operate with weekly rates that we
believe represent effective average daily rates of less than $40. Based upon
industry sources, including public disclosure and equity research reports, we
believe that our nearest competitors in the mid-priced segment, which include
Studio Plus, MainStay Suites, Towne Place, Sierra Suites and Homegate
Hospitality, had a total of approximately 200 hotels open at the end of 1998. We
believe that all the brands previously mentioned do not meet the needs of a
large number of travelers who desire well appointed, high quality, spacious
accommodations with full kitchens, but with room rates in the mid-priced segment
of the extended-stay market. Candlewood hotels are designed to accommodate what
we believe to be an underserved segment of the extended-stay market. In
addition, we believe that the high quality of Candlewood hotels, relative to
their moderate daily rate, attracts certain guests who otherwise would stay at
traditional hotels. In most areas of the country, the average daily rate at
Candlewood hotels is approximately $55 to $95 per studio suite and $75 to $115
per one bedroom suite. These rates are significantly lower than full-service
hotels with comparable room features and amenities and generally competitive
with traditional limited-service hotels that do not offer the high quality
appointments and amenities of our rooms. Accordingly, we believe that Candlewood
hotels are particularly attractive to business travelers, including
professionals on temporary work assignment, consultants, travelers conducting or
participating in training seminars and government employees.
HOTEL OPERATIONS
During 1999, we intend to focus our efforts on continuing to improve the
efficiency and effectiveness of our hotel operations. This effort is being led
by our President and Chief Operating Officer. Our principal operating strategies
include:
- providing our guests with clean, comfortable and attractive
accommodations at competitive rates;
- ensuring guest satisfaction through a commitment to customer service
and product quality, including providing our guests with amenities
which we believe are valued by our target clientele (the business
traveler);
- building revenue yield through the continued use of our targeted
local and national sales teams that are supported by intense training
and innovative incentives;
- controlling operating costs at each of our hotels through the use of
"Best Methods", a program developed to ensure high quality and
minimal operating expense; and
- carefully monitoring hotel product quality through a quality
assurance program.
Candlewood hotels focus on delivering those services and amenities which
we believe are valued most by our target clientele. For example, in addition to
providing clean, comfortable and attractive
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accommodations, each room contains many amenities that are essential for
business travelers and others who stay for six nights or longer.
Our focused approach to customer service enables each hotel to employ
only 10 to 12 employees, thereby minimizing operating costs. Each Candlewood
hotel employs a general manager who is responsible for the operations of the
hotel. The general manager shares duties with and oversees a staff of
approximately nine to 11 persons, typically consisting of an assistant manager,
a director of sales, desk clerks, a maintenance person, and housekeeper/laundry
staff (many of whom are part-time employees). The office at each of our
facilities is generally open daily from 7:00 a.m. to 8:00 p.m., although a staff
member is normally on site at all facilities 24 hours a day to respond to our
guests' needs. We believe that employing only 10 to 12 employees at each hotel
minimizes operating costs. Each Candlewood hotel has a system in place that
allows our guests to check in and check out without the assistance of hotel
employees.
The on-site general manager at each Candlewood hotel is responsible for
Candlewood's quality control standards and procedures which govern management,
operations, maintenance, regulatory compliance, reporting and marketing. Each
Candlewood hotel is measured against guest service standards and a detailed
revenue and expense budget, as well as against the performance of our other
properties. Key on-site personnel participate in an incentive program based on
hotel revenues and profits. Our operations division conducts periodic
inspections of each Candlewood hotel to ensure compliance with Candlewood's
quality control standards. We believe that our corporate services, such as
accounting and payroll services, permit on-site hotel general managers to
effectively focus on providing guest services and results in economies of scale.
Each Candlewood hotel on-site general manager and director of sales is
required to complete classroom courses which we administer and on-the-job
training to learn the marketing and operational systems specific to operating a
Candlewood hotel, how to maximize operating efficiencies and how to attract
extended-stay guests. In addition, dedicated pre-opening teams (consisting of
our experienced general managers) deliver on-site training to new employees to
ensure that a guest's experience in a newly-opened Candlewood hotel is
consistent with the standards set by comparable properties.
We make our hotel management services available to franchisees and our
joint venture partners. Currently, we provide management services to the
Cambridge Suites by Candlewood owned by Jack DeBoer and located in Wichita,
Kansas, pursuant to a one-year renewable contract. We also provide our hotel
management services to the Hotel at Old Town located in Wichita, Kansas, a hotel
in which Jack DeBoer has a pecuniary interest. In addition, we anticipate that
some franchisees may want to utilize our experience and expertise to manage
their hotels and believe that our management of such hotels helps to maximize
the consistency of the Candlewood hotel system. If in excess of 75% of the cost
of a franchised hotel is financed and the franchisee wishes to utilize a
guarantee by Doubletree Corporation, which is a wholly owned subsidiary of
Promus Hotel Corporation ("Doubletree"), Doubletree requires that we manage the
franchisee's hotel as a condition to guaranteeing a portion of the loan. If a
franchisee's hotel shares a common trade area with Candlewood hotels, we may
require that we manage those hotels in order to coordinate direct sales efforts
in the region. We have structured our management agreements so that we will
receive approximately 5% of hotel revenue in exchange for our management
services. We currently do not manage any hotels owned by a franchisee.
MARKETING AND SALES
Candlewood hotels provide high quality, comfortable and attractive
accommodations together with the amenities desired by the extended-stay business
traveler. We believe that the high quality of our rooms attracts business
travelers in the mid-priced segment of the entire hotel market. We also believe
that our design and pricing results in longer stays, higher occupancy rates and
a more stable revenue stream.
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Each Candlewood hotel has an on-site director of sales dedicated to
marketing and direct sales efforts. The sales and marketing division uses direct
mail solicitations. Through these direct sales efforts, we believe we can obtain
and maintain consistently high occupancy levels and generate longer stays by our
guests. Our sales and marketing division targets institutions and employers
located near our properties.
We have established a toll free telephone number, 1-800-946-6200, to
enable our guests to make reservations at any of our hotels. The number uses an
automated response system that directs the caller to the specific hotel desired,
and reservations are then booked directly with that hotel's personnel. In
addition, in February 1999, we became aligned with Lexington Services, a
subsidiary of The Travel Company, the largest provider of global hotel
reservations in the nation and the second largest in the world. Our alliance
with Lexington enables travel agents throughout the world to book rooms and
access detailed information about all our hotels using their existing computer
networks. In addition, we are utilizing Lexington's LexLink OnLine service. This
service will enable real-time access to our reservation systems and should
enable us to more effectively manage our hotels' inventory and access more
current information on productivity and guest arrivals.
We believe that our marketing and sales efforts have been successful in
promoting brand awareness. For example, Candlewood hotels have been used by
business travelers from more than 350 of the Fortune 500 companies. In addition,
according to data supplied by Smith Travel Research for 1998, those Candlewood
hotels open greater than six months had achieved a higher market share than
their peer group.
HOTEL FRANCHISING
We have established a national franchising program which we believe will
accelerate the establishment of our market presence and brand awareness on a
national level, generate incremental revenues at an attractive margin, and
create opportunities to obtain management contracts with respect to franchised
properties. As of December 31, 1998, we had received approval to sell franchises
in 47 states and had nine franchised Candlewood hotels open with a total of
1,050 rooms:
<TABLE>
<CAPTION>
NUMBER
LOCATION OPENING DATE OF ROOMS
- -------- ------------ ---------------
<S> <C> <C>
Hillsboro, Oregon June, 1997 126
Pleasanton, California August, 1997 126
Rockford, Illinois November, 1997 67
Sacramento, California March, 1998 126
Dallas, Texas March, 1998 150
Syracuse, New York August, 1998 92
Bellevue, Washington September, 1998 126
Milpitas, California November, 1998 127
San Antonio, Texas December, 1998 110
</TABLE>
In addition, as of December 31, 1998, we had two franchise hotels under
construction with a total of 191 rooms:
<TABLE>
<CAPTION>
NUMBER
LOCATION STATUS OF ROOMS
- -------- ------------------ -------------------
<S> <C> <C>
Salina, Kansas Under Construction 69
Glen Allen, Virginia Under Construction 122
</TABLE>
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As of December 31, 1998, we had also entered into franchise agreements
for the establishment of Candlewood hotels in the following five areas:
Louisville, Kentucky Huntersville, North Carolina
Westlake, Ohio Chapel Hill, North Carolina
Durham, North Carolina
We expect franchising to be an increasingly important component of our
growth during 1999. Accordingly, we intend to increase the number of employees
responsible for seeking and investigating franchising opportunities. In
addition, we intend to focus a significant portion of our efforts towards
increasing awareness of our national franchising program.
Franchise agreements are executed when we and the franchisee agree on a
site prior to construction. We make the services and expertise of our real
estate, construction, sales and operations divisions available to our
franchisees in order to ensure high quality facilities and customer service. Our
construction division advises on the construction and development of franchised
hotels. A representative of our construction division visits franchised hotel
sites during the construction phase and inspects and approves each franchised
Candlewood hotel before or shortly after commencement of operations. In
addition, after commencing operations, all franchised Candlewood hotels are
subject to periodic inspection to ensure that they are in compliance with our
quality control program and maintenance and updating standards. While we may
grant franchises in geographic locations where we own and operate hotels, if
franchisees' hotels share a common trade area with Candlewood hotels, we may
require that we manage those hotels in order to coordinate direct sales efforts
in the region.
Our franchising program is focused on the sale of single and multi-site
franchises and the establishment of development agreements under which we grant,
in exchange for nominal consideration, the right to obtain franchises to
construct and operate Candlewood hotels in an exclusive geographic territory.
Pursuant to our development agreements, exclusive rights may be rescinded by us
if the developer fails to submit franchise applications pursuant to a
development schedule. We are a party to only two development agreements, which,
in each case, do not obligate the developer to build or open any Candlewood
hotels. By granting exclusive rights in a territory, we must rely on the
developer, to the exclusion of us or other franchisees, to franchise hotels at
such locations as the developer chooses and at such times as specified in the
development schedule.
There can be no assurance that the franchised hotels will be opened at
the time specified in the agreements, or at all. There can be no assurance that
any additional franchise agreements will be signed, either pursuant to
development agreements or independently, or that any Candlewood hotels will be
opened pursuant to the terms and the times specified in the development
agreements, the franchise agreements, or at all. Some franchisees will require
financing for the construction of their hotels, and there can be no assurance
that financing or guarantees (by Doubletree or otherwise) will be available on
terms satisfactory to the franchisee, or at all. Failure to franchise hotels
according to the schedules set forth in the development agreements could result
in delays in construction in certain territories and could have a material
adverse effect on our business and results of operations. See "Competition."
HOTEL DEVELOPMENT
As of December 31, 1998, we operated 53 hotels. In addition, we were
constructing 12 additional hotels. Through the development of
Candlewood-operated hotels, we expect to be able to obtain a presence in key
markets and to achieve economies of scale in management, marketing and
purchasing. As of December 31, 1998, 34 of our 53 hotels were subject to two
separate sale-leaseback arrangements (all 34 hotels had been sold and leased
back to us as of January 1999).
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Our development status as of December 31, 1998 was as follows:
<TABLE>
<CAPTION>
PROPERTIES ROOMS
---------- -----
<S> <C> <C>
Owned and operated 22 2,549
Operated under leases 31 3,522
Under Construction 12 1,512
---------- -----
TOTAL 65 7,583
</TABLE>
Our construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels developed by Candlewood.
The construction division has relationships with a group of approximately eight
contractors that are performing approximately 80% of the construction of our
hotels in various regions of the United States. Each of these approved
contractors has extensive experience in the construction of lodging facilities.
Each of the contractors has agreed to a guaranteed maximum price contract which
sets a ceiling on total construction cost that is expected to limit cost
overruns. Any savings in costs of construction are shared by us and the general
contractors. Our construction division is responsible for site visits and
inspections during construction and upon completion of construction must approve
a hotel's quality before it can commence operations. The average construction
time on each hotel is approximately nine months; however, construction is
subject to delays due to weather and other circumstances.
Each of our hotels is designed and constructed according to uniform
plans and specifications for the design of Candlewood facilities. We expect to
make design variations, including changes in the number of studio suites and
one-bedroom suites, based on market demographics and site restrictions, among
other factors. To date, we have constructed each hotel developed by us and have
no immediate plans to convert other brands to Candlewood hotels. We believe that
our coordination of the construction of Candlewood hotels and our use of a
comprehensive design manual has lowered costs and resulted in consistent quality
and appearance.
As of December 31, 1998, the following 12 Candlewood-owned hotels with
1,512 expected rooms were under construction in eight different states, three of
which are located in states where we did not then operate hotels:
<TABLE>
<CAPTION>
EXPECTED NUMBER
LOCATION OF ROOMS
- -------- ---------------
<S> <C>
Dallas - Ft. Worth, Texas 122
Atlanta, Georgia 122
Chicago - Schaumburg, Illinois 122
Chicago - Warrenville, Illinois 122
St. Louis, Missouri 122
Columbus, Ohio 122
Chicago - Hoffman Estates, Illinois 122
Cleveland, Ohio 122
Philadelphia - Mt. Laurel, New Jersey 123
Oklahoma City, Oklahoma 122
Miami, Florida 129
Chicago - Schiller Park, Illinois 162
</TABLE>
Our real estate division is continuously evaluating a variety of sites
for purchase and construction of Candlewood hotels. We typically build
Candlewood hotels within 15 minutes of employment centers, including large
corporate headquarters, and within five minutes of services such as restaurants
and grocery stores. We have not excluded any area of the country from our hotel
development plans.
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As of December 31, 1998, we had entered into 14 contracts for the
purchase of the following potential hotel sites in 10 states, four of which are
located in states where we did not then operate hotels or have hotels under
construction:
<TABLE>
<CAPTION>
EXPECTED NUMBER
LOCATION OF ROOMS
- -------- ---------------
<S> <C>
Santa Ana, California 122
Fairfax, Maryland 122
Herndon, Virginia 122
Santa Clara, California 122
Jersey City, New Jersey 213
Meriden, Connecticut 122
Boston - Burlington, Massachusetts 149
Chicago - Wheeling, Illinois 122
Boston - Lowell, Massachusetts 125
Las Vegas, Nevada 278
Alexandria, Virginia 150
Detroit - Farmington Hills, Michigan 125
Boise, Idaho 122
Morris Plans - Parsippany, New Jersey 122
</TABLE>
In response to current capital market conditions, we anticipate
employing a conservative hotel development strategy. Accordingly, we expect our
development of new hotels during 1999 to be less than our development during
1998. As part of our conservative development of new hotels, we intend to
actively pursue joint venture arrangements, sale-leaseback transactions, and
select company developments. We also will continue to actively encourage
development by proven franchise operators, especially those who have strong
relationships with local and regional banking institutions, which continue to
finance hotel development. We may make adjustments to our resources dedicated to
hotel development as a result of this conservative development strategy.
There can be no assurance that present or future development will
proceed in accordance with our expectations. Our continued development is
heavily dependent on our ability to obtain or generate equity capital and to
secure financing on acceptable terms. The number of rooms listed for those
hotels that are under construction or under contract are subject to change, and
are only estimates of the number of rooms we expect to construct. Construction
is subject to delays from a number of sources, many of which are outside of our
control. The contracts that we enter into 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. We have the right to terminate each contract if we are not
satisfied with the results of the investigations and diligence. If we terminate
any contract, as a result of the unavailability of financing or otherwise, we
may have to write-off expenses incurred in connection with that property. There
can be no assurance that we will acquire properties, complete the development
and construction of hotels or that any such development or construction will be
completed on time or within budget.
FINANCING ACTIVITY
In order to finance the continued development of Candlewood hotels, we
have and expect to continue to seek financing from various sources, including
joint venture partners, local and regional banking institutions and large
banking and other financial institutions.
To help finance the development of Candlewood hotels, in March 1999, we
signed a letter of intent with Boston Capital Institutional Advisors LLC
relating to the joint funding of the development of
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Candlewood hotels. The joint-venture would provide up to $50 million of equity
capital, sufficient to begin construction on 10 to 15 new hotels, of which up to
$37.5 million would be provided by Boston Capital. Funding is contingent upon
numerous events including: negotiation and execution of definitive
documentation, securing construction financing on acceptable terms, and
satisfactory due-diligence for potential hotels. The Company can give no
assurance that the transaction will be completed or that any hotel will be built
with this financing. While the terms of any joint venture may vary from
agreement to agreement, we believe that this financing vehicle may provide us
with a source of capital which will enable the continued development of
Candlewood hotels. Accordingly, we intend to continue to explore additional
joint-venture relationships.
In addition to seeking joint-venture partners, we expect to seek
financing from regional and local banking institutions. We believe that
construction debt is available from local and regional banks on an individual
hotel basis as contrasted to one large bank or a syndication of banks providing
a large line of credit similar to our GMAC facility. We intend to leverage our
contacts and knowledge of local markets. In order to finance the construction of
new hotels, we require financing of at least 50% of total costs. We have worked
with various lenders to secure this debt financing. Doubletree has agreed to
guarantee certain portions of either corporate or franchisee loans up to 80% of
cost. The total guaranty cannot exceed $30 million. As of December 31, 1998, the
amounts loaned to us and our franchisees which are guaranteed by Doubletree were
$8.4 million and $3.6 million, respectively. Most franchisees will require debt
financing for a portion of the cost of the construction of their hotels, and
there can be no assurance that financing or guarantees (by Doubletree or
otherwise) will be available on terms satisfactory to the franchisee, or at all.
As of December 31, 1998, we had financed the construction of $306.7
million Candlewood-owned and franchised hotels with GMAC. As part of its
financial relationship with us, GMAC has provided construction loans of up to
70% of the cost of new Candlewood hotels. These loans are not guaranteed by
Doubletree and are subject to various conditions. Following stabilization, we
and our franchisees are expected to be able to convert these construction loans
into long-term financing through GMAC.
To help finance the continued development of Candlewood-owned hotels, we
have completed two private placements whereby we issued 65,000 shares of our
Series A Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock"), at a price of $1,000 per share, raising net proceeds $61.5 million, and
42,000 shares of our Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") at a price of $1,000 per share, raising net proceeds
of $39.4 million. We also issued the holders of our Series B Preferred Stock, at
no additional cost, warrants to purchase an aggregate of 336,000 shares of
Common Stock at $12.00 per share. The private placement of the Series A
Preferred Stock was completed in two closings on September 23, 1997 ($25.0
million) and October 3, 1997 ($40.0 million). The private placement of the
Series B Preferred Stock and accompanying warrants was also completed in two
separate closings on July 13, 1998 ($39.4 million) and August 3, 1998 ($2.6
million). The purchasers of the Series A and Series B Preferred Stock (the
"Purchasers") consisted of a group of institutional investors and accredited
investors. The Purchasers are entitled to a preferential dividend equal to 7.5%,
payable quarterly. The Certificate of Designation provides for the conversion of
the Series A and Series B Preferred Stock into Common Stock upon the election of
the holders, at a price of $9.50 per share of Common Stock, subject to certain
anti-dilution adjustments.
Funding of loans for each newly constructed hotel will be subject to the
approval of the lender on an individual hotel basis, upon satisfaction of
various conditions. There can be no assurance that any financing applications
submitted by us will be approved on a timely basis, or at all, that we will be
able to utilize the Doubletree guarantee, or that we will be able to finance
greater than 70% of the cost of any Candlewood hotel. If the applications are
not approved or if loans are not funded on a timely basis, we may be unable to
construct additional Candlewood hotels, may experience delays in our planned
development of hotels, and expect that we will be required to seek additional
financing. In addition, our
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ability to meet our debt service obligations will depend upon the future
performance of our operations, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond our control. We
have no current arrangements with respect to, or sources of, additional debt
financing, including regional and local banking institutions. Additionally, no
assurance can be given that financing will be available to us when needed or
upon terms acceptable to us. In addition, we cannot make any assurances that we
will be able to find joint-venture partners on terms acceptable to us, or that
finding such partners will positively impact the company and our results of
operations. If such capital or financing is unavailable, we may not be able to
develop further hotels.
SALES OF HOTELS
In order to provide further funds for our development activities, we
entered into two separate sale-leaseback arrangements with Hospitality
Properties Trust, a Maryland real estate investment trust ("HPT") on November
19, 1997 and May 27, 1998, respectively. Pursuant to the November 1997
sale-leaseback arrangement, we sold 17 hotels to HPT for an aggregate purchase
price of $118.5 million. Pursuant to the May 1998 sale-leaseback arrangement, we
agreed to sell an additional 17 Candlewood hotels to HPT for an aggregate
purchase price of $142.4 million. As of December 31, 1998, we had completed the
sale of 31 hotels to HPT, 26 of which were sold in 1998. The cumulative sales
price for the 26 hotels sold in 1998 is approximately $198.4 million. We
completed the sale of all 34 hotels to HPT in January 1999.
For each of the hotels sold to HPT, the hotel is leased back to one of
our wholly-owned subsidiaries pursuant to the terms of two operating leases.
Pursuant to the lease for the hotels subject to the November 1997 sale-leaseback
arrangement, the initial term of the lease expires on December 31, 2011 and the
annual base rent equals approximately $10.0 million as of December 31, 1998.
Pursuant to the lease for the hotels subject to the May 1998 sale-leaseback
arrangement, the initial term of the lease expires on December 31, 2011 and the
annual base rent equals approximately $13.4 million as of December 31, 1998. In
addition, under each lease, percentage rent is equal to 10% of the increases in
gross hotel sales over the amount generated in each hotel's second year of
operation. We will continue to explore sale-leaseback arrangements in respect of
groups or individual hotels with real estate investment trusts, such as HPT, or
other regional or local institutions. We believe that these and future
sale-leaseback arrangements will enable us to leverage our financial resources
and accelerate the roll-out of hotels.
HISTORY OF CANDLEWOOD
Our current business of developing, owning, operating, franchising and
managing business hotels originated in November 1995 with the formation of
Candlewood Hotel Company, L.L.C., a Delaware limited liability company
("Candlewood LLC"). Our company was founded by Doubletree together with Jack
DeBoer, our Chairman and Chief Executive Officer, and Warren Fix, a director and
the Executive Vice President and Chief Financial Officer of Candlewood.
Candlewood was incorporated in the State of Delaware in August 1996 to succeed
to the business of Candlewood LLC. In November 1996, we completed an initial
public offering of our common stock. In October 1997 and August 1998, we
completed private placements of our Series A Preferred Stock and Series B
Preferred Stock, respectively.
THE LODGING INDUSTRY
The lodging industry revenues and profits have improved in each year
since 1991, according to industry sources that the Company believes to be
reliable. The industry is estimated to have generated its sixth consecutive year
of profits in 1998 at a record of approximately $18.9 billion, up 11.2% from
profits of approximately $17.0 billion in 1997. Estimated profits for the
industry ( in billions ) were $0.0, $2.4, $5.5, $8.5, and $ 12.5 in 1992, 1993,
1994, 1995, and 1996 respectively. The industry has also achieved increases in
revenue per available room ("RevPAR") every year since 1991. According to Smith
Travel Research, RevPAR for the industry as a whole grew 3.2%, 5.6%, 6.5%, 6.0%,
7.7%, 5.1%
10
<PAGE> 11
and 3.7% in 1992, 1993, 1994, 1995, 1996, 1997 and 1998, respectively, over each
of the previous periods.
The Extended-Stay Segment
The Company believes that the extended stay market is one of the most
rapidly growing segments of the U.S. lodging industry. Of the 3.4 million rooms
available in the lodging industry in 1996, extended stay hotel chains had only
approximately 55,000 rooms. For 1997, there were approximately 3.6 million rooms
available in the lodging industry of which approximately 86,000 rooms were at
extended stay hotels chains. For 1998, there were approximately 3.7 million
rooms available in the lodging industry of which approximately 128,000 rooms
were at extended stay hotels chains. Of the 31,000 and 42,000 rooms added at
extended stay hotel chains in 1997 and 1998, approximately 2,568 and 4,553 were
attributable to the Company.
The Company believes that the longer length of stay has allowed
occupancy rates for extended stay hotels to exceed occupancy rates in the
overall U.S. lodging industry. As shown below, average occupancy rates for
extended stay hotel chains have exceeded the average occupancy rates in the
overall U.S. lodging industry for each of the previous six years.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Extended Stay 80.5% 82.6% 81.2% 78.9% 75.2% 72.1%
Hotel Chains (1)
All U.S. Lodging 63.5 64.8 65.1 65.1 64.5 63.9
Industry (2)
</TABLE>
- --------------
(1) Occupancy rates were provided by Smith Travel Research. Includes
Residence Inn by Marriot, Homewood Suites, TownePlace, Homegate,
Mainstay, Homestead Village(R), Villager Lodge(R), StudioPLUS,
Lexington Hotel Suites(R), EXTENDED STAYAMERICA Efficiency Studios,
Suburban Lodge, Candlewood, and Sierra Suites.
(2) Occupancy rates were provided by Smith Travel Research.
The Company believes the decline in occupancy rates for extended stay
hotel chains since 1995 is in part the result of an increase in the proportion
of newly-opened hotels, which generally experience lower occupancy rates during
their pre-stabilization period. According to data provided by Smith Travel
Research, available room nights for extended stay hotels increased by 2.9
million in 1996, 7.5 million in 1997 and 13.9 million in 1998, or 21.7%, 45.3%
and 58.1%, respectively, to a total of 37.8 million. Occupied room nights for
extended stay hotels increased by 2.0 million in 1996, 5.0 million in 1997 and
9.3 million in 1998, or 18.3%, 38.5% and 51.7%, respectively, to a total of 27.3
million, indicating that a significant amount of the new construction has been
absorbed.
Industry sources, including public disclosures and analyst reports,
estimate that approximately 45,000 extended stay rooms will open in 1999. The
breakdown of room starts by price segment is as follows: upper price of 15,000,
mid-price of 12,000, and economy price of 18,000. The overall extended stay room
openings and mid-price extended stay room openings represent 1.2% and 0.3%,
respectively of the total hotel rooms available of 3.8 million. The Company's
hotel room openings are reported to represent 12.2% of the 12,000 mid-price
extended stay room starts.
The lodging industry and the extended-stay segment in which the Company
operates may be adversely affected by changes in national or local economic
conditions and other local market conditions, such as an oversupply of hotel
rooms or a reduction in demand for hotel space in a
11
<PAGE> 12
geographic area, changes in travel patterns, extreme weather conditions, changes
in governmental regulations which influence or determine wages, prices or
construction costs, changes in interest rates, the availability of financing for
operating or capital needs or changes in real estate tax rates and other
operating expenses. In addition, due in part to the strong correlation between
the lodging industry's performance and economic conditions, the lodging industry
is subject to cyclical changes in revenues and profits. Downturns or prolonged
adverse conditions in the real estate or capital markets or in national or local
economies, the inability of the Company or its franchisees to secure financing
for the development of Candlewood hotels or an oversupply of hotel rooms coupled
with a reduction in demand could have a material adverse impact on the Company's
business and results of operations.
COMPETITION
The lodging industry is highly competitive. Competitive factors within
the industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. We intend to build most of our
properties in geographic locations where other extended-stay hotels may be
located. We expect to compete for guests and development sites with both
traditional lodging facilities and other extended-stay facilities, including
those owned and operated by competing chains and individual extended-stay
facilities. Many of these competitors have greater financial resources and may
have better relationships with prospective franchisees, representatives of the
construction industry and others in the lodging industry. The number of
competitive lodging facilities in a particular area could have a material
adverse effect on occupancy, average daily rate and revenues of Candlewood
hotels.
Competition for franchise agreements in the lodging industry is intense.
We expect to compete with national and regional brand franchisors, most of which
have greater name recognition and financial resources and a more established
market presence than Candlewood. We believe that competition for franchise
agreements is based principally upon: the perceived value and validity of the
brand; the nature and quality of services provided to franchisees; the
franchisees' view of the relationship of building cost and operating expenses to
the potential for revenues and profitability during operation and upon sale; and
the franchisees' ability to finance construction and operation of the hotel. No
assurance can be given that we will be successful in establishing brand
awareness or the other factors on which franchisors compete, retaining its
current franchisee, or competing for or obtaining additional franchisees. Our
failure to maintain and attract franchisees could have a material adverse effect
on our business and results of operations.
We anticipate that competition within the extended-stay lodging market
will increase substantially in the foreseeable future. A number of other lodging
chains and developers have developed or are attempting to develop extended-stay
lodging facilities that may compete with our facilities. In particular, some of
these entities target the mid-priced segment of the extended-stay market in
which we compete. We may compete for guests and for development sites with
certain of these established entities that have greater financial resources than
us and better relationships with lenders and real estate sellers. Furthermore,
there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services or
amenities or significantly expand or improve facilities in markets in which we
compete, thereby materially adversely affecting our business and results of
operations.
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, we and our franchisees are subject to laws governing
our relationships with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. We are also subject to federal
regulations and certain state laws that govern the offer and sale of franchises.
Many state franchise laws impose substantive requirements on franchise
agreements, including limitations on noncompetition provisions
12
<PAGE> 13
and termination or nonrenewal of a franchise. Some states require that certain
materials be approved before franchises can be offered or sold in that state.
The failure to obtain permits or licenses or approvals to sell franchises, or an
increase in the minimum wage rate, employee benefit costs or other costs
associated with employees, could adversely affect our business and results of
operations. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.
Under the Americans With Disabilities Act ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although we have attempted to satisfy ADA
requirements in the designs for our facilities, no assurance can be given that a
material ADA claim will not be asserted against us, which could result in a
judicial order requiring compliance, and the expenditure of substantial sums to
achieve compliance, an imposition of fines, or an award of damages to private
litigants. These and other initiatives could adversely affect us as well as the
lodging industry in general.
ENVIRONMENTAL MATTERS
Our operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations.
In addition, in the event any future legislation is adopted, we may, from time
to time, be required to make significant capital and operating expenditures in
response to such legislation. We attempt to minimize our exposure to potential
environmental liability through our site selection procedures. Accordingly, we
typically enter into contracts to purchase real estate subject to certain
contingencies. In addition, prior to purchasing a property, we conduct a Phase I
environmental assessment (which generally includes a physical inspection and
database search, but not soil or groundwater analyses).
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership or operation of
hotels, we may be potentially liable for any such costs. Although we are
currently not aware of any material environmental claims pending or threatened
against us or any of our managed or franchised hotels, no assurance can be given
that a material environmental claim will not be asserted against us or against
us and our managed or franchised hotels. The cost of defending against claims of
liability or of remediating a contaminated property could have a material
adverse effect on our results of operations.
PROPRIETARY RIGHTS
"Candlewood" is a registered service mark on the principal register of
the United States Patent and Trademark Office. The Certificate of Registration
was issued to us on December 24, 1996. Candlewood is also a registered service
mark with the State of Kansas and a trademark application for proposed use for
Candlewood has been made in Canada and was filed in November 1996. A notice of
allowance was issued to us by the Canadian Intellectual Property Office on
November 6, 1997. We have until June 25, 1999 to file a declaration of use on
this mark. "Your Studio Hotel" is a registered service mark on the supplemental
register of the United States Patent and Trademark Office. The Certificate of
Registration was issued to us on November 11, 1997. Registration on the
supplemental register does not provide the protection afforded by registration
on the principal register but lays a basis for establishing a claim to such
rights in the future. Our Candle Flame/Twin Circle logo is a registered service
mark on the
13
<PAGE> 14
principal register of the United States Patent and Trademark Office. The
Certificate of Registration for the logo was issued on April 7, 1998.
"Delivering Exceptional Value" is a registered service mark on the principal
register of the United States Patent and Trademark Office. The Certificate of
Registration was issued to us on June 16, 1998.
We have filed service mark applications with the United States Patent
and Trademark Office for "Candlewood Suites" and "Candlewood Cupboards." Both of
these applications have a filing date of May 14, 1998 and their status is
pending. On August 11, 1998, we also filed a service mark applications with the
United States Patent and Trademark Office for "Where Value Stays". The status of
this application is pending.
We also claim common law rights to the trade name and service marks for
various Candlewood products and services. To date, we have not filed trademark
or service mark applications for any other mark.
INSURANCE
We currently have the types and amounts of insurance coverage that we
consider appropriate for a company of our size in our business. While we believe
that our insurance coverage is adequate, if we were held liable for amounts
exceeding the limits of our insurance coverage or for claims outside of the
scope of our insurance coverage, our business, results of operations, and
financial condition could be materially and adversely affected. Specifically,
there are certain types of hotel-related losses, generally of a catastrophic
nature, such as earthquakes and floods, that may be uninsurable or not
economically insurable. We use our discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to obtaining
appropriate insurance on Candlewood hotels at a reasonable cost and on suitable
terms. This may result in insurance coverage that in the event of a loss would
be insufficient to pay the full current market value or current replacement cost
of our lost investment. Inflation, changes in building codes and ordinances,
environmental considerations and other factors also might make it unfeasible to
use insurance proceeds to replace a hotel after it has been damaged or
destroyed. Under these circumstances, the insurance proceeds received by us
might not be adequate to restore our economic position with respect to such
hotel. In addition, property and casualty insurance rates may increase depending
on claims experience, insurance market conditions and the replacement value of
our hotels. Mr. DeBoer is affiliated with an insurance provider we utilize. See
"Certain Transactions" in our Proxy Statement for our 1999 Annual Meeting of
Stockholders.
EMPLOYEES
As of December 31, 1998, we and our subsidiaries employed on a full or
part-time basis 821 persons, 693 of whom were employed at our hotels, and 128 of
whom were employed at our corporate headquarters. Our employees are not subject
to any collective bargaining agreements, and our management believes that its
relationship with our employees is good.
PROPERTIES
As of December 31, 1998, we operated the following 53 hotels in 23
different states with a total of 6,071 rooms:
<TABLE>
<CAPTION>
NUMBER
LOCATION OPENING DATE OF ROOMS
- -------- --------------- -------------
<S> <C> <C>
Wichita, Kansas May, 1996 107
Omaha, Nebraska January, 1997 130
Denver - Tech Center, Colorado February, 1997 131
Cincinnati - Blue Ash, Ohio May, 1997 77
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
NUMBER
LOCATION OPENING DATE OF ROOMS
- -------- --------------- -------------
<S> <C> <C>
Louisville, Kentucky May, 1997 77
Norfolk - Hampton, Virginia September, 1997 98
Birmingham, Alabama October, 1997 98
Kansas City - Overland Park, Kansas October, 1997 122
Charlotte, North Carolina November, 1997 81
Irvine East, California November, 1997 122
Jacksonville, Florida November, 1997 111
Philadelphia - Willow Grove, Pennsylvania November, 1997 110
Phoenix, Arizona November, 1997 98
Salt Lake - Airport, Utah November, 1997 122
Salt Lake - Ft. Union, Utah November, 1997 98
Wichita - Airport, Kansas November, 1997 81
Detroit - Southfield, Michigan December, 1997 121
Houston - Clear Lake, Texas December, 1997 122
Houston - Loop Central, Texas December, 1997 122
Huntsville, Alabama December, 1997 123
Knoxville, Tennessee December, 1997 98
Phoenix - Tempe, Arizona March, 1998 122
Dallas - Ft. Worth - Fossil Creek, Texas March, 1998 98
Raleigh - Cary, North Carolina April, 1998 81
Houston - Town & Country, Texas April, 1998 122
Detroit - Warren, Michigan April, 1998 122
Pittsburgh - Airport, Pennsylvania April, 1998 123
Des Moines, Iowa May, 1998 98
Detroit - Auburn Hills, Michigan May, 1998 110
Chicago - Libertyville, Illinois June, 1998 122
Irving - Las Colinas, Texas June, 1998 117
Detroit - Troy, Michigan June, 1998 118
Austin - Northwest, Texas June, 1998 125
Charlotte - North, North Carolina July, 1998 122
Dallas - Arlington, Texas August, 1998 125
Anaheim - South, California August, 1998 133
Irvine - Spectrum, California September, 1998 122
Albuquerque, New Mexico September, 1998 123
Dallas - Plano, Texas October, 1998 122
Houston - Westchase, Texas October, 1998 123
Nashville - Brentwood, Tennessee October, 1998 122
Somerset, New Jersey October, 1998 110
Dallas - Galleria, Texas October, 1998 134
Orlando, Florida November, 1998 122
Minneapolis, Minnesota November, 1998 134
Denver - Lakewood, Colorado November, 1998 122
Boston - Braintree, Massachusetts November, 1998 133
Detroit - Ann Arbor, Michigan November, 1998 122
Chicago - Waukegan, Illinois December, 1998 122
Austin - South, Texas December, 1998 122
Baltimore - Airport, Maryland December, 1998 125
Greensboro, North Carolina December, 1998 122
Clearwater - St. Petersburg, Florida December, 1998 104
</TABLE>
15
<PAGE> 16
In addition to the properties described above, we also maintain our
corporate headquarters in Wichita, Kansas, at 8621 East 21st Street North, Suite
200. We moved our corporate headquarters to this location in March 1999, and
lease this office space from Vantage Point Properties, Inc. The lease term is
five years with four five-year renewal options. The initial monthly lease
payment is approximately $43,000. We do not anticipate any difficulty in
securing additional office space, as needed, on terms acceptable to us.
CERTAIN BUSINESS CONSIDERATIONS
This Annual Report on Form 10-K contains forward-looking statements
which involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and elsewhere in this Annual Report on Form 10-K.
We have a Limited Operating History. We opened our first hotel in May
1996 and, as a result, we have a limited operating history upon which to
evaluate our performance and our claims about the proposed construction,
operation, features, rates and demand for Candlewood hotels, among other things.
At December 31, 1998, we operated 53 hotels. We have incurred losses to date and
cannot give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels is subject to numerous risks,
including:
- the inability to operate the hotels at expected expense levels;
- the inability to maintain high occupancy rates or to attract guests
for extended stays;
- liability for accidents and other events occurring at hotel
properties; and
- the inability to achieve expected nightly rates.
If we are unable to efficiently and effectively operate our hotels, our business
and results of operations would be materially and adversely affected.
Our Continued Capital Needs and Our Acquisition of Additional Financing
Could Materially Adversely Affect our Business and Results of Operations. The
development of hotels is capital intensive. We have submitted financing
applications with various lenders to finance up to 70% of the cost of individual
Candlewood-developed hotels. We have and expect to continue to seek financing of
up to 80% of the cost of certain Candlewood-developed hotels utilizing
Doubletree's guarantee to facilitate such financing. The use of the Doubletree
guarantee reduces our profit opportunity, if any, with respect to certain
Candlewood-developed hotels. The Doubletree guarantee is currently limited to
$30 million of total funds guaranteed. Funding of the loans for each hotel will
be subject to approval of the third party lender on an individual hotel basis,
upon satisfaction of various conditions. We cannot provide assurance that the
third-party lenders will approve on a timely basis, or at all, any financing
applications we submit, that we will be able to utilize the Doubletree
guarantee, or that we will be able to finance greater than 70% of the cost of
any Candlewood-developed hotel. If our applications are not approved or our
loans are not funded on a timely basis, we may be unable to construct additional
Candlewood hotels and may experience delays in our planned development of
hotels. We have no current arrangements with respect to, or sources of,
additional debt financing. Additionally, we cannot assure that additional
financing will be available when needed or upon terms acceptable to us. If we
are unable to arrange for additional capital or financing, we may not be able to
develop further hotels.
We May be Unable to Service our Debt Obligations. Our ability to make
payments on, to repay or to refinance our indebtedness and to make our scheduled
preferred stock dividends will depend upon our ability to generate capital in
the future. We cannot make any assurances that our business will generate
sufficient cash flow from operations to fund our debt obligations as they become
due. In addition, we may need to refinance all or a portion of our indebtedness
on or before the maturity date.
16
<PAGE> 17
We cannot provide any assurances that we will be able to refinance any of our
indebtedness on commercially reasonable terms, or at all. Our ability to make
payments on, to repay or to refinance our indebtedness and to make our scheduled
preferred stock dividends also is, to a certain extent, subject to general
economic, competitive, legislative, regulatory and other factors beyond our
control. Our inability to make payments on, to repay, or to refinance our debt
obligations or preferred stock could have a material adverse effect on our
business and results of operations.
Our Growth is Dependent on Developing Hotels. We intend to grow
primarily by developing and franchising additional Candlewood hotels. Our
development of hotels involves substantial risks, including:
- financing not being available to us on favorable terms;
- our actual costs exceeding budgeted or contracted amounts;
- delays in completion of construction;
- incurring substantial costs if we abandon a development project prior
to completion;
- our failure to obtain all necessary zoning and construction permits;
- our developed properties not achieving desired revenue or
profitability levels once opened;
- competition for suitable development sites from our competitors, some
of whom have greater financial resources than us;
- changes in governmental rules, regulations and interpretations; and
- changes in general economic and business conditions.
There can be no assurance that we will acquire properties, or develop or
construct hotels on time and within budget, or at all.
We Need to Manage our Rapid Growth. Our development plans will require
us to implement specialized operational and financial systems and will require
additional management, operational and financial resources. For example, we will
be required to recruit and train property managers and other personnel for each
new hotel as well as additional personnel at our headquarters. We cannot assure
that we will be able to achieve our planned rate of expansion or manage our
expanding operations efficiently or effectively. If we are unable to manage our
growth efficiently and effectively, our business and results of operations could
be materially and adversely affected.
We Depend on a Single Type of Lodging Facility and a Single Brand. We
intend to exclusively develop, manage and franchise Candlewood hotels. We
currently do not intend to develop any lodging facilities other than hotels
focused on business travelers in the mid-priced segment of the market and do not
intend to develop lodging facilities with other franchisors. Accordingly, we
will be subject to risks inherent in concentrating investments in a single type
of lodging facility and a single franchise brand, such as a shift in demand or a
reduction in business following adverse publicity related to the brand, which
could have a material adverse effect on our business and results of operations.
In addition, we have a limited history upon which we can gauge consumer
acceptance of our hotels and, accordingly, we cannot provide assurances that our
hotels will be readily accepted by guests who are looking for conventional or
extended-stay hotel accommodations. Furthermore, we compete against other
facilities with substantially greater brand recognition.
We are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate investments
is significantly dependent upon our ability to maintain or increase cash
provided by operating our investments. The value of our hotels and the income
from our hotels may be materially adversely affected by:
17
<PAGE> 18
- changes in national economic conditions;
- changes in general or local economic conditions and neighborhood
characteristics;
- competition from other lodging facilities;
- changes in real property tax rates;
- changes in the availability, cost and terms of financing;
- the impact of present or future environmental laws;
- the ongoing need for capital improvements;
- changes in operating expenses;
- changes in governmental rules and policies;
- natural disasters; and
- other factors which are beyond our control.
In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to dispose
of an investment when we find disposition advantageous or necessary, or that the
sale price of any disposition will recoup or exceed the amount of our
investment.
Our Hotels May Experience Seasonal Fluctuations. Based upon our
experience operating extended-stay hotels, we expect that occupancy and revenues
may be lower than normal during the months of November, December and January due
to the holiday season. Because many of our expenses do not fluctuate with
occupancy, declines in occupancy may cause fluctuations or decreases in our
quarterly earnings.
We Depend on Key Personnel. Our success depends to a significant extent
upon the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief Financial
Officer. The loss of the services of either of these individuals could have a
material adverse effect upon our business and results of operations.
18
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
We are and from time to time have been party to commercial litigation
relating to our business. We believe that none of these matters is material and
intend to defend ourselves vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Candlewood's initial public offering of common stock was made on
November 5, 1996. The common stock is listed on the Nasdaq National Market under
the symbol "CNDL". The following table sets forth the high and low sales prices
per share, as reported by the Nasdaq National market during the periods
indicated:
1998 High Low
---- ---- ---
Fourth Quarter $6 1/4 $3 3/4
Third Quarter 8 1/4 4 1/4
Second Quarter 8 1/4 7 1/8
First Quarter 9 7 7/8
1997 High Low
---- ---- ---
Fourth Quarter $10 7/8 $7 5/8
Third Quarter 11 1/2 7 3/8
Second Quarter 10 1/4 7 7/8
First Quarter 13 3/4 8
The closing sales price of our common stock on March 17, 1999 was $4.
The approximate number of beneficial stockholders on March 17, 1999 was 1,202.
The approximate number of stockholders of record on March 17, 1999 was 148.
We have not paid dividends on our Common Stock. The Series A and Series
B Preferred Stock accumulate dividends at a rate of 7.5% of the stated value of
the shares ($1,000 per share), and are in preference to any dividend on our
Common Stock. We currently do not anticipate paying any cash dividends on our
Common Stock in the foreseeable future. Any future payment of dividends on the
Common Stock will be at the discretion of the Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors. We
anticipate that future financing, including any lines of credit, may restrict or
prohibit our ability to pay dividends. 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.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected consolidated financial data set forth below has been
derived from our audited consolidated financial statements and the notes
thereto. The selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements.
<TABLE>
<CAPTION>
Period from
October 1,
1995
Year Ended Year Ended Year Ended (Inception) to
December 31, December 31, December 31, December 31,
1998 1997 1996 1995(1)
------------ ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Hotel operations revenues $47,278 $6,223 $ 686 $ -
Other income 672 221 - -
Hotel operating expenses 28,266 4,713 400 -
Rent expense on leased hotels 12,365 79 - -
Corporate operating expenses 3,906 2,372 1,637 204
Abandoned site costs 3,799 157 - -
Depreciation and amortization 3,565 1,022 249 5
Interest income 1,166 1,216 328 -
Interest expense (214) (134) (81) -
Net loss (6,287) (817) (1,353) (209)
Net loss per share (pro forma 1996 and (1.40) (0.23) (0.23) (0.04)
1995) (2)
Weighted average shares outstanding (pro
forma 1996 and 1995) (2) 9,025,000 9,025,000 5,764,071 5,175,000
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31,
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 23,155 $ 35,355 $33,792 $ 123
Total assets 293,358 181,807 51,674 1,283
Accounts payable and other accrued 40,277 16,040 2,435 92
expenses
Long term debt 114,742 63,416 15,457 -
Minority interest - - - 8
Members' equity - - - 1,183
Stockholders' equity 19,382 32,589 33,406 -
</TABLE>
(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, our statements of operations have
been presented as if our operations began on October 1, 1995.
(2) Pro forma net loss per share is based on (i) the 5,175,000 shares of our
Common Stock issued in conjunction with the conversion from a limited
liability company to a corporation in November 1996, (ii) the 3,850,000
shares of our Common Stock issued in conjunction with our initial public
offering and (iii) the amount of pro forma net loss we would have
recorded had we operated as a C Corporation for all periods presented.
See Note 2i. of Notes to Consolidated Financial Statements.
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 table sets forth our hotel development for
the past three years:
<TABLE>
<CAPTION>
Number of Hotels
December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Open Hotels
-----------
Company - Operated 53 21 1
Franchised 9 3 -
------------- ------------- -------------
Total 62 24 1
Under Construction
------------------
Company - Owned 12 22 7
Franchised 2 6 1
------------- ------------- -------------
Total 14 28 8
Under Contract
--------------
Company - Owned 14 34 19
</TABLE>
The following is a summary of hotel openings by quarter for 1998:
<TABLE>
<CAPTION>
1998
----------------------------------------
First Second Third Fourth
As of Quarter Quarter Quarter Quarter As of
12/31/97 3/31 6/30 9/30 12/31 12/31/98
-------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Company - Operated 21 2 10 5 15 53
</TABLE>
At the end of 1998, we had a total of 53 company-operated hotels and
nine franchised hotels located in 26 different states. We expect to complete the
construction of the 12 facilities under construction at December 31, 1998 at
various times during 1999. 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 which would otherwise be capitalized.
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. A total of 26
hotels were sold and leased back
22
<PAGE> 23
during 1998 for a cumulative sales price of approximately $198.4 million. In
1997, we sold and leased back five hotels. The remaining three hotels were sold
and leased back in January 1999. The results from operations for both years,
1998 and 1997, 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. See Note 11 to Consolidated Financial
Statements.
The following table sets forth our operating property portfolio as of
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
December 31 December 31
---------------- ---------------
1998 1997 Increase 1998 1997 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Company Owned 22 16 6 2,549 1,691 858
Leased 31 5 26 3,522 558 2,964
---- ---- -------- ----- ----- --------
Total 53 21 32 6,071 2,249 3,822
Franchised 9 3 6 1,050 319 731
---- ---- -------- ----- ----- --------
Total System 62 24 38 7,121 2,568 4,553
</TABLE>
Our results of operations were negatively impacted by our early adoption
of Statement of Position (SOP 98-5) during the fourth quarter of 1998. SOP 98-5
requires opening and organization costs to be expensed as incurred. Our opening
costs capitalized, net of accumulated amortization, at December 31, 1998,
totaled $3.9 million.
Our results are dependent upon our revenue per available room (RevPAR)
which is a factor of occupancy and room rate. Accordingly, we intend to remain
focused on ,occupancy levels at each of our hotels until such time 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' occupancy levels have stabilized, we intend
to review the nightly pricing rates of our hotels. We believe that this practice
is a prevailing standard in the lodging industry.
On August 3, 1998, we completed the private placement of $42.0 million
of our Series B Preferred Stock and warrants to purchase our Common Stock. The
net proceeds to us were approximately $39.4 million, after deducting commissions
and expenses of $2.6 million.
23
<PAGE> 24
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Hotel Operations
Hotel Operations Revenue
The following is a summary of 1998 and 1997 hotel operations revenues
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Number Fiscal 1998 Fiscal 1997 Percentage
Opened of Hotels Revenues Revenues Increase Change
----------- --------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
1998 32 $15,043 - $15,043 N/A
1997 20 30,564 $4,651 25,913 557.1%
1996 1 1,671 1,572 99 6.3%
----- -- ------- ------ ------- -----
Total 53 47,278 6,223 41,055 659.7%
</TABLE>
Hotel operations revenue, which includes room revenue and other revenue
(e.g. guest telephone, vending, pay per view movie rental), totaled $47.3
million for 1998, compared to $6.2 million for 1997. The increase in revenue
reflects the increase in the number of hotels in operation during 1998 and the
full year impact of the hotels opened in 1997. The following table sets forth
our operating statistics for 1998 and 1997:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 Change
--------------- --------------- ------------
<S> <C> <C> <C>
Occupancy 65.7% 52.1% 13.6%
Average Daily Rate $53.14 $51.31 $1.83
Revenue per available room $34.93 26.74 $8.19
</TABLE>
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 65.7% for 1998, compared to 52.1% for 1997. The increase in
occupancy was largely due to the increased number of hotels that had completed
or were near completion of their ramp-up phase at December 31, 1998.
The average daily room rate in 1998 was $53.14, compared to $51.31 for
1997. Average daily room rates are determined by dividing room revenue by the
number of rooms occupied on a daily basis for the applicable period. The
increase in average daily rate was largely due to our entry into higher priced
markets. We believe that the average daily room rates vary due primarily to (i)
stays of less than one week, which are charged at a higher nightly rate, (ii)
higher rates for our one-bedroom suites, and (iii) higher rates in certain hotel
locations. Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $34.93 for 1998, compared to $26.74
for 1997. Future occupancy and room rates may be impacted by a number of
factors, including the number and geographic location of new hotels, as well as
the season in which such hotels open, competition, market acceptance of our
hotels and general economic conditions. We cannot predict whether current
occupancy and room rates can be maintained.
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 demand
24
<PAGE> 25
characteristics of individual markets and is most evident in the occupancy of
the hotel. The following table compares the 1998 and 1997 performance of the 21
hotels open at December 31, 1997:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 Change
---- ---- ------
<S> <C> <C> <C>
Occupancy 70.3% 52.1% 18.2%
Average Daily Rate $53.54 $51.31 $2.23
Revenue per Available Room $37.62 $26.74 $10.88
</TABLE>
Hotel Operating Expenses
Hotel operating expenses for 1998 totaled $28.3 million, compared to
$4.7 million for 1997. 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 1998. In
addition, the variable nature of many of the expenses factors into the overall
increase in hotel operating expenses. For example, labor, utilities, and
cleaning supply costs increase as occupancy at the hotels increases.
Rent Expense on Leased Hotels
We incurred rent expense in 1998 of $12.4 million for the 31 hotels
leased as of December 31, 1998. We recorded $79,000 of rent expense in 1997 for
the five hotels leased as of December 31, 1997. The increase in rent expense
reflects the sale and leaseback of 26 additional hotels in 1998, as well as the
full-year lease costs of the hotels sold in 1997.
Hotel Depreciation and Amortization
Hotel depreciation and amortization expense (e.g. building, furniture,
fixtures, equipment and capitalized opening costs) for 1998, totaled $3.4
million, compared to $879,000 for 1997. The increase was a direct result of the
increase in the number of company-owned hotels open and operating during 1998.
An additional factor in the growth in hotel depreciation was the age of the
hotels in the portfolio at December 31, 1998. Many of our hotels opened in the
fourth quarter of 1997 and as a result, only a partial year's depreciation was
recorded in 1997. As for 1998, depreciation and amortization expense does not
reflect any expense for the properties sold in the sale-leaseback transactions.
In accordance with generally accepted accounting principles, we do 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.
Corporate Operations
Other Income
Other income for 1998, totaled $672,000, compared to $221,000 for 1997.
Other income consists primarily of franchise fees and royalty fees from
franchise hotels, management fees received from a managed hotel (Cambridge
Suites, located in Wichita, Kansas) and equity income from a joint venture hotel
in Rockford, Illinois. At December 31, 1998, we had nine franchised hotels in
operation, compared to three hotels at December 31, 1997. The growth in other
income in 1998, compared to 1997 reflects an increase in royalty, franchise fee
and management fee income, partially offset by our equity in the net loss of the
Rockford, Illinois joint venture hotel.
25
<PAGE> 26
In addition, we sold 26 additional hotels as part of the sale-leaseback
transaction during 1998. The total sales price for these hotels was $198.4
million. A deferred gain of $13.5 million was recorded on the sales. In 1998, we
recognized $569,000 of the gain on hotels sold in 1997 and 1998. There was no
gain recognized during 1997.
Corporate Operating Expenses
Corporate operating expenses for 1998 totaled $3.9 million, compared to
$2.4 million for 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 our increase in hotels in operation, under
construction and properties on which we performed due diligence.
Abandoned Site Costs
We recorded $3.8 million of abandoned site costs in 1998, compared to
$157,000 in 1997. Abandoned site costs represent costs related to certain
development sites under purchase options that we have decided not to develop.
Many of these sites were under purchase option contracts.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for
1998 totaled $162,000, compared to $143,000 for 1997 and related to the
furniture, equipment and intangible assets at the corporate office. The increase
in depreciation and amortization reflects the increase in furniture, fixtures
and equipment required as the corporate office support staff expanded to meet
our 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) is computed using the straight-line method over
the life of the corresponding asset.
Interest Income and Expense
We earned $1.2 million of interest income in 1998. This income resulted
primarily from short-term investment of excess funds received in the Series A
and B Preferred Stock private placements. For 1997, we earned $1.2 million of
interest income related to the temporary investment of excess funds that stemmed
from the initial public offering of our Common Stock, the Series A Preferred
Stock offering, and the sale-leaseback transaction.
We had interest expense, net of capitalized interest, of $214,000 for
1998, compared to $134,000 for 1997. The increase in interest expense was the
result of our slowdown in development activity in the fourth quarter of 1998. We
began construction of fewer projects in the fourth quarter thereby limiting the
amount of interest that could be capitalized.
26
<PAGE> 27
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Hotel Operations
Hotel Operations Revenues
The following is a summary of 1997 hotel operations revenues:
<TABLE>
<CAPTION>
Fiscal Year Number Fiscal 1997 Fiscal 1996 Percentage
Opened of Hotels Revenues Revenues Increase Change
----------- --------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
1997 20 $4,651 - $4,651 N/A
1996 1 1,572 $686 886 129.1%
------------ -- ------ ---- ------ ------
Total 21 6,223 686 5,537 907.1%
</TABLE>
As of December 31, 1997, we owned and operated 21 Candlewood hotels. As
of December 31, 1996, we owned and operated one Candlewood hotel in Wichita,
Kansas, which opened on May 5, 1996. Total 1997 revenue from hotel operations,
which includes room revenue and other revenue, was $6.2 million, compared to
$686,000 for 1996. The increase in revenue reflected the increase in the number
of hotels in operation during 1997 and the full year impact of the hotel opened
in 1996. The following table sets forth our operating statistics for 1997 and
1996:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1997 1996 Change
-------------- ----------- -------
<S> <C> <C> <C>
Occupancy 52.1% 56.0% (3.9%)
Average Daily Rate $51.31 $47.71 $3.60
Revenue per Available Room $26.74 $26.77 $(0.03)
</TABLE>
Our overall 1997 average occupancy was negatively impacted by the lower
occupancy typically experienced for newly opened facilities. A total of 20
properties opened in 1997, compared to one property that opened in 1996. Of the
20 properties that opened in 1997, 15 opened in the fourth quarter.
Hotel Operating Expenses
Hotel operating expenses consist of all expenses directly applicable to
the operation of the hotels. Hotel operating expenses totaled $4.7 million in
1997, compared to $400,000 in 1996. The increase was the result of the increased
number of hotels open and operating at December 31, 1997.
Rent Expense on Leased Hotels
We incurred rent expense in 1997 of $79,000 for the five hotels leased
as of December 31, 1997. There was no sale leaseback activity in 1996.
Hotel Depreciation and Amortization
In 1997, depreciation and amortization expense attributable to hotel
operations totaled $879,000, compared to $180,000 for 1996. The increase
reflected the full year operation of the Wichita, Kansas hotel and the partial
periods of operation in 1997 for the 20 properties opened during 1997.
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<PAGE> 28
Corporate Operations
Other Income
Other income consists primarily of franchise fees and royalty fees from
franchise hotels, management fees, and equity income from joint ventures. Other
income for the year ending December 31, 1997 was $221,000, compared to $0 for
1996. At December 31, 1997, we had three franchised hotels in operation. There
were no franchised hotels open at December 31, 1996.
Additionally, we sold five hotels as part of the sale-leaseback
transaction during 1997. The total sales price for these hotels was $35.9
million. A deferred gain of $6.8 million was recorded on the sale. There was no
sale leaseback activity in 1996.
Corporate Operating Expenses
Corporate operating expenses include all expenses not directly related
to the development or operations of specific hotels. In 1997, these expenses
totaled $2.4 million, compared to $1.6 million in 1996. 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 1997, compared to 1996
reflects the impact of additional personnel and related expenses associated with
our increased activity in 1997.
Abandoned Site Costs
Abandoned site costs represent costs related to certain development
sites under purchase options that we no longer will develop. We recorded
$157,000 of abandoned site costs in 1997. There were no abandoned site costs in
1996.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
year ended December 31, 1997 totaled $143,000, compared to $69,000 in 1996. The
increase in depreciation and amortization reflected the increased needs of the
corporate office staff as it expanded to accommodate our growth.
Interest Income and Expense
We earned $1.2 million of interest income in 1997, compared to $328,000
in 1996. This income resulted primarily from short-term investment of excess
funds, including proceeds from our initial public offering of Common Stock, our
offering of Series A Preferred Stock, and the sale-leaseback transaction.
We had interest expense, net of capitalized interest, of $134,000 in
1997, compared to $81,000 in 1996. The increase in interest expense reflects the
increased level of activity in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $23.2 million at December 31, 1998
and $35.4 million at December 31, 1997. Net cash provided by operating
activities totaled $29.4 million in 1998, compared to $49.7 million of net cash
used in operating activities in 1997. For 1998, we recorded a net loss of $6.3
million, which includes a $3.9 million write-off of opening costs related to
abandoned sites. One of the primary uses of cash in 1998 was related to the
$15.3 million of deposits relating to the sale-leaseback of certain of the
Company's hotels. Sources of cash in 1998 included a reduction of $23.9 million
in the amount of hotels held for sale, a $12.5 million increase in accounts
payable and accrued expenses, and $3.6 million of non-cash depreciation and
amortization expense. The primary use of cash in 1997 related
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<PAGE> 29
to the $44.7 million of hotels held for sale at the end of the year pursuant to
the sale-leaseback transaction.
Net cash used in investing activities for the year ended December 31,
1998 totaled $125.0 million, compared to $58.8 million in 1997. 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. In 1998,
we expended approximately $111.3 million on construction, compared to $54.1
million in 1997.
In 1998, net cash provided by financing activities was $83.4 million,
compared to $110.1 million in 1997. For 1998, the cash provided by financing
activities included the $39.4 million in proceeds from the Series B Preferred
Stock issuance and proceeds from mortgages and notes payable. In 1997, the cash
provided by financing activities was related to proceeds from mortgages and
notes payable and the closing of the Series A Preferred Stock placement.
At December 31, 1998, we had 12 hotels under construction with a total
estimated cost of approximately $105.7 million. Our total equity requirement for
these properties is $32.4 million, all of which had been funded as of December
31, 1998. At December 31, 1998, we had secured financing on nine hotels in the
amount of $54.2 million and were processing loans with a third-party lender with
respect to the three remaining properties which, if approved, would provide an
estimated $21.0 million of additional financing. As of March 1, 1999, one of the
loans in the amount of $4.6 million had been secured.
In addition to hotels under construction, we had 14 properties under
contract at December 31, 1998, with an estimated total project cost of $161.3
million. As of December 31, 1998, we had incurred costs of approximately $15.4
million on these projects. These costs include deposits and fees for surveys,
legal services, environmental studies, and architectural drawings.
We believe that a combination of our cash and cash equivalents, cash
from operations, borrowed funds from third-party lenders (if approved on an
individual basis) and construction loan guarantees from Doubletree will be
sufficient to provide capital for development of projects currently under
construction and operations through 1999. Substantial capital resources in
addition to those discussed above will be necessary for 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 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.
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,
29
<PAGE> 30
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 an independent
agency.
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 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 two 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 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. We have
begun this testing on personal computers in our corporate office and
will expand our tests to the field systems, including the property
management system, during the second quarter of 1999. As of December 31,
1998, this process was 25% complete. We anticipate completion by
September 30, 1999. We anticipate that this will allow sufficient time
to remedy any problems that we identify.
D. Implementation - The final phase of our plan is scheduled to be complete
by September 30, 1999. 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.
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<PAGE> 31
We have contingency plans for certain critical applications and are
working on such plans for others. These contingency plans involve, among other
actions, data back-up and retrieval, manual workarounds and adjustments to
staffing strategies.
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,
elevators, phone service providers, 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
In April 1998, the American Institute of Certified Public Accountants
issued a Statement of Position (SOP 98-5), Reporting on the Costs of Start-up
Activities. The SOP requires that entities expense costs of start-up activities
as they are incurred. Except for certain entities, this SOP is effective for
financial statements for fiscal years beginning after December 15, 1998, with
earlier application encouraged. The initial application of the SOP is to be
reported as a cumulative effect of a change in accounting principle. Opening
costs capitalized, net of accumulated amortization, at December 31, 1998,
totaled $3.9 million. We elected to early adopt the SOP in the fourth quarter of
1998, at which time a cumulative effect of the change in accounting principle of
$3.9 million was recorded.
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
would change by approximately $11,500. 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 December 31,
1998, would change by approximately $1,800.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document 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, adverse changes in national or
local economic conditions, competition from other lodging properties, changes in
real property tax rates, changes in the availability, cost and terms of
financing, the impact of present or future environmental legislation, 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
31
<PAGE> 32
result in uninsured losses), acts of war, and adverse changes in zoning laws.
Certain of these factors are discussed in more detail elsewhere in this Annual
Report on Form 10-K, including without limitation under the captions "Certain
Business Considerations," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business and Properties."
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this report on
Form 10-K (see page F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information
appearing under the caption "Proposal 1 Election of Directors" and under the
caption "Executive Officers of the Company" of the Candlewood's definitive Proxy
Statement for its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 12, 1999.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information
appearing under the caption "Executive Compensation" of the Candlewood's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 12, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information
appearing under the caption "Voting Securities and Principal Holders Thereof" of
the Candlewood's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information
appearing under the caption "Certain Transactions" of the Candlewood's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 12, 1999.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Independent
Auditors' Reports are filed as part of this Report (see page F-1).
2. Financial Statement Schedules. See page F-1.
3. Exhibits.
The list of exhibits contained in the Index to Exhibits is filed as part
of this Report (see page E-1).
(b) Reports on Form 8-K
None.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 26, 1999 CANDLEWOOD HOTEL COMPANY, INC.
By: /s/ Jack P. DeBoer
-------------------------------
Jack P. DeBoer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date Signed
--------- ----- -----------
<S> <C> <C>
/s/ Jack P. DeBoer Chief Executive Officer March 26, 1999
- -------------------------------------- and Director (Principal
Jack P. DeBoer Executive Officer)
/s/ Warren D. Fix Executive Vice President, March 23, 1999
- -------------------------------------- Chief Financial Officer,
Warren D. Fix Secretary and Director
(Principal Financial and
Accounting Officer)
/s/ James E. Roos President and Chief March 25, 1999
- -------------------------------------- Operating Officer
James E. Roos
/s/ Gary E. Costley Director March 22, 1999
- --------------------------------------
Gary E. Costley
/s/ Robert J. Cresci Director March 26, 1999
- --------------------------------------
Robert J. Cresci
/s/ Richard J. Ferris Director March 26, 1999
- --------------------------------------
Richard J. Ferris
/s/ Robert S. Morris Director March 26, 1999
- --------------------------------------
Robert S. Morris
/s/ William L. Perocchi Director March 25, 1999
- --------------------------------------
William L. Perocchi
/s/ Frank J. Pados Director March 26, 1999
- --------------------------------------
Frank J. Pados
/s/ Tony M. Salazar Director March 23, 1999
- --------------------------------------
Tony M. Salazar
/s/ Thomas H. Nielsen Director March 26, 1999
- --------------------------------------
Thomas H. Nielsen
</TABLE>
36
<PAGE> 37
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors (Ernst & Young LLP)..................................... F-2
Report of Independent Auditors (KPMG LLP).............................................. F-3
Consolidated Balance Sheets at December 31, 1998 and 1997.............................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997
and 1996....................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998,
1997 and 1996.................................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996.................................................................. F-7
Notes to Consolidated Financial Statements............................................. F-8
Schedule III - Real Estate and Accumulated Depreciation................................ S-1
</TABLE>
* Certain schedules have been omitted as they are not applicable to the
Company or the information is contained in the consolidated financial
statements or notes thereto.
F-1
<PAGE> 38
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
To the Board of Directors of Candlewood Hotel Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Candlewood Hotel
Company, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. We have also audited the related financial statement
schedule listed in the accompanying index for the year ended December 31, 1998.
These financial statements and schedule are the responsibility of the management
of Candlewood Hotel Company, Inc. and Subsidiaries. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Candlewood Hotel Company, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects the information set forth
therein.
As described in Note 2 to the consolidated financial statements, the Company
adopted Statement of Position 98-5, "Reporting on the Costs of Start-up
activities", which required the expensing of unamortized organization and
opening costs in 1998.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
February 13, 1999
F-2
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors
Candlewood Hotel Company, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Candlewood Hotel Company, Inc. and
subsidiaries for the year ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Candlewood Hotel Company, Inc. and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Wichita, Kansas
February 21, 1997
F-3
<PAGE> 40
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, state value, and share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31, 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 150,401 $ 75,589
Hotels under construction 67,447 46,320
Other costs 16,591 7,973
--------- ---------
234,439 129,882
Accumulated depreciation and amortization (1,907) (1,109)
--------- ---------
Net investment in hotels 232,532 128,773
Cash and cash equivalents (including $521 and $1,510 of
restricted cash, respectively) 23,155 35,355
Deposits 23,847 8,594
Accounts and other receivables 3,566 3,266
Other assets 10,258 5,819
--------- ---------
Total assets $ 293,358 $ 181,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 114,742 $ 63,416
Accounts payable and other accrued expenses 40,277 16,040
Deferred gain on sale of hotels 16,771 6,807
Other liabilities 1,449 1,494
--------- ---------
Total liabilities 173,239 87,757
Redeemable, convertible, cumulative preferred stock ("Series
A"), $1,000 stated value, 65,000 shares authorized and
outstanding, net of offering costs 61,339 61,461
Redeemable, convertible, cumulative preferred stock ("Series
B"), $1,000 stated value, 42,000 shares authorized and
outstanding, net of offering costs 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 (15,978) (2,771)
--------- ---------
Total stockholders' equity 19,382 32,589
--------- ---------
Total liabilities and stockholders' equity $ 293,358 $ 181,807
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996 (In
thousands, except share and per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Hotel operations $ 47,278 $ 6,223 $ 686
Other income 672 221 -
----------- ----------- -----------
Total hotel operating revenues 47,950 6,444 686
Proceeds from sales of hotels, net of deferred
gain of $10,533 and $6,807, respectively 184,841 29,134 -
Deferred gain recognition on sales of hotels 569 -- -
----------- ----------- -----------
Total Revenues 233,360 35,578 686
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 28,266 4,713 400
Corporate operating expenses 3,906 2,372 1,637
Rent expense on leased hotels 12,365 79 -
Abandoned Site Costs 3,799 157 -
Depreciation and amortization 3,565 1,022 249
----------- ----------- -----------
Total operating costs and expenses 51,901 8,343 2,286
Cost of hotels sold 184,841 29,134 -
----------- ----------- -----------
(3,382) (1,899) (1,600)
Interest income 1,166 1,216 328
Interest expense (214) (134) (81)
----------- ----------- -----------
Loss before preferred dividends and
cumulative effect of a change in
accounting principle (2,430) (817) (1,353)
Preferred stock dividends (6,338) (1,248) -
Loss available to common stockholders before
cumulative effect of a change in
accounting principle (8,768) (2,065) (1,353)
Cumulative effect of a change in accounting
principle, less applicable
income taxes of $0 (3,857) - -
----------- ----------- -----------
Net loss available to common stockholders $ (12,625) $ (2,065) $ (1,353)
=========== =========== ===========
Per share amounts (proforma for 1996) - basic
and diluted
Income before cumulative effect of a
change in accounting principle $ (.97) $ (0.23) $ (0.23)
Cumulative effect of change in accounting
principle (.43) - -
=========== =========== ===========
Net loss $ (1.40) $ (0.23) $ (0.23)
=========== =========== ===========
Weighted average shares outstanding - basic
and diluted 9,025,000 9,025,000 5,764,071
=========== =========== ===========
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 42
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Total Additional Total
Member's Common Paid-in Accumulated Stockholders'
Equity Stock Capital Deficit Equity
-------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,183 $ - $ - $ - $ 1,183
Members' capital contributions 10,981 - - - 10,981
Distribution to Member (11,973) - - (392) (12,365)
Issuance of common stock, net
of offering costs - 39 34,921 - 34,960
Exchange of members'
interests for common stock (191) 51 349 (209) -
Net Loss - - - (1,353) (1,353)
-------- ------ -------- -------- --------
Balance at December 31, 1996 - 90 35,270 (1,954) 33,406
Net Loss - - - (817) (817)
-------- ------ -------- -------- --------
Balance at December 31, 1997 - 90 35,270 (2,771) 32,589
Preferred stock dividends paid - - - (6,920) (6,920)
Net Loss - - - (6,287) (6,287)
-------- ------ -------- -------- --------
Balance at December 31, 1998 $ -- $ 90 $ 35,270 $(15,978) $ 19,382
======== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 43
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before cumulative effect of change in $ (2,430) $ (817) $ (1,353)
accounting principle
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3,565 1,022 249
Deferred gain recognition on sales of hotels (569) - -
Abandoned site costs 3,799 157 -
Change in:
Hotels completed and under construction - held 23,877 (44,653) -
for sale
Deposits (15,253) (8,594) -
Accounts receivable (1,309) (1,346) (140)
Opening costs (2,543) (1,797) (235)
Other assets (2,956) (1,140) (301)
Accounts payable and other accrued expenses 12,457 224 993
Deferred gain on sale of hotels 10,533 6,807 -
Other liabilities 227 422 376
--------- --------- ---------
Net cash provided by (used in) operating
activities 29,398 (49,715) (411)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
Construction (111,324) (54,127) (13,552)
Payments for site acquisition costs (13,731) (4,701) (1,391)
Purchase of intangible assets 47 (10) (3)
--------- --------- ---------
Net cash used in investing activities (125,008) (58,838) (14,946)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of preferred stock 39,276 61,461 -
Proceeds from mortgage and notes payable 147,101 63,286 15,458
Payments on mortgages and notes payable (95,775) (15,327) -
Net proceeds from issuance of common stock - - 34,960
Distribution to member - - (12,365)
Members' capital contributions - - 10,981
Minority interest - - (8)
Preferred stock dividends (6,920) - -
Other liabilities (272) 696 -
--------- --------- ---------
Net cash provided by financing activities 83,410 110,116 49,026
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (12,200) 1,563 33,669
Cash and cash equivalents at beginning of year 35,355 33,792 123
--------- --------- ---------
Cash and cash equivalents at end of year $ 23,155 $ 35,355 $ 33,792
========= ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 7,147 $ 3,335 $ 31
========= ========= =========
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE> 44
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. DESCRIPTION OF BUSINESS
Candlewood Hotel Company, Inc. (the "Company") develops, constructs, owns,
operates, manages and franchises a nationwide hotel chain under the name
Candlewood Suites. The hotels are designed to serve extended-stay, value
oriented guests with high quality, fully equipped studio units. The first
hotel commenced operations on May 5, 1996, and as of December 31, 1998, the
Company had a portfolio of 62 properties ("Hotels"). Of these properties,
the Company managed 53 Hotels and nine were franchised and operated by third
parties. Of the Company managed Hotels, 22 were wholly-owned and 31 were
leased from a third party. The Company also had a total of 12 Company-owned
Hotels under construction at year-end.
B. ORGANIZATION
Candlewood Hotel Company, Inc. was incorporated in August 1996 to succeed to
the business of Candlewood Hotel Company, LLC, a Delaware limited liability
company ("Candlewood LLC"), in anticipation of an initial public offering of
3,850,000 shares of the Company's Common Stock, $.01 par value per share.
Candlewood LLC was formed in November 1995 to develop, own, operate and
franchise Candlewood extended-stay Hotels designed particularly for the
business traveler. Candlewood LLC began construction of its first Candlewood
hotel in Wichita, Kansas in the fourth quarter of 1995, and construction was
completed and the hotel opened for operations in May 1996.
On November 8, 1996, the Company completed an initial public offering of
3,850,000 shares of Common Stock at an initial public offering price of
$10.00 per share (the "Offering"). The net proceeds to the Company from the
Offering, after deducting the underwriting discounts and commissions and
expenses of the Offering, were approximately $35.0 million. These proceeds
were used to fund the national expansion of the Company through the
development of Company-owned and operated Candlewood Hotels.
Prior to the Offering, the membership interests in Candlewood LLC were owned
50% by Doubletree Corporation ("Doubletree"), 42.5% by JPD Corporation and
certain trusts (the "DeBoer Trusts") and 7.5% by the Warren D. Fix Family
Partnership, L.P. (the "Fix Partnership"). JPD Corporation is a Kansas
corporation owned by Mr. Jack P. DeBoer, the Company's Chairman and Chief
Executive Officer. Warren D. Fix, the Company's Executive Vice President and
Chief Financial Officer, is the general partner and majority owner of the
Fix Partnership.
Immediately prior to the Offering, Doubletree and the Fix Partnership
contributed to the Company all of their outstanding membership interests in
Candlewood LLC and certain minority interests which they held in the
subsidiary LLCs, which owned the initially contributed properties
("Subsidiary LLCs"). At the same time, Mr. DeBoer and the DeBoer Trusts
contributed to the Company 100% of the stock of JPD Corporation, the assets
of which were substantially comprised of its membership interest in
Candlewood LLC and the Subsidiary LLCs. In consideration of such transfer,
Doubletree and the Fix Partnership were each issued shares of the Company's
Common Stock in proportion to their ownership interests in Candlewood LLC
immediately prior to such transfer. In addition, Mr. DeBoer and the DeBoer
Trusts, collectively, were issued shares of the Company's common stock in
proportion to JPD Corporation's ownership interest in Candlewood
F-8
<PAGE> 45
LLC immediately prior to such transfer. As a result, the ownership of the
Common Stock of the Company by Doubletree, the Fix Partnership and the
shareholders of JPD Corporation, totaling 5,175,000 shares, was in the same
proportion as their ownership of membership interests in Candlewood LLC
immediately prior to the reorganization of the Company.
In addition, prior to the Offering, approximately $12.4 million previously
contributed to Candlewood LLC by Doubletree, including a preferred return
amounting to approximately $392,000 on its capital contributions was
distributed by Candlewood LLC to Doubletree. Doubletree concurrently
extended to the Company a $15.0 million subordinated credit facility, of
which the amount of the distribution to Doubletree was funded in connection
with the reorganization of the Company. The terms of the distribution to
Doubletree as well as the terms of the subsequent loan by Doubletree to the
Company were determined by the members of Candlewood LLC in the course of
arms-length negotiations.
In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of 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. The
Preferred Stock accumulates dividends at a rate of 7.5% of the Stated Value,
per annum. Series A Preferred Stockholders 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 Series A Preferred Stock will
be redeemed under a mandatory redemption clause, at the Stated Value plus
unpaid dividends.
In August of 1998, the Company completed the private placement of $42.0
million of its 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"). Preferred
stockholders were also issued, at no additional cost, warrants to purchase
336,000 shares of Common Stock at $12.00 per share. These warrants expire on
July 13, 2005. The net proceeds to the Company were approximately $39.4
million after deducting commissions and expenses. The Preferred Stock
accumulates dividends at a rate of 7.5% of the Stated Value, per annum.
Series B Preferred Stockholders have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.50
per share. Subsequent to September 30, 1999, the Series B Preferred Stock
will be redeemable in cash, in whole or part, at the option of the Company
at 200% of the Stated Value. At September 30, 2004, the Series B Preferred
Stock will be redeemed under a mandatory redemption clause, at the Stated
Value plus unpaid dividends.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The accompanying consolidated financial 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 organization, and various
wholly-owned LLCs which own certain Hotels. All significant intercompany
balances and transactions have been eliminated in consolidation.
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
F-9
<PAGE> 46
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. During December 1998, the Company determined that, due to
changes in the availability of capital to the Company, certain sites would
not be developed. As a result, the Company expensed approximately $3.8
million in site costs during the fourth quarter related to the abandoned
sites.
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. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of the
Company's financial instruments, which include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, approximate fair
values due to the short maturities of such instruments. The fair value of
the Company's long-term debt, which approximates carrying value, is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities.
F. INTANGIBLE ASSETS
Pursuant to the terms of the Limited Liability Company Agreement of
Candlewood LLC, JPD Corporation contributed the ownership rights, title and
interest in the Candlewood Hotel name and logo and certain other intangibles
to the Company in 1996 at the agreed-upon value of $200,000. Such amount is
included in intangible assets and is being amortized using the straight-line
method over a period of twenty years. Intangible assets also include costs
for patents and trademarks. These assets are being amortized using the
straight-line method over a period of twenty years and are included in other
assets.
F-10
<PAGE> 47
G. 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.
H. 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.
I. PRO FORMA PER SHARE INFORMATION
Pro forma net loss per share information for 1996 is presented as if (i) the
Company had operated as a taxable entity (C Corporation) for the entire year
ended December 31, 1996 and (ii) the reorganization as described in Note 1
had been effective as of January 1, 1996.
J. CHANGE IN ACCOUNTING METHOD FOR OPENING AND ORGANIZATION 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. Organization costs relate to the formation of
the Company and Subsidiaries.
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 opening and organization costs to be expensed
as incurred. The remaining unamortized opening and organization costs of
$3.9 million were expensed in the accompanying 1998 Statement of Operations.
Such expenses have been reported as a cumulative effect of a change in
accounting principle. The cumulative effect of the change is a one-time
charge to net income in 1998.
K. 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.
F-11
<PAGE> 48
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>
Year ended December 31, 1998
------------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues from external customers $47,950 $184,841 $232,791
Interest expense 214 - 214
Depreciation expense 3,403 - 3,403
Segment profit 3,916 569 4,485
Hotels assets:
Hotels completed and under
construction 197,072 20,776 217,848
Accounts receivable 1,195 2,213 3,408
</TABLE>
The difference between segment profit and net income is corporate expenses
not specific to the Company's reportable segments.
For the year ended December 31, 1997, net revenues from the sale of hotels
were $29.1 million and hotel assets held for sale were $44.7 million. The
remainder of the Company's revenues, expenses and assets were from the
operation of hotels and corporate overhead activities.
L. 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.
M. 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.
F-12
<PAGE> 49
3. INVESTMENT IN HOTELS COMPLETED AND UNDER CONSTRUCTION
Investment in Hotels consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Hotels completed:
Land $ 26,407 $ 15,753
Buildings and improvements 104,595 43,431
Furniture, fixtures and equipment 19,399 16,405
--------- ---------
150,401 75,589
Hotels under construction 67,447 46,320
Other costs 16,591 7,973
--------- ---------
234,439 129,882
Less accumulated depreciation (1,907) (1,109)
--------- ---------
$ 232,532 $ 128,773
========= =========
</TABLE>
Approximately $20.8 million and $44.7 million of the balance in Hotels completed
and Hotels under construction at December 31, 1998 and 1997, respectively, were
held for sale as part of the transactions described in Note 11. Hotels completed
and Hotels under construction also include capitalized interest costs. The
Company incurred interest costs of approximately $8.0 million and $3.3 million
of which $7.8 million and $3.1 million in 1998 and 1997, respectively, were
capitalized. Depreciation expense for completed Hotels for the years ended
December 31, 1998 and 1997, was approximately $3.5 million and $991,000,
respectively.
Other costs included approximately $15.9 million and $5.9 million of acquisition
costs at December 31, 1998 and 1997, respectively. Acquisition costs relating to
abandoned site costs of approximately $3.8 million and $157,000 were charged to
operations in 1998 and 1997, respectively. No such costs were expensed in 1996.
At December 31, 1997, other costs also included approximately $2.0 million of
opening costs.
At December 31, 1998 and 1997, respectively, furniture, fixtures and equipment
included approximately $807,000 of hotel phone systems under capital leases
expiring in October 2000. The assets are amortized over their useful lives and
amortization is recorded in depreciation expense. Amortization of assets under
capital leases included in depreciation expense during 1998 and 1997,
respectively, was approximately $21,000 and $2,000. The related obligations
under the capital leases are recorded in other liabilities. As of December, 31,
1998 and 1997, respectively, approximately $424,000 and $696,000 of obligations
remained. The imputed interest rate on the capitalized lease is 9.29% and is
based on the Company's incremental borrowing rate at the inception of the lease.
F-13
<PAGE> 50
The minimum future lease payments under capital leases as of December 31, 1998
for each of the next two years are:
- -------------------------------------------------------------------------------
(In thousands)
Year Ending December 31,
1999 $ 304
2000 152
-----
Total minimum lease payments $ 456
Less amount representing interest (32)
-----
Present value of net minimum lease payments $ 424
=====
- -------------------------------------------------------------------------------
4. MORTGAGES AND NOTES PAYABLE
A summary of mortgages and notes payable is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(In thousands) December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Mortgage notes:
Mortgage notes payable to a bank, secured by individual Hotels, interest
payable monthly at LIBOR plus 2.75%, principal payments commencing twelve
months following Hotel opening with a maturity date of $ 3,948 $ 9,604
February 1, 2000
Mortgage notes payable to a financial institution secured by individual
Hotels, interest payable monthly at rates ranging from LIBOR plus 3.40% to
4.25%, principal payments commencing eighteen months from related loan
closing with maturity dates ranging from
March 1, 2001 to January 1, 2003 95,794 38,812
Notes payable:
Subordinate credit facility due to stockholder, interest 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 15,000 15,000
-------- --------
$114,742 $ 63,416
======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
LIBOR rates, depending on the maturity dates of the individual notes, ranged
from 5.08% to 5.55% at December 31, 1998, to 5.72% to 5.84% at December 31,
1997.
Certain of the Company's debt is guaranteed by Doubletree at no cost to the
Company. As of December 31, 1998 and 1997, approximately $8.4 million and $37.1
million, respectively, of the Company's debt was guaranteed by Doubletree.
F-14
<PAGE> 51
Scheduled principal payments required on mortgage and other notes payable
subsequent to December 31, 1998, are as follows:
- -------------------------------------------------------------------------------
(In thousands)
Year Ending December 31,
------------------------
1999 $ 12,010
2000 36,079
2001 48,337
2002 18,210
2003 106
Thereafter -
--------
Total $114,742
========
5. 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
December 31, 1998, as more fully described below, the Company had 65,000 and
42,000 shares, respectively, of Series A and Series B redeemable preferred stock
issued and outstanding.
Series A Preferred Stock Offering
In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of "Series A" Redeemable, Convertible, Cumulative Preferred Stock
at an offering price of $1,000 per share ("Stated Value"). The net proceeds to
the Company were approximately $61.3 million, after deducting commissions and
expenses of $3.7 million.
The Preferred Stock accumulates dividends at a rate of 7.5% of the Stated Value,
per annum, payable in cash initially on August 31, 1998 and thereafter,
quarterly, including up to the date of conversion, when and if declared by the
board of directors.
Series A Preferred Stockholders have the right to convert, at any time at their
option into shares of Common Stock at the conversion price of $9.50 per share.
Subsequent to August 31, 1999, the Preferred Stock will be redeemable in cash,
in whole or part, at the option of the Company at 200% of the Stated Value. At
August 31, 2004, the Preferred Stock will be redeemed under a mandatory
redemption clause, at the Stated Value plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
F-15
<PAGE> 52
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 and
warrants to purchase its common stock. In total, 42,000 shares of Series B
Preferred Stock were issued at an offering price of $1,000 per share ("Stated
Value"). Preferred stockholders were also issued, at no additional cost,
warrants to purchase 336,000 shares of common stock at $12.00 per share. These
warrants expire on July 13, 2005. The net proceeds to the Company were
approximately $39.4 million, after deducting commissions and expenses of $2.6
million.
The Series B Preferred Stock accumulates dividends at a rate of 7.5% of the
Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Series B Preferred Stockholders have the right to convert, at any time at their
option into shares of Common Stock at the conversion price of $9.50 per share.
Subsequent to September 30, 1999, the Series B Preferred Stock will be
redeemable in cash, in whole or part, at the option of the Company at 200% of
the Stated Value. At September 30, 2004, the Series B Preferred Stock will be
redeemed under a mandatory redemption clause, at the Stated Value plus unpaid
dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
6. STOCKHOLDERS' EQUITY
On November 8, 1996, the Company completed its initial public offering of
3,850,000 shares of common stock. The stock was offered to the public at an
initial offering price of $10.00 per share. The proceeds to the Company were
approximately $35.0 million, net of offering costs of $2.7 million.
Immediately prior to the offering, Doubletree, JPD Corporation and the Fix
Partnership received 5,175,000 shares in exchange for their outstanding
membership interests in Candlewood LLC and certain minority interests in
subsidiary LLC's (Note 1). Total shares outstanding at December 31, 1998 and
1997 were 9,025,000.
7. STOCK OPTIONS
The Company has one stock option plan, the 1996 Equity Participation Plan (the
"Plan"), in which options may be granted to key personnel to purchase shares of
the Company's common stock at a price not less than the current market price at
the date of the grant. The options vest annually and ratably over the four-year
period from the date of grant and expire ten years after the grant date. The
Plan allows for 1,676,710 options to be granted. The Plan also provides for the
issuance of stock appreciation rights, restrictive stock or other awards, none
of which have been granted.
F-16
<PAGE> 53
A summary of the Company's stock option activity and related exercise price
information for the years ended December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted
Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Options outstanding, January 1, 1996 - -
Granted 355,200 $10.00
Exercised - -
Canceled (1,000) 10.00
--------
Options outstanding, December 31, 1996 354,200 10.00
Granted 296,250 8.74
Exercised - -
Canceled (44,650) 9.96
--------
Options outstanding, December 31, 1997 605,800 9.39
========
Granted 397,800 7.36
Exercised - -
Canceled (103,700) 8.11
--------
Options outstanding, December 31, 1998 899,900 8.73
========
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 899,900 options were outstanding at prices ranging from
$4.00 to $11.375. There were 222,700 and 200,608 shares exercisable by employees
as of December 31, 1998 and 1997, respectively. There were no shares exercisable
at December 31, 1996.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The effects of
applying FAS 123 for providing pro forma disclosures are not likely to be
representative of net income (loss) in future years. If the Company had elected
to recognize compensation cost based on the fair value of the options granted at
the grant date as prescribed by FAS No. 123, net loss and net loss per share
would have been increased to the unaudited pro forma amounts indicated in the
table below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net loss, as reported (in thousands) $(6,287) $ (817) $(1,353)
Net loss, pro forma (in thousands) (6,619) (1,119) (1,390)
Net loss per share, as reported (1.40) (0.23) (0.23)
Net loss per share, pro forma (1.44) (0.26) (0.24)
- ---------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 54
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 44.50% 44.50% 12.41%
Risk-free interest rate 5.21% 6.09% 6.02%
Expected life of options 5 years 5 years 5 years
- ---------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of the options granted during 1998, 1997 and
1996 is $3.06, $4.06 and $2.74 per share, respectively. The weighted average
exercise price and weighted averaged contractual life, by exercise price range
is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Weighted Avg
Weighted Avg Remaining
Exercise Contractual
Exercise Price # of Options Price Life
- ------------------------------------------ ------------- ------------ ------------
<S> <C> <C> <C>
$4.00 to $6.00 87,500 $4.37 10 years
$6.00 to $9.00 340,500 8.07 9 years
$9.00 to $11.375 471,900 9.99 8 years
</TABLE>
The weighted average exercise price of the options exercisable as of December
31, 1998 and 1997 were $9.71 and $10.00, respectively.
8. EMPLOYEE BENEFITS PLAN
Effective June 1, 1996, the Company established the Candlewood Hotel Company
401(k) Profit Sharing Plan (the "Plan") for its employees. Generally, all
full-time employees over the age of 21 who have completed ninety days of
service, as amended, are eligible to participate in the Plan. Employees are
permitted to contribute up to 15% of their individual compensation, subject to
certain limitations established by the Internal Revenue Service for plans of
this type. The Company may, but is not obligated to, make contributions on
behalf of each participant at the rate up to 25% of all participants'
contributions, not to exceed 6% of the employee's compensation. For the years
ended December 31, 1998 and 1997 respectively, the Company matched contributions
in the amount of approximately $94,000 and $22,000. There were no matching
contributions provided by the Company for the year ended December 31, 1996.
9. RELATED PARTY TRANSACTIONS
The Company obtains property and casualty insurance, workers' compensation
coverage, and builder's risk insurance through an insurance agency ("Agency") in
which the Company's chairman owns a minority interest. Prior to March 15, 1999,
the Company also rented office space and equipment under a month to month
operating lease from a corporation in which the Company's chairman owns a
minority interest. In addition, certain corporate travel is purchased from a
corporation owned by the Company's chairman. A summary of the dollar amounts of
these transactions and the related payable at year-end is as follows:
F-18
<PAGE> 55
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands)
Year Ended December 31, 1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Total insurance premiums for third party insurance $1,134 $167 $23
Approximate amount of commissions earned by Agency 147 22 3
----------- ------------ ------------
Total payments to Agency 1,281 189 26
Office and equipment rent 118 117 114
Corporate air travel 396 41 -
Amounts payable at December 31: 17 37 13
- -----------------------------------------------------------------------------------------------
</TABLE>
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's approximated deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Taxable gain on sale / lease-back transaction
in excess of book income $1,207 $ 475 $ -
Deferred franchise fee revenue 132 153 150
Excess book expenses over tax 1,234 128 26
------ ------ ------
Total gross deferred tax assets 2,573 756 176
Valuation allowance 1,309 386 81
------ ------ ------
Total deferred tax assets 1,264 370 95
------ ------ ------
DEFERRED TAX LIABILITIES:
Excess tax depreciation over book 1,197 106 20
Financial basis in excess of tax basis of
Intangible assets 67 75 75
------ ------ ------
Total deferred tax liabilities 1,264 181 95
====== ====== ======
Net deferred tax asset $ - $ 189 $ -
====== ====== ======
- -------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had not recorded either a deferred tax
asset or liability. The Company had $310,000 in prepaid taxes that it expects to
have refunded in 1999. For disclosure purposes, the taxes payable reflected in
the above schedule resulted from items that are currently taxable for federal
and state income tax purposes but were not included in book net income. Timing
differences that resulted in a deferred tax asset but did not result in current
taxes payable were offset by a valuation allowance due to the uncertainty of the
ultimate realization of the asset.
Net operating losses are available to offset future earnings in the amounts of
approximately $4.3 million for 1998, $421,000 for 1997 and $51,000 for 1996,
which expire in 2013, 2012 and 2011, respectively.
11. SALE / LEASEBACK
F-19
<PAGE> 56
In November, 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell 15 hotels for a total purchase price of $100.0
million, and to lease the hotels back from the buyer under a noncancelable
operating lease. The Company completed the sale and leaseback of five hotels in
December 1997, nine hotels in the first quarter of 1998, and one hotel in the
second quarter of 1998. In December 1998, the Company agreed to sell two
additional hotels to HPT under the terms of the 1997 transaction. These hotels
were sold in January 1999.
In May 1998, the Company announced 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 four hotels in the second
quarter of 1998, six hotels in the third quarter of 1998, and six hotels in the
fourth quarter of 1998. As of December 31, 1998, 16 of the 17 hotels had been
sold. 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 December 31, 1998, the Company had completed the sale of 31 hotels, 26 of
which were sold in 1998. The cumulative sales price for the 26 hotels sold
during 1998 was $198.4 million with a total deferred gain on the sale of the
hotels of $10.5 million. In total, the Company has sold $234.3 million of hotels
with a total deferred gain of $17.3 million. Such gain has been deferred and
will be recognized in income as noted in the Company's accounting policies (Note
2). The Company recognized approximately $569,000 of deferred gain into income
in 1998. Sale proceeds, net of the deferred gain and related cost of the Hotels
sold are presented on the statement of operations
12. COMMITMENTS
The Company leases corporate office space and related equipment under two
separate month-to-month lease agreements. In addition, the Company leases
certain equipment under noncancelable operating leases that expire at various
dates through October 2002. The total monthly payment on these leases is
approximately $28,000.
The Company leases 31 Hotels under noncancelable operating leases expiring in
December 2011. The leases call for monthly lease payments of approximately $2.0
million plus additional rent of 10% of defined excess revenues over stipulated
base year amounts, if any.
Payments for all operating leases for the years ended December 31, 1998, 1997
and 1996, were approximately $13,900,000, $283,000, and $94,000, respectively.
Future minimum lease payments
F-20
<PAGE> 57
under noncancelable operating leases having remaining terms in excess of one
year at December 31, 1998, are as follows:
- -------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
1999 $23,500
2000 23,500
2001 23,500
2002 23,500
2003 23,400
Thereafter 187,500
---------
Total future minimum lease payments $304,900
========
</TABLE>
13. LITIGATION AND LEGAL MATTERS
From time to time, the Company is involved in various legal proceedings arising
in the ordinary course of business. All such proceedings taken together are not
expected to have a material adverse impact on the Company.
F-21
<PAGE> 58
14. EPS-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(In thousands, except for share and per share data): 1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Loss available to common stockholders before
preferred dividends and cumulative effect of a
change in accounting principle $ (2,430) $ (817) $ (1,353)
Convertible preferred stock dividends (6,338) (1,248) -
----------- ----------- -----------
Loss available to common stockholders before
cumulative effect of a change in accounting (8,768) (2,065) (1,353)
principle
Cumulative effect of a change in accounting
principle, net of tax (3,857) - -
----------- ----------- -----------
Net loss available to common stockholders
(Numerator for basic earnings per share) (12,625) (2,065) (1,353)
Dilutive securities - Preferred stock dividends - - -
----------- ----------- -----------
Income available to common stockholders after
assumed conversion of Preferred
Stock - (Numerator for diluted earnings per share) $ (12,625) $ (2,065) $ (1,353)
=========== =========== ===========
Weighted-average common shares - (Denominator for
basic earnings per share) 9,025,000 9,025,000 5,764,071
Dilutive securities - Employee stock options - - -
Dilutive securities - Preferred stock - - -
----------- ----------- -----------
Adjusted weighted - average common shares and
assumed conversion of Preferred Stock -
(Denominator for diluted earnings per share) 9,025,000 9,025,000 5,764,071
=========== =========== ===========
Per share amounts - basic and diluted
Income before a cumulative effect of a change in
accounting principle $ (0.97) $ (0.23) $ (0.23)
Cumulative effect of a change in accounting
principle (.43) - -
=========== =========== ===========
Net loss $ (1.40) $ (0.23) $ (0.23)
=========== =========== ===========
</TABLE>
For additional disclosures regarding the convertible preferred stock and the
employee stock options, see Notes (5) and (7).
Options to purchase 899,900 shares of common stock at a weighted average
exercise price of $8.73 per share were outstanding as of December 31, 1998.
These options were not included in the computation of diluted earnings per share
as the Company had a net loss available to common stockholders, and the
inclusion of such options would be antidilutive.
As of December 31, 1998, the Company has $65.0 million and $42.0 million,
respectively, of Series A and Series B Preferred Stock outstanding (See Note 5).
The assumed conversion of these shares into approximately 11.3 million shares of
common stock would be antidilutive and, therefore, was not included in the
reported diluted earnings per share calculation.
F-22
<PAGE> 59
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 1998 and 1997 (amounts in
thousands, except for per share amounts.)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
ENDED 3/31 ENDED 6/30 ENDED 9/30 ENDED 12/31
---------- ---------- ---------- -----------
1998
- ------------------------------------------
<S> <C> <C> <C> <C>
Hotel Operating Revenue $ 6,917 $ 10,330 $ 14,120 $ 15,911
Total revenues 56,053 66,190 44,546 66,571
Cumulative effect of change in accounting ___ ___ ___ (3,857)
principle
Income (loss) before preferred stock 469 829 954 (8,539)
dividends
Net loss available to common shareholders (733) (386) (944) (10,562)
Weighted average shares outstanding --
basic and diluted 9,025 9,025 9,025 9,025
Net loss per share of common stock --
basic and diluted $ (0.08) $ (0.04) $ (0.10) $ (1.18)
</TABLE>
<TABLE>
<CAPTION>
1997
- ------------------------------------------
<S> <C> <C> <C> <C>
Hotel Operating Revenue $ 539 $ 1,278 $ 1,770 $ 2,857
Total revenues 539 1,278 1,770 31,991
Income (loss) before preferred stock (374) (163) (352) 72
dividends
Net loss available to common shareholders (374) (163) (388) (1,140)
Weighted average shares outstanding --
basic and diluted 9,025 9,025 9,025 9,025
Net loss per share of common stock --
basic and diluted $ (0.04) $ (0.02) $ (0.04) $ (0.13)
</TABLE>
F-23
<PAGE> 60
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Costs
Capitalized Gross Amount Carried
Initial Cost to Subsequent to at Close of Period
Company Acquisition 12/31/98
----------------------------------------------------------
(1) Depreciable Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property Land Property Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City Overland Park KS $3,948 $542 $5,345 $- $- $542 $5,345 $ 5,887
Charlotte - Tyvola
Executive Charlotte NC 3,034 403 3,804 - - 403 3,804 4,207
Raleigh-Cary Raleigh NC 3,185 576 4,968 - - 576 4,968 5,544
Knoxville Knoxville TN 3,297 566 4,371 - - 566 4,371 4,938
Houston-Galleria Houston TX 5,765 1,774 5,653 - - 1,774 5,653 7,427
Detroit - Auburn
Hills Detroit MI 6,050 1,205 6,108 - - 1,205 6,108 7,313
Fort Worth - Fossil
Creek Fort Worth TX 4,582 591 4,750 - - 591 4,750 5,340
Detroit - Troy Troy MI 5,312 1,003 6,740 - - 1,003 6,740 7,743
Miami - Airport Miami FL 2,529 1,775 3,964 - - 1,775 3,964 5,739
Chicago -
Libertyville Libertyvill IL 5,737 1,120 6,807 1 - 1,121 6,807 7,928
Arlington Arlington TX 5,161 954 6,316 - - 954 6,316 7,271
Irvine - West Irvine CA 6,070 2,116 6,474 - - 2,116 6,474 8,590
Dallas - Galleria Dallas TX 5,412 2,005 6,715 - - 2,005 6,715 8,720
Washington D.C. -
Fairfax Fairfax VA - 1,229 465 - - 1,229 465 1,694
Washington D.C. -
Herndon Herndon VA - 1,004 939 - - 1,004 939 1,943
Dallas - Plano Plano TX 4,825 1,511 6,486 - - 1,511 6,486 7,997
Denver - Lakewood Lakewood CO 3,155 754 5,445 - - 754 5,445 6,200
Altamonte Springs Orlando FL 4,474 1,572 7,444 - - 1,572 7,444 9,016
Ann Arbor Ann Arbor MI 4,018 962 6,022 - - 962 6,022 6,984
Greensboro Greensboro NC 3,972 1,004 5,634 - - 1,004 5,634 6,638
Dallas - LBJ Dallas TX 2,112 1,566 5,374 - - 1,566 5,374 6,939
Anaheim - South Garden Grove CA 5,864 1,665 7,756 - - 1,665 7,756 9,421
Clearwater - St.
Petersburg Clearwater FL 2,142 908 4,271 - - 908 4,271 5,179
Baltimore Linthicum MD - 1,998 7,100 - - 1,998 7,100 9,098
Chicago -
Schaumburg Schaumburg IL 1,998 1,238 4,698 - - 1,238 4,698 5,936
Chicago -
Warrenville Warrenville IL 1,347 1,729 3,766 - - 1,729 3,766 5,495
Chicago - Waukegan Waukegan IL - 816 3,734 - - 816 3,734 4,550
St. Louis - Earth
City Earth City MO 1,155 1,032 5,551 - - 1,032 5,551 6,583
Philadelphia -
Mount Laurel Mount Laurel NJ - 768 2,587 - - 768 2,587 3,354
Austin - South Austin TX - 1,271 5,784 - - 1,271 5,784 7,055
Atlanta Atlanta GA 2,843 2,145 5,048 - - 2,145 5,048 7,193
Columbus Columbus OH - 571 3,825 - - 571 3,825 4,396
Orange County Santa Ana CA - 2,441 1,577 - - 2,441 1,577 4,019
Cleveland -
North Olmsted North Olmsted OH 1,754 1,442 2,787 - - 1,442 2,787 4,229
Chicago -
Hoffman Estates Hoffman Estates IL - 1,392 2,284 - - 1,392 2,284 3,677
Chicago -
Schiller Park Schiller Park IL - 3,595 1,558 - - 3,595 1,558 5,154
Oklahoma City Oklahoma City OK - 799 1,061 - - 799 1,061 1,860
San Jose Santa Clara CA - 2,932 263 - - 2,932 263 3,195
Jersey City Jersey City NJ - 3,058 814 - - 3,058 814 3,873
Corporate (4) 15,000 1,090 1,879 - - 1,090 1,879 2,969
Acquisition costs
for potential sites - 3,145 - - - 3,145 - 3,145
========================================================================
$114,742 $58,270 $176,168 $1 $- $58,271 $176,168 $234,439
========================================================================
</TABLE>
<TABLE>
<CAPTION>
(2) (3)
Accumulated Date of Date of
Depreciation Construction Acquisition
------------ ------------ -----------
<S> <C> <C> <C> <C>
Kansas City Overland Park KS $237 Oct-97 Dec-96
Charlotte - Tyvola Executive Charlotte NC 149 Dec-97 Feb-97
Raleigh-Cary Raleigh NC 106 Apr-98 Feb-97
Knoxville Knoxville TN 158 Jan-98 Mar-97
Houston-Galleria Houston TX 170 Mar-98 Mar-97
Detroit - Auburn Hills Detroit MI 101 May-98 May-97
Fort Worth - Fossil Creek Fort Worth TX 134 Mar-98 Jun-97
Detroit - Troy Troy MI 106 Jun-98 Jun-97
Miami - Airport Miami FL - N/A Aug-97
Chicago - Libertyville Libertyvill IL 114 Jun-98 Sep-97
Arlington Arlington TX 77 Aug-98 Oct-97
Irvine - West Irvine CA 59 Sep-98 Dec-97
Dallas - Galleria Dallas TX 39 Oct-98 Dec-97
Washington D.C. - Fairfax Fairfax VA - N/A Dec-97
Washington D.C. - Herndon Herndon VA - N/A Dec-97
Dallas - Plano Plano TX 38 Oct-98 Jan-98
Denver - Lakewood Lakewood CO - Nov-98 Jan-98
Altamonte Springs Orlando FL 32 Nov-98 Feb-98
Ann Arbor Ann Arbor MI 18 Nov-98 Feb-98
Greensboro Greensboro NC - Dec-98 Feb-98
Dallas - LBJ Dallas TX - N/A Feb-98
Anaheim - South Garden Grove CA 63 Sep-98 Mar-98
Clearwater - St Petersburg Clearwater FL - Dec-98 Mar-98
Baltimore Linthicum MD - Dec-98 Mar-98
Chicago - Schaumburg Schaumburg IL - N/A Mar-98
Chicago - Warrenville Warrenville IL - N/A Mar-98
Chicago - Waukegan Waukegan IL - Dec-98 Apr-98
St. Louis - Earth City Earth City MO - N/A Apr-98
Philadelphia - Mount Laurel Mount Laurel NJ - N/A Apr-98
Austin - South Austin TX - Dec-98 May-98
Atlanta Atlanta GA - N/A May-98
Columbus Columbus OH - N/A May-98
Orange County Santa Ana CA - N/A Jun-98
Cleveland - North Olmsted North Olmsted OH - N/A Jul-98
Chicago - Hoffman Estates Hoffman Estates IL - N/A Jul-98
Chicago - Schiller Park Schiller Park IL - N/A Jul-98
Oklahoma City Oklahoma City OK - N/A Jul-98
San Jose Santa Clara CA - N/A Sep-98
Jersey City Jersey City NJ - N/A Sep-98
Corporate (4) 307 N/A N/A
Acquisition costs for
potential sites - N/A N/A
------
$1,907
======
</TABLE>
NOTES:
NA - Not applicable
(1) This schedule includes only those properties purchased through December 31,
1998.
(2) For depreciable property, the Company uses a 40-year estimated life for
buildings and components, ten years estimated life for furniture and
fixtures, and seven years estimated life on computer equipment,
computer E-3 software, loan fees and closing costs. Assets held for sale
are not depreciated.
(3) Dates of construction represent the date the hotel became fully operational
based on construction completion of project.
(4) The loan is not collateralized by specific properties and is a general
company obligation.
S-1
<PAGE> 61
SCHEDULE III (CONTINUED)
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
The changes in total real estate and depreciable property for the years ended
December 31, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $129,882 $16,937 $887
Acquisitions 285,172 141,273 16,050
Cost of hotels sold (180,615) (28,328) -
-------------------------------------------
Balance, end of year $234,439 $129,882 $16,937
===========================================
</TABLE>
The changes in accumulated depreciation for the years ended December 31,
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,109 $ 222 $ -
Depreciation expense 3,081 887 222
Dispositions and other (2,283) - -
-------------------------------------
Balance, end of year $ 1,907 $ 1,109 $ 222
=====================================
</TABLE>
S-2
<PAGE> 62
EXHIBIT INDEX
Exhibit
No. Description
3.1 Restated Certificate of Incorporation of Candlewood Hotel Company,
Inc. (1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc.
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.
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.
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.
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.
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)
E-1
<PAGE> 63
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.
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.
11.1 Statement re Computation of Per Share Earnings -- not applicable.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
- ----------
(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.
E-2
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. OFFICES.......................................................................1
Section 1.1. Registered Office................................................1
Section 1.2. Other Offices....................................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS.....................................................1
Section 2.1. Place of Meetings................................................1
Section 2.2. Annual Meeting of Stockholders. .................................1
Section 2.3. Quorum; Adjourned Meetings and Notice Thereof. ..................1
Section 2.4. Voting. .........................................................2
Section 2.5. Proxies. ........................................................2
Section 2.6. Special Meetings. ...............................................2
Section 2.7. Notice of Stockholder's Meetings. ...............................2
Section 2.8. Stockholder Proposals............................................2
Section 2.9. Maintenance and Inspection of Stockholder List. .................3
Section 2.10. No Stockholder Action by Written Consent Without a Meeting......3
ARTICLE III. DIRECTORS...................................................................4
Section 3.1. Number, Election and Tenure......................................4
Section 3.2. Vacancies. ......................................................4
Section 3.3. Notification of Nomination. .....................................4
Section 3.4. Powers. .........................................................5
Section 3.5. Directors' Meetings. ............................................5
Section 3.6. Regular Meetings. ...............................................5
Section 3.7. Special Meetings. ...............................................5
Section 3.8. Quorum. .........................................................5
Section 3.9. Action Without Meeting. .........................................6
Section 3.10. Telephonic Meetings. ...........................................6
Section 3.11. Committees of Directors. .......................................6
Section 3.12. Minutes of Committee Meetings. .................................6
Section 3.13. Compensation of Directors. .....................................6
Section 3.14. Indemnification.................................................7
ARTICLE IV. OFFICERS.....................................................................9
Section 4.1. Officers.........................................................9
Section 4.2. Election of Officers.............................................9
Section 4.3. Subordinate Officers.............................................9
Section 4.4. Compensation of Officers. .......................................9
Section 4.5. Term of Office; Removal and Vacancies...........................10
Section 4.6. Chairman of the Board. .........................................10
Section 4.7. President. .....................................................10
Section 4.8. Vice President. ................................................10
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.9. Secretary. .....................................................10
Section 4.10. Assistant Secretaries. ........................................10
Section 4.11. Chief Financial Officer. ......................................11
Section 4.12. Assistant Treasurer............................................11
ARTICLE V. CERTIFICATES OF STOCK........................................................11
Section 5.1. Certificates....................................................11
Section 5.2. Signatures on Certificates......................................11
Section 5.3. Statement of Stock Rights, Preferences, Privileges..............11
Section 5.4. Lost Certificates...............................................12
Section 5.5. Transfers of Stock. ............................................12
Section 5.6. Fixing Record Date. ............................................12
Section 5.7. Registered Stockholders.........................................12
ARTICLE VI. GENERAL PROVISIONS..........................................................13
Section 6.1. Dividends.......................................................13
Section 6.2. Payment of Dividends............................................13
Section 6.3. Checks..........................................................13
Section 6.4. Fiscal Year.....................................................13
Section 6.5. Corporate Seal..................................................13
Section 6.6. Manner of Giving Notice.........................................13
Section 6.7. Waiver of Notice................................................13
Section 6.8. Annual Statement................................................13
ARTICLE VII. AMENDMENTS.................................................................14
Section 7.1. Amendment by Directors or Stockholders..........................14
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED BYLAWS
OF
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
ARTICLE I.
OFFICES
Section 1.1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 1.2. Other Offices. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2.1. Place of Meetings. Meetings of stockholders shall be held
at any place within or without the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation.
Section 2.2. Annual Meeting of Stockholders. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors. At each annual meeting directors shall be elected and any
other proper business may be transacted.
Section 2.3. Quorum; Adjourned Meetings and Notice Thereof. A majority
of the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these
Amended and Restated Bylaws (the "Bylaws"). A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum and
the votes present may continue to transact business until adjournment. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.
<PAGE> 5
Section 2.4. Voting. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these Bylaws, a different vote is required
in which case such express provision shall govern and control the decision of
such question.
Section 2.5. Proxies. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period. All
proxies must be filed with the Secretary of the corporation at the beginning of
each meeting in order to be counted in any vote at the meeting. Each stockholder
shall have one vote for each share of stock having voting power, registered in
his name on the books of the corporation on the record date set by the Board of
Directors as provided in Article V, Section 5.6 hereof. All elections shall be
had and all questions decided by a plurality vote.
Section 2.6. Special Meetings. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or the Secretary at the request in writing of a majority of the
Board of Directors, the Chairman or any Co-Chairman of the Board of Directors
and shall be held at such place, on such date, and at such time as shall be
fixed by the person or persons calling the meeting, but such special meetings
may not be called by any other person or persons. Such request shall state the
purpose or purposes of the proposed meeting. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 2.7. Notice of Stockholder's Meetings. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given which notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting. If mailed, notice is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
Section 2.8. Stockholder Proposals. At an annual meeting of
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been brought before the annual meeting (a)
by, or at the direction of, a majority of the directors, or (b) by any
stockholder of the corporation who complies with the notice procedures set forth
in this Section 2.8. For a proposal to be properly brought before an annual
meeting by a stockholder, the stockholder must be given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the corporation not less than 60 days prior to the scheduled annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later
<PAGE> 6
date; provided, however, that if less than 70 days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by the stockholder, to be timely, must be so delivered or received not later
than the close of business on the tenth day following the earlier of the day on
which such notice of the date of the scheduled annual meeting was mailed or the
day on which such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (a) a brief description of the proposal desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (c) the
class and number of shares of the corporation's stock which are beneficially
owned by the stockholder on the date of such stockholder notice and by any other
stockholders known by such stockholder to be supporting such proposal on the
date of such stockholder notice, and (d) any financial interest of the
stockholder in such proposal.
The presiding officer of the annual meeting shall determine and declare
at the annual meeting whether the stockholder proposal was made in accordance
with the terms of this Section 2.8. If the presiding officer determines that a
stockholder proposal was not made in accordance with the terms of this Section
2.8, he shall so declare at the annual meeting and any such proposal shall not
be acted upon at the annual meeting.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
Section 2.9. Maintenance and Inspection of Stockholder List. The officer
who has charge of the stock ledger of the corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 2.10. No Stockholder Action by Written Consent Without a
Meeting. Effective upon the closing of the corporation's initial sale of its
Common Stock in a firm commitment underwriting involving a public offering
pursuant to a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly called and may not be taken by
written consent of the stockholders.
3
<PAGE> 7
ARTICLE III.
DIRECTORS
Section 3.1. Number, Election and Tenure. The authorized number of
directors which shall constitute the Board shall not be less than seven (7) nor
more than twelve (12). The exact number shall be determined from time to time by
resolution of the Board. Directors shall be elected at the annual meeting of
stockholders and each director shall serve until such person's successor is
elected and qualified or until such person's death, retirement, resignation or
removal. The directors need not be stockholders. Subject to the rights, if any,
of the holders of shares of Preferred Stock then outstanding, if any, any and
all directors of the corporation may be removed from office by the stockholders
only for cause and only by the affirmative vote of at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding shares of Common Stock of the
corporation at any annual or special meeting of stockholders of the corporation,
the notice of which shall state that the removal of a director or directors is
among the purposes of the meeting.
Section 3.2. Vacancies. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors shall be filled solely by the affirmative vote of
a majority of the remaining directors then in office, even though less than a
quorum, or by a sole remaining director. The directors so chosen shall hold
office until the next annual election of directors and until their successors
are duly elected and qualified, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office. No decrease
in the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
Section 3.3. Notification of Nomination. Subject to the rights, if any,
of the holders of shares of Preferred Stock then outstanding, if any, only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the corporation may be made at a meeting of stockholders
by or at the direction of the Board of Directors, by any nominating committee or
person appointed by the Board, or by any stockholder of the corporation entitled
to vote for the election of directors at the meeting who complies with the
notice procedures set forth in this Section 3.3. Such nominations, other than
those made by or at the direction of the Board or by any nominating committee or
person appointed by the Board, shall be made pursuant to timely notice in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the corporation not less than 60 days prior to the scheduled annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that if less than 70 days' notice or
prior public disclosure of the date of the scheduled annual meeting is given or
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<PAGE> 8
made, notice by the stockholder, to be timely, must be so delivered or received
not later than the close of business on the tenth day following the earlier of
the day on which such notice of the date of the scheduled annual meeting was
mailed or the day on which such public disclosure was made. A stockholder's
notice to the Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal number of shares of capital stock of the corporation which are
beneficially owned by the person and (iii) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934, as amended; and (b) as to the stockholder giving the notice (i) the name
and address, as they appear on the corporation's books, of the stockholder and
(ii) the class and number of shares of the corporation's stock which are
beneficially owned by the stockholder on the date of such stockholder notice.
The corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the corporation to determine the
eligibility of such proposed nominee to serve as director of the corporation.
The presiding officer of the annual meeting shall determine and declare
at the annual meeting whether the nomination was made in accordance with the
terms of this Section 3.3. If the presiding officer determines that a nomination
was not made in accordance with the terms of this Section 3.3, he shall so
declare at the annual meeting and any such defective nomination shall be
disregarded.
Section 3.4. Powers. The property and business of the corporation shall
be managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by these Bylaws expressly conferred upon them, the
Board may exercise all such powers of the corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 3.5. Directors' Meetings. The directors may hold their meetings
and have one or more offices, and keep the books of the corporation outside of
the State of Delaware.
Section 3.6. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 3.7. Special Meetings. Special meetings of the Board of
Directors may be called by the President on forty-eight hours' notice to each
director, either personally or by mail or by telegram; special meetings shall be
called by the President or the Secretary in like manner and on like notice on
the written request of two directors unless the Board consists of only one
director; in which case special meetings shall be called by the President or
Secretary in like manner or on like notice on the written request of the sole
director.
Section 3.8. Quorum. At all meetings of the Board of Directors a
majority of the authorized number of directors shall be necessary and sufficient
to constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at
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<PAGE> 9
which there is a quorum, shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by the Certificate of
Incorporation or by these Bylaws. If a quorum shall not be present at any
meeting of the Board of Directors the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present. If only one director is authorized,
such sole director shall constitute a quorum.
Section 3.9. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 3.10. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 3.11. Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the Bylaws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 3.12. Minutes of Committee Meetings. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
Section 3.13. Compensation of Directors. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to
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<PAGE> 10
fix the compensation of directors. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 3.14. Indemnification.
(a) The corporation shall indemnify any person who was or
is made a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, limited liability company, trust or other enterprise, against all
expense, liability and loss (including attorneys' fees), judgments, fines, ERISA
excise taxes and amounts paid or to be paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, limited liability company, trust or
other enterprise against expenses, liability and loss (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no such indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of Delaware
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court of Chancery or such other court
shall deem proper.
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<PAGE> 11
(c) To the extent that a director, officer, employee or
agent of the corporation shall be successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in paragraphs (a) and (b),
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
(d) Any indemnification under paragraphs (a) and (b)
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors in the manner provided in paragraph (d) upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the corporation as authorized in this Section 3.14.
(f) The indemnification provided by this Section 3.14
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
(g) The Board of Directors may authorize, by a vote of a
majority of a quorum of the Board of Directors, the corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Section 3.14.
(h) For the purposes of this Section 3.14, references to
"the corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or
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<PAGE> 12
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other
enterprise, shall stand in the same position under the provisions of this
Section with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
ARTICLE IV.
OFFICERS
Section 4.1. Officers. The officers of this corporation shall be chosen
by the Board of Directors and shall include a Chairman of the Board, a
President, a Secretary, and a Chief Financial Officer. The corporation may also
have at the discretion of the Board of Directors such other officers as are
desired, including one or more Vice Presidents, one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 4.3 hereof. In the event
there are two or more Vice Presidents, then one or more may be designated as
Executive Vice President, Senior Vice President, or other similar or dissimilar
title. At the time of the election of officers, the directors may by resolution
determine the order of their rank. Any number of offices may be held by the same
person, unless the Certificate of Incorporation or these Bylaws otherwise
provide.
Section 4.2. Election of Officers. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the corporation.
Section 4.3. Subordinate Officers. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4.4. Compensation of Officers. The salaries of all officers and
agents of the corporation shall be fixed by the Board of Directors.
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Section 4.5. Term of Office; Removal and Vacancies. The officers of the
corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Section 4.6. Chairman of the Board. The Chairman of the Board, if such
an officer be elected, shall, if present, preside at all meetings of the Board
of Directors and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws. If there is no President, the Chairman of the Board shall in
addition be the Chief Executive Officer of the corporation and shall have the
powers and duties prescribed in Section 4.7 of this Article IV.
Section 4.7. President. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the Chief Executive Officer of the
corporation, unless such an officer is elected separately by the Board of
Directors, and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-oficio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
Section 4.8. Vice President. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to time
may be prescribed for them, respectively, by the Board of Directors.
Section 4.9. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep in
safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
Section 4.10. Assistant Secretaries. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Secretary designated by the Board of Directors, shall, in
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<PAGE> 14
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 4.11. Chief Financial Officer. The Chief Financial Officer shall
have the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys, and other valuable effects in the name
and to the credit of the corporation, in such depositories as may be designated
by the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Chief Financial Officer and of the financial condition of the
corporation. If required by the Board of Directors, he shall give the
corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
Section 4.12. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Chief Financial Officer, perform the duties and exercise the
powers of the Chief Financial Officer and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
ARTICLE V.
CERTIFICATES OF STOCK
Section 5.1. Certificates. Every holder of stock of the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Chief Financial Officer or an Assistant Treasurer of the corporation,
certifying the number of shares represented by the certificate owned by such
stockholder in the corporation.
Section 5.2. Signatures on Certificates. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 5.3. Statement of Stock Rights, Preferences, Privileges. If the
corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or
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<PAGE> 15
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 5.4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5.5. Transfers of Stock. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 5.6. Fixing Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 5.7. Registered Stockholders. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly provided
by the laws of the State of Delaware.
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ARTICLE VI.
GENERAL PROVISIONS
Section 6.1. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 6.2. Payment of Dividends. Before payment of any dividend there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the directors from time to time, in their absolute
discretion, think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interests of the corporation, and the directors may abolish any such
reserve.
Section 6.3. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 6.4. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 6.5. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6.6. Manner of Giving Notice. Whenever, under the provisions of
the statutes or of the Certificate of Incorporation or of these Bylaws, notice
is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram.
Section 6.7. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed to be equivalent.
Section 6.8. Annual Statement. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders when called
for by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
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ARTICLE VII.
AMENDMENTS
Section 7.1. Amendment by Directors or Stockholders. The Board of
Directors is expressly empowered to adopt, amend or repeal bylaws of the
corporation, without the approval of the stockholders. Any adoption, amendment
or repeal of bylaws of the corporation by the Board of Directors shall require
the approval of a majority of the total number of authorized directors (whether
or not there exist any vacancies in previously authorized directorships at the
time any resolution providing for adoption, amendment or repeal is presented to
the Board). The stockholders shall also have power to adopt, amend or repeal the
bylaws of the corporation. In addition to any vote of the holders of any class
or series of stock of this corporation required by law or by the Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding shares of Common Stock of the
corporation shall be required to adopt, amend or repeal any provisions of the
bylaws of the corporation.
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EXHIBIT 10.2
INDEMNIFICATION AGREEMENT SCHEDULE
Each of the following Directors and Officers of Candlewood Hotel
Company, Inc. (the "Company") are a party to an Indemnification
Agreement with the Company:
<TABLE>
<CAPTION>
INDEMNITEE TITLE
- ---------- -----
<S> <C>
Gary E. Costley Director
Robert J. Cresci Director
Jack P. DeBoer Director, Chairman of the Board, Chief Executive Officer
Richard J. Ferris Director
Warren D. Fix Director, Executive Vice President, Chief Financial Officer,
Secretary & Treasurer
Robert S. Morris Director
Thomas H. Nielsen Director
Frank J. Pados, Jr. Director
William L. Perocchi Director
Tony M. Salazar Director
James E. Roos President and Chief Operating Officer
James E. Korroch Vice President-Operations
David A. Redfern Vice President-Sales & Marketing
Jeffrey F. Hitz Senior Vice President-Development
Thomas Kennalley Vice President-Controller and Assistant Secretary
Pamela J. Cloud Assistant Secretary, Director-Real Estate Finance
Gina-Lynne Scharoun Vice President-Franchising
H. Steven Meadows Vice President Operations-East Division
</TABLE>
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO THE
1996 EQUITY PARTICIPATION PLAN
OF
CANDLEWOOD HOTEL COMPANY, INC.
This First Amendment to The 1996 Equity Participation Plan of Candlewood
Hotel Company, Inc. (the "Plan"), is adopted by Candlewood Hotel Company, Inc.,
a Delaware corporation (the "Company") effective as of May 18, 1998.
RECITALS
A. The Plan was adopted by the Board of Directors of the Company on
September 30, 1996 and was approved by the stockholders of the
Company on November 7, 1996.
B. On January 26, 1998, the Board of Directors of the Company
approved the following amendment to the Plan:
AMENDMENT
1. Section 2.1(a) of the Plan is hereby amended to read in
its entirety as follows.
"2.1 Shares Subject to Plan
(a) The shares of stock subject to Options, awards of
Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred
Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
options or rights or upon any such awards under the Plan shall not exceed
1,676,710. The shares of Common Stock issuable upon exercise of such options or
rights or upon any such awards may be either previously authorized but unissued
shares or treasury shares."
The undersigned, Warren D. Fix, Chief Financial Officer,
Executive Vice President and Secretary of the Company, hereby certifies that the
Stockholders of the Company approved the foregoing First Amendment to the Plan
effective as of May 18, 1998.
CANDLEWOOD HOTEL COMPANY, INC.,
a Delaware corporation
By: /S/ WARREN D. FIX
---------------------------------------
Warren D. Fix, Chief Financial Officer,
Executive Vice President and Secretary
<PAGE> 1
EXHIBIT 10.12
FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT
AND AGREEMENT TO LEASE AND FOURTH AMENDMENT
TO LEASE AGREEMENT AND INCIDENTAL DOCUMENTS
THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT AND AGREEMENT TO
LEASE AND FOURTH AMENDMENT TO LEASE AGREEMENT AND INCIDENTAL DOCUMENTS (this
"Amendment") is entered into as of this 7th day of January, 1999, by and among
(i) HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust
("HPT"); (ii) HPT CW PROPERTIES TRUST, a Maryland real estate investment trust
(the "Landlord"); (iii) CANDLEWOOD HOTEL COMPANY, INC., a Delaware corporation,
("Candlewood"); (iv) the seventeen entities listed as "Sellers" on the signature
pages of this Agreement (collectively, the "Sellers"); and (v) CANDLEWOOD
LEASING NO. 1, INC., a Delaware corporation (the "Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to a Purchase and Sale Agreement, dated as of November
19, 1997 (the "Purchase Agreement"), and an Agreement to Lease, dated as of
November 19, 1997 (the "Agreement to Lease"), HPT agreed to acquire from
Candlewood and the Sellers certain hotel properties and lease or cause the
Landlord to lease such properties to the Tenant, all as more particularly
described in and subject to and upon the terms and conditions set forth in the
Purchase Agreement and Agreement to Lease; and
WHEREAS, pursuant to the Purchase Agreement and Agreement to Lease, the
Landlord and the Tenant entered into a Lease Agreement, dated as of December 24,
1997 (as amended, the "Lease"); and
WHEREAS, the obligations of the Tenant under the Lease are secured and
guaranteed by certain undertakings and agreements of Candlewood pursuant to the
Incidental Documents (this and other capitalized terms used and not otherwise
defined herein having the meanings ascribed to such terms in the Lease); and
WHEREAS, the parties wish to amend certain terms and conditions of the
Purchase Agreement and the Agreement to Lease and to amend further certain terms
and conditions of the Lease and certain incidental documents, all as more
particularly set forth herein; and
WHEREAS, on the date hereof, a Closing (as defined in the Purchase
Agreement) is occurring with respect to certain hotel properties, the legal
descriptions of which are set forth in Exhibits A-1 through A-2 of this
Amendment; and
WHEREAS, the transactions contemplated by this Amendment are of direct
substantial and material benefit to Candlewood;
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the mutual receipt and
legal sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Section 1.3 of the Purchase Agreement is hereby amended by deleting
the dollar amount "One Hundred Million Dollars ($100,000,000)" appearing therein
and inserting the dollar amount "One Hundred Eighteen Million Five Hundred
Thousand Dollars ($118,500,000)" in its place.
2. Section 1.15 of the Purchase Agreement is hereby amended by deleting
the dollar amount "Five Million Dollars ($5,000,000)" appearing therein and
inserting the dollar amount "Six Million Forty Thousand Six Hundred Twenty Five
Dollars ($6,040,625)" in its place.
3. Section 1.24 of the Purchase Agreement is hereby amended by deleting
the dollar amount "One Hundred Million Dollars ($100,000,000)" appearing therein
and inserting the dollar amount "One Hundred Eighteen Million Five Hundred
Thousand Dollars ($118,500,000)" in its place.
4. The Purchase Agreement is hereby further amended by (a) deleting
Schedule A thereto and inserting Schedule A to this Amendment in its place and
(b) inserting the legal descriptions attached hereto as Exhibits A1 through A2
to the Purchase Agreement as Schedules B-16 through B-17.
5. Each of the Sellers confirms, by execution of this Amendment that the
obligations of the Sellers under the Purchase Agreement are the joint and
several obligations of each of the Sellers.
6. Exhibit C to the Agreement to Lease is hereby deleted and Exhibit B
to this Amendment inserted in its place.
7. The definition of "Minimum Rent" set forth in the Lease is hereby
deleted in its entirety and the following inserted in its place:
"MINIMUM RENT" shall mean an amount equal to One Million Six
Thousand Seven Hundred Seventy Two Dollars ($1,006,772) per
Accounting Period.
8. The definition of "Retained Funds" set forth in the Lease is hereby
deleted in its entirety and the following inserted in its place:
"RETAINED FUNDS" shall mean a cash amount equal to Twelve
Million Eighty One Thousand Two Hundred Fifty Dollars
($12,081,250).
2
<PAGE> 3
9. Exhibit A to the Lease is hereby amended by adding Exhibits A-16
through A-17 at the end thereof and all references in the Lease to "Exhibit A-1
through A-15" are hereby amended to refer to "Exhibit A-1 through A-17".
10. Exhibit B to the Lease is hereby deleted in its entirety and Exhibit
C to this Amendment inserted in its place.
11. Exhibit C to the Lease is hereby deleted and Exhibit D to this
Amendment inserted in its place.
12. Section 11 of the Guaranty is hereby amended by deleting the dollar
amount "Five Million Dollars ($5,000,000)" appearing therein and inserting the
dollar amount "Six Million Forty Thousand Six Hundred Twenty Five Dollars
($6,040,625)" in its place.
13. All references in the Lease to the Incidental Documents are hereby
amended to refer to the Incidental Documents as amended by this Amendment.
14. Each of the Incidental Documents is hereby amended so that each
reference therein to the Lease, the Purchase Agreement, the Agreement to Lease
or to any other Incidental Document shall mean the Lease, such Agreement and
such Incidental Document as amended by this Amendment.
15. The Tenant and Candlewood represent and warrant that no Default or
Event of Default has occurred and is continuing under the Lease or any other
Incidental Document.
16. As amended hereby, the Purchase Agreement, the Agreement to Lease,
the Lease and the Incidental Documents shall remain in full force and effect in
accordance with their respective terms and provisions.
17. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal
as of the date above first written.
HOSPITALITY PROPERTIES TRUST
By: /S/ John G. Murray
-------------------------------------
Its President
HPT CW II PROPERTIES TRUST
By: /S/ John G. Murray
-------------------------------------
Its President
CANDLEWOOD HOTEL COMPANY, INC.
By: /S/ Pamela Cloud
-------------------------------------
Its Assistant Secretary
CANDLEWOOD LEASING NO. 1, INC.
By: /S/ Pamela Cloud
-------------------------------------
Its Assistant Secretary
CANDLEWOOD WICHITA NORTHEAST, LLC
CANDLEWOOD ENGLEWOOD, LLC
CANDLEWOOD JEFFERSONTOWN, LLC
CANDLEWOOD BLUE ASH, LLC
CANDLEWOOD BIRMINGHAM, LLC
CANDLEWOOD LOS ANGELES, CA-LAKE
FOREST, LLC
CANDLEWOOD OMAHA, LLC
CANDLEWOOD PHOENIX METRO, AZ, LLC
CANDLEWOOD NORTH TEMPLE, LLC
CANDLEWOOD HORSHAM, PA, LLC
CANDLEWOOD FORT UNION, UT, LLC
CANDLEWOOD SOUTHFIELD, LLC
CANDLEWOOD HAMPTON, LLC
CANDLEWOOD WICHITA AIRPORT, LLC
CANDLEWOOD HOUSTON, TX-TOWN & COUNTRY,
LLC
CANDLEWOOD AUSTIN, TX-SOUTH, LLC
CANDLEWOOD BALTIMORE, MD-AIRPORT,
LLC
4
<PAGE> 5
By: CANDLEWOOD HOTEL COMPANY, INC.,
MANAGER
By: /S/ Thomas Kennalley
-------------------------------
Name:
Its: Assistant Secretary
5
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDMENT TO PURCHASE AND SALE-AGREEMENT,
AGREEMENT TO LEASE, LEASE AGREEMENT
AND INCIDENTAL DOCUMENTS
THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT, AGREEMENT TO
LEASE, LEASE AGREEMENT AND INCIDENTAL DOCUMENTS (this "Amendment") is entered
into as of this 18th day of June, 1998, by and among (i) HOSPITALITY PROPERTIES
TRUST, a Maryland real estate investment trust ("HPT"); (ii) HPT CW II
PROPERTIES TRUST, a Maryland real estate investment trust (the "Landlord");
(iii) CANDLEWOOD HOTEL COMPANY, INC., a Delaware corporation, ("Candlewood");
and (iv) CANDLEWOOD LEASING NO. 2, INC., a Delaware corporation (the "Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to a Purchase and Sale Agreement, dated-May 14,
1998 (as amended, the "Purchase Agreement"), and an Agreement to Lease, dated
May 14, 1998 (as amended, the "Agreement to Lease"), HPT agreed to acquire from
Candlewood and certain of its wholly owned subsidiaries fifteen hotel properties
and lease or cause the Landlord to lease such properties to the Tenant, all as
more particularly described in and subject to and upon the terms and conditions
set forth in the Purchase Agreement and Agreement to Lease; and
WHEREAS, pursuant to the Purchase Agreement and Agreement to
Lease, the Landlord and the Tenant entered into a Lease Agreement, dated May 20,
1998 (the "Lease"); and
WHEREAS, the obligations of the Tenant under the Lease are
secured and guaranteed by certain undertakings and agreements of Candlewood
pursuant to the Incidental Documents (this and other capitalized terms used and
not otherwise defined herein having the meanings ascribed to such terms in the
Lease); and
WHEREAS, on the date hereof, a Closing (as defined in the
Purchase Agreement) is occurring with respect to certain hotel properties, the
legal descriptions of which are set forth in Exhibit A-1 through A-2 of this
Amendment; and
WHEREAS, the parties hereto wish to amend the Lease so as to
include such properties among the properties demised under the Lease; and
WHEREAS, the transactions contemplated by this Amendment are of
direct substantial and material benefit to Candlewood; and
WHEREAS, the parties also wish to amend certain terms of the
Purchase Agreement and the Agreement to Lease;
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the mutual receipt and
legal sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. The definition of "Minimum Rent" set forth in the Lease is
hereby deleted in its entirety and the following inserted in its place:
"Minimum Rent" shall mean an amount equal to Three Hundred
Nine Thousand Eight Hundred Thirty-Three Dollars
($390,833) per Accounting Period.
2. The definition of "Retained Funds" set forth in the Lease is
hereby deleted in its entirety and the following inserted in its place:
"Retained Funds" shall mean a cash amount equal to Four
Million Six Hundred Ninety Thousand Dollars ($4,690,000).
3. Exhibit A to the Lease is hereby amended by adding Exhibits
A-1 through A-2 at the end thereof and all references in the Lease to "Exhibit
A-1 through A-4" are hereby amended to refer to "Exhibit A-1 through A-6."
4. Exhibit B to the Lease is hereby deleted in its entirety and
Exhibit B to this Amendment inserted in its place.
5. Exhibit C to the Lease is hereby deleted and Exhibit C to this
Amendment inserted in its place.
6. All references in the Lease to the Incidental Documents are
hereby amended to refer to the Incidental Documents as amended by this
Amendment.
7. Schedule A to the Purchase Agreement is hereby deleted and
Exhibit D to this Amendment inserted in its place.
8. Exhibit C to the Agreement to Lease is hereby deleted and
Exhibit E to this Amendment inserted in its place.
9. Each of the Incidental Documents is hereby amended so that
each reference therein to the Lease, the Purchase Agreement, the Agreement to
Lease or to any other Incidental Document shall mean the Lease, such Agreement
and such Incidental Document as amended by this Amendment.
10. The Tenant and Candlewood represent and warrant that no
Default or Event of Default has occurred and is continuing under the Lease or
any other Incidental Document.
<PAGE> 3
11. As amended hereby, the Purchase Agreement, the Agreement to
Lease, the Lease and the Incidental Documents shall remain in full force and
effect in accordance with their respective terms and provisions.
12. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment under seal as of the date above first written.
HOSPITALITY PROPERTIES TRUST
By: /S/ Thomas M. O'Brien
------------------------------------
Its (Vice) President
HPT CW II PROPERTIES TRUST
By: /S/ Thomas M. O'Brien
------------------------------------
Its (Vice) President
CANDLEWOOD HOTEL COMPANY, INC.
By: /S/ Thomas Kennalley
------------------------------------
Its Assistant Secretary
CANDLEWOOD LEASING NO. 2, INC.
By: /S/ Thomas Kennalley
------------------------------------
Its Assistant Secretary
<PAGE> 1
EXHIBIT 10.20
THIRD AMENDMENT TO PURCHASE AND SALE AGREEMENT AND
AGREEMENT TO LEASE AND SIXTH AMENDMENT TO LEASE AGREEMENT
AND INCIDENTAL DOCUMENTS
THIS THIRD AMENDMENT TO PURCHASE AND SALE AGREEMENT AND AGREEMENT TO
LEASE AND SIXTH AMENDMENT TO LEASE AGREEMENT AND INCIDENTAL DOCUMENTS (this
"Amendment") is entered into as of this 23rd day of December, 1998, by and among
(i) HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust
("HPT"); (ii) HPT CW II PROPERTIES TRUST, a Maryland real estate investment
trust (the "Landlord"); (iii) CANDLEWOOD HOTEL COMPANY, INC., a Delaware
corporation, ("Candlewood"); (iv) the eighteen entities listed as "Sellers" on
the signature pages of this Agreement (collectively, the "Sellers"); and (v)
CANDLEWOOD LEASING NO. 2, INC., a Delaware corporation (the "Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to a Purchase and Sale Agreement, dated as of May 14,
1998 (as amended, the "Purchase Agreement"), and an Agreement to Lease, dated as
of May 14, 1998 (as amended, the "Agreement to Lease"), HPT agreed to acquire
from Candlewood and the Sellers certain hotel properties and lease or cause the
Landlord to lease such properties to the Tenant, all as more particularly
described in and subject to and upon the terms and conditions set forth in the
Purchase Agreement and Agreement to Lease; and
WHEREAS, pursuant to the Purchase Agreement and Agreement to Lease, the
Landlord and the Tenant entered into a Lease Agreement, dated May 20, 1998 (as
amended, the "Lease"); and
WHEREAS, the obligations of the Tenant under the Lease are secured and
guaranteed by certain undertakings and agreements of Candlewood pursuant to the
Incidental Documents (this and other capitalized terms used and not otherwise
defined herein having the meanings ascribed to such terms in the Lease); and
WHEREAS, the parties wish to amend further certain terms and conditions
of the Purchase Agreement, the Agreement to Lease and the Lease and certain
incidental documents, all as more particularly set forth herein; and
WHEREAS, on the date hereof, a Closing (as defined in the Purchase
Agreement) is occurring with respect to certain hotel properties, the legal
descriptions of which are set forth in Exhibits A-1 through A-2 of this
Amendment; and
WHEREAS, the transactions contemplated by this Amendment are of direct
substantial and material benefit to Candlewood;
1
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the mutual receipt and
legal sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Section 1.3 of the Purchase Agreement is hereby amended by deleting
the dollar amount "One Hundred Thirty Five Million Dollars ($135,000,000)"
appearing therein and inserting the dollar amount "One Hundred Forty Two Million
Four Hundred Thousand Dollars ($142,400,000)" in its place.
2. Section 1.15 of the Purchase Agreement is hereby amended by deleting
the dollar amount "Seven Million Seventy Thousand Dollars ($7,070,000)"
appearing therein and inserting the dollar amount "Seven Million One Hundred
Twenty Six Thousand Two Hundred Fifty Dollars ($7,126,250)" in its place.
3. Section 1.24 of the Purchase Agreement is hereby amended by deleting
the dollar amount "One Hundred Forty One Million Four Hundred Thousand Dollars
($141,400,000)" appearing therein and inserting the dollar amount "One Hundred
Forty Two Million Four Hundred Thousand Dollars ($142,400,000)" in its place.
4. The Purchase Agreement is hereby further amended by (a) deleting
Schedule A thereto and inserting Schedule A to this Amendment in its place and
(b) deleting the legal description for Miami, Florida appearing therein and
inserting the legal description attached hereto in its place.
5. Each of the Sellers confirms, by execution of this Agreement that the
obligations of the Sellers under the Purchase Agreement, as amended by this
Amendment, are the joint and several obligations or each of the Sellers.
6. Exhibit C to the Agreement to Lease is hereby deleted and Exhibit B
to this Amendment inserted in its place.
7. The definition of "Minimum Rent" set forth in the Lease is hereby
deleted in its entirety and the following inserted in its place:
"MINIMUM RENT" shall mean an amount equal to One Million One
Hundred Twenty Thousand Two Hundred Nine Dollars ($1,120,209)
per Accounting Period.
8. The definition of "Retained Funds" set forth in the Lease is hereby
deleted in its entirety and the following inserted in its place:
"RETAINED FUNDS" shall mean a cash amount equal to Thirteen
Million Four Hundred Forty Two Thousand Five Hundred Dollars
($13,442,500).
2
<PAGE> 3
9. Exhibit A to the Lease is hereby amended by adding Exhibits A-15
through A-16 at the end thereof and all references in the Lease to "Exhibit A-1
through A-14" are hereby amended to refer to "Exhibit A-1 through A-16".
10. Exhibit B to the Lease is hereby deleted in its entirety and Exhibit
C to this Amendment inserted in its place.
11. Exhibit C to the Lease is hereby deleted and Exhibit D to this
Amendment inserted in its place.
12. Section 11 of the Guaranty is hereby amended by deleting the dollar
amount "Six Million Seven Hundred Fifty Thousand Dollars ($6,750,000)" appearing
therein and inserting the dollar amount "Seven Million One Hundred Twenty Six
Thousand Two Hundred Fifty Dollars ($7,126,250)" in its place.
13. All references in the Lease to the Incidental Documents are hereby
amended to refer to the Incidental Documents as amended by this Amendment.
14. Each of the Incidental Documents is hereby amended so that each
reference therein to the Lease, the Purchase Agreement, the Agreement to Lease
or to any other Incidental Document shall mean the Lease, such Agreement and
such Incidental Document as amended by this Amendment.
15. The Tenant and Candlewood represent and warrant that no Default or
Event of Default has occurred and is continuing under the Lease or any other
Incidental Document.
16. Candlewood and the Sellers hereby grant HPT and/or the Landlord the
option to acquire that certain property located in Miami, Florida upon
Substantial Completion (as defined in the Purchase Agreement) thereof for a
purchase price of Nine Million Three Hundred Thousand Dollars ($9,300,000) and
to lease the same to Tenant all subject to and upon the terms and conditions set
forth in the Purchase Agreement and Agreement to Lease. Such option shall be
exercisable by HPT and/or Landlord by notice given to Candlewood within 30 days
after HPT receives notice from Candlewood that Substantial Completion has
occurred. To evidence the aforesaid option, upon execution of this Amendment,
the parties hereto have executed and delivered and caused to be recorded a
Notice of Purchase Option in the form attached hereto as Exhibit E.
17. Candlewood, the Sellers and the Tenant shall cause the separate
assessment of the Property located in Braintree, Massachusetts within a
reasonable period of time after the date hereof but in no event later than May
28, 1999. Candlewood represents to HPT and the Landlord that it owns the parcel
adjacent to the Braintree Property which is a single assessed parcel with the
Braintree Property, shall pay, when due, all taxes related thereto and shall not
sell, transfer or dispose of such property, or any interest therein, unless and
until the Braintree Property shall be a separately assessed tax lot. Any default
by Candlewood or its Affiliated Persons under this paragraph shall be an Event
of Default under the Lease. Candlewood shall indemnify and hold harmless HPT and
the Landlord from and against any and all obligations, claims, losses, damages,
liabilities and expenses (including, without limitation, reasonable attorneys'
fees)
3
<PAGE> 4
arising out of the failure of Candlewood to obtain a separate tax parcel for the
Property located in Braintree, Massachusetts.
18. As amended hereby, the Purchase Agreement, the Agreement to Lease,
the Lease and the Incidental Documents shall remain in full force and effect in
accordance with their respective terms and provisions.
19. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal
as of the date above first written.
HOSPITALITY PROPERTIES TRUST
By: /S/ John G. Murray
------------------------------------
Its President
HPT CW II PROPERTIES TRUST
By: /S/ John G. Murray
------------------------------------
Its President
CANDLEWOOD HOTEL COMPANY, INC.
By: /S/ Thomas Kennalley
------------------------------------
Its Assistant Secretary
CANDLEWOOD LEASING NO. 2, INC.
By: /S/ Thomas Kennalley
------------------------------------
Its Assistant Secretary
CANDLEWOOD JACKSONVILLE, FL, LLC
CANDLEWOOD HOUSTON, TX-CLEARLAKE, LLC
CANDLEWOOD HUNTSVILLE, AL, LLC
CANDLEWOOD TEMPE, AZ, LLC
CANDLEWOOD DETROIT, MI-WARREN, LLC
CANDLEWOOD AUSTIN, TX-NORTHWEST, LLC
CANDLEWOOD IRVING, TX, LLC
CANDLEWOOD PITTSBURGH, PA-AIRPORT, LLC
CANDLEWOOD MIAMI, FL-INTL. PKWY., LLC
CANDLEWOOD CHARLOTTE, NC-UNIVERSITY, LLC
CANDLEWOOD SOMERSET, NJ, LLC
CANDLEWOOD NASHVILLE, TN-BRENTWOOD, LLC
CANDLEWOOD ALBUQUERQUE, NM, LLC
CANDLEWOOD HOUSTON, TX-WESTCHASE, LLC
CANDLEWOOD DENVER, CO-LAKEWOOD, LLC
CANDLEWOOD BOSTON, MA-BRAINTREE, LLC
CANDLEWOOD WEST DES MOINES, IA, LLC
CANDLEWOOD MINNEAPOLIS, MN, LLC
5
<PAGE> 6
By: CANDLEWOOD HOTEL COMPANY, INC.,
MANAGER
By: /S/ Thomas Kennalley
-------------------------------
Its: Assistant Secretary
6
<PAGE> 1
EXHIBIT 10.26
LEASE AGREEMENT
BY AND BETWEEN
VANTAGE POINT PROPERTIES, INC.
AS LANDLORD
AND
CANDLEWOOD HOTEL COMPANY, INC.
AS TENANT
<PAGE> 2
<TABLE>
<S> <C>
1. LEASED PREMISES........................................................................ 2
1.1 Building Construction ........................................................ 2
1.2 Description of Leased Premises................................................ 2
1.3 Date of Occupancy............................................................. 2
2. TERM OF LEASE........................................................................... 4
2.1 Original Term.................................................................. 4
2.2 Acceptance of Leased Premises.................................................. 4
2.3 Early Occupancy................................................................ 4
2.4 Certificate of Possession...................................................... 4
3. RENTAL.................................................................................. 4
3.1 Base Building Rent............................................................. 4
3.2 Rent Adjustments............................................................... 4
3.3 Additional Rental.............................................................. 5
3.4 Estimates of Additional Expenses............................................... 5
3.5 Reconciliations................................................................ 6
3.6 Adjustments for Partial Years.................................................. 6
3.7 Survival of Obligation......................................................... 6
3.8 Common Areas................................................................... 6
3.9 Payment Address................................................................ 6
3.10 Interest Charges.............................................................. 7
4. ORDINANCES AND REGULATIONS.............................................................. 7
4.1 Leased Premises................................................................ 7
4.2 Total Building Facilities...................................................... 7
5. INSPECTION.............................................................................. 7
5.1 Right to Inspect, Repair, Alter and Add........................................ 7
5.2 Right to Show.................................................................. 8
6. ASSIGNMENT AND SUBLEASE................................................................. 8
6.1 No Assignment, Sublease or Encumbrance..........................................8
6.2 LANDLORD's Transfer............................................................ 8
6.3 Right to Collect from Assignee................................................. 8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
7. DESTRUCTION OF PREMISES................................................................ 8
7.1 Total Destruction............................................................. 8
7.2 Partial Destruction........................................................... 9
8. CONDEMNATION........................................................................... 9
8.1 Total Taking.................................................................. 9
8.2 Partial Taking................................................................ 9
9. INDEMNIFICATION........................................................................ 10
9.1 Indemnification of LANDLORD................................................... 10
9.2 Indemnification of TENANT..................................................... 10
9.3 LANDLORD's Liability.......................................................... 10
10. USE OF PREMISES....................................................................... 11
11. IMPROVEMENTS, REPAIRS, ALTERATIONS AND TAXES.......................................... 11
11.1 Prohibitions................................................................. 11
11.2 TENANT's Maintenance Obligations..............................................11
11.3 Mechanic Liens............................................................... 12
11.4 Bonding Against Liens........................................................ 12
11.5 Taxes on TENANT's Property and Improvements.................................. 12
12. INSURANCE............................................................................. 12
12.1 TENANT's Insurance........................................................... 12
12.2 LANDLORD's Insurance......................................................... 13
12.3 Waiver of Subrogation........................................................ 13
13. DEFAULT............................................................................... 13
13.1 Default - Cure Period........................................................ 13
13.2 Reletting.................................................................... 13
13.3 LANDLORD Occupancy........................................................... 14
13.4 Constructive Eviction........................................................ 14
13.5 No Waiver of Accord and Satisfaction......................................... 14
14. LEASE AND MORTGAGES................................................................... 14
14.1 Subordination................................................................ 14
14.2 Attornment................................................................... 15
14.3 Non-Disturbance.............................................................. 15
15. SECURITY DEPOSIT...................................................................... 15
15.1 Deposit...................................................................... 15
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
15.2 Application of Deposit....................................................... 16
16. SERVICES AND UTILITIES................................................................ 16
16.1 Failure of Services.......................................................... 16
16.2 Standard Services............................................................ 16
16.3 Building Security / After Hours Access....................................... 17
17. PARKING............................................................................... 17
18. END OF TERM........................................................................... 17
18.1 Condition of Surrendered Premises............................................ 17
18.2 Notice of Option............................................................. 17
18.3 Holdover..................................................................... 18
19. GENERAL............................................................................... 18
19.1 Gender....................................................................... 18
19.2 Binding Effect............................................................... 18
19.3 Modifications................................................................ 18
19.4 Notices...................................................................... 18
19.5 Cumulative Remedies.......................................................... 19
19.6 Saving Clause................................................................ 19
19.7 Waivers...................................................................... 19
19.8 Captions..................................................................... 19
19.9 Choice of Law................................................................ 19
19.10 Estoppel Certificate......................................................... 19
19.11 Right to Cure............................................................... 19
19.12 Use of Building Name........................................................ 20
19.13 Counter Parts............................................................... 20
19.14 Time of the Essence......................................................... 20
20. AUTHORITY FOR EXECUTION............................................................... 20
20.1 Corporate Authority.......................................................... 20
21. QUIET ENJOYMENT....................................................................... 20
22. COMPLIANCE WITH DECLARATIONS.......................................................... 20
23. BROKERAGE............................................................................. 20
24. SIGNS................................................................................. 21
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
25. DEMISED PREMISES CONSTRUCTION......................................................... 21
25.1 Shell Condition.............................................................. 21
25.2 TENANT's Finish Allowance.................................................... 21
25.3 Leasehold Improvements....................................................... 22
26. REPRESENTATIONS AND WARRANTIES OF LANDLORD............................................ 22
27. ENVIRONMENTAL COMPLIANCE.............................................................. 23
28. NOTICE OF VACANCY..................................................................... 24
29. EXISTING LEASE........................................................................ 24
</TABLE>
<PAGE> 6
SUMMARY SHEET
THIS AGREEMENT made and entered into on this 30th day of April, 1998, in
Wichita, Kansas,
BY AND BETWEEN
VANTAGE POINT PROPERTIES, INC.,
a Kansas corporation, whose address is
8110 E. 32nd, Suite 100, Wichita, Kansas
67226 hereinafter referred to as
"LANDLORD"
AND
CANDLEWOOD HOTEL COMPANY, INC. a
Delaware corporation, whose address is
9342 E. Central, Wichita, Kansas 67206
hereinafter referred to as
"TENANT"
SUMMARY OF GENERAL BASIC PROVISIONS
A. Leased Premises: Approximately 28,175 gross square feet of floor
space consisting of the entire second floor of a new office building to be
constructed in Wilson Estates Office Park, Wichita, Kansas
B. Term: Five (5) years, subject to options
C. Monthly Base Building Rent:$40,502.00 ($17.25 per square foot)
D. Additional Expenses: See Section 3.3 hereof
E. Security Deposit: $10,000
<PAGE> 7
W I T N E S S E T H:
For and in consideration of the mutual covenants and agreements
contained herein, the parties hereto for themselves, their respective successors
and assigns, agree as follows:
1. LEASED PREMISES:
1.1 BUILDING CONSTRUCTION: It is understood by the parties that
the LANDLORD intends to construct an office building to be known as the
Candlewood Hotel Company Office Building (herein the "BUILDING"). The Building
is located in Wilson Estates Office Park (herein the "OFFICE PARK"). A copy of
the site plan depicting the planned Office Park is attached hereto as Exhibit A
and made a part hereof by this reference. The Building will be constructed on
the land (herein the "LAND") described in Exhibit B, which is also attached
hereto and made a part hereof by this reference.
1.2 DESCRIPTION OF LEASED PREMISES: (a) LANDLORD does hereby
lease to TENANT and TENANT does hereby hire from LANDLORD office space,
hereinafter called the "DEMISED PREMISES" or "LEASED PREMISES" which constitutes
the entire second floor of the Building. The location of the demised premises is
shown and outlined on the floor plan attached hereto as Exhibit C and made a
part hereof by reference. It is agreed that the leased premises will contain
approximately 28,175 gross square feet and that the Building will contain
approximately 56,350 square feet of total gross space (exclusive of any basement
area). TENANT's prorata share of the Building is 50% of the total gross area of
the Building.
(b) Exhibits A and B are provided for informational purposes only
and shall not be deemed to be a warranty, representation or agreement by
LANDLORD that the Office Park, Land, Building or demised premises, or any other
information contained thereon will be exactly as indicated on such Exhibits.
Notwithstanding Exhibits A and B, or any other provision of this Lease to the
contrary, LANDLORD reserves the right to change, modify, add to or subtract from
the size and dimensions of the Office Park or Land, or parts thereof, including,
but not limited to, the number, location and dimensions of tenant spaces, the
size and configuration of parking areas, entrances, exits, corridors, signage,
number of tenant spaces, identity of tenants and the size, shape and arrangement
of Common Areas outside of the "Protected Zone." Inside the area described on
Exhibit A hereto as the "PROTECTED ZONE," LANDLORD must obtain TENANT's written
approval before making any changes or modifications, which approval shall not be
unreasonably withheld or unduly delayed.
1.3 DATE OF OCCUPANCY: (a) It is understood by the parties that
the LANDLORD will own the Building and the demised premises will be a part of
and located within said Building. The LANDLORD covenants and agrees to make all
reasonable efforts to have the
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demised premises completed and ready for occupancy by TENANT in accordance with
the following schedule, assuming the Lease is executed no later than May 1,
1998:
5/1/98: Break Ground
8/1/98: TENANT shall complete final design of the leased premises and submit
(3 mos) for LANDLORD approval, which approval shall not be unreasonably
withheld.
11/1/98: The demised premises, in Shell Condition as defined in Section 25.1
(6 mos) hereof, shall be weather-tight, ready for commencement of Leasehold
Improvement work.
2/1/99: TENANT has the right to enter into the demised premises for the purpose
(9 mos) of installing computer network cabling and telephone cabling. Said
entry shall not constitute early occupancy, and no rental payment shall
be due for said occupancy.
3/1/99: Target Commencement Date. The demises premises is Ready for Occupancy.
(10 mos)
(b) If Landlord fails, is delayed, or for any reason is unable to
deliver the demised premises to the TENANT, Ready for Occupancy, by April 15,
1999, then LANDLORD shall credit TENANT'S rent by $500 for each day that
LANDLORD delivers the leased premises, Ready for Occupancy, past April 15, 1999.
Said rent credit shall be in addition to the postponement of the Commencement
Date. In the event LANDLORD is unable to deliver the leased premises by May 15,
1999, then TENANT may, at its option, terminate this agreement no later than May
25, 1999. If such notice is given, this Lease, and the rights and obligations of
the parties hereunder, shall thereupon cease and terminate without need of the
execution of any further instrument, but if LANDLORD shall request, TENANT shall
execute an instrument in recordable form whereby TENANT releases and surrenders
all right, title and interest which it may have in and to the demised premises
under this Lease, or otherwise. Except as is otherwise herein expressly provided
to the contrary, this Lease shall not be voidable by TENANT, nor shall LANDLORD
be liable to TENANT for any loss or damage resulting from delay or failure in
the delivery of the demised premises to TENANT. In any case, LANDLORD shall
provide TENANT two weeks advance notice of the date carpet will be installed and
ready for placement of furniture in the demised premises.
(c) The phrase "READY FOR OCCUPANCY" shall mean that Leasehold
Improvements have been substantially completed, that vacant possession of the
demised premises, in broom clean condition, is available to be delivered to
TENANT, and that
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LANDLORD, on application and payment therefor, would have the right to obtain a
certificate of occupancy for the demised premises from governmental authorities
having jurisdiction over the issuance of such certificate.
(d) LANDLORD agrees to provide TENANT ten (10) business days,
rent abated, for moving in and setting up furniture in the demised premises
beginning on the latter of (i) the date specified in LANDLORD's notice to TENANT
regarding the date carpet will be installed and ready for placement of furniture
in the demised premises pursuant to 1.3(b) hereof; or (ii) the actual date the
carpet is installed and ready for placement of furniture in the demised
premises.
2. TERM OF LEASE:
2.1 ORIGINAL TERM: This Lease shall be for a period of Five (5)
years. The term of this Lease shall commence on the day LANDLORD delivers
possession of the demised premises to TENANT (herein the "COMMENCEMENT DATE")
and shall expire Five (5) years after the last day of the month in which the
Certificate of Possession was executed in accordance with the provisions of
paragraph number 2.4 hereof.
2.2 ACCEPTANCE OF LEASED PREMISES: By occupying the leased
premises, TENANT shall be deemed to have accepted the same as being in good and
sanitary order, condition and repair and to have acknowledged that the same
comply fully with LANDLORD's covenants and obligations hereunder except for
latent defects and punch-list items brought to LANDLORD's attention within sixty
(60) days after the Commencement Date.
2.3 EARLY OCCUPANCY: In the event that LANDLORD shall permit
TENANT to occupy the leased premises prior to the Commencement Date of the term,
such occupancy shall be at the Base Building Rental rate hereinafter provided
and such occupancy shall be subject to all other terms and provisions of this
Lease. Said early possession shall not advance the termination date hereinbelow
provided. If TENANT'S occupancy commences other than the first of the month,
TENANT shall occupy the leased premises under the terms and provisions of this
Lease and rent for the pro rata portion of said month shall be paid.
2.4 CERTIFICATE OF POSSESSION: The parties agree to execute a
certificate evidencing (i) the date that TENANT first took possession of the
leased premises; and (ii) the actual amount of Base Building Rent hereunder in
accordance with sections 3.1 and 25.2 hereof.
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3. RENTAL:
3.1 BASE BUILDING RENT: TENANT promises and agrees to pay to
LANDLORD as Base Building Rent for the leased premises the sum of Forty Thousand
Five Hundred Two and 00/100 Dollars ($40,502.00), based on $17.25 per gross
square foot, in advance on the first day of each and every month of the term
hereof.
3.2 RENT ADJUSTMENTS: The foregoing Base Building Rent shall be
adjusted at the beginning of each calendar year, beginning January 1, 2000. The
original Base Building Rent hereunder shall be increased proportionately with
any increase in the Consumer Price Index for "All Urban Consumers - All Items"
(1982-84 = $100.00) (The "BLS Index") issued by the Bureau of Labor Statistics
of the United States Department of Labor; provided, any increase due to such
Index for any calendar year shall not exceed 5%. The monthly Base Building Rent,
commencing with the first full calendar year of the term of this Lease, shall be
adjusted annually, as of each January 1, by multiplying the original Base
Building Rent by a fraction, the numerator of which shall be the BLS Index for
the month of January of the year for which the Base Building Rent is being
adjusted and the denominator of which shall be the BLS Index for the first month
of the term of this Lease. Said product shall be the adjusted Base Building Rent
thereafter until the following January when such rent shall be further adjusted
in accordance with the foregoing provisions. In the event the Bureau of Labor
Statistics shall no longer publish the BLS Index so the BLS Index figure for any
January shall not be available, the parties shall mutually agree on a substitute
of the nearest equitable and practical index available for achieving the same
purpose. In no event shall the monthly Base Building Rent for any calendar year
following the Commencement Date be less than the monthly Base Building Rent for
the immediately preceding calendar year. In the event the necessary index
figures are not available on January 1 of each calendar year of the term of this
Lease, then TENANT shall continue to pay rent at the rate for the preceding year
until such time as such figures are available and LANDLORD notifies TENANT of
the new rental rate. On the first day of the month following such notification,
TENANT shall commence to pay the Base Building Rent at its newly adjusted rate
and shall further pay all deficiencies in rent for any of the prior months
during which TENANT paid rent at the preceding year's rate.
3.3 ADDITIONAL TAXES: As additional rental (herein the
"ADDITIONAL TAXES"), TENANT agrees to pay to Landlord, in equal monthly
installments, during the term of this Lease the amount, if any, by which the
"Actual Tax Expense" (hereafter defined) exceeds the "Base Tax Expense"
(hereafter defined). For the purposes of this Lease, the phrase "ACTUAL TAX
EXPENSE" means one-half of the actual amount of "Taxes" (hereafter defined)
which become due and payable during the applicable calendar year of the term
hereof. For the purposes of this Lease, the phrase "BASE TAX EXPENSE" means
one-half of the actual amount of Taxes for the calendar year 1999, grossed up to
reflect 95% occupancy and full assessment. For the purposes
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of this Lease, the term "TAXES" means the aggregate of all taxes, rates,
charges, levies, and assessments (including assessments for governmental
improvements) payable by LANDLORD and imposed by any taxing authority upon or in
respect of the Building, Land and other improvement located on the Land,
including, without limitation, any tax imposed on the capital invested in the
Land or improvements on the Land, together with personal property taxes, and all
other governmental charges, impositions, assessments and fees, general and
special, ordinary and extraordinary, foreseen and unforeseen, of any kind and
nature whatsoever, which may at any time during the term be levied, assessed,
imposed upon or become a lien upon the Land or the rents, receipts and income
received by the LANDLORD, but not including federal, state and local income
taxes of the LANDLORD, or penalties assessed against LANDLORD for late payment
of taxes to the extent not caused by TENANT. In determining Taxes, any corporate
income, profits, excess profits, and business tax imposed upon the income of
LANDLORD and any other impost of a personal nature charged or levied against the
LANDLORD shall be excluded, except to the extent that it is levied in lieu of
taxes, rates, charges, or assessments in respect of the Building, Land or any
improvements thereon. If during the Lease term, any special assessments are
assessed against the Building or any portion of it which LANDLORD may elect to
currently pay in full, or elect to pay such assessment over a term of years with
interest, LANDLORD shall elect to cause such assessment to be paid over the
longest term possible, with interest, and only such installments of interest and
principal which become actually due and payable during any calendar year shall
be considered to be a portion of the taxes payable during such calendar year.
3.4 ESTIMATES OF ADDITIONAL TAX EXPENSES: LANDLORD shall furnish
to TENANT, beginning January 1, 2000, LANDLORD's written estimate of the
Additional Taxes for said calendar year and at the beginning of each calendar
year thereafter throughout the term of this Lease LANDLORD shall furnish TENANT
LANDLORD'S written estimate of the Additional Taxes for said calendar year and
TENANT shall pay to LANDLORD on the first day of each month of the term hereof
as additional rental 1/12 of the Additional Taxes.
3.5 RECONCILIATIONS: LANDLORD shall also furnish TENANT at the
end of each calendar year throughout the term of this Lease a copy of the actual
invoice for Taxes for the applicable calendar year. In the event TENANT has
overpaid TENANT'S proportionate share of the Additional Taxes, LANDLORD shall
credit such overpayment against future Additional Taxes required to be paid by
TENANT. In the event TENANT has underpaid TENANT'S proportionate share of the
Additional Taxes, TENANT shall pay LANDLORD such underpaid amount within thirty
(30) days following receipt by TENANT of a written notice of the amount of such
underpayment.
3.6 ADJUSTMENTS FOR PARTIAL YEARS: During the last calendar year
of the term of this Lease, TENANT shall be obligated to pay a pro rata portion
of the Additional Taxes due and
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payable for such calendar year based upon the part of such years during which
this Lease is in effect.
3.7 SURVIVAL OF OBLIGATION: TENANT's obligation to pay the
Additional Taxes as provided herein shall survive the termination of this Lease,
as shall LANDLORD's obligation to refund any excess Additional Tax payments.
3.8 COMMON AREAS: (a) TENANT and TENANT's employees, agents,
officers, contractors, and invitees shall have the right to use, in common with
the other tenants of the Building, the "Common Areas" (hereafter defined). The
term "Common Areas" shall be deemed to mean such areas, improvements, space, and
equipment in or at the Building and surrounding grounds reasonably designated by
the LANDLORD, from time to time, to the general usage of all tenants of the
Building and their employees, customers and invitees, including without
limitation, all designated parking areas, access roads, driveways, entrances and
exits, retaining walls, landscaped areas, roads and pathways, accommodation
areas such as sidewalks, grass plots, ornamental planting, entry monuments and
signs, directional signals and the like. Notwithstanding any other provision
hereof to the contrary, LANDLORD reserves the right, from time to time, to
change those areas which will constitute Common Areas and specifically reserves
the right to remove and exclude areas from constituting a part of the Common
Area. Common Areas and Land shall be referred to herein collectively as the
"Total Building Facilities." The number of parking spaces and the amount of
gross space associated with the leased premises are fixed in this Lease, and
LANDLORD cannot modify these in any way without written permission from TENANT
if said changes would result in a decrease in existing accommodations to TENANT
as provided herein.
3.9 PAYMENT ADDRESS: All payments for Base Building Rent and all
other sums (whether designated additional rent or otherwise) shall be paid to
LANDLORD at 8080 E. Central, Suite 160, Wichita, Kansas 67206, or to such other
person or at such other place as LANDLORD may from time to time designate in
writing.
3.10 INTEREST CHARGES: TENANT does hereby covenant and agree
promptly to pay the Base Building Rent, Additional Taxes and other adjustments
and charges herein reserved as and when the same shall become due and payable,
without demand therefor, and without any set-off or deduction whatsoever, and to
keep and perform, and to permit no violation of, each and every one of the
covenants, agreements, terms, provisions and conditions herein contained on the
part and behalf of the TENANT to be kept and performed. Rental and other monies
due LANDLORD under this Lease not paid within ten (10) days after written notice
of Default shall bear interest from the date due at the highest rate allowed by
law but not to exceed one and one-half (1 1/2) percent per month.
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4. ORDINANCES AND REGULATIONS:
4.1 LEASED PREMISES: TENANT will maintain the leased premises in
a clean and healthful condition. TENANT hereby agrees to comply with all laws,
ordinances, orders, rules, and regulations (state, federal, municipal and other
agencies or bodies having any jurisdiction thereof) with reference to use,
condition or occupancy of the leased premises. TENANT further agrees to comply
with all reasonable and non-discriminatory rules and regulations which may be
hereafter established and consistently enforced from time to time by LANDLORD,
initially, those set forth on Exhibit 'D' hereto and made a part hereof by this
reference. LANDLORD reserves the right from time to time to make additional
modifications to said rules and regulations which shall be binding upon TENANT
upon delivery of a copy thereof to TENANT. LANDLORD shall not be responsible to
TENANT for the nonperformance by any other tenants or occupants of any of said
rules and regulations. TENANT will not knowingly violate or permit the violation
of any condition imposed by the standard fire insurance policy issued for office
buildings in the Wichita, Kansas area, and not knowingly do anything or keep
anything in the leased premises which would increase the fire or other casualty
insurance rate on the Building or the property therein, or which would result in
insurance companies of good standing refusing to insure the Building or any such
property in amounts and against risks reasonably determined by LANDLORD.
4.2 TOTAL BUILDING FACILITIES: LANDLORD will maintain the Total
Building Facilities in a clean and healthful condition. LANDLORD hereby agrees
to comply with all laws, ordinances, orders, rules and regulations (state,
federal, municipal and other agencies or bodies having any jurisdiction thereof)
with reference to use, condition or occupancy of the Total Building Facilities.
LANDLORD agrees to maintain the Total Building Facilities consistent with other
first class office buildings in Wichita, Kansas.
5. INSPECTION:
5.1 RIGHT TO INSPECT, REPAIR, ALTER AND ADD: TENANT will permit
LANDLORD and its officers, agents and representatives to enter into and upon any
and all parts of the leased premises during business hours to inspect the same,
clean or make repairs or alterations or additions after providing 24 hours oral
notice with the exception of emergencies. Significant alterations or repairs
will be made after business hours.
5.2 RIGHT TO SHOW: Upon 24 hours oral notice, TENANT will permit
LANDLORD, during business hours, to show the leased premises to any owner, or
mortgagee or any prospective purchaser, or any holder of any ownership or
security interest in the Building or the Land, or of LANDLORD'S interest therein
(and to their respective representatives) and similarly to show the leased
premises to any person contemplating the leasing of all or a portion
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of the same during the last three hundred sixty-five (365) days of the term or
any extended term hereof, provided TENANT has not exercised any option to extend
the Lease pursuant to Section 18.2 hereof.
6. ASSIGNMENT AND SUBLEASE:
6.1 NO ASSIGNMENT, SUBLEASE OR ENCUMBRANCE: TENANT will not
assign, mortgage, pledge or encumber this Lease, or any part thereof, directly
or indirectly, or allow the same to be assigned by operation of law or otherwise
or sublet the leased premises or any part thereof, or use or permit the same to
be used for any other purpose than stated in paragraph 10 hereinafter, without
the prior, written consent of LANDLORD in each instance, which consent shall not
be unreasonably withheld. Such permitted assignment or sublease shall not
relieve the TENANT from its obligations hereunder for the payment of rents or
the performance of conditions, covenants and provisions of this Lease.
Notwithstanding the above, TENANT shall have the absolute right from time to
time, to sublet, assign or otherwise transfer all or any portion of its interest
in this Lease to a Licensee, Franchisee, or operating subsidiary or affiliate of
TENANT, without LANDLORD's approval, written or otherwise, so long as TENANT
remains fully liable under this Lease. A transfer of ownership of TENANT shall
not constitute an assignment of this Lease.
6.2 LANDLORD'S TRANSFER: LANDLORD shall have the right to
transfer and assign, in whole or in part, any of its rights under this Lease and
in the Building and property referred to herein and, to the extent that such
assignee assumes LANDLORD'S obligations hereunder, LANDLORD shall by virtue of
such assignment be released from such obligations.
6.3 RIGHT TO COLLECT FROM ASSIGNEE: If the leased premises are
sublet or occupied by anybody other than TENANT and TENANT is in default
hereunder or if this Lease is assigned by TENANT then LANDLORD may collect rent
from the assignee under TENANT or occupant and apply the net amount collected to
the rent herein reserved; but no such collection shall be deemed a waiver of the
covenant herein against assignment or subletting or the acceptance of such
assignee under TENANT or occupant as "TENANT", or a release of TENANT from
further performance of the covenants herein contained.
7. DESTRUCTION OF PREMISES:
7.1 TOTAL DESTRUCTION: In the event that the Building should be
totally destroyed by fire, tornado or other casualty, or if the Building should
be so damaged that rebuilding or repairs cannot be completed within one hundred
eighty (180) days after the date of such damage, either LANDLORD or TENANT shall
have the option of terminating this Lease by giving
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written notice to the other at any time prior to the sixtieth (60th) day after
the date of such damage.
7.2 PARTIAL DESTRUCTION: If the leased premises are partially
damaged by fire, tornado, or other casualties, or totally destroyed thereby and
neither party elects to terminate this Lease within the provisions of paragraph
7.1 above, then the LANDLORD agrees to restore the leased premises to a kind and
quality substantially similar to that immediately prior to such destruction or
damage. LANDLORD further agrees to make reasonable efforts to find temporary
space for TENANT. Said restoration shall be commenced within forty-five (45)
days after the date of such damage and diligently prosecuted to completion by
LANDLORD. In case LANDLORD has not completed such repairs within one hundred
eighty (180) days after the date of the damage, then all rent accruing after
said one hundred eighty (180) days shall be equitably and proportionately
suspended and adjusted according to the nature and extent of the destruction or
damage, pending completion of rebuilding, restoration or repair, except that in
the event the destruction or damage is so extensive as to make it infeasible for
the TENANT to conduct all of its business on the leased premises, the rent shall
be proportionately reduced or abated (based on the extent to which the leased
premises is unusable) from the date of said damage until the premises are
restored by the LANDLORD or until the TENANT resumes the conduct of all of his
business on the leased premises, whichever shall first occur. In the event
LANDLORD cannot restore the premises within two hundred seventy (270) days from
the date of damage, TENANT may, at its option, terminate this Lease. The
LANDLORD shall not be liable for any inconvenience or interruption of business
of the TENANT occasioned by fire, tornado or other casualty. Notwithstanding the
foregoing to the contrary, LANDLORD shall not be obligated to make any repairs
which cost in excess of the amount of insurance proceeds received by LANDLORD in
connection with such damage.
8. CONDEMNATION:
8.1 TOTAL TAKING: If during the term of this lease, or any
renewal thereof, the whole of the leased premises, or such portion thereof as
will make the leased premises unusable for the purpose leased, be condemned by
public authority for public use, then, in either event, the term hereby granted
shall cease and come to an end as of the date of the vesting of title in such
public authority, or when possession is given to such public authority,
whichever event last occurs. Upon such occurrence, the rent shall be apportioned
as of such date and any prepaid rent shall be returned to the TENANT. TENANT
shall not be entitled to any part of the award or any payment in lieu thereof,
nor shall TENANT be entitled to any award for the loss of its leasehold estate.
The entire award for the taking of the leased premises, the Building and the
land upon which it is located shall belong solely and exclusively to LANDLORD.
TENANT may file a claim for loss of TENANT's trade fixtures and for TENANT's
moving expenses and loss of business.
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8.2 PARTIAL TAKING: If a portion of the leased premises or
Building is taken or condemned by public authority for public use so as not to
make the remaining portion of the leased premises unusable for the purposes
leased, this Lease shall continue in full force and effect unless LANDLORD
determines that the continued operation of the Building, after such taking, is
not practical, in which event LANDLORD may terminate this Lease by giving TENANT
written notice of termination to be effective upon the day the condemning
authority takes possession of the condemned portion. In the event of such a
termination, all rent and other charges shall be adjusted, prorated and paid to
the date of termination. In the event of such a partial taking and this Lease is
not terminated in accordance with the foregoing, then, effective upon the day
the condemning authority takes possession of the condemned portion, the rent
shall be equitably and fairly reduced and abated for the remainder of the term
in proportion to the amount of the leased premises taken and the LANDLORD shall
be entitled to the entire award for such partial taking.
9. INDEMNIFICATION:
9.1 INDEMNIFICATION OF LANDLORD: TENANT will defend, by counsel
reasonably acceptable to LANDLORD, indemnify and save harmless LANDLORD of and
from any and all fines, suits, claims, demands, expenses, costs and actions of
any kind arising out of, directly or indirectly, TENANT'S or TENANT's agents,
employees, contractors, guests or invitees use, occupancy, or control of the
leased premises or Common Areas, or any breach, violation or non-performance of
any covenant hereof on the part of TENANT; and except for LANDLORD'S own
negligence, LANDLORD shall not be liable to TENANT or TENANT'S agents,
employees, guests or invitees for any damage to persons or property due to
condition, design or defect in or on the leased premises, Building or its
mechanical systems which may exist or occur.
9.2 INDEMNIFICATION OF TENANT: LANDLORD will defend, by counsel
reasonably acceptable to TENANT, indemnify and save harmless TENANT of and from
any and all fines, suits, claims, demands, expenses, costs and actions of any
kind arising out of, directly or indirectly, LANDLORD's or LANDLORD's agents,
employees, contractors, guests or invitees use, occupancy, or control of the
Building or the Common Areas, or any breach, violation or non-performance of any
covenant hereof on the part of LANDLORD.
9.3 LANDLORD'S LIABILITY: LANDLORD and its agents shall not be
liable to TENANT or to TENANT'S officers, employees, agents, licensees or
invitees for any loss or damage to any part of the Building or the Land or
related improvements or appurtenances thereto becoming out of repair, any defect
in or failure of pipes or wiring, the backing up of any drains or the bursting
or leaking of any pipes, faucets and plumbing fixtures, any gas, water, steam,
electricity, oil or rain leaking, escaping or flowing into the leased premises
from any part of the
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Building, or from the pipes, appliances or plumbing works therein or from the
roof, street or subsurface or from any other place resulting from dampness or
any other cause whatsoever, theft, fire, explosion, Act of God, riot, war,
insurrection, court order or order of governmental authority or any other matter
beyond the control of the LANDLORD, unless caused by or due to the negligence of
LANDLORD, its agents, servants or employees. LANDLORD or its agents shall not be
liable for interference with the light or other incorporeal hereditaments, loss
of business by TENANT nor shall LANDLORD be liable for any latent defect in the
leased premises or in the Building. TENANT shall give prompt written notice to
LANDLORD in case of fire or accidents in the leased premises or in the Building
or of defects therein or in the fixtures or equipment located therein.
10. USE OF PREMISES:
TENANT shall use and occupy the leased premises and the Building
as and for the following purpose: General office use including, but not limited
to, training, sales, storage, and customer services and for no other purpose.
11. IMPROVEMENTS, REPAIRS, ALTERATIONS AND TAXES:
11.1 PROHIBITIONS: TENANT shall not, without LANDLORD'S prior
written consent, which shall not be unreasonably withheld:
a. make any alterations, additions or improvements in the
leased premises or the Building other than with respect to
TENANT's furnishings, decoration of the leased premises
and communications and computer cabling inside the leased
premises;
b. knowingly do or suffer anything to be done on the leased
premises or the Building which will render LANDLORD'S
insurance void or the insurance risk more hazardous;
c. permit the accumulation of waste or refuse matter other
than in the normal course of business;
d. abandon the leased premises for more than twelve months
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11.2 TENANT'S MAINTENANCE OBLIGATIONS: TENANT shall take good
care of the leased premises and the fixtures and appurtenances therein. TENANT
shall maintain the leased premises, at all times during the term of this Lease,
in good condition and repair, ordinary wear and tear excepted. All damage or
injury to the leased premises and to its fixtures, appurtenances and equipment
or to the Building of which the same form a part or to its fixtures,
appurtenances and equipment caused by TENANT moving property in or out of the
Building or by installation or renewal of furniture, fixtures or other property
or resulting from any cause of any kind or nature whatsoever due to
carelessness, omission, neglect, improper conduct or other cause of TENANT, its
servants, employees, agents, visitors, or licensees shall be repaired, restored
or replaced promptly by TENANT at its sole cost and expense to the reasonable
satisfaction of LANDLORD. All the aforesaid repairs, restorations or
replacements shall be in quality and class equal to the original work or
installations. If TENANT fails to make such repairs, restorations or
replacements, the same may be made by LANDLORD at the expense of TENANT and
collectible as additional rent or otherwise and shall be paid by TENANT within
ten (10) days after presentment of a bill or statement therefor. Alterations,
additions, improvements and immovable fixtures shall become the property of
LANDLORD upon installation and shall not be removed without LANDLORD'S prior
written consent.
11.3 MECHANIC LIENS: TENANT shall not have the power or right to
create in any way liens for labor or material which would be a lien upon any
interest of LANDLORD or in and to the leased premises and shall protect
LANDLORD'S interest against any liens or claims for improvements made by TENANT.
In the event any such liens are filed, TENANT agrees, at its expense, to cause
the same to be released or secured by a bond within ten (10) days after the same
are filed.
11.4 BONDING AGAINST LIENS: If TENANT plans to make improvements,
additions or alterations to the leased premises, and said alterations or
additions are estimated to cost in excess of $20,000.00, LANDLORD may require,
at LANDLORD'S sole option, that TENANT provide LANDLORD, at TENANT'S sole cost
and expense, a payment and performance bond in an amount equal to one and
one-half (1 1/2) times the estimated cost of said improvements, additions or
alterations, to insure LANDLORD against any liability for mechanics' and
materialmen's liens and to insure completion of the work.
11.5 TAXES ON TENANT'S PROPERTY AND IMPROVEMENTS: TENANT shall
pay or cause to be paid, before delinquent, any and all taxes levied or assessed
during the term hereof or any extension or renewal thereof, upon any and all of
TENANT'S leasehold improvements, equipment, furniture, fixtures, and personal
property located in the leased premises. If the same shall be assessed and taxed
with the Building, TENANT shall pay to LANDLORD its prorata share of such taxes
within thirty (30) days after delivery to TENANT of a written statement by
LANDLORD setting forth the amount of such taxes applicable to TENANT'S property.
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12. INSURANCE:
12.1 TENANT'S INSURANCE: With respect to the leased premises and
Common Areas, TENANT shall, at TENANT'S sole cost and expense, obtain and keep
in force at all times during the term of this Lease, comprehensive general
liability insurance, including property damage, in the amount of at least One
Million Dollars ($1,000,000.00) combined single limit, insuring LANDLORD and
TENANT against any liability arising out of the ownership, use, occupancy or
maintenance of the leased premises and all areas appurtenant thereto. The limit
of said insurance shall not, however, limit the liability of the TENANT
hereunder. TENANT may carry said insurance under a blanket policy providing,
however, said insurance by TENANT shall have a LANDLORD'S protective liability
endorsement attached thereto. Insurance required hereunder shall be in companies
licensed in the State of Kansas and shall have a rating of A or better in
"Best's Insurance Guide" and a financial rating of Class XII or better. Mutual
insurance companies may be used only if they are nonassessable. Such policy
shall name LANDLORD as an additional insured and shall be primary and
noncontributing with any insurance carried by LANDLORD. No policy shall be
cancelable or subject to reduction of coverage except after thirty (30) days
written notice to LANDLORD. LANDLORD shall receive reasonable evidence of
insurance upon request.
12.2 LANDLORD'S INSURANCE: LANDLORD shall maintain during the
Lease term and any option term, fire and broad form extended coverage insurance
on the Building and Common Areas for full replacement value. Each policy of
insurance maintained by LANDLORD shall be issued by a responsible and solvent
insurance carrier licensed to do business in the State of Kansas. Each such
policy of insurance shall provide protection against losses so insured for the
benefit of the LANDLORD, TENANT and any mortgagee as their interest may appear.
LANDLORD shall furnish TENANT proof thereof, and each such policy of insurance
shall expressly provide for thirty (30) days notice to the TENANT prior to any
cancellation or modification of coverage.
12.3 WAIVER OF SUBROGATION: LANDLORD and TENANT each hereby waive
all claims against the other for any loss of or damage to any of its property if
such property is insured against such loss or damage under any valid and
collectible insurance policy or policies, but only to the extent of any recovery
collected by it under such insurance, subject however, to the limitation that
this waiver shall apply only when permitted by the applicable policy or policies
of insurance. LANDLORD and TENANT each hereby further agree to cause any and all
policies containing extended coverage and/or material damage insurance now or
hereafter carried by it to be endorsed with a subrogation clause providing in
substance that the insurer has waived any or all rights of recovery against the
other party hereto for loss of or damage to the insured property first occurring
after the date of such waiver; provided, however, if there is a charge or
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extra premium for such an endorsement, the party obligated to obtain the same
shall be excused therefrom unless the other party pays such charge or extra
premium.
13. DEFAULT:
13.1 DEFAULT - CURE PERIOD: If (i) TENANT defaults in payment of
Base Building Rent or Additional Taxes or (ii) defaults in the performance of
any of the covenants or conditions hereof, LANDLORD, in such event(s), may give
to TENANT written notice of such default and if TENANT fails to cure any Base
Building Rent or Additional Taxes default within ten (10) days after the giving
of such notice or fails to cure any other default within thirty (30) days after
the giving of such notice, or, if such default other than Base Building Rent or
Additional Taxes, cannot be reasonably cured within 30 days, to immediately
begin to cure and diligently pursue said cure to completion, LANDLORD may, at
its election, terminate this Lease with TENANT, and on the date specified in
said notice the term of this Lease shall terminate and TENANT shall then quit
and surrender the leased premises to LANDLORD, but TENANT shall remain liable as
hereinafter provided. In the event of a default which is not cured in the
applicable cure period, LANDLORD may, with or without terminating this Lease, at
any time thereafter resume possession of the Building by any lawful means and
remove TENANT or other occupants and their effects.
13.2 RELETTING: In any case where LANDLORD has recovered
possession of the leased premises by reason of TENANT'S default, LANDLORD may,
at LANDLORD'S option, occupy the leased premises or cause the leased premises to
be reasonably redecorated, altered, divided, consolidated with other adjoining
premises, or otherwise changed or prepared for reletting, and may relet the
leased premises or any part thereof as agent of TENANT or otherwise for a term
or terms to expire prior to, at the same time as, or subsequent to the original
expiration date of this Lease, at LANDLORD'S option, and receive the rent
therefor, applying the same first to the payment of such expenses as LANDLORD
may have incurred in connection with the recovery of possession, redecoration,
altering, dividing, consolidating with other adjoining premises, or otherwise
changing or preparing for reletting, and the reletting, including reasonable
brokerage fees and attorneys' fees (to the extent allowed by law) and then to
the payment of damages in amounts equal to the rent hereunder and to the cost
and expense of performance of the other covenants of TENANT as herein provided;
and TENANT agrees, whether or not LANDLORD has relet, to pay to LANDLORD damages
equal to the rent and other sums herein agreed to be paid by TENANT during the
remainder of the original term of this Lease, less the net proceeds of the
reletting, if any, as ascertained from time to time and the same shall be
payable by TENANT on the several rent days above specified. LANDLORD shall have
the right, in reletting the leased premises, to grant reasonable rent
concessions and TENANT shall not be entitled to any credit by reason thereof. No
such reletting shall constitute a surrender and
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acceptance or be deemed evidence thereof or in any way relieve TENANT of its
obligations under this Lease except to the extent of the net proceeds received
from such reletting.
13.3 LANDLORD OCCUPANCY: In any case where LANDLORD has recovered
possession due to TENANT's Default, if LANDLORD elects to occupy and use the
leased premises or any part thereof during any part of the balance of the term
as originally fixed or since extended, there shall be allowed against TENANT'S
obligations for rent and other damages as herein defined, during the period of
LANDLORD'S occupancy, the reasonable value of such occupancy, not to exceed in
any event the rent herein reserved and such occupancy shall not be construed as
a release of TENANT'S liability hereunder.
13.4 CONSTRUCTIVE EVICTION: TENANT shall not be entitled to claim
a constructive eviction from the leased premises unless TENANT shall have first
notified LANDLORD in writing of the condition or conditions giving rise thereto
and unless LANDLORD shall have failed to remedy such conditions as soon as
reasonably practical after receipt of such notice. Notwithstanding the foregoing
to the contrary, in the event the conditions relied on by TENANT do not
constitute a constructive eviction, then no such eviction shall be deemed to
have occurred regardless of the fact that LANDLORD may not have remedy TENANT's
complaints.
13.5 NO WAIVER OF ACCORD AND SATISFACTION: No payment by the
TENANT or receipt by the LANDLORD of a lesser amount than the rent stipulated in
this Lease shall be deemed other than a payment on account of the earliest rent
due, nor shall any endorsement or statement on any check or on any letter
accompanying any check or payment as rent be deemed an accord and satisfaction,
and the LANDLORD may accept such check or payment without prejudice to its right
to recover the balance of the rent or to pursue any other remedy provided for in
this Lease.
14. LEASE AND MORTGAGES:
14.1 SUBORDINATION: This Lease shall be and is subject and
subordinate to all underlying restrictions, declarations, leases and mortgages
which may now or hereafter affect the real property of which the building forms
a part, and also to all renewals, modifications, consolidations and replacements
of said underlying restrictions, declarations, leases and said mortgages.
Although no instrument or act on the part of TENANT will be necessary to effect
such subordination, TENANT will, nevertheless, execute and deliver such further
instruments confirming such subordination of this Lease as may be desired by the
holders of said mortgages or by any of the lessors under such underlying leases.
If any underlying lease to which this Lease is subject terminates, TENANT shall,
on timely request, attorn to the owner of the reversion. In the event TENANT
fails or refuses to deliver any instrument confirming such
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subordination, within thirty (30) days after LANDLORD's request therefor, such
failure or refusal shall constitute a default under this Lease, for which there
shall be no cure period, entitling LANDLORD to enforce all of its rights and
remedies set forth herein or provided by law.
14.2 ATTORNMENT: Without limitation of any of the provisions of
this Lease, in the event that, by reason of any default on the part of LANDLORD,
any mortgagee or lessor or their respective assigns shall succeed to the
interest of LANDLORD hereunder or of any successor-LANDLORD, then at the option
of such mortgagee or lessor, this Lease shall nevertheless continue in full
force and effect and TENANT shall and does hereby agree to attorn to such
mortgagee or its assigns and to recognize such mortgagee or lessor or its
assigns as its LANDLORD. In the event TENANT fails or refuses to deliver any
instrument confirming such attornment within thirty (30) days after LANDLORD's
request therefore, such failure or refusal shall constitute a default under this
lease, for which there shall be no cure period, entitling LANDLORD to enforce
all of its rights and remedies set forth herein or provided by law.
14.3 NON-DISTURBANCE: If the demised premises or any portion
thereof is subject to a mortgage at the time this Lease commences or at any time
during the term of this Lease or any extension hereof, LANDLORD agrees to obtain
from the holder of the mortgage an agreement, in recordable form, evidencing the
mortgagee's recognition of this Lease. Said document will include the
mortgagee's agreement not to disturb TENANT during the term of this Lease or any
extension thereof so long as TENANT is not in default hereunder. The term
"mortgage" as used herein means any mortgage, assignment, deed of trust or other
transfer of the demised premises in whole or in part made as security for any
indebtedness of LANDLORD; and the term "mortgagee" as used herein means any
person to whom or for whose benefit any such mortgage of the demised premises
has been made. LANDLORD represents and warrants that there are no mortgages,
deeds of trust or superior leases presently affecting the Building or the Land
except as may be specified in this Lease.
15. SECURITY DEPOSIT:
15.1 DEPOSIT: The TENANT, concurrently with the execution of this
Lease, has deposited with the LANDLORD the sum of Ten Thousand and 00/100
Dollars ($10,000.00), the receipt whereof is hereby acknowledged, which sum
shall be retained by the LANDLORD. The deposit shall be held by LANDLORD as
security for the performance by TENANT of TENANT'S covenants and obligations
under this Lease. It being expressly understood that such deposit shall not be
considered an advance payment of rental or measure of LANDLORD'S damages in case
of default by TENANT. LANDLORD shall be under no obligation to pay or account to
TENANT for any interest on earnings accruing to LANDLORD from the use of any
such security deposit.
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15.2 APPLICATION OF DEPOSIT: Upon the occurrence of any event of
default by TENANT, and the expiration of applicable cure periods therefore,
LANDLORD may, from time to time, without prejudice to any other remedy, use such
deposit to the extent necessary to make good any arrearages of rent and any
other damage, injury, expense or liability caused to LANDLORD by such event of
default. Following any such application of the security deposit, TENANT shall
pay to LANDLORD on demand the amount so applied in order to restore the security
deposit to its original amount. TENANT'S failure to do so shall be a material
breach of this Lease. If TENANT shall fully and faithfully perform every
provision of this Lease, the security deposit or any balance thereof shall be
returned to TENANT (or, at LANDLORD'S option, to the last assignee of TENANT'S
interest hereunder) at the termination of this Lease term.
16. SERVICES AND UTILITIES:
16.1 FAILURE OF SERVICES: The failure to any extent to furnish or
any stoppage of the water service or any other services to be furnished by
LANDLORD, resulting from causes beyond the control of LANDLORD, shall not render
LANDLORD liable in any respect for damages to either person or property, nor be
construed as an eviction of TENANT or work an abatement of rent, nor relieve
TENANT from fulfillment of any covenant or agreement hereof. Should any
equipment or machinery break down, or for any cause cease to function properly,
LANDLORD shall use reasonable diligence to repair same promptly, but TENANT
shall have no claim for rebate of rent or damages on account of any
interruptions in service, beyond the control of LANDLORD occasioned thereby or
resulting therefrom. In the event the interruption of services is within
LANDLORD's control, rent shall be equitably and proportionately adjusted after
the interruption has persisted for three (3) consecutive days if such disruption
materially interferes with TENANT's ability to conduct its business.
16.2 STANDARD SERVICES: LANDLORD shall, at its own cost and
expense, furnish the following services and utilities to TENANT throughout the
term of this Lease during the normal business hours of 7:00 a.m. to 6:00 p.m.
Monday through Friday, and 8:00 a.m. to 1:00 p.m. Saturdays. Such services
exclude holidays designated as New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. In the event a holiday falls on a
weekend, services and utilities will be provided as normal on the Friday before
and the Monday following:
1. Heating and air conditioning for the comfortable use and occupancy of
the leased premises.
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2. Electricity for lighting and ordinary business purposes, including but
not limited to typewriters, adding machines, photocopy machines,
computers and any other office equipment.
3. Hot and cold running water for use in lavatories, drinking fountains and
all other plumbing fixtures.
4. Janitor service, five days each week
5. Snow removal and rubbish removal
6. Pest Control
7. Replacement of lighting tubes, lamp ballasts and bulbs
8. Parking in accordance with Section 17 of this Lease.
9. Common Area maintenance including the grounds
16.3 BUILDING SECURITY / AFTER HOURS ACCESS: Throughout the term
of this Lease, the Building will be unlocked during normal business hours of
7:00 a.m. to 6:00 p.m. Monday through Friday. TENANT will have access to the
Building and the demised premises outside of these times by use of Building keys
and/or combination locks supplied by LANDLORD in accordance with Exhibit D
hereto.
17. PARKING:
TENANT shall have the right to use in common with LANDLORD, other
tenants or occupants of the Building and their employees, agents, and business
invitees the parking facilities of the Building, if any, subject to the rules
and regulations, and any other charges of LANDLORD for such parking facilities
which may be established or altered by LANDLORD at any time or from time to time
during the term hereof. LANDLORD shall provide one hundred forty (140) parking
spaces for the demised premises plus four (4) parking spaces for every 1,000
square feet of usable area on the first floor of the Building (26,924 square
feet) which is equal to 108 parking spaces. The total number of parking spaces
for the Building shall be equal to 248 parking spaces.
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18. END OF TERM:
18.1 CONDITION OF SURRENDERED PREMISES: TENANT will, at the end
of the term of this Lease, quit and surrender to LANDLORD the leased premises
broom clean and in good order and condition except for ordinary wear and tear.
Any personal property which shall remain in the leased premises after the
expiration or termination of this Lease shall be deemed to have been abandoned,
and either may be retained by LANDLORD as its property or may be disposed of in
such manner as LANDLORD may see fit, any removal expense to be paid by the
TENANT. If the last day of the term of this Lease falls on a Sunday or a legal
holiday, this Lease shall expire on the business day immediately preceding.
18.2 NOTICE OF OPTION: (a) Provided it is not in Default
hereunder, TENANT shall have four options to extend the term of this Lease, each
for a term of sixty (60) months, upon the same terms and conditions as those
provided herein, except that no improvement allowance shall be paid for any
extended term. Base Building Rent for said option terms shall be equal to the
adjusted Base Building Rent in effect at the end of the immediately preceding
term pursuant to Sections 3.2 and 3.3 hereof.
(b) TENANT may exercise each option term by giving written notice
to LANDLORD of TENANT's election to renew, which notice must be given three
hundred sixty-five (365) days prior to expiration of the then current term.
(c) If TENANT exercises its option to extend the term of this
Lease by written notice, the Lease shall be automatically extended for the
additional period covered by the option so exercised without execution of any
further instrument.
18.3 HOLDOVER: In the event of a holdover by TENANT without
LANDLORD'S permission, TENANT shall be liable to LANDLORD for rent during the
unauthorized holdover period (determined on a daily basis) in an amount equal to
one hundred fifty (150%) percent of the Base Building Rent and Additional Taxes
in effect at the termination of the Lease. Such unauthorized holdover shall not
be construed to create any periodic tenancy rights in favor of TENANT.
19. GENERAL:
19.1 GENDER: Words of any gender used in this Lease shall be held
and construed to include any other gender, and words in singular number shall be
held to include the plural, unless the context otherwise requires.
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19.2 BINDING EFFECT: The terms, provisions, covenants and
conditions contained in this Lease shall apply to, inure to the benefit of, and
be binding upon the parties hereto and their respective permitted assigns,
successors in interest, heirs and legal representatives except as otherwise
herein expressly provided.
19.3 MODIFICATIONS: Any modifications of this Lease, or any
collateral agreement with respect to the relationship between the LANDLORD and
TENANT shall not be binding upon the LANDLORD unless the same be made in writing
and signed by an authorized representative of the LANDLORD. In the event that
the Lease herein or any of its provisions or covenants shall be modified or
stricken out, or new covenants added thereto, said changes shall not be
considered a termination of this instrument and the same shall continue in full
force and effect as so changed.
19.4 NOTICES: All notices, demands, consents and requests which
may or are required to be given by either party to the other hereunder shall be
in writing and shall be either: (i) addressed and personally delivered to an
officer of the company; or (ii) sent by certified mail, return receipt
requested, postage prepaid, addressed as set forth in this section or to such
other place as either party may from time to time designate in a written notice
to the other party. Notices, demands, consents and requests which shall be
served upon either party in the foregoing manner shall be deemed served or given
for all purposes hereunder at the time such notice, demand, consent or request
shall be personally delivered or, if mailed, the day such notice, demand,
consent or request was mailed in accordance with this section. The notice
addresses of the parties are as follows:
As to Landlord: Vantage Point Properties, Inc.
8110 E. 32nd Street North, Suite 100
Wichita, KS 67226
Attn: Paul Jackson
As to Tenant: Candlewood Hotel Company, Inc.
9342 E. Central
Wichita, KS 67206
Attn: Jeff Hitz
19.5 CUMULATIVE REMEDIES: It is agreed that each and every one of
the rights, remedies and benefits provided by this Lease shall be cumulative,
and shall not be exclusive of any other said rights, remedies and benefits, or
of any other rights, remedies and benefits allowed by law.
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19.6 SAVING CLAUSE: Invalidation of any of the provisions herein
contained by law, judgment or court order shall in nowise affect any of the
other provisions which shall remain in full force and effect.
19.7 WAIVERS: One or more waivers of any covenant, condition,
rule or regulation by the LANDLORD shall not be construed as a waiver of a
further breach of the same.
19.8 CAPTIONS: The captions are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this Lease nor the intent of any provision thereof.
19.9 CHOICE OF LAW: This Lease shall be governed exclusively by
the terms hereof, and by the laws of the State of Kansas.
19.10 ESTOPPEL CERTIFICATE: Upon not less than fifteen (15) days
prior notice by LANDLORD, TENANT will promptly execute and deliver to LANDLORD a
statement in writing certifying that this Lease is in full force and effect, the
dates to which any rent has been paid in advance, if any, and whether or not to
the best knowledge of signer, LANDLORD is in default and, if so, specifying each
default, and contain such other information or statements as LANDLORD may
require. The failure to timely deliver any such estoppel certificate shall
constitute a default hereunder.
19.11 RIGHT TO CURE: Either party ("CURING PARTY") shall have the
right, but not the obligation, at any time, without notice, to cure any default
by the other ("DEFAULTING PARTY") under this Lease and whenever the Curing Party
so elects, all costs and expenses incurred by the Curing Party in curing such
default, together with interest on the amount of costs and expenses so incurred
at the highest lawful rate, shall be paid by the Defaulting Party to the Curing
Party on demand.
19.12 USE OF BUILDING NAME: [ Intentionally Deleted ]
19.13 COUNTER PARTS: This Lease may be executed in one or more
counterparts each of which shall constitute one Lease binding on all the parties
hereto.
19.14 TIME OF THE ESSENCE: With respect to the Lease, time is of
the essence.
20. AUTHORITY FOR EXECUTION:
20.1 CORPORATE AUTHORITY: Each individual executing this Lease on
behalf of said corporation or association represents and warrants that he is
duly authorized to execute and
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deliver this Lease on behalf of said entity, in accordance with a duly adopted
resolution of the board of directors of said entity or in accordance with the
by-laws of said entity, and that this Lease is binding upon said entity in
accordance with its terms.
21. QUIET ENJOYMENT:
LANDLORD covenants that if, and so long as, TENANT keeps and
performs each and every covenant, agreement, term, provision and condition
herein contained on the part and on behalf of TENANT to be kept and performed
TENANT shall quietly enjoy the leased premises without hindrance or molestation
by LANDLORD, subject to the covenants, agreements, terms, provisions and
conditions of this Lease and to the leases or mortgages to which this Lease may
be subject and subordinate, as herein set forth.
22. COMPLIANCE WITH DECLARATIONS:
TENANT hereby acknowledges that the Building and Land are subject
to the terms and provisions of the Declaration of Covenants, Conditions and
Restrictions of Wilson Estates dated June 5, 1996, as amended, recorded in the
Office of the Register of Deeds of Sedgwick County, Kansas, in Film 1614, Page
1383 (herein the "DECLARATIONS"). TENANT hereby agrees that: (i) it is leasing
the demised premises subject to the Declarations; and (ii) it will observe and
comply with the terms and provisions of the Declarations in so far as they
relate to the demised premises and/or TENANT's use of the demised premises or
any other facilities in the Building or on the Land made available to TENANT by
LANDLORD. A copy of the Declarations is attached hereto as Exhibit E.
23. BROKERAGE:
LANDLORD and TENANT represent and warrant to each other that
neither has dealt with any real estate brokers in the negotiation of this Lease.
24. SIGNS:
TENANT shall have the right, at TENANT'S sole cost and expense,
to place its name on a shared monument sign along 21st Street as indicated on
Exhibit A hereto. TENANT shall also have the exclusive right to place its name
on the front of the Building and the non-exclusive right to place its name on
the tenant directory in the Building lobby. The design of the signs and TENANT'S
name shall be similar in design to other monument signs and building signs at
Wilson Estates Office Park. All signs shall have interior or halo illumination
and shall require LANDLORD'S written approval prior to installation.
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25. DEMISED PREMISES CONSTRUCTION:
25.1 SHELL CONDITION: LANDLORD agrees to deliver the demised
premises in "Shell Condition" to TENANT at LANDLORD's sole cost and expense. For
the purposes of this Lease, "SHELL CONDITION" includes all base Building
structural systems, concrete floors, exterior walls framed and insulated inside
the demised premises, exterior window openings and standard building glazing,
Building standard doors from the Building common areas into the demises premises
complete with frames and hardware, primary heating and air conditioning
equipment including air handlers, HVAC control system, main trunk ductwork
stubbed into the demised premises, electricity for power and lighting available
from a panel in the second floor equipment room, a main fire sprinkler line
stubbed into the premises, two wet stacks consisting of sanitary sewer, vent and
cold water (one on each end of the Building, one women's and one men's restroom
on the second floor Exhibit F and a fire alarm system for the Building pursuant
to local codes. All systems and equipment provided as part of the Building Shell
shall be adequately sized and designed to accommodate standard office use in
Wichita, Kansas. LANDLORD shall make its best efforts to provide limited
participation for TENANT in the selection of colors of interior common areas and
colors of exterior materials. The following are attached hereto to further
define the Building shell:
Exhibit F: Building Shell Floorplan--This plan shows the extent that walls,
windows, stairs, etc. will be constructed as part of the Building Shell. Any
finishes other than those shown on the plan shall be included as part of
Leasehold Improvements as defined in Section 25.3 hereof.
Exhibit G: Building Elevations--These plans show the exterior appearance of the
Building from the front, side and back views.
Exhibit H: Building Shell Specifications--These specifications identify the
types and level of finish to be completed as part of the Building Shell. Any
work performed that is not included in the Building Shell specifications shall
be included as part of Leasehold Improvements as defined in Section 25.3 hereof.
25.2 TENANT'S FINISH ALLOWANCE: LANDLORD shall be responsible for
all costs and expenses of completing TENANT's Leasehold Improvements as defined
in Section 25.3 hereof, up to a maximum of Four Hundred Fifty Thousand Eight
Hundred and 00/100 Dollars ($450,800.00), based on $16.00 per gross square foot
in the leased premises. TENANT may, at TENANT'S option, obtain bids for the
construction of the Leasehold Improvements from LANDLORD-approved contractors.
If said bids reflect a lower cost than LANDLORD'S bid, TENANT may select said
low bidding contractor to complete the Leasehold Improvements and LANDLORD shall
reimburse TENANT for the cost of constructing the Leasehold Improvements up to a
maximum of $16.00 per square foot. A list of LANDLORD-approved contractors is
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attached hereto as Exhibit I. Any costs in excess of said allowance shall be
added to the Base Building Rent hereunder at a rate of $.25 per square foot for
every $1.00 per square foot of excess Leasehold Improvement costs incurred, or,
at TENANT'S option, said excess may be paid in cash within thirty days of
receipt of an invoice together with appropriate backup documentation.
25.3 LEASEHOLD IMPROVEMENTS: Subject to LANDLORD's approval of
TENANT's floor plans, finish schedules and building specifications, which
approval shall not be unreasonably withheld, LANDLORD shall perform the work to
complete TENANT's "Leasehold Improvements," pursuant to Section 25.2 hereof. For
the purposes of this Lease, "LEASEHOLD IMPROVEMENTS" shall include all
demolition of existing improvements, all Building and monument signage, any
structural requirements above base Building construction within the demises
premises, all distribution, equipment and control wiring for heating and air
conditioning within the demised premises, all electrical distribution, fixtures
and equipment for power and lighting within the demised premises, all
distribution and equipment for fire sprinkler systems within the demised
premises, and all interior finishes including millwork, plumbing, plumbing
fixtures, walls, ceilings, interior doors, door frames and hardware, floor
coverings, wall coverings, paint, architectural and engineering fees for the
demised premises and, at TENANT's option, interior space planning fees.
26. REPRESENTATIONS AND WARRANTIES OF LANDLORD:
LANDLORD covenants, warrants and represents to TENANT as follows:
(i) During the term of this Lease, the premises and the Building,
except as to TENANT installed improvements, fixtures, furniture and displays,
are and will at all times be in compliance with the terms and provisions of all
applicable laws, ordinances, rules and regulations, including but not limited to
the terms and provisions of the Americans With Disabilities Act of 1990, and all
amendments and supplements thereto, and all rules and regulations issued
thereunder (jointly referred to as "ADA"). LANDLORD understands that the
Building and premises are places of public accommodations pursuant to the ADA.
If the foregoing representation and warranty proves to be untrue, regardless of
any other provision of this Lease, LANDLORD hereby agrees to protect, defend,
indemnify and hold TENANT harmless from and against all liability resulting
therefrom, and to promptly bring the premises and the Building into compliance
therewith at no cost to TENANT. LANDLORD shall have such access to the premises
as is reasonably necessary to permit LANDLORD to comply with the foregoing
provision, provided however, that LANDLORD shall not unreasonably interfere with
TENANT's business or TENANT's use of the premises.
25
<PAGE> 31
(ii) LANDLORD has the full right and power to execute and deliver
this Lease, grant the estate created hereby and to perform its obligations
hereunder, all without notice to, or consent of, any other person or entity.
(iii) LANDLORD has no knowledge of any hazardous or toxic
materials or substances in or under the Building, including the leased premises.
27. ENVIRONMENTAL COMPLIANCE:
(a) Regardless of any other contrary provision in this Lease, it
shall be LANDLORD's sole responsibility, and LANDLORD shall indemnify and hold
TENANT harmless, from the consequences of any and all present and future
federal, state and local environmental statutes and all rules and regulations
promulgated thereunder (hereinafter collectively called "Environmental
Provisions") which apply to the Building or the leased premises which existed
prior to TENANT taking possession of the leased premises, if such condition was
not caused by TENANT. LANDLORD's obligations hereunder shall include, but not be
limited to, the submission of all information required hereunder by any
governmental authority; the development and implementation of any cleanup plan
required because of the existence of or because of any spill or discharge of any
material, hazardous substance or waste as defined in any Environmental
Provisions ("Hazardous Material"), including, without limitation, friable
asbestos bearing materials, under, at, on or in the Building or the leased
premises; and holding TENANT harmless from and against any and all liabilities,
losses and costs, including, without limitation, TENANT's reasonable attorney
fees and expenses, which TENANT may incur by reason of any claim or charge under
any Environmental Provision which names TENANT, or because of LANDLORD's failure
to comply with the foregoing provisions of this Section.
(b) If any release of Hazardous Material, or the clean-up of such
release within the Office Park materially interferes with TENANT's use or
occupancy of the leased premises (other than a release for which TENANT or its
agents, employees, or contractors are responsible), then (i) rent and all other
charges payable under this Lease shall be proportionately reduced or abated
during the period of such interference based on the extent to which TENANT's use
of the leased premises is impaired, as reasonably determined by TENANT; and (ii)
if such interference continues for a period in excess of 90 days, or poses a
health hazard to TENANT's agents, employees, or customers for any period of
time, then TENANT, at its option, can forthwith terminate this Lease. In the
event LANDLORD acquires actual knowledge of the presence or alleged presence by
any governmental or enforcement agency, of any Hazardous Material in the
Building, LANDLORD shall forthwith give TENANT notice of the presence or alleged
presence of such Hazardous Material and its location within the Building.
26
<PAGE> 32
(c) If TENANT breaches the obligations stated in this Section, or
if the presence of Hazardous Material under, at, on or in the Building or the
leased premises caused or permitted by TENANT results in the contamination of
the Building, leased premises or the Land, or if contamination of the Building,
leased premises or Land by Hazardous Material otherwise occurs for which TENANT
is legally liable to LANDLORD for damage resulting therefrom, TENANT shall
indemnify, defend and hold LANDLORD harmless from any and all claims judgement,
damages, penalties, fines, costs, liabilities or losses, including without
limitation reasonable attorney's fees, which arise during or after the term or
any extended term of the Lease as a result of such contamination. Without
limiting the foregoing, if the presence of any Hazardous Material under, at, on
or in the Building, leased premises or Land caused or permitted by TENANT
results in any contamination of the same, TENANT shall promptly take all actions
at its expense as are necessary to return the same to the condition existing
prior to the introduction of any such Hazardous Material, provided that
LANDLORD's approval of such actions shall first be obtained, which approval
shall not be unreasonably withheld.
28. NOTICE OF VACANCY:
LANDLORD hereby agrees to give TENANT written notice of any
vacancies, or upcoming vacancies, in the Building within ten (10) days of
LANDLORD'S knowledge of said vacancy. TENANT shall respond to LANDLORD within
ten (10) days of TENANT'S intent to expand into said vacant space. TENANT'S
failure to respond to LANDLORD's notice within the time specified shall be
deemed the same as if TENANT had responded and chosen to decline expansion into
said vacant space. Furthermore, during the initial lease-up of the Building,
LANDLORD shall give TENANT oral notice if any third party shows serious interest
in leasing all or a portion of the vacant space in the Building for a period in
excess of three years. In the event TENANT expands within the Building during
the first twenty-four months of occupancy, LANDLORD shall lease the additional
space to TENANT at the then-current adjusted Base Building Rent, minus
Fifty-five cents ($.55) per square foot, under all the same terms and conditions
as this Lease, except that additional leased space shall be allocated four (4)
parking spaces per 1000 usable square feet in lieu of five (5) parking spaces
per 1000 usable square feet. In the event TENANT desires the term of the
expansion space lease to be coterminous with this Lease, LANDLORD shall prorate
the actual improvement costs pursuant to Section 25.2 hereof, based on a five
year amortization and eleven percent (11%) interest.
29. EXISTING LEASE:
LANDLORD hereby agrees to execute an agreement, concurrently with
the execution of this Lease, to assume the obligations of TENANT's existing
lease dated February 23, 1996, at 9342 E. Central, Wichita, Kansas, upon
TENANT's occupancy of the demised premises.
27
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have executed this Lease
as of the day and year first above written.
"TENANT"
CONSOLIDATED HOLDINGS, INC.
Name: /S/ Jeffrey F. Hitz
-------------------------------------
Title: Sr. Vice President, Development
-------------------------------------
ATTEST /S/ Lori Moody
-------------------------------------
"LANDLORD"
VANTAGE POINT PROPERTIES, INC.
By: /S/ Paul D. Jackson
-------------------------------------
Title: President
-------------------------------------
ATTEST /S/ Shelly M. Ratzlaff
-------------------------------------
28
<PAGE> 34
FIRST ADDENDUM TO THE LEASE
APRIL 30, 1998
THE FIRST ADDENDUM TO THE LEASE, BY AND BETWEEN: VANTAGE POINT PROPERTIES, INC.,
a Kansas Corporation, as "Landlord", and CANDLEWOOD HOTEL COMPANY, INC., a
Delaware Corporation, as "Tenant". Both Landlord and Tenant wish to modify the
LEASE AGREEMENT dated April 30, 1998 for 28,175 gross sq ft to be located at
Wilson Estates Office Park, in Wichita, Kansas.
For and in consideration of the mutual covenants agreements contained herein,
the parties hereto for themselves, their respective successors and assigns,
agree to the following changes:
1) Page 1, entitled SUMMARY OF GENERAL BASIC PROVISIONS, subsection C.
Monthly Base Building Rent shall be changed to $41,792.91 ($17.80 per
square foot)
2) Page 4, paragraph 3.1, entitled BASE BUILDING RENT, shall be changed to
reflect the rent of Forty-one Thousand Seven Hundred Ninety-two and
91/100 Dollars ($41,792.91), based on $17.80 per gross square foot
3) Page 22, paragraph 25.2, entitled TENANT'S FINISH ALLOWANCE, shall have
the following sentences added:
A) After the fourth sentence ending with . . . attached hereto as
Exhibit 1. The following sentence shall be added: "TENANT shall
have the right to request additional contractors to be added to
Exhibit 1 per LANDLORD's approval, which said approval will not
be unreasonably withheld."
B) The following shall be added to the end of the paragraph: "If
TENANT fails to use it's entire $16.00 per square foot
($450,800.00) Tenant Finish Allowance, LANDLORD agrees to
reimburse Tenant in cash within 30 days of occupancy.
All other terms and conditions of the lease shall remain the same.
"TENANT" "LANDLORD"
CANDLEWOOD HOTEL COMPANY, INC. VANTAGE POINT PROPERTIES, INC.
By: /S/ Jeffrey F. Hitz By: /S/ Paul D. Jackson
------------------------------- -------------------------------
Title: Sr. Vice President, Development Title: President
Attest: /S/ Lori Moody Attest: /S/ Shelly M. Ratzlaff
--------------------------- ---------------------------
<PAGE> 35
SECOND ADDENDUM TO THE LEASE
THIS SECOND ADDENDUM (herein the "Second Addendum") is made and entered into on
this 24th day of December, 1998 by and between CANDLEWOOD HOTEL COMPANY, INC., a
Delaware corporation (hereinafter called "TENANT") and VANTAGE POINT PROPERTIES,
INC., a Kansas corporation (hereinafter called "Landlord").
WITNESSETH THAT:
WHEREAS, Landlord and Tenant entered into one certain Lease Agreement dated
April 30, 1998 (herein the "Lease") for the Candlewood Building located at 8621
E. 21st Street North, Wichita, Kansas, covering approximately 28,175 gross
square feet on the second floor identified as Suite 200 (herein the "leased
premises"); and
WHEREAS, the parties entered into one certain First Addendum to the Lease dated
April 30, 1998 (herein the "First Addendum"), to amend and modify the Lease in
certain respects; and
WHEREAS, the parties desire to further amend and modify the Lease in certain
respects.
NOW THEREFORE, in consideration of the foregoing recitation, the mutual
covenants hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. The square footage of the leased premises shall be adjusted to include
approximately 28,249 gross square feet on the second floor identified as suite
200. In addition, Tenant will occupy 740 usable square feet on the first floor
plus 74 square feet of common area on the first floor identified collectively as
suite 170 (total first floor space is 814 square feet). The total square footage
for the leased premises in suites 170 and 200 is 29,063 gross square feet. A
floorplan showing the leased premises is attached hereto as Exhibit `A'.
2. The Building will contain approximately 57,446 gross square feet (exclusive
of any basement area). Tenant's prorata share of the Building is 50% of the
total gross area of the Building.
3. The monthly Base Building Rent per Section 3.1 of the Lease, as amended in
the First Addendum, is hereby further adjusted to Forty-Three Thousand One
Hundred Ten and 12/100 Dollars ($43,110.12), based on $17.80 per square foot.
Said adjustment to the monthly Base Building Rent is intended to allow for the
increased square footage outlined in item 1 above. Said adjustment does not
include any adjustment for amortized improvements above Landlord's Allowance.
4. Notwithstanding anything in the Lease or First Addendum to the contrary,
Landlord shall pay to Tenant, or directly to the general contractor at
Landlord's sole option, an allowance (herein "Allowance") equal to $16.00 per
gross square foot in the leased premises ($465,008) for Tenant to complete its
Leasehold Improvements. The bid awarded for the Leasehold Improvements was Five
Hundred Sixty Thousand Seven Hundred Two and 00/100 ($560,702.00), excluding any
change orders.
5. The parties hereby agree to amortize Fifty-Two Thousand Three Hundred
Thirteen and 40/100 Dollars ($52,313.40) of the general construction contract
for Leasehold Improvements into the monthly Base Building Rent by increasing the
monthly Base Building Rent by an amount equal to Forty-Five Cents per square
foot ($.45 psf) in accordance with Section 25.2 of the Lease. Said adjustment in
the monthly Base Building Rent is intended to accommodate amortization of the
Leasehold Improvements
<PAGE> 36
only, and does not include any adjustment for increased square footage in the
leased premises. The remaining costs to complete Tenant's Leasehold Improvements
shall be paid in cash by Tenant in the following manner:
(i) Fifty Thousand and 00/100 Dollars ($50,000.00) shall be paid toward
the first application for payment from Eby Construction for the
Leasehold Improvement construction within fifteen (15) days of receipt
of an invoice therefor.
(ii) The remaining amount due, including all change orders, shall be
paid to Eby Construction upon substantial completion of the project and
within fifteen (15) days of invoicing therefor, subject to Eby's
completion of reasonable punchlist items.
6. Total monthly Base Building Rent is hereby adjusted to an amount equal to
Forty-Four Thousand One Hundred Ninety-Nine and 98/100 ($44,199.98), which is
the sum of monthly Base Building Rent as adjusted for both increased square
footage and for amortized improvements.
The following table is included to provide a graphic representation of the
adjusted square footage, the adjusted rental amount, the amortized improvements
and the cash requirements of Tenant:
<TABLE>
<S> <C>
------------------------------------------------------------------------------
New Square Footage 29,063 gross square feet
------------------------------------------------------------------------------
Adjusted Monthly Rent (based on $43,110.12 ($17.80 psf)
square foot change)
------------------------------------------------------------------------------
Adjusted Monthly Rent (based on $1,089.86 ($.45 psf)
amortized improvements)
------------------------------------------------------------------------------
Total Adjusted Monthly Base Rent $44,199.98 ($18.25 psf)
(square foot adjustment plus
adjustment for amortized
improvements)
------------------------------------------------------------------------------
General Contract Amount (excluding $560,702.00
change orders)
------------------------------------------------------------------------------
Architecture Contract Amount $19,120.00
(Approximate amount only--billed at
actual hourly rate)
------------------------------------------------------------------------------
Approximate Total Construction $ $579,822.00
------------------------------------------------------------------------------
Landlord Allowance $465,008.00 ($16.00 psf)
------------------------------------------------------------------------------
Amortized Improvements $52,313.40
------------------------------------------------------------------------------
Initial Tenant Cash Requirement $50,000.00
------------------------------------------------------------------------------
Final Tenant Cash Requirement $12,500.60 plus change orders
------------------------------------------------------------------------------
Total Tenant Cash Requirement $62,500.60 plus change orders
------------------------------------------------------------------------------
</TABLE>
7. Landlord's notice address is hereby changed to the following:
Vantage Point Properties, Inc.
Attn: Property Management
8080 E. Central, Suite 160
Wichita, KS 67206
8. The Lease is hereby modified to conform to the provisions of this Second
Addendum. If any of the terms or provisions of the Lease or First Addendum
conflict with terms or provisions of this Second Addendum, the terms and
provisions of this Second Addendum shall control.
<PAGE> 37
9. The capitalized words used in this Second Addendum shall have the same
meaning as the capitalized words as used in the Lease and the First Addendum.
10. This Second Addendum shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties have caused this Second Addendum to be executed
as of the day and year first above written.
VANTAGE POINT PROPERTIES, INC.
By: /S/ Paul D. Jackson
-------------------------------------
Name: Paul D. Jackson
-------------------------------------
Title: President
-------------------------------------
Attest: /S/ Virginia L. Smith
-------------------------------------
CANDLEWOOD HOTEL COMPANY
By: /S/ Jeffrey F. Hitz
-------------------------------------
Name: Jeffrey F. Hitz
-------------------------------------
Title: Sr. Vice President, Development
-------------------------------------
Attest: /S/ Lori Moody
-------------------------------------
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-39219) of Candlewood Hotel Company, Inc., of our report dated
February 13, 1999, with respect to the consolidated financial statements and
schedules of Candlewood Hotel Company, Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Chicago, Illinois
March 25, 1999
<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>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 23,155,000
<SECURITIES> 0
<RECEIVABLES> 3,566,000
<ALLOWANCES> (82,000)
<INVENTORY> 0
<CURRENT-ASSETS> 26,721,000
<PP&E> 234,439,000
<DEPRECIATION> (1,907,000)
<TOTAL-ASSETS> 293,358,000
<CURRENT-LIABILITIES> 40,277,000
<BONDS> 114,742,000
100,737,000
0
<COMMON> 90,000
<OTHER-SE> 35,270,000
<TOTAL-LIABILITY-AND-EQUITY> 293,358,000
<SALES> 0
<TOTAL-REVENUES> 234,526,000
<CGS> 184,841,000
<TOTAL-COSTS> 51,901,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,000
<INCOME-PRETAX> (2,430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,857,000)
<NET-INCOME> (6,287,000)
<EPS-PRIMARY> (1.40)<F1>
<EPS-DILUTED> (1.40)
<FN>
<F1>For Purposes Of This Exhibit, Primary Means Basic
</FN>
</TABLE>
