<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 March 31, 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 May 10, 2000
----- ---------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and March 31, 1999
(unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 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 - 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
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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>
March 31,
2000 December 31,
(Unaudited) 1999
----------- ----
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 238,804 $ 238,320
Hotels under construction 41,173 37,755
Other costs 3,256 3,654
--------- ---------
283,233 279,729
Accumulated depreciation and amortization (10,569) (8,582)
--------- ---------
Net investment in hotels 272,664 271,147
Cash and cash equivalents (including $914 and $407 of
restricted cash, respectively) 15,874 18,624
Deposits 26,334 26,334
Accounts and other receivables 4,792 4,735
Other assets 24,564 20,437
--------- ---------
Total assets $ 344,228 $ 341,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 200,526 $ 190,545
Accounts payable and other accrued expenses 18,292 22,874
Deferred gain on sale of hotels 16,903 17,431
Other liabilities 991 1,172
--------- ---------
Total liabilities 236,712 232,022
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 (28,533) (26,794)
--------- ---------
Total stockholders' equity 6,827 8,566
--------- ---------
Total liabilities and stockholders' equity $ 344,228 $ 341,277
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three-Months Ended
------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES:
Hotel operations $ 30,240 $ 21,267
Other income 450 207
----------- -----------
Total hotel operating revenues 30,690 21,474
Proceeds from sale of hotels, net of deferred gain of $0 and
$3,405, respectively - 23,196
Deferred gain recognition on sales of hotels 523 181
----------- -----------
Total revenues 31,213 44,851
----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 16,968 13,060
Corporate operating expenses 1,408 1,240
Rent expense on leased hotels 6,259 6,136
Hotel opening costs 93 585
Depreciation and amortization 2,543 1,489
----------- -----------
Total operating costs and expenses 27,271 22,510
Cost of hotels sold - 23,196
----------- -----------
3,942 (855)
Interest income 232 282
Interest expense (3,918) (1,480)
----------- -----------
Income (loss) before preferred stock dividends 256 (2,053)
Preferred stock dividends (1,995) (1,979)
----------- -----------
Net loss available to common stockholders $ (1,739) $ (4,032)
=========== ===========
Net loss per share of common stock - basic and diluted $ (0.19) $ (0.45)
=========== ===========
Weighted average shares outstanding - basic and diluted 9,025,000 9,025,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends $ 256 $ (2,053)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,543 1,489
Deferred gain recognition on sales of hotels (523) (181)
Change in:
Hotels completed and under construction - held for sale - 20,776
Deposits - (2,487)
Accounts receivable (17) (1,785)
Opening costs - 718
Other assets (4,903) 369
Accounts payable and other accrued expenses (1,223) (5,575)
Deferred gain on sale of hotels (5) 3,168
Other liabilities (108) (38)
-------- --------
Net cash (used in) provided by operating activities (3,980) 14,401
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under construction (7,080) (33,321)
Change in site acquisition costs 398 (8,539)
Purchase of intangible assets (1) -
-------- --------
Net cash used in investing activities (6,683) (41,860)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 10,286 27,682
Payments on mortgages and notes payable (305) (3,181)
Preferred stock dividends (1,995) (1,979)
Other liabilities (73) (67)
-------- --------
Net cash provided by financing activities 7,913 22,455
-------- --------
Net decrease in cash and cash equivalents (2,750) (5,004)
Cash and cash equivalents at beginning of period 18,624 23,155
-------- --------
Cash and cash equivalents at end of period $ 15,874 $ 18,151
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,879 $ 2,414
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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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
generally accepted accounting principles for complete financial statements
have been omitted. The accompanying unaudited financial statements contain
all adjustments (consisting of only normal recurring adjustments and
including eliminations of all significant intercompany transactions and
accounts) which the Company believes are necessary for the fair
presentation of the Company's financial position and results of operations.
The condensed consolidated balance sheet data at December 31, 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from those
estimates.
B. Investment in Hotels Completed and Under Construction
Hotels Completed
Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the Hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.
Hotels under Construction
Hotels under construction represents costs incurred in the acquisition
and development of Hotels. Such costs include land acquisition costs,
construction costs, capitalized interest and construction overhead. Upon
completion, the costs of construction, including any capitalized costs, are
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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.
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 March 31, 2000, the Company had contributed
$9.6 million to the joint ventures, of which $2.6 million (in non-cash
transactions) was contributed during the quarter. This amount is included
in other assets on the accompanying balance sheets.
The Company has one significant joint venture that was formed in 1999.
Hotel operations for this joint venture had not yet commenced as of March
31, 2000, as the assets were still under construction. As of March 31,
2000, the Company had seven joint venture hotels under construction
pursuant to this agreement, all of which are scheduled to open in 2000 or
early 2001. Under the
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terms of the agreement, if the Company does not have at least 10 hotels
under construction by August 31, 2000, it may be required to increase it's
capital contributions relating to existing joint venture hotels by up to
5%, or an aggregate of approximately $3.0 to $5.0 million. While the
Company will continue to identify and evaluate potential joint venture
sites, it is unable to assure that it will have at least 10 joint venture
hotels under construction by August 31, 2000. The following is unaudited
financial information for the joint venture as of March 31, 2000:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
2000
-----------------
<S> <C>
Hotels under development $ 34,814
Other assets 2,751
-----------------
Total assets $ 37,565
=================
Total development liabilities $ 30,388
Total equity 7,177
-----------------
Total liabilities and equity $ 37,565
=================
</TABLE>
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>
Three months ended March 31, 2000
-------------------------------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------ ------ -----
<S> <C> <C> <C>
Revenues from external customers $ 30,690 $ - $ 30,690
Interest expense 3,918 - 3,918
Depreciation expense 2,364 - 2,364
Segment profit 5,099 523 5,622
Hotels assets:
Hotels completed and under construction 279,977 - 279,977
Trade accounts receivable 2,223 2,141 4,364
</TABLE>
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<TABLE>
<CAPTION>
Three months ended March 31, 1999
-------------------------------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------ ------ -----
<S> <C> <C> <C>
Revenues from external customers $ 21,474 $ 23,196 $ 44,670
Interest expense 1,480 - 1,480
Depreciation expense 1,365 - 1,365
Segment profit 913 181 1,094
Hotels assets:
Hotels completed and under construction 220,640 - 220,640
Trade accounts receivable 2,017 2,840 4,857
</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 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.
Note 2: Mortgages and Notes Payable
As of March 31, 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% (9.28% to 10.17% as of March 31, 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
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Company and certain other of the Company's wholly-owned subsidiary LLCs. At
March 31, 2000, $160.9 million was outstanding under these 30 building loan
agreements.
The Company has entered into loan agreements with various local and
regional banks for financing on four 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 March 31, 2000, interest on
the loans ranged from 8.75% to 10.0% with maturity dates ranging from February
2001 to December 2007. 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 March 31, 2000, $24.6
million was outstanding under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as of
March 31, 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 March
31, 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 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
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("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 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 a stockholders' agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Series B Preferred Stock Offering
On August 3, 1998, the Company completed the private placement of $42.0
million of its "Series B" 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 a stockholders' agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Note 4: Sale-Leaseback
In November, 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell 15 hotels for a total purchase price of $100.0
million, and to lease the hotels back from the buyer under a non-cancelable
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
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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, six hotels in the
fourth quarter of 1998, and one hotel in the first quarter of 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.
As of March 31, 2000, the Company had completed the sale of all 34 hotels.
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 $523,000 of deferred
gain in income in the quarter ended March 31, 2000, compared to $181,000 in the
quarter ended March 31, 1999. In total, the Company has recognized a total of
$2.4 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.
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The following table sets forth our property portfolio as of March 31, 2000
and March 31, 1999:
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
March 31, March 31,
-------------------------- -------------------------
2000 1999 Increase 2000 1999 Increase
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Owned 32 24 8 3,810 2,790 1,020
Leased 34 34 - 3,893 3,893 -
Managed 2 2 - 179 179 -
Joint Venture - - - - - -
Franchised 11 10 1 1,240 1,119 121
------------ ------------ ------------ ------------ ------------ ------------
Total 79 70 9 9,122 7,981 1,141
</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 rapid
expansion, the overall occupancy rate for company-operated 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 at March 31, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
Number of Hotels
As of March 31,
-----------------------------------------------------------
Increase /
2000 1999 (Decrease)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Open Hotels
Owned 32 24 8
Leased 34 34 -
Managed 2 2 -
Joint Venture - - -
Franchised 11 10 1
----------------- ----------------- -----------------
Total 79 70 9
Under Construction
Owned 1 7 (6)
Leased - - -
Managed - - -
Joint Venture 7 - 7
Franchised 6 1 5
----------------- ----------------- -----------------
Total 14 8 6
Potential Development
Owned 1 13 (12)
Leased - - -
Managed - - -
Joint Venture 1 - 1
Franchised 13 5 8
----------------- ----------------- -----------------
Total 15 18 (3)
</TABLE>
13
<PAGE> 14
At the end of 1999, we had a total of 65 company-operated hotels and 11
franchised hotels located in 29 different states. We opened one company-operated
hotel in the first quarter of 2000 in Las Vegas, Nevada. At March 31, 2000, we
had a total of 66 company-operated hotels and 11 franchised hotels in operation
located in 30 different states. In addition, at March 31, 2000, we had a total
of one company-owned hotel, seven joint venture hotels and six franchised hotels
under construction. Our portfolio also included one parcel of undeveloped
property. We are attempting to secure financing for the development of this
property. As of March 31, 2000, we had one new joint venture development site
under contract on which we were performing market-feasibility due diligence. 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 or will develop. 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 generally accepted accounting principles, the gain
must be deferred and not recognized into earnings until certain operating
performance levels are achieved. See Note 4 to Consolidated Financial
Statements.
As of March 31, 2000, we managed two 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.
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 March 31, 2000, we had seven joint venture hotels under
construction pursuant to this agreement, all of which are scheduled to open in
2000 or early 2001. 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.
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, 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 March 31, 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 March 31, 2000 and March 31, 1999, represents the franchising of
the Candlewood Suites brand. At March 31, 2000, we had 30 signed franchise
14
<PAGE> 15
agreements, compared to 16 at March 31, 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 March 31, 2000 and March 31,
1999:
<TABLE>
<CAPTION>
As of March 31,
-------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Open hotels 11 10
Hotels under construction 6 1
Signed, not under construction 13 5
-------------------- --------------------
Total franchise agreements signed 30 16
</TABLE>
RESULTS OF OPERATIONS
Comparison of fiscal quarters ended March 31, 2000 and March 31, 1999
Hotel Operations
Hotel Operations Revenue
Hotel operations revenue, which includes room revenue and other
revenue (e.g., guest telephone, sales of products from the Candlewood cupboard),
totaled $30.2 million for the quarter ended March 31, 2000, compared to $21.3
million for the quarter ended March 31, 1999. The increase in revenue reflects
the increase in the number of hotels in operation during the first 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 the three months ended March 31, 2000 and March 31,
1999:
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------------
2000 1999 Change
------------------- ------------------- ----------------------
<S> <C> <C> <C>
Occupancy 75.5% 60.1% 15.4%
Average Daily Rate $ 55.64 $ 59.26 $ (3.62)
Revenue per available room $ 42.02 $ 35.60 $ 6.42
</TABLE>
Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 75.5% for the quarter ended March 31, 2000, compared to
60.1% for the quarter ended March 31, 1999. Occupancy in the first 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 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.
The average daily room rate for the quarter ended March 31, 2000 was
$55.64, compared to $59.26 for the quarter ended March 31, 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:
- - stays of less than one week, which are charged at a higher daily rate;
15
<PAGE> 16
- - higher rates for our one-bedroom suites; and
- - higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $42.02 for the quarter ended March 31,
2000, compared to $35.60 for the quarter ended March 31, 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:
- - the number and geographic location of new hotels;
- - the season in which new hotels open;
- - competition;
- - market acceptance of our hotels; and
- - 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 hotels for the quarters ended March 31, 2000 and March 31,
1999, respectively:
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------------------
2000 1999 Change
------------------ ------------------ ------------------
<S> <C> <C> <C>
Number of hotels 53 53 -
Average age (in months) 20.4 8.4 12
Occupancy 77.6% 61.7% 15.9%
Average Daily Rate $ 54.99 $ 59.42 $ (4.43)
Revenue per available room $ 42.66 $ 36.64 $ 6.02
</TABLE>
The average occupancy rate for the 53 company-operated hotels open as of
December 31, 1998 increased 15.9 occupancy points in the first quarter of 2000
to 77.6%, compared to 61.7% 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 March 31, 2000, and the larger percentage of extended-stay
business experienced by the hotels during the first quarter of 2000. The average
daily rate declined $4.43 or 7.5% in the first quarter of 2000 compared to the
first quarter of 1999. This decrease is the result of the lower daily rates
charged extended-stay guests. Revenue per available room increased 16.4% to
$42.66 in the first quarter of 2000, compared to $36.64 in the first quarter of
1999, as a result of the increase in the occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended March 31, 2000, totaled
$17.0 million, compared to $13.1 million for the quarter ended March 31, 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 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 first quarter of 2000,
the variable nature of many of the expenses, and general economic wage and price
increases.
16
<PAGE> 17
Rent Expense on Leased Hotels
We incurred rent expense on the 34 hotels leased in the first quarter of
2000 of $6.3 million, compared to $6.1 million of expense in the first quarter
of 1999. The increase in rent expense reflects the full quarter impact of the
three hotels sold and leased back in January 1999.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. During the fourth quarter of 1998, we elected early
adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires opening costs to be expensed as
incurred. Opening costs for the quarter ended March 31, 2000 totaled $93,000,
compared to $585,000 for the quarter ended March 31, 1999. The decrease in
opening costs is primarily the result of opening one hotel in the first quarter
of 2000, compared to five hotels in the first 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 March 31,
2000, totaled $2.4 million, compared to $1.4 million for the quarter ended March
31, 1999. The increase in depreciation and amortization expense in the first
quarter of 2000, compared to 1999, was a result of the increase in the number of
company-owned hotels open and operating in the first quarter of 2000. In
addition, many of the newly opened corporate hotels are in higher priced,
primary markets where it costs more to build. 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 generally
accepted accounting principles, we do not depreciate assets held for sale. As of
March 31, 2000 and March 31, 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.
Corporate Operations
Other Income
Other income for the quarter ended March 31, 2000, totaled $450,000,
compared to $207,000 for the quarter ended March 31, 1999. Other income consists
primarily of franchise fees and royalty fees from franchise hotels, management
fees received from managed hotels and equity income from a joint venture hotel
in Rockford, Illinois. The growth in other income in 2000, compared to 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. At March 31, 2000, we had 11 franchised hotels in operation, compared to
10 hotels at March 31, 1999.
We did not sell any hotels in the first quarter of 2000; however, we did
recognize gain on hotels that were previously sold. For the quarter ended March
31, 2000, we recognized $523,000 of gain on hotels sold, compared to $181,000 in
the quarter ended March 31, 1999.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended March 31, 2000, totaled
$1.4 million, compared to $1.2 million for the quarter ended March 31, 1999, and
included all expenses not directly related to the
17
<PAGE> 18
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 largely due to the expansion of
our franchise sales and service team, which occurred in the second and third
quarters 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.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
quarter ended March 31, 2000, totaled $179,000, compared to $124,000 for the
quarter ended March 31, 1999. The increase in depreciation and amortization
reflects depreciation of the leasehold improvements and furnishings purchased in
1999 for the new corporate office, and depreciation of the financial system
hardware, software and peripheral equipment purchased in 1999. 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.
Interest Income and Expense
We earned $232,000 of interest income for the quarter ended March 31, 2000,
compared to $282,000 for the quarter ended March 31, 1999. Interest income for
the quarter ended March 31, 2000, resulted primarily from the temporary
investment of cash provided by operations. Interest income for the quarter ended
March 31, 1999, related to the short-term investment of proceeds received from
the sale-leaseback transaction and the Series B Preferred Stock offering.
We had interest expense, net of capitalized interest, of $3.9 million for
the quarter ended March 31, 2000, compared to $1.5 million for the quarter ended
March 31, 1999. The increase for the quarter ended March 31, 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
As of March 31, 2000, 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 March 31, 2000 and March 31, 1999 (in thousands, except
number of hotels):
<TABLE>
<CAPTION>
For the three months ended March 31,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Number of hotels sold - quarter - 3
Proceeds from sales of hotels, net
of deferred gain $ - $ 23,196
Rent expense on leased hotels $ 6,259 $ 6,136
Gain recognized into earnings $ 523 $ 181
</TABLE>
18
<PAGE> 19
Liquidity and Capital Resources
We had cash and cash equivalents of $15.9 million at March 31, 2000,
compared to $18.6 million at March 31, 1999. Net cash used in operating
activities totaled $4.0 million in the first quarter of 2000 compared to $14.4
million of cash provided by operating activities in the first quarter of 1999.
The primary sources of cash in the first quarter of 2000 were $256,000 of net
income from operations and $2.5 million of non-cash depreciation and
amortization expense. Uses of cash in the first quarter of 2000 included a $4.9
million increase in other assets and a reduction of $1.2 million in accounts
payable and other accrued expenses. The increase in other assets reflects the
increase in investment in joint ventures made during the quarter ended March 31,
2000. The primary sources of cash for the quarter ended March 31, 1999 were a
reduction of $20.8 million in the amount of hotels held for sale, an increase of
$3.2 million in deferred gain on sale of hotels, and $1.5 million of non-cash
depreciation and amortization. The primary uses of cash during the first quarter
of 1999 consisted of $2.1 million in net loss from operations, a decrease of
$5.6 million in accounts payable and accrued expenses 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 quarter ended March 31, 2000,
totaled $6.7 million, compared to $41.9 million for the quarter ended March 31,
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 quarter ended March 31, 2000, we expended
approximately $7.1 million, compared to $33.3 million for the quarter ended
March 31, 1999.
For the quarter ended March 31, 2000, net cash provided by financing
activities was $7.9 million compared to $22.5 million for the quarter ended
March 31, 1999. Net cash provided by financing activities included $10.3 million
in proceeds from mortgages and notes payable for the quarter ended March 31,
2000, partially offset by $2.0 million of preferred stock dividend payments. For
the quarter ended March 31, 1999, cash provided by financing activities
consisted of $27.7 million in proceeds from mortgages and notes payable,
partially offset by $3.2 million in principal payments on notes and $2.0 million
of preferred stock dividend payments. The principal payments on notes payable
made in the first quarter of 1999 related primarily to the three hotels sold
during the quarter.
At March 31, 2000, we had two company-owned hotels under construction
(Jersey City, New Jersey and Las Vegas, Nevada) with a total estimated cost of
approximately $47.6 million. The Las Vegas, Nevada hotel was partially opened in
February 2000. We have secured financing on both hotels. As of March 31, 2000,
we had incurred costs of approximately $29.9 million on these projects. Under
terms of the financing, our total equity requirement for these properties is
$12.8 million, $12.0 million of which had been funded as of March 31, 2000. The
remaining $800,000 of equity will be funded upon completion of one of the
hotels. In addition to the company-owned hotels under construction, at March 31,
2000, we owned one property on which construction had not begun. We are
attempting to secure financing for this project.
We had seven hotels under construction at March 31, 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 seven hotels
is $74.6 million. As of March 31, 2000, the joint venture had incurred costs of
approximately $37.6 million on these projects. These costs include land
acquisition costs, deposits and fees for surveys, legal services, environmental
studies, and architectural drawings. Our total equity requirement per the loan
agreements for these six hotels is $8.3 million, all of which had been funded as
of March 31, 2000. Under the terms of our joint venture development agreement,
if we do not have at least 10 hotels under construction by August 31, 2000, we
may be required to increase our capital contributions relating to existing joint
venture hotels by up to 5%, or an aggregate of $3.0 to $5.0
19
<PAGE> 20
million. While we will continue to identify and evaluate potential joint venture
sites, we are unable to assure that we will have at least 10 joint venture
hotels under construction by August 31, 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 March 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 March 31, 2000, would change by
approximately $18,600. Additionally, we have market risk on our short-term
investments, which are 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 March 31, 2000,
would change by approximately $1,000.
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
20
<PAGE> 21
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:
- - the market acceptance of the Candlewood brand;
- - the ability to attract and retain franchisees;
- - the risk that signed franchise agreements may not result in the
construction or opening of hotels;
- - the ability to maximize revenue per available room through the management
of occupancy and rate;
- - the ability to attract and retain quality personnel;
- - operating performance of our hotels;
- - 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;
- - adverse changes in governmental rules and fiscal policies;
- - adverse changes in zoning laws;
- - civil unrest;
- - acts of God, including earthquakes and other natural disasters (which may
result in uninsured losses); and
- - 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.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
22
<PAGE> 23
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.
<TABLE>
<CAPTION>
CANDLEWOOD HOTEL COMPANY, INC.
<S> <C>
Date: May 10, 2000 By: /s/ Jack P. DeBoer
----------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: May 10, 2000 By: /s/ Warren D. Fix
------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
</TABLE>
23
<PAGE> 24
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)
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)
24
<PAGE> 25
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.
26
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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100,689,000
0
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