<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-21583
Candlewood Hotel Company, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8621 E. 21st Street North, Suite 200
Wichita, Kansas 67206
------------------------------------------
(Address of principal executive offices)
(316) 631-1300
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 2000
----------------------------------- ------------------------------
Common Stock, $.01 par value 9,025,000 shares
<PAGE> 2
CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
JUNE 30, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and June 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and June 30, 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value, stated value and share data)
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 261,431 $ 238,320
Hotels under construction 19,162 37,755
Other costs 23 3,654
--------- ---------
280,616 279,729
Accumulated depreciation and amortization (12,697) (8,582)
--------- ---------
Net investment in hotels 267,919 271,147
Cash and cash equivalents (including $917 and $407 of
restricted cash, respectively) 23,160 18,624
Deposits 26,334 26,334
Accounts and other receivables 5,124 4,735
Other assets 28,279 20,437
--------- ---------
Total assets $ 350,816 $ 341,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 202,509 $ 190,545
Accounts payable and other accrued expenses 22,496 22,874
Deferred gain on sale of hotels 16,400 17,431
Other liabilities 899 1,172
--------- ---------
Total liabilities 242,304 232,022
Redeemable, convertible, cumulative preferred stock
("Series A"), $1,000 stated value, 65,000 shares
authorized and outstanding, net of offering costs 61,339 61,339
Redeemable, convertible, cumulative preferred stock
("Series B"), $1,000 stated value, 42,000 shares
authorized and outstanding, net of offering costs 39,350 39,350
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 (27,537) (26,794)
--------- ---------
Total stockholders' equity 7,823 8,566
--------- ---------
Total liabilities and stockholders' equity $ 350,816 $ 341,277
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the
For the Quarter Ended Six-Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Hotel operations $ 33,840 $ 26,906 $ 64,080 $ 48,173
Other income 787 236 1,237 443
----------- ----------- ----------- -----------
Total hotel operating revenues 34,627 27,142 65,317 48,616
Proceeds from sale of hotels, net of deferred
gain of $0 and $2,315, respectively -- -- -- 24,285
Deferred gain recognition on sales of hotels 514 328 1,037 509
----------- ----------- ----------- -----------
Total revenues 35,141 27,470 66,354 73,410
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 17,263 15,084 34,231 28,144
Corporate operating expenses 1,553 1,228 2,961 2,468
Rent expense on leased hotels 6,299 6,218 12,558 12,354
Hotel opening costs 20 212 113 797
Abandoned site costs -- 863 -- 863
Depreciation and amortization 2,645 2,106 5,188 3,595
----------- ----------- ----------- -----------
Total operating costs and expenses 27,780 25,711 55,051 48,221
Cost of hotels sold -- -- -- 24,285
----------- ----------- ----------- -----------
7,361 1,759 11,303 904
Interest income 267 310 499 592
Interest expense (4,614) (1,934) (8,532) (3,414)
----------- ----------- ----------- -----------
Income (loss) before preferred dividends 3,014 135 3,270 (1,918)
Preferred stock dividends (1,996) (2,001) (3,991) (3,980)
----------- ----------- ----------- -----------
Net income (loss) available to common
stockholders $ 1,018 $ (1,866) $ (721) $ (5,898)
=========== =========== =========== ===========
Net income (loss) per share of common stock
- basic and diluted $ 0.11 $ (0.20) $ (0.08) $ (0.65)
=========== =========== =========== ===========
Weighted average shares outstanding
- basic and diluted 9,025,000 9,025,000 9,025,000 9,025,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends $ 3,270 $ (1,918)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,188 3,595
Deferred gain recognition on sales of hotels (1,037) (509)
Abandoned site costs -- 863
Change in:
Hotels completed and under construction - held for sale -- 20,776
Deposits -- (2,487)
Accounts receivable (389) (3,067)
Opening costs -- 718
Other assets (3,979) (1,601)
Accounts payable and other accrued expenses 1,195 (3,723)
Deferred gain on sale of hotels 6 1,996
Other liabilities (125) (120)
-------- --------
Net cash provided by operating activities 4,129 14,523
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under construction (14,182) (65,260)
Change in site acquisition costs 3,631 (272)
Purchase of intangible assets (7) --
-------- --------
Net cash used in investing activities (10,558) (65,532)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 16,160 53,529
Payments on mortgages and notes payable (1,034) (3,260)
Preferred stock dividends (4,013) (4,002)
Other liabilities (148) (135)
Expenditures for private placement -- (48)
-------- --------
Net cash provided by financing activities 10,965 46,084
-------- --------
Net increase (decrease) in cash and cash equivalents 4,536 (4,925)
Cash and cash equivalents at beginning of period 18,624 23,155
-------- --------
Cash and cash equivalents at end of period $ 23,160 $ 18,230
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 10,119 $ 5,815
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
The Company's current business of owning, operating, managing,
developing and franchising extended-stay hotels originated in November
1995, with the formation of Candlewood Hotel Company, L.L.C., a Delaware
limited liability company ("Candlewood LLC"). The Company was incorporated
in the State of Delaware in August 1996, and in November 1996, the Company
succeeded to the business of Candlewood LLC and completed an initial public
offering of its common stock (collectively, the "Reorganization").
The accompanying unaudited consolidated financial statements of
Candlewood Hotel Company, Inc. (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. The statements include the accounts of Candlewood
Hotel Company, Inc. and its subsidiaries, including Candlewood LLC, which
was the entity through which business was conducted until completion of the
Reorganization, and various wholly-owned LLCs which own or lease certain
hotels. Accordingly, certain information and footnotes, required by
accounting principles generally accepted in the United States for complete
financial statements, have been omitted. The accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments and including elimination of all significant
intercompany transactions and accounts) which the Company believes are
necessary for the fair presentation of the Company's financial position and
results of operations. The condensed consolidated balance sheet data at
December 31, 1999, was derived from the Company's audited financial
statements. These interim financial statements should be read in
conjunction with the Company's 1999 Annual Report on Form 10-K filed with
the Securities and Exchange Commission. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for the entire year. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
B. Investment in Hotels Completed and Under Construction
Hotels Completed
Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the Hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.
Hotels under Construction
Hotels under construction represents costs incurred in the acquisition
and development of Hotels. Such costs include land acquisition costs,
construction costs, capitalized interest and construction overhead. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to Hotels completed and except for hotels held for sale,
depreciated over the asset's useful life.
6
<PAGE> 7
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.
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 loan
agreements, has been set aside for pending land acquisitions and financing.
These funds will be held until the Company has satisfied its obligation
under the loan agreements.
E. Revenue Recognition
Room revenue and other revenues are recognized when earned.
Recognition of franchise fee revenue is deferred until all material
services or conditions relating to the respective franchise have been
substantially performed or satisfied by the Company. Such revenue when
recognized is included in other income on the accompanying statements of
operations.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized
when the title passes to the buyer, generally upon the receipt of proceeds.
Related profit is deferred due to required support obligations under the
operating lease agreements until operations meet stipulated levels. At such
time, the deferred gain is recognized in earnings over the remaining lease
term.
F. Income Taxes
The Company is taxed as a corporation as defined in subchapter "C"
under the Internal Revenue Code for federal and state income tax purposes
and accounts for any temporary differences under the asset and liability
method.
G. Investments in Joint Ventures
The Company has certain investments in joint ventures in which it owns
50% or less of the voting equity that it accounts for under the equity
method of accounting. As of June 30, 2000, the Company had contributed
$12.4 million to the joint ventures, of which $2.8 million (in non-cash
transactions) was contributed during the quarter ended June 30, 2000 and a
total of $5.5 million contributed during the six months ended June 30,
2000. This amount is included in other assets on the accompanying balance
sheets.
The Company has one significant joint venture that was formed in 1999.
As of June 30, 2000, the Company operated five hotels and had three
additional hotels under construction pursuant to this agreement. Under the
terms of the agreement, if the Company does not have at least 10 hotels
open or under construction by August 31, 2000, it may be required to
increase its capital contributions relating to existing joint venture
hotels by up to 5% of the estimated total costs. At June 30, 2000, this
amount is estimated at approximately $3.5 million. While the Company has
eight hotels open or under
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<PAGE> 8
construction at June 30, 2000 and will continue to identify and evaluate
potential joint venture sites, it does not expect to have 10 joint venture
hotels open or under construction by August 31, 2000. The following is
unaudited financial information for the joint venture as of June 30, 2000:
---------------------------------------------------------------------------
Six months ended June 30, 2000
---------------------------------------------------------------------------
(In thousands)
Hotels completed and under construction $60,667
Other assets 3,039
-------
Total assets $63,706
=======
Total development liabilities $55,348
Total equity 8,358
-------
Total liabilities and equity $63,706
=======
H. 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.
The Company has two reportable segments: the operation of hotels and
the sale of hotels. Information related to the Company's reportable
segments is as follows:
<TABLE>
<CAPTION>
Six months ended June 30, 2000
-------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ ------- -------
<S> <C> <C> <C>
Revenues from external customers $65,317 $ -- $65,317
Interest expense 8,532 -- --
Depreciation expense 4,831 -- --
Segment profit 13,697 1,037 14,734
Hotels assets:
Hotels completed and under construction 280,593 -- 280,593
Trade accounts receivable 2,285 2,306 4,591
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Six months ended June 30, 1999
-------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ ------- --------
<S> <C> <C> <C>
Revenues from external customers $48,616 $24,285 $ 72,901
Interest expense 3,414 -- 3,414
Depreciation expense 3,294 -- 3,294
Segment profit 4,824 509 5,333
Hotels assets:
Hotels completed and under construction 248,598 -- 248,598
Trade accounts receivable 3,302 2,419 5,721
</TABLE>
Corporate expenses account for the difference between segment profit
and net income. These expenses are not specific to the Company's reportable
segments.
I. Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training hotel personnel, such as
travel, compensation and relocation.
During the fourth quarter of 1998, the Company elected early adoption
of Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires that hotel opening costs be
expensed as incurred.
J. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Note 2: Mortgages and Notes Payable
As of June 30, 2000, the Company had entered into separate building loan
agreements with GMAC Commercial Mortgage Corporation for 30 of the Company's
hotels. Each agreement was entered into by a separate wholly-owned subsidiary of
the Company which owns the related property and hotel; however, each loan is
cross-defaulted. The terms of the building loan agreements provide for advances,
generally on a monthly basis, based on construction costs incurred to date.
Interest on the loans is payable monthly, in arrears, beginning on the first day
of the first full calendar month after the date of each agreement. Interest
payments are calculated at a variable rate per annum, adjusted monthly, at rates
ranging from LIBOR plus 3.40% to 4.25% (10.0% to 10.9% as of June 30, 2000).
Based on the individual note, principal payments commence either 12 months
following the related hotel opening or 18 months from the related loan closing.
Depending on the terms of the individual notes, principal payments are
calculated based on a 25-year amortization schedule using a 10% fixed interest
rate or the prevailing interest rate as defined in the note. Each note matures
on the first day of the first full calendar month after the fourth anniversary
of loan closing and provides for two 12-month extension periods. Maturity dates
currently range from March 2001 to September 2003. Amounts borrowed under the
building loan agreements are secured by the respective hotels, the land on which
they are constructed and certain funds deposited in demand deposit accounts
assigned to GMAC and are guaranteed by the Company and certain other of the
Company's wholly-owned subsidiary LLCs. At June 30, 2000, $164.7 million was
outstanding under these 30 building loan agreements.
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<PAGE> 10
The Company has entered into loan agreements with various local and
regional banks for financing on three of the Company's hotels. Each of the
agreements was entered into by wholly-owned subsidiaries of the Company that own
the related hotel and land. Interest on the loans is payable monthly, in
arrears, beginning on the first full calendar month after the date of each
agreement. Interest payments are calculated monthly at either a fixed or
variable rate per annum depending on the note. As of June 30, 2000, interest on
the loans ranged from 9.4% to 12.5% with maturity dates ranging from February
2001 to March 2004. Principal amortization payments are made monthly and based
on terms ranging from 20 to 25 years. These payments will continue until
maturity. Each of the loans may be extended for one year if certain conditions
are met and upon payment of a specified extension fee. During the one-year
extension period, the Company will be required to continue to make interest
payments and principal amortization payments based on the original amortization
term. Amounts borrowed under the loans are secured by the hotel and the land on
which the hotel is constructed, certain funds deposited in demand deposit
accounts assigned to the bank, as well as a guarantee by the Company and certain
other of the Company's wholly-owned subsidiary LLCs. At June 30, 2000, $22.8
million was outstanding under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as of
June 30, 2000, with Doubletree Corporation, a wholly-owned subsidiary of Hilton
Hotels Corporation ("Doubletree"), evidenced by two promissory notes. Interest
is payable quarterly at 15%, with principal of $12.5 million and $2.5 million
payable at maturity in November 2001 and July 2002, respectively.
Certain amounts borrowed under the building loan agreements are further
partially guaranteed by Doubletree. Doubletree has agreed to guarantee the
portions of certain loans made to the Company and its franchisees. The guarantee
applies to loans that exceed 56.25% of the hotel cost but not in excess of 80%
of such costs of hotels that the Company manages and 75% of the costs of hotels
not managed by the Company. It is anticipated that the guarantee will remain in
effect until the loan has been repaid. Upon an event of default, Doubletree will
have the option to meet any shortfalls or pay down the loan principal. In
exchange for the guarantee, Doubletree will receive a 5% interest in the cash
flows of the hotels and a 0.25-0.50% fee on the total loan amount outstanding.
In the event a loan is refinanced, Doubletree will receive a fee equal to 5% of
the increase in proceeds attributable to the refinancing. In the event the loan
is extinguished through the sale of the underlying property, Doubletree will
receive as a fee, 5% of the gain on sale resulting from the transaction.
Note 3: Redeemable, Convertible, Cumulative Preferred Stock
General
The Company has authorized "blank check" preferred stock in the amount of
5,000,000 shares at $.01 par value per share. The stock may be issued with such
voting powers and such designations, preferences, privileges and other special
rights as designated by the Board of Directors. At the date of issuance of any
of the preferred stock, the Company determines whether the stock is redeemable
and the appropriate classification of the stock on the balance sheet. At June
30, 2000, 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
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.
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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 is 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 the stockholders' agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Series B Preferred Stock
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 is
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 the stockholders' agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Note 4: Sale-Leaseback
In November, 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell 15 hotels for a total purchase price of $100.0
million, and to lease the hotels back from the buyer under a non-cancelable
operating lease. The Company completed the sale and leaseback of five hotels in
1997 and ten hotels in 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.
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<PAGE> 12
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 16 hotels in 1998 and one hotel
in January 1999.
Terms of the sales are all cash at the close of escrow for hotels sold. The
lease term for the non-cancelable 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 was charged to cost of sales as the hotels were 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.
The Company completed the sale of all 34 hotels in 1999. In total, the
Company has sold $260.9 million of hotels with a total deferred gain of $19.6
million at the date the sales were completed. Such gain has been deferred and is
being recognized in income as noted in the Company's accounting policies (Note
1). The Company recognized approximately $1.0 million of deferred gain in income
in the six months ended June 30, 2000, compared to $509,000 in the six months
ended June 30, 1999. In total, the Company has recognized a total of $2.9
million of deferred gain in income. Sale proceeds, net of the deferred gain and
related cost of the Hotels sold are presented on the statement of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.
GENERAL
Candlewood owns, operates, manages, develops and franchises hotels serving
mid-market extended-stay business travelers.
The following table sets forth our property portfolio as of June 30, 2000
and June 30, 1999:
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
June 30, June 30,
------------------ ------------------
2000 1999 Increase 2000 1999 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Owned 32 29 3 3,968 3,401 567
Leased 34 34 -- 3,893 3,893 --
Managed 2 2 -- 179 179 --
Joint Venture 5 -- 5 636 -- 636
Franchised 12 10 2 1,340 1,119 221
--- --- --- ------ ----- -----
Total 85 75 10 10,016 8,592 1,424
=== === === ====== ===== ======
</TABLE>
Our results of operations are dependent upon our revenue per available room
(RevPAR) which is a factor of occupancy and room rate. Accordingly, we intend to
focus on increasing occupancy levels at each of our newly opened hotels until
such time as the occupancy levels reach stabilization. Due to our
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<PAGE> 13
rapid expansion, the overall occupancy rate for corporate hotels (which is
comprised of owned and leased hotels) has been negatively impacted by the lower
occupancy typically experienced during the ramp-up 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 daily pricing rates of our hotels. We
believe that this practice is a prevailing standard in the U.S. lodging
industry.
Our overall results of operations and financial position are significantly
influenced by our development activity. The following table sets forth our hotel
development and hotel openings for the periods indicated:
Number of Hotels
As of June 30,
-----------------------------------------
Increase/
2000 1999 (Decrease)
---- ---- ----------
Open Hotels
Owned 32 29 3
Leased 34 34 --
Managed 2 2 --
Joint Venture 5 -- 5
Franchised 12 10 2
--- --- ---
Total 85 75 10
Under Construction
Owned 1 3 (2)
Leased -- -- --
Managed -- -- --
Joint Venture 4 2 2
Franchised 7 2 5
--- --- ---
Total 12 7 5
Potential Development
Owned -- 4 (4)
Leased -- -- --
Managed -- -- --
Joint Venture -- 4 (4)
Franchised 16 3 13
--- --- ---
Total 16 11 5
=== === ===
2000 Year to Date Hotel Openings:
2000
-----------------------------------
As of 12/31/99 1st Qtr. 2nd Qtr. As of 6/30/00
-------------- -------- -------- -------------
Open Hotels
Owned 31 1 -- 32
Leased 34 -- -- 34
Managed 2 -- -- 2
Joint Venture -- -- 5 5
Franchised 11 -- 1 12
--- --- --- ---
Total 78 1 6 85
=== === === ===
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We opened one franchised hotel and five joint venture hotels in the second
quarter of 2000 in the following areas:
Franchised
o Louisville, Kentucky
Joint Venture
o Santa Clara, California
o Morris Plains, New Jersey
o Detroit, Michigan - Farmington Hills
o Chicago, Illinois - Wheeling
o Meriden, Connecticut - Hartford
At the end of 1999, we had a total of 65 company-operated hotels (which is
comprised of owned, leased and joint venture hotels), two managed hotels and 11
franchised hotels located in 29 different states. At June 30, 2000, we had a
total of 71 company-operated hotels, two managed hotels and 12 franchised hotels
in operation located in 31 different states. In addition, at June 30, 2000, we
had one company-owned hotel, four joint venture hotels and seven franchised
hotels under construction. We continue to perform market feasibility due
diligence on potential development sites and may enter into agreements to
purchase additional sites in the future. The contracts into which we enter for
the purchase of potential hotel sites provide for numerous investigations and
other due diligence, including environmental studies and title reports, prior to
the closing of the sale. We have the right to terminate each contract if we are
not satisfied with the results of the investigations and due diligence. We are
unable to assure that we will acquire properties or complete the development and
construction of hotels or that any such development or construction will be
completed on time or within budget. In addition, if we abandon a contract, we
may write-off certain costs that would otherwise be capitalized. We intend to
continue developing additional hotels through either new construction or
acquisition of existing properties and are evaluating various financing
arrangements. We are unable to assure such development opportunities or the
related financing will be available and, if available, under terms acceptable to
us. We will continue to perform periodic evaluations of our development projects
and make adjustments to our development strategy as warranted.
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. The transactions were closed in stages, beginning in
1997 and ending in early 1999. The results from operations for 2000 and 1999
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 accounting principles generally accepted in the United States, the
gain must be deferred and not recognized into earnings until certain operating
performance levels are achieved. See Note 4 to Consolidated Financial
Statements.
In June 1999, we entered into an agreement with Boston Capital
Institutional Advisors LLC and Mass Mutual to jointly develop new Candlewood
hotels. As of June 30, 2000, we had five joint venture hotels in operation and
three joint venture hotels under construction pursuant to this agreement, all of
which are scheduled to open in 2000 or 2001. All joint venture hotels are
franchised and operated as Candlewood hotels and are classified as joint venture
hotels in the preceding development table. While we will continue to identify
and evaluate potential joint venture sites, we are unable to assure that we will
be able to identify and develop additional joint venture hotels. The remaining
joint venture hotel under construction is in East Lansing, Michigan and is being
developed on the campus of Michigan State University.
As of June 30, 2000, we managed two non-Candlewood brand hotels, the
Cambridge Suites by Candlewood and the Hotel at Old Town, both located in
Wichita, Kansas. Our revenues for managing these hotels consist primarily of
management fees that are based on a percentage of gross revenues, operating
profits, cash flow or a combination thereof.
We believe that a significant element of our future growth and expansion
will be provided through the franchising of hotels. Traditionally, our franchise
development program has consisted of one brand,
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<PAGE> 15
Candlewood Suites. To serve a perceived market demand, we added a second brand,
Cambridge Suites by Candlewood, to our franchise program in November 1999. The
Cambridge Suites by Candlewood brand extends the value-oriented philosophy of
the Candlewood Suites brand to an upscale hotel. We believe that the addition of
the Cambridge Suites brand diversifies our franchise program and provides
additional growth opportunities. As of June 30, 2000, we had not entered into a
franchising agreement for the Cambridge Suites brand and cannot assure that we
will enter into any such agreement in the future. Accordingly, all franchise
activity reported as of June 30, 2000 and June 30, 1999, represents the
franchising of the Candlewood Suites brand. At June 30, 2000, we had 35 signed
franchise agreements, compared to 15 at June 30, 1999. We are unable to assure
that we will enter into any additional franchise agreements or that franchisees
will complete the development and construction of hotels. The following table
summarizes the franchise development activity at June 30, 2000 and June 30,
1999:
As of June 30,
--------------
2000 1999
---- ----
Open hotels 12 10
Hotels under construction 7 2
Franchise agreements signed, hotel
not under construction 16 3
--- ---
Total franchise agreements signed 35 15
=== ===
RESULTS OF OPERATIONS
Comparison of fiscal quarters ended June 30, 2000 and June 30, 1999
Hotel Operations
Hotel Operations Revenue
Hotel operations revenue, which includes room revenue and other revenue
(e.g., guest telephone and sales of products from the Candlewood cupboard),
totaled $33.8 million for the quarter ended June 30, 2000, compared to $26.9
million for the quarter ended June 30, 1999. The increase in revenue reflects
the increase in the number of hotels in operation during the second quarter of
2000 and the increased revenue generated by hotels that had completed or were
near completion of their ramp-up phase. The following table sets forth our
operating statistics for corporate hotels for the three months ended June 30,
2000 and June 30, 1999:
For the three months
ended June 30,
--------------------
2000 1999 Change
------ ------ ------
Occupancy 80.1% 67.8% 12.3%
Average Daily Rate $57.43 $60.11 $(2.68)
Revenue per available room $46.00 $40.75 $ 5.25
Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 80.1% for corporate hotels for the quarter ended June 30,
2000, compared to 67.8% for the quarter ended June 30, 1999. Occupancy in the
second quarter was positively influenced by the increase in occupancy
experienced by those hotels that had completed or were near completion of their
ramp-up phase. Overall, the increase in occupancy was experienced in both short
and long-term stays, but was particularly strong in our long-term stay core
business, which consists of travelers staying seven or more nights. It is our
practice to continuously review individual markets to assess the impact of
competition on local supply and demand and establish room rates that balance
occupancy to produce optimal revenue.
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<PAGE> 16
The average daily room rate for corporate hotels for the quarter ended June
30, 2000 was $57.43, compared to $60.11 for the quarter ended June 30, 1999.
Average daily room rates are determined by dividing room revenue by the number
of guestrooms occupied on a daily basis for the applicable period. The decrease
in average daily rate was primarily due to the increase in our long-term stays,
which are charged at a lower daily rate. Other factors that influence average
daily room rates include:
o stays of less than one week, which are charged at a higher daily rate;
o higher rates for our one-bedroom suites; and
o higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $46.00 for the quarter ended June 30,
2000, compared to $40.75 for the quarter ended June 30, 1999.
We cannot predict whether current occupancy and room rates can be
maintained. Future occupancy and room rates may be impacted by a number of
factors including:
o the number and geographic location of new hotels;
o the season in which new hotels open;
o competition;
o market acceptance of our hotels; and
o general economic conditions.
We consider a property to have completed its ramp-up phase somewhere
between six and twelve months following hotel opening. The ramp-up phase is
dependent on the supply and demand characteristics of individual markets as well
as the effectiveness of our local sales efforts. We had 53 company-operated
hotels open as of December 31, 1998. The following table sets forth the
performance of these 53 hotels for the quarters ended June 30, 2000 and June 30,
1999, respectively:
For the three months
ended June 30,
-----------------------
2000 1999 Change
------ ------ -------
Average age (in months) 23.4 11.4 12
Occupancy 81.4% 69.6% 11.8%
Average Daily Rate $56.51 $60.19 $(3.68)
Revenue per available room $46.00 $41.89 $ 4.11
The average occupancy rate for the 53 company-operated hotels open as of
December 31, 1998 increased 11.8 occupancy points in the second quarter of 2000
to 81.4%, compared to 69.6% for the same quarter in 1999. The increase was due
in large part to hotels that had completed or were near completion of their
ramp-up phase at June 30, 2000, and the larger percentage of extended-stay
business experienced by the hotels during the second quarter of 2000. The
average daily rate declined $3.68 or 6.2% in the second quarter of 2000 compared
to the second quarter of 1999. This decrease is the result of the lower daily
rates charged extended-stay guests. Revenue per available room increased 9.8% to
$46.00 in the second quarter of 2000, compared to $41.89 in the second quarter
of 1999, as a result of the increase in the occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended June 30, 2000, totaled $17.3
million compared to $15.1 million for the quarter ended June 30, 1999. Hotel
operating expenses consist of all expenses directly applicable to the operation
of the hotels, including corporate allocations for various operating, marketing
and accounting functions. The largest portion of hotel operating expenses
consisted of
16
<PAGE> 17
salaries, wages and fringe benefits. The balance of hotel operating expenses was
comprised of normal operating items, such as utilities, property taxes,
insurance, supplies, promotional materials, maintenance items and similar
expenses. The increase in hotel operating expenses is largely due to the
increased number of hotels in operation during the second quarter of 2000, the
variable nature of many of the expenses, increased wages and general economic
price increases.
Rent Expense on Leased Hotels
We incurred rent expense on the 34 hotels leased in the second quarter of
2000 of $6.3 million, compared to $6.2 million of expense in the second quarter
of 1999. The increase in rent expense is due to the contingent rent expense
incurred on certain properties. Contingent rent expense is a variable expense
based on a property achieving improved year over year financial performance and
is calculated on an individual property basis.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation costs. During the fourth quarter of 1998, we elected
early adoption of Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5). SOP 98-5 requires opening costs to be expensed
as incurred. Opening costs for the quarter ended June 30, 2000 totaled $20,000,
compared to $212,000 for the quarter ended June 30, 1999. The decrease in
opening costs is primarily the result of not having opened any corporate hotels
in the second quarter of 2000, compared to five corporate hotels in the second
quarter of 1999.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations (e.g.,
building, furniture, fixtures and equipment) for the quarter ended June 30,
2000, totaled $2.5 million, compared to $1.9 million for the quarter ended June
30, 1999. The increase in depreciation and amortization expense in the second
quarter of 2000, compared to 1999, was a result of the increase in the number of
company-owned hotels open and operating in the second quarter of 2000. In
addition, many of the newly opened corporate hotels are in higher priced,
primary markets where building costs are higher. For both 2000 and 1999,
depreciation and amortization expense does not reflect any expense for
properties sold in the sale leaseback transactions. In accordance with
accounting principles generally accepted in the United States, we do not
depreciate assets held for sale. As of June 30, 2000 and June 30, 1999, we had
no assets which were 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.
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<PAGE> 18
Corporate Operations
Other Income
Other income for the quarter ended June 30, 2000, totaled $787,000,
compared to $236,000 for the quarter ended June 30, 1999. Other income consists
primarily of franchise fees (a one-time fee received upon signing of a franchise
agreement) and royalty fees (revenue-based fees received over the life of the
franchise agreement) from franchised hotels, management fees received from
managed hotels and equity income (loss) from joint venture hotels. The growth in
other income for the quarter ended June 30, 2000, as compared to the quarter
ended June 30, 1999, reflects an increase in franchise fee, royalty fee and
management fee income. The increase in franchise fee income is a result of
increased franchise sales activity. The growth in royalty fee income is due to
the increase in the number of franchise hotels in operation, and the increased
revenue generated by those franchise hotels that had completed or were near
completion of their ramp-up phase. As previously discussed, the five joint
venture hotels opened during the quarter ended June 30, 2000 are also Candlewood
franchise hotels which we manage. As a result, we began receiving royalty and
management fee income from these hotels during the quarter ended June 30, 2000.
At June 30, 2000, we had 12 franchised hotels in operation (not counting the
five joint venture hotels), compared to 10 hotels at June 30, 1999.
We did not sell any hotels in the second quarter of 2000; however, we did
recognize deferred gain on hotels that were previously sold. For the quarter
ended June 30, 2000, we recognized $514,000 of gain on hotels sold, compared to
$328,000 in the quarter ended June 30, 1999.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended June 30, 2000, totaled
$1.6 million, compared to $1.2 million for the quarter ended June 30, 1999, and
included all expenses not directly related to the development or operations of
specific hotels. The largest portion of corporate operating expenses consisted
of salaries, wages and fringe benefits. The balance of other corporate operating
expenses was comprised of normal operating costs, such as office space lease,
travel, utilities, advertising, professional fees and similar expenses. The
increase in 2000 is primarily due to the expansion of our franchise sales and
service team. This expansion began in the second quarter of 1999 and was
completed in the third quarter of 1999. This increase was partially offset by
cost savings generated by a reduction in the number of corporate office
personnel and other support and service costs.
Abandoned Site Costs
We did not record any abandoned site costs for the quarter ended June 30,
2000. We recorded $863,000 of abandoned site costs for the quarter ended June
30, 1999. Abandoned site costs represent costs, such as acquisition,
architectural and zoning costs, related to certain development sites that we
have decided not to develop.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
quarter ended June 30, 2000, totaled $179,000, compared to $176,000 for the
quarter ended June 30, 1999. Depreciation and amortization reflects depreciation
of leasehold improvements and furnishings and our financial system hardware,
software and peripheral equipment. Depreciation expense is calculated using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to twenty years. Amortization expense for intangible assets
(e.g., operating rights, trademarks) is computed using the straight-line method
over a period of twenty years.
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<PAGE> 19
Interest Income and Expense
We earned $267,000 of interest income for the quarter ended June 30, 2000,
compared to $310,000 for the quarter ended June 30, 1999. Interest income for
the quarter ended June 30, 2000, resulted primarily from the temporary
investment of cash provided by operations. Interest income for the quarter ended
June 30, 1999, related to the short-term investment of proceeds received from
the sale-leaseback transaction.
We had interest expense, net of capitalized interest, of $4.6 million for
the quarter ended June 30, 2000, compared to $1.9 million for the quarter ended
June 30, 1999. The increase for the quarter ended June 30, 2000 is largely due
to the increased level of debt, higher interest rates, and fewer projects under
construction, thereby reducing the amount of interest capitalized.
Sales of Hotels
We have sold to and leased back from HPT 34 hotels. A deferred gain was
recorded on the sales, a portion of which has been recorded in income in 2000
and 1999. The following table sets forth the activity for the three months ended
June 30, 2000 and June 30, 1999 (in thousands, except number of hotels):
For the three months
ended June 30,
--------------------
2000 1999
------ ------
Rent expense on leased hotels $6,299 $6,218
Gain recognized into earnings $ 514 $ 328
Comparison of six months ended June 30, 2000 and June 30, 1999
Hotel Operations
Hotel Operations Revenue
For the six months ended June 30, 2000, hotel operations revenue, which
includes room revenue and other revenue (e.g., guest telephone and sales of
products from the Candlewood cupboard), totaled $64.1 million, compared to $48.2
million for the six months ended June 30, 1999. The increase in revenue reflects
the increase in the number of hotels in operation during the first six months of
2000 and the increased revenue generated by hotels that had completed or were
near completion of their ramp-up phase. The following table sets forth our
operating statistics for corporate hotels for the six months ended June 30, 2000
and June 30, 1999:
For the six months
ended June 30,
------------------
2000 1999 Change
------ ------ ------
Occupancy 77.8% 64.1% 13.7%
Average Daily Rate $56.57 $59.75 $(3.18)
Revenue per available room $44.03 $38.32 $ 5.71
The average occupancy rate for corporate hotels was 77.8% for the six
months ended June 30, 2000, compared to 64.1% for the six months ended June 30,
1999. Occupancy for the six months ended June 30, 2000, was positively
influenced by the increase in occupancy experienced by those hotels that had
completed or were near completion of their ramp-up phase. In addition, we
experienced strong occupancy rates in our core business, long-term stays, which
consists of travelers staying seven or more nights.
The average daily room rate for corporate hotels for the six months ended
June 30, 2000 was $56.57, compared to $59.75 for the six months ended June 30,
1999. The decrease in average daily rate was
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<PAGE> 20
primarily due to the increase in our long-term stays, which are charged at a
lower daily rate. Revenue per available room was $44.03 for the six months ended
June 30, 2000, compared to $38.32 for the six months ended June 30, 1999. This
increase is the result of the increased occupancy rate experienced in the six
months ended June 30, 2000.
We had 53 company-operated hotels open as of December 31, 1998. The
following table sets forth the performance of these hotels for the six months
ended June 30, 2000 and June 30, 1999:
For the six months
ended June 30,
---------------------
2000 1999 Change
------ ------ ------
Number of hotels 53 53 --
Average age (in months) 23.4 11.4 12
Occupancy 79.5% 65.7% 13.8%
Average Daily Rate $55.77 $59.83 $(4.06)
Revenue per available room $44.33 $39.28 $ 5.05
The average occupancy rate for the 53 company-operated hotels open as of
December 31, 1998 increased 13.8 occupancy points for the six months ended June
30, 2000 to 79.5%, compared to 65.7% for the six months ended June 30, 1999. The
increase was due in large part to hotels that had completed or were near
completion of their ramp-up phase at June 30, 2000, and the larger percentage of
extended-stay business experienced by the hotels during the six months ended
June 30, 2000. The average daily rate declined $4.06 or 6.8% in the six months
ended June 30, 2000 compared to the six months ended June 30, 1999. This
decrease is the result of the lower daily rates charged extended-stay guests.
Revenue per available room increased 12.9% to $44.33 for the six months ended
June 30, 2000, compared to $39.28 for the six months ended June 30, 1999, as a
result of the increase in the occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the six months ended June 30, 2000, totaled
$34.2 million compared to $28.1 million for the six months ended June 30, 1999.
The increase in hotel operating expenses is primarily due to the increased
number of hotels in operation at June 30, 2000, the variable nature of many of
the expenses, increased wages, and general economic price increases.
Rent Expense on Leased Hotels
For the six months ended June 30, 2000, we incurred rent expense of $12.6
million for leased hotels, compared to $12.4 million for the six months ended
June 30, 1999. The increase in rent expense reflects the full six -month lease
costs of the three hotels sold in January 1999 and the payment of contingent
rent on certain properties.
Hotel Opening Costs
For the six months ended June 30, 2000, opening costs totaled $113,000,
compared to $797,000 for the six months ended June 30, 1999. The decrease in
opening costs is primarily the result of having opened only one company-operated
hotel in the six month period ended June 30, 2000, compared to 10 hotels in the
six month period ended June 30, 1999.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations for
the six months ended June 30, 2000, totaled $4.8 million, compared to $3.3
million for the six months ended June 30, 1999. The increase in depreciation and
amortization expense for the six months ended June 30, 2000, compared to
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<PAGE> 21
the same period in 1999, is primarily the result of the increase in the number
of company-owned hotels open and operating at June 30, 2000. In addition, as
previously noted, many of the newly opened corporate hotels are in higher
priced, primary markets where building costs are higher.
Corporate Operations
Other Income
Other income for the six months ended June 30, 2000, totaled $1.2 million,
compared to $443,000 for the six months ended June 30, 1999. The growth in other
income in 2000, compared to 1999, reflects an increase in franchise fee, royalty
fee and management fee income.
We did not sell any hotels during the six months ended June 30, 2000;
however, we did recognize $1.0 million of gain on hotels that were previously
sold. For the six months ended June 30, 1999, we sold three hotels and
recognized $509,000 of gain on hotels sold.
Corporate Operating Expenses
For the six months ended June 30, 2000, corporate operating expenses
totaled $3.0 million, compared to $2.5 million for the six months ended June 30,
1999. The increase in 2000 is primarily due to the expansion of our franchise
sales and service team and was partially offset by cost savings generated by a
reduction in the number of corporate office personnel and other support and
service costs.
Abandoned Site Costs
There were no abandoned site costs recorded for the six months ended June
30, 2000. We recorded $863,000 of abandoned site costs for the six months ended
June 30, 1999.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations totaled
$357,000 for the six months ended June 30, 2000, compared to $300,000 for the
six months ended June 30, 1999. The increase in depreciation and amortization
reflects depreciation of the leasehold improvements and furnishings purchased in
1999 for the new corporate office and the depreciation of the financial system
hardware, software and peripheral equipment purchased in 1999.
Interest Income and Expense
Interest income totaled $499,000 for the six months ended June 30, 2000,
compared to $592,000 for the six months ended June 30, 1999. Interest income for
the six months ended June 30, 2000, resulted primarily from the temporary
investment of cash provided by operations. Interest income for the six months
ended June 30, 1999, related to the short-term investment of proceeds received
from the sale-leaseback transaction and the Series B Preferred Stock offering.
Interest expense, net of capitalized interest, totaled $8.5 million for the
six months ended June 30, 2000, compared to $3.4 million for the six months
ended June 30, 1999. The increase in interest expense is largely due to the
increased level of debt, higher interest rates, and fewer projects under
construction, thereby reducing the amount of interest capitalized.
Sales of Hotels
We have sold to and leased back from HPT 34 hotels. A deferred gain was
recorded on the sales, a portion of which has been recorded in income in 2000
and 1999. The following table sets forth the
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activity for the six months ended June 30, 2000 and June 30, 1999 (in thousands,
except number of hotels):
For the six months
ended June 30,
--------------------
2000 1999
------- -------
Number of hotels sold - six months -- 3
Proceeds from sales of hotels, net
of deferred gain $ -- $24,285
Rent expense on leased hotels $12,558 $12,354
Gain recognized into earnings $ 1,037 $ 509
Liquidity and Capital Resources
We had cash and cash equivalents of $23.2 million at June 30, 2000,
compared to $18.2 million at June 30, 1999. Net cash provided by operating
activities totaled $4.1 million for the six months ended June 30, 2000 compared
to $14.5 million for the six months ended June 30, 1999. The primary sources of
cash for the six month period ended June 30, 2000 were $3.3 of net income from
operations and $5.2 million of non-cash depreciation and amortization expense.
Uses of cash in 2000 consisted primarily of a $4.0 million increase in other
assets. The primary sources of cash for the six months ended June 30, 1999 were
the reduction of $20.8 million in the amount of hotels held for sale, an
increase of $2.0 million in deferred gain on sale of hotels, and $3.6 million of
non-cash depreciation and amortization. Uses of cash in 1999 consisted of $1.9
million in net loss from operations, a decrease of $3.7 million in accounts
payable and accrued expenses, an increase of $3.1 million in accounts
receivable, and a $2.5 million increase in the amount of deposits relating to
the sale-leaseback transaction.
Net cash used in investing activities for the six months ended June 30,
2000, totaled $10.6 million, compared to $65.5 million for the six months ended
June 30, 1999. Our expenditures for property and equipment in connection with
the completed hotels, the construction of new hotels, acquisition costs for
potential development sites, and the costs of hotels sold accounted for the
majority of the cash used. For the six months ended June 30, 2000, we expended
approximately $14.2 million, compared to $65.3 million for the six months ended
June 30, 1999.
For the six months ended June 30, 2000, net cash provided by financing
activities was $11.0 million compared to $46.1 million for the six months ended
June 30, 1999. Net cash provided by financing activities included $16.2 million
in proceeds from mortgages and notes payable for the six months ended June 30,
2000, partially offset by $4.0 million of preferred stock dividend payments. For
the six months ended June 30, 1999, cash provided by financing activities
consisted of $53.5 million in proceeds from mortgages and notes payable,
partially offset by $3.3 million in principal payments on notes and $4.0 million
of preferred stock dividend payments. The principal payments on notes payable
made in 1999 related primarily to the three hotels sold in the first quarter of
1999.
At June 30, 2000, we had one company-owned hotel under construction (Jersey
City, New Jersey) with a total estimated cost of approximately $24.3 million. We
have secured financing for this hotel. As of June 30, 2000, we had incurred
costs on this hotel of approximately $13.1 million. Under terms of the
financing, our total equity requirement for this hotel is $5.5 million, $5.1
million of which had been funded as of June 30, 2000. The remaining $400,000 of
equity will be funded upon completion of the hotel.
We had three hotels under construction at June 30, 2000 as part of our
joint venture development agreement with Boston Capital Institutional Advisors
and Mass Mutual. The total estimated cost of construction for these hotels is
$34.5 million. As of June 30, 2000, the joint venture had incurred costs of
approximately $16.7 million on these projects. These costs include land
acquisition costs, deposits and
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<PAGE> 23
fees for surveys, legal services, environmental studies, and architectural
drawings. Our total equity requirement per the loan agreements for these three
hotels is $4.2 million, all of which had been funded as of June 30, 2000. Under
the terms of our joint venture development agreement, if we do not have at least
10 joint venture hotels open or under construction by August 31, 2000, we may be
required to increase our capital contribution to existing joint venture hotels
by up to 5%. As of June 30, 2000, this would amount to approximately $3.5
million. While we have eight hotels open or under construction at June 30, 2000
and will continue to identify and evaluate potential joint venture sites, we do
not expect to have 10 joint venture hotels open or under construction by August
31, 2000.
In addition to the above, at June 30, 2000, we had one joint venture hotel
under construction in East Lansing, Michigan. The total estimated cost of
construction for this hotel is $8.3 million. As of June 30, 2000, the joint
venture had incurred costs on this hotel of approximately $117,000. Under terms
of the joint venture agreement, our total equity requirement for this hotel is
$895,000, $117,000 of which had been funded as of June 30, 2000.
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, payment of preferred dividends and operations through December
2001. In addition, from time to time we will consider strategic acquisitions as
a means of growth, which would similarly require additional capital. We continue
to consider and/or pursue a number of financing alternatives, including credit
facilities, the issuance of equity, debt or equity-linked securities and joint
ventures, which are necessary to provide the capital needed to build or acquire
additional hotels. 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
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of our
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe our systems
successfully responded to the Year 2000 date change. We expended approximately
$100,000 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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. For each interest
rate change of .01 percent, the market value of our mortgages and notes payable,
based on the outstanding balance at June 30, 2000, would change by approximately
$18,800. Additionally, we have market risk on our short-term investments, which
are
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considered cash equivalents, due to changes in interest rates. For each interest
rate change of .01 percent, the market value of our short-term investments,
based on the outstanding balance at June 30, 2000, would change by approximately
$1,500.
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:
o the market acceptance of the Candlewood brand;
o the ability to attract and retain franchisees;
o the risk that signed franchise agreements may not result in the
construction or opening of hotels;
o the ability to maximize revenue per available room through the
management of occupancy and rate;
o the ability to attract and retain quality personnel;
o operating performance of our hotels;
o adverse changes in national or local economic conditions;
o competition from other lodging properties;
o changes in real property tax rates;
o changes in the availability, cost and terms of financing;
o the impact of present or future environmental legislation;
o the ongoing need for capital improvements;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning laws;
o civil unrest;
o acts of God, including earthquakes and other natural disasters (which
may result in uninsured losses); and
o acts of war.
Certain of these factors are discussed in more detail elsewhere in this Form
10-Q and the Company's other filings with the Securities and Exchange
Commission.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 16, 2000, the Company held its 2000 Annual Meeting of Stockholders
to elect the Company's board of directors. The number of shares entitled to vote
was 9,025,000 shares of the Company's Common Stock, 65,000 shares of the
Company's Series A Preferred Stock and 42,000 shares of the Company's Series B
Preferred Stock. On an as-converted basis, the total number of shares of Common
Stock available to vote was 20,288,158. The total number of shares represented
in person or by proxy to vote was 16,070,872. Each of the current directors was
re-elected. Messrs. Costley, Cresci, DeBoer, Fix, Morris, Nielsen, Pados,
Perocchi and Salazar were re-elected with 16,059,602 affirmative votes and
11,270 votes against. Ms. Albrecht and Messrs. Keltner and Storey were
re-elected with 16,059,502 affirmative votes and 11,370 votes against. No other
matters were put to a vote of stockholders at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: August 11, 2000 By: /s/ Jack P. DeBoer
---------------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: August 11, 2000 By: /s/ Warren D. Fix
---------------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
26
<PAGE> 27
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. (11)
3.3 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of
Series A Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc. (3)
3.4 Certificate of Amendment of Certificate of Designations of Series
A Preferred Stock. (10)
3.5 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of
Series B Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc. (10)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Form of Warrant. (9)
4.3 Amended and Restated Stockholders Agreement dated as of July 10,
1998. (10)
10.1 Form of Indemnification Agreement for Executive Officers and
Directors. (5)
10.2 Indemnification Agreement Schedule. (11)
10.3 1996 Equity Participation Plan and Form of Stock Option
Agreements. (5)
10.4 First Amendment to the 1996 Equity Participation Plan effective as
of May 18, 1998. (11)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and
Jack P. DeBoer dated as of September 1, 1996. (1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc.
and Doubletree Corporation dated as of November 11, 1996. (2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc.
to Doubletree Corporation dated as of November 11, 1996. (2)
10.8 Employment Agreement between Candlewood Hotel Company, Inc. and
James Roos dated as of June 2, 1997. (4)
10.9 Series A Cumulative Convertible Preferred Stock Purchase Agreement
dated as of August 27, 1997. (3)
10.10 Amended and Restated Registration Rights Agreement dated as of
July 10, 1998. (10)
10.11 Purchase and Sale Agreement, dated as of November 19, 1997, by and
among Candlewood Hotel Company, Inc. and certain of its
affiliates, as sellers, and HPT, as purchaser. (6)
10.12 First Amendment to Purchase and Sale Agreement and Agreement to
Lease and Fourth Amendment to Lease Agreement and Incidental
Documents, dated as of January 7, 1999, by and among Candlewood
Hotel Company, Inc., Candlewood Leasing No. 1, Inc., HPT and HPT
CW, and seventeen entities which are parties thereto. (11)
10.13 Agreement to Lease, dated as of November 19, 1997, by and between
Candlewood Hotel Company, Inc. and HPT. (6)
10.14 Lease Agreement, dated as of December 24, 1997, by and between
HPTCW, as landlord, and Candlewood Leasing No. 1, Inc., as tenant.
(6)
10.15 Guaranty Agreement, dated as of December 24, 1997, by Candlewood
Hotel Company, Inc. for the benefit of HPTCW and HPT. (6)
<PAGE> 28
Exhibit
No. Description
------- -----------
10.16 Stock Pledge Agreement, dated as of December 24, 1997, by
Candlewood Hotel Company, Inc. for the benefit of HPTCW. (6)
10.17 Purchase and Sale Agreement, dated as of May 14, 1998, by and
among Candlewood Hotel Company, Inc. and certain of its
affiliates, as sellers, and HPT, as purchaser. (7)
10.18 First Amendment to Purchase and Sale Agreement, Agreement to
Lease, Lease Agreement and Incidental Documents, dated as of June
18, 1998, by and among Candlewood Hotel Company, Inc., Candlewood
Leasing No. 2, Inc., HPT and HPT CW II. (11)
10.19 Second Amendment to Purchase and Sale Agreement, Agreement to
Lease, Lease Agreement and Incidental Documents, dated as of July
31, 1998, by and among Candlewood Hotel Company, Inc., Candlewood
Leasing No. 2, Inc., HPT and HPT CW II. (9)
10.20 Third Amendment to Purchase and Sale Agreement and Agreement to
Lease and Sixth Amendment to Lease Agreement and Incidental
Documents, dated as of December 23, 1998, by and among Candlewood
Hotel Company, Inc., Candlewood Leasing No. 2, Inc., HPT, HPT CW
II and seventeen entities which are parties thereto. (11)
10.21 Agreement to Lease, dated as of May 14, 1998, by and between
Candlewood Hotel Company, Inc. and HPT. (7)
10.22 Lease Agreement, dated as of May 21, 1998, by and between HPTCW,
as landlord, and Candlewood Leasing No. 2, Inc., as tenant. (7)
10.23 Guaranty Agreement, dated as of May 14, 1998, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW and HPT. (7)
10.24 Stock Pledge Agreement, dated as of May 27, 1998, by Candlewood
Hotel Company, Inc. for the benefit of HPTCW. (7)
10.25 Securities Purchase Agreement dated as of September 30, 1998. (10)
10.26 Lease Agreement dated April 30, 1998 by and between Candlewood
Hotel Company, Inc. and Vantage Point Properties, Inc. (11)
11.1 Statement re Computation of Per Share Earnings -- not applicable.
27.1 Financial Data Schedule.
-------------
(1) Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1997.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997 filed
July 30, 1998.
(9) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(11) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
