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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 48-1188025
--------------------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
8621 E. 21st Street North, Suite 200
Wichita, Kansas 67206
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(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.
<TABLE>
<S> <C>
Class Outstanding at November 10, 2000
---------------------------- --------------------------------
Common Stock, $.01 par value 9,025,000 shares
</TABLE>
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
INDEX
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<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and
September 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 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 13 - 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
</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>
September 30,
2000 December 31,
(Unaudited) 1999
--------- ---------
<S> <C> <C>
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 263,594 $ 238,320
Hotels under construction 23,788 37,755
Other costs 50 3,654
--------- ---------
287,432 279,729
Accumulated depreciation and amortization (14,872) (8,582)
--------- ---------
Net investment in hotels 272,560 271,147
Cash and cash equivalents (including $926 and $407 of
restricted cash, respectively) 21,552 18,624
Deposits 26,334 26,334
Accounts and other receivables 5,761 4,735
Other assets 27,373 20,437
--------- ---------
Total assets $ 353,580 $ 341,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 208,554 $ 190,545
Accounts payable and other accrued expenses 18,751 22,874
Deferred gain on sale of hotels 15,844 17,431
Other liabilities 854 1,172
--------- ---------
Total liabilities 244,003 232,022
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 (26,472) (26,794)
--------- ---------
Total stockholders' equity 8,888 8,566
--------- ---------
Total liabilities and stockholders' equity $ 353,580 $ 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>
For the
For the Quarter Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel operations $ 33,624 $ 29,585 $ 97,704 $ 77,758
Other income 1,185 538 2,422 981
----------- ----------- ----------- -----------
Total hotel operating revenues 34,809 30,123 100,126 78,739
Proceeds from sale of hotels, net of deferred
gain of $0 and $2,317, respectively -- -- -- 24,283
Deferred gain recognition on sales of hotels 550 395 1,587 904
----------- ----------- ----------- -----------
Total revenues 35,359 30,518 101,713 103,926
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 16,810 15,609 51,041 43,753
Corporate operating expenses 1,648 1,067 4,609 3,535
Rent expense on leased hotels 6,294 6,227 18,852 18,581
Hotel opening costs 44 208 157 1,005
Abandoned site costs -- -- -- 863
Depreciation and amortization 2,805 2,364 7,993 5,959
----------- ----------- ----------- -----------
Total operating costs and expenses 27,601 25,475 82,652 73,696
Cost of hotels sold -- -- -- 24,283
----------- ----------- ----------- -----------
7,758 5,043 19,061 5,947
Interest income 335 171 834 763
Interest expense (5,011) (3,099) (13,543) (6,513)
----------- ----------- ----------- -----------
Income before preferred dividends 3,082 2,115 6,352 197
Preferred stock dividends (2,017) (2,023) (6,008) (6,003)
----------- ----------- ----------- -----------
Net income (loss) available to common
Stockholders $ 1,065 $ 92 $ 344 $ (5,806)
=========== =========== =========== ===========
Net income (loss) per share of common
stock - basic $ .12 $ .01 $ .04 $ (0.64)
=========== =========== =========== ===========
Net income (loss) per share of common
stock - diluted $ .12 $ .01 $ .04 $ (0.64)
=========== =========== =========== ===========
Weighted average shares
outstanding - basic and diluted 9,025,000 9,025,000 9,025,000 9,025,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
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<CAPTION>
Nine Months Ended
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September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before preferred stock dividends $ 6,352 $ 197
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,993 5,959
Deferred gain recognition on sales of hotels (1,587) (904)
Abandoned site costs -- 863
Change in:
Hotels completed and under construction - held for sale -- 20,776
Deposits -- (2,487)
Accounts receivable (1,026) (3,796)
Opening costs -- 718
Other assets (4,087) (5,343)
Accounts payable and other accrued expenses (1,247) (1,733)
Deferred gain on sale of hotels -- 2,009
Other liabilities (170) (84)
-------- --------
Net cash provided by operating activities 6,228 16,175
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under construction (21,891) (89,041)
Change in site acquisition costs 3,604 10,714
Purchase of intangible assets (6) (256)
-------- --------
Net cash used in investing activities (18,293) (78,583)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 22,514 67,613
Payments on mortgages and notes payable (1,343) (3,354)
Preferred stock dividends (6,030) (6,024)
Other liabilities (148) (205)
Expenditures for private placement -- (48)
-------- --------
Net cash provided by financing activities 14,993 57,982
-------- --------
Net increase (decrease) in cash and cash equivalents 2,928 (4,426)
Cash and cash equivalents at beginning of period 18,624 23,155
-------- --------
Cash and cash equivalents at end of period $ 21,552 $ 18,729
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 15,648 $ 9,790
======== ========
</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 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
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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 September 30, 2000, the Company had
contributed $12.0 million to the joint ventures, of which $5.0 million
(in non-cash transactions) was contributed during the nine months ended
September 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 with Boston Capital Institutional Advisors and Mass Mutual in which
it has a 50% ownership. As of September 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 did
not have at least 10 hotels open or
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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. As of September 30, 2000, this
amount was estimated at approximately $3.7 million. As of November 10,
2000, Boston Capital and Mass Mutual had not required the Company to
increase its capital contribution, although they may require the Company
to do so in the future. The Company is otherwise in compliance with the
terms of the joint venture agreement. The Company will continue to
identify and evaluate potential joint venture sites with these partners.
The following is unaudited financial information for the joint venture
as of September 30, 2000:
---------------------------------------------------------------------------
Nine months ended September 30, 2000
---------------------------------------------------------------------------
(In thousands)
<TABLE>
<S> <C>
Hotels completed and under construction $63,345
Other assets 4,268
-------
Total assets $67,613
=======
Total development liabilities $58,488
Total equity 9,125
-------
Total liabilities and equity $67,613
=======
</TABLE>
---------------------------------------------------------------------------
Nine months ended September 30, 2000
---------------------------------------------------------------------------
(In thousands)
<TABLE>
<S> <C>
Total revenue $ 4,727
Hotel operating expenses 1,853
Hotel opening costs 400
Depreciation and amortization 824
Interest expense 866
-------
Net pre-tax income $ 784
=======
</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 third
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:
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---------------------------------------------------------------------------
Nine months ended September 30, 2000
---------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Operation of Sale of
Hotels Hotels Total
-------- ------ --------
<S> <C> <C> <C>
Revenues from external customers $100,126 $ -- $100,126
Interest expense 13,543 -- 13,543
Depreciation expense 7,456 -- 7,456
Segment profit 22,777 1,587 24,364
Hotels assets:
Hotels completed and under construction 287,382 -- 287,382
Trade accounts receivable 2,979 2,392 5,371
</TABLE>
---------------------------------------------------------------------------
Nine months ended September 30, 1999
---------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Operation of Sale of
Hotels Hotels Total
-------- ------ --------
<S> <C> <C> <C>
Revenues from external customers $ 78,739 $24,283 $103,022
Interest expense 6,513 -- 6,513
Depreciation expense 5,477 -- 5,477
Segment profit 10,928 904 11,832
Hotels assets:
Hotels completed and under construction 272,344 -- 272,344
Trade accounts receivable 3,583 2,803 6,386
</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 September 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
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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% (10.02% to 10.88% as of September 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 September 30, 2000, $168.0 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 September 30, 2000,
interest on the loans ranged from 9.37% to 12.50% 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 September 30,
2000, $25.6 million was outstanding under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as
of September 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 an annual fee equal to 0.25% to 0.50% of 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.
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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 September 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.
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
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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.
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
third 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.
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 $1.6 million
of deferred gain in income in the nine months ended September 30, 2000, compared
to $904,000 in the nine months ended September 30, 1999. In total, the Company
has recognized a total of $3.5 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.
GENERAL
Candlewood owns, operates, manages, develops and franchises hotels
serving mid-market extended-stay business travelers.
The following table sets forth our property portfolio as of September
30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
Number of Hotels Number of Rooms
September 30, September 30,
------------------------ ------------------------
2000 1999 Increase 2000 1999 Increase
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Owned 32 30 2 3,968 3,530 438
Leased 34 34 -- 3,893 3,893 --
Managed 2 2 -- 179 179 --
Joint Venture 5 -- 5 636 -- 636
Franchised 15 10 5 1,652 1,118 534
------ ------ ------ ------ ------ ------
Total 88 76 12 10,328 8,720 1,608
</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.
Traditionally, the overall occupancy rate for our 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 occupancy levels stabilize at a
corporate hotel, we review the daily pricing rates of that hotel. 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 tables set
forth our hotel development and hotel openings for the periods indicated:
<TABLE>
<CAPTION>
Number of Hotels
As of September 30,
---------------------------------------
Increase /
2000 1999 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Open Hotels
Owned 32 30 2
Leased 34 34 --
Managed 2 2 --
Joint Venture 5 -- 5
Franchised 15 10 5
---- ---- ----
Total 88 76 12
</TABLE>
13
<PAGE> 14
continued:
<TABLE>
<CAPTION>
Number of Hotels
As of September 30,
--------------------------------------------
Increase /
2000 1999 (Decrease)
------ ------ ----------
<S> <C> <C> <C>
Under Construction
Owned 1 3 (2)
Leased -- -- --
Managed -- -- --
Joint Venture 4 6 (2)
Franchised 6 3 3
------ ------ ------
Total 11 12 (1)
Potential Development
Owned -- 1 (1)
Leased -- -- --
Managed -- -- --
Joint Venture 1 1 --
Franchised 15 8 7
------ ------ ------
Total 16 10 6
</TABLE>
2000 Year to Date Hotel Openings:
<TABLE>
<CAPTION>
2000
------------------------------------------------------------
As of As of
12/31/99 1ST Qtr. 2nd Qtr. 3rd Qtr. 9/30/00
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Open Hotels
Owned 31 1 -- -- 32
Leased 34 -- -- -- 34
Managed 2 -- -- -- 2
Joint Venture -- -- 5 -- 5
Franchised 11 -- 1 3 15
------ ------ ------ ------ ------
Total 78 1 6 3 88
</TABLE>
We opened three franchised hotels in the third quarter of 2000 in the
following areas:
- Durham, North Carolina
- Green Bay, Wisconsin
- Richmond, Virginia
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 September 30, 2000, we
had a total of 71 company-operated hotels, two managed hotels and 15 franchised
hotels in operation located in 32 different states. In addition, at September
30, 2000, we had one company-owned hotel, four joint venture hotels and six
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 may
not acquire properties, complete the development and construction of hotels or
be able to build or develop hotels 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.
14
<PAGE> 15
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 September 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 September 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. We have a franchise program
which consists of two brands, Candlewood Suites by Candlewood and Cambridge
Suites by Candlewood. At September 30, 2000, we had a total of 36 signed
franchise agreements for both the Candlewood and Cambridge Suites brands,
compared to 21 at September 30, 1999. As of September 30, 2000, we had entered
into 35 franchise agreements for the Candlewood Suites brand and one agreement
for the Cambridge Suites brand. 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 September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
As of September 30,
------------------------
2000 1999
------ ------
<S> <C> <C>
Open hotels 15 10
Hotels under construction 6 3
Franchise agreements signed, hotel
not under construction 15 8
------ ------
Total franchise agreements signed 36 21
</TABLE>
15
<PAGE> 16
RESULTS OF OPERATIONS
Comparison of fiscal quarters ended September 30, 2000 and September 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 $33.6 million for the quarter ended September 30, 2000, compared to
$29.6 million for the quarter ended September 30, 1999. The increase in revenue
reflected the increase in the number of corporate hotels (comprised of owned and
leased hotels) in operation during the third 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 September 30, 2000 and September 30,
1999:
<TABLE>
<CAPTION>
For the three months ended September 30,
--------------------------------------------
2000 1999 Change
------ ------ ------
<S> <C> <C> <C>
Occupancy 77.4% 72.1% 5.3%
Average Daily Rate $58.09 $58.39 $(0.30)
Revenue per available room $44.99 $42.13 $ 2.86
</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 77.4% for corporate hotels for the quarter ended September
30, 2000, compared to 72.1% for the quarter ended September 30, 1999. Occupancy
in the third 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.
The average daily room rate for corporate hotels for the quarter ended
September 30, 2000 was $58.09, compared to $58.39 for the quarter ended
September 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:
- stays of less than one week, which are charged at a higher daily
rate;
- higher rates for our one-bedroom suites; and
- higher rates in certain hotel locations.
Revenue per available room for corporate hotels, calculated as the
average occupancy rate multiplied by the average daily rate, was $44.99 for the
quarter ended September 30, 2000, compared to $42.13 for the quarter ended
September 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:
16
<PAGE> 17
- 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 nine and twelve months following a hotel's 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 corporate hotels open
as of December 31, 1998. The following table sets forth the performance of these
53 hotels for the quarters ended September 30, 2000 and September 30, 1999,
respectively:
<TABLE>
<CAPTION>
For the three months
ended September 30,
-------------------------
2000 1999 Change
------ ------ ------
<S> <C> <C> <C>
Average age (in months) 26.4 14.4 12
Occupancy 78.7% 73.1% 5.6%
Average Daily Rate $57.63 $58.33 $(0.70)
Revenue per available room $45.33 $42.61 $ 2.72
</TABLE>
The average occupancy rate for the 53 corporate hotels open as of
December 31, 1998 increased 5.6 occupancy points in the third quarter of 2000 to
78.7%, compared to 73.1% 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 September 30, 2000, and the larger percentage of extended-stay business
experienced by the hotels during the third quarter of 2000. The average daily
rate declined $0.70, or 1.2%, in the third quarter of 2000 compared to the third
quarter of 1999. This decrease was the result of the lower daily rates charged
extended-stay guests. Revenue per available room increased 6.4% to $45.33 in the
third quarter of 2000, compared to $42.61 in the third quarter of 1999, as a
result of the increase in the occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended September 30, 2000
totaled $16.8 million compared to $15.6 million for the quarter ended September
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 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 corporate hotels in operation during
the third quarter of 2000, the variable nature of many hotel operating expenses,
increased wages and general economic price increases.
Rent Expense on Leased Hotels
We incurred rent expense on the 34 hotels leased in the third quarter of
2000 of $6.3 million, compared to $6.2 million of expense in the third quarter
of 1999. The increase in rent expense was 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.
17
<PAGE> 18
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 September 30, 2000 totaled
$44,000, compared to $208,000 for the quarter ended September 30, 1999. The
decrease in opening costs was primarily the result of having opened fewer
company-owned hotels in 2000.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the quarter ended
September 30, 2000, totaled $2.6 million, compared to $2.2 million for the
quarter ended September 30, 1999. The increase in depreciation and amortization
expense in the third quarter of 2000, compared to 1999, was a result of the
increase in the number of company-owned hotels open in the third quarter of
2000. In addition, many of the newly opened company-owned 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 September 30, 2000 and September 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.
Corporate Operations
Other Income
Other income for the quarter ended September 30, 2000, totaled $1.2
million, compared to $538,000 for the quarter ended September 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 September 30, 2000, as
compared to the quarter ended September 30, 1999, was due to an increase in
royalty fee, management fee, and equity income. 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 Boston
Capital joint venture hotels open at September 30, 2000 are also Candlewood
franchise hotels that we manage. As a result, we receive royalty fees,
management fees, and equity income from these hotels. At September 30, 2000, we
had 15 franchised hotels in operation (not counting the five joint venture
hotels), compared to 10 hotels at September 30, 1999.
We did not sell any hotels in the third quarter of 2000; however, we did
recognize deferred gain on hotels that were previously sold. For the quarter
ended September 30, 2000, we recognized $550,000 of gain on hotels sold,
compared to $395,000 in the quarter ended September 30, 1999.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended September 30, 2000,
totaled $1.6 million, compared to $1.1 million for the quarter ended September
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
18
<PAGE> 19
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 was 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. In addition, we incurred costs in the
third quarter of 2000 related to the purchase of our new field property
management system and the training of related personnel. These costs were
expensed in accordance with accounting Statement of Position 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use".
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
quarter ended September 30, 2000, totaled $179,000, compared to $182,000 for the
quarter ended September 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.
Interest Income and Expense
We earned $335,000 of interest income for the quarter ended September
30, 2000, compared to $171,000 for the quarter ended September 30, 1999.
Interest income for the quarter ended September 30, 2000, resulted primarily
from the temporary investment of cash provided by operations. Interest income
for the quarter ended September 30, 1999, related to the short-term investment
of proceeds received from the sale-leaseback transaction and the temporary
investment of cash provided by operations.
We had interest expense, net of capitalized interest, of $5.0 million
for the quarter ended September 30, 2000, compared to $3.1 million for the
quarter ended September 30, 1999. The increase for the quarter ended September
30, 2000 was 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
September 30, 2000 and September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
------------------------
2000 1999
------ ------
<S> <C> <C>
Rent expense on leased hotels $6,294 $6,227
Gain recognized into earnings $ 550 $ 395
</TABLE>
19
<PAGE> 20
Comparison of nine months ended September 30, 2000 and September 30, 1999
Hotel Operations
Hotel Operations Revenue
For the nine months ended September 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 $97.7 million, compared to
$77.8 million for the nine months ended September 30, 1999. The increase in
revenue reflects the increase in the number of corporate hotels in operation
during the first nine 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
nine months ended September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
2000 1999 Change
------ ------ ------
<S> <C> <C> <C>
Occupancy 77.7% 67.0% 10.7%
Average Daily Rate $57.09 $59.22 $(2.13)
Revenue per available room $44.36 $39.68 $ 4.68
</TABLE>
The average occupancy rate for corporate hotels was 77.7% for the nine
months ended September 30, 2000, compared to 67.0% for the nine months ended
September 30, 1999. Occupancy for the nine months ended September 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 nine months
ended September 30, 2000 was $57.09, compared to $59.22 for the nine months
ended September 30, 1999. 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.
Revenue per available room was $44.36 for the nine months ended September 30,
2000, compared to $39.68 for the nine months ended September 30, 1999. This
increase was the result of the increased occupancy rate experienced in the nine
months ended September 30, 2000.
We had 53 corporate hotels open as of December 31, 1998. The following
table sets forth the performance of these 53 hotels for the nine months ended
September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
2000 1999 Change
------ ------ ------
<S> <C> <C> <C>
Average age (in months) 26.4 14.4 12
Occupancy 79.2% 68.2% 11.0%
Average Daily Rate $56.39 $59.29 $(2.90)
Revenue per available room $44.66 $40.40 $ 4.26
</TABLE>
The average occupancy rate for the 53 corporate hotels open as of
December 31, 1998 increased 11.0 occupancy points for the nine months ended
September 30, 2000 to 79.2%, compared to 68.2% for the nine months ended
September 30, 1999. The increase was due in large part to hotels that had
completed or were near completion of their ramp-up phase at September 30, 2000,
and the larger percentage of extended-stay business experienced by the hotels
during the nine months ended September 30, 2000. The average daily rate declined
$2.90 or 4.9% in the nine months ended September 30, 2000 compared to the
20
<PAGE> 21
nine months ended September 30, 1999. This decrease was the result of the lower
daily rates charged extended-stay guests. Revenue per available room increased
10.5% to $44.66 for the nine months ended September 30, 2000, compared to $40.40
for the nine months ended September 30, 1999, as a result of the increase in the
occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the nine months ended September 30, 2000,
totaled $51.0 million compared to $43.8 million for the nine months ended
September 30, 1999. The increase in hotel operating expenses was primarily due
to the increased number of corporate hotels in operation at September 30, 2000,
the variable nature of many hotel operating expenses, increased wages, and
general economic price increases.
Rent Expense on Leased Hotels
For the nine months ended September 30, 2000, we incurred rent expense
of $18.9 million for leased hotels, compared to $18.6 million for the nine
months ended September 30, 1999. The increase in rent expense was due to the
full nine 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 nine months ended September 30, 2000, opening costs totaled
$157,000, compared to $1.0 million for the nine months ended September 30, 1999.
The decrease in opening costs was primarily the result of having opened only one
company-owned hotel in the nine month period ended September 30, 2000, compared
to 11 company-owned hotels in the nine month period ended September 30, 1999.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations for
the nine months ended September 30, 2000, totaled $7.5 million, compared to $5.5
million for the nine months ended September 30, 1999. The increase in
depreciation and amortization expense was a result of the increase in the number
of company-owned hotels open at September 30, 2000 and the pro-rated effect on
depreciation expense of the timing of 1999 hotel openings. In addition, as
previously noted, many of the newly opened company-owned hotels are in higher
priced, primary markets where building costs are higher.
Corporate Operations
Other Income
Other income for the nine months ended September 30, 2000, totaled $2.4
million, compared to $1.0 million for the nine months ended September 30, 1999.
The growth in other income in 2000, compared to 1999, was due to an increase in
franchise fee, royalty fee, management fee and equity income.
We did not sell any hotels during the nine months ended September 30,
2000; however, we did recognize $1.6 million of gain on hotels that were
previously sold. For the nine months ended September 30, 1999, we sold three
hotels and recognized $904,000 of gain on hotels sold.
21
<PAGE> 22
Corporate Operating Expenses
For the nine months ended September 30, 2000, corporate operating
expenses totaled $4.6 million, compared to $3.5 million for the nine months
ended September 30, 1999. The increase in 2000 was primarily due to the full
nine month 2000 year impact of the 1999 expansion of our franchise sales and
service team. In addition, we incurred costs in 2000 related to the purchase and
training of personnel associated with our new field property management system.
These costs are 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 nine months ended
September 30, 2000. We recorded $863,000 of abandoned site costs for the nine
months ended September 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 totaled
$537,000 for the nine months ended September 30, 2000, compared to $482,000 for
the nine months ended September 30, 1999. The increase in depreciation and
amortization was due to the depreciation of 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 $834,000 for the nine months ended September 30,
2000, compared to $763,000 for the nine months ended September 30, 1999.
Interest income for the nine months ended September 30, 2000, resulted primarily
from the temporary investment of cash provided by operations. Interest income
for the nine months ended September 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 $13.5 million for
the nine months ended September 30, 2000, compared to $6.5 million for the nine
months ended September 30, 1999. The increase in interest expense was 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 nine months ended
September 30, 2000 and September 30, 1999 (in thousands, except number of
hotels):
22
<PAGE> 23
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
2000 1999
------- -------
<S> <C> <C>
Number of hotels sold - nine months -- 3
Proceeds from sales of hotels, net of
Deferred gain $ -- $24,283
Rent expense on leased hotels $18,852 $18,581
Gain recognized into earnings $ 1,587 $ 904
</TABLE>
Liquidity and Capital Resources
We had cash and cash equivalents of $21.6 million at September 30, 2000,
compared to $18.7 million at September 30, 1999. Net cash provided by operating
activities totaled $6.2 million for the nine months ended September 30, 2000
compared to $16.2 million for the nine months ended September 30, 1999. The
primary sources of cash for the nine month period ended September 30, 2000 were
$6.4 million of net income from operations and $8.0 million of non-cash
depreciation and amortization expense. Uses of cash in 2000 consisted primarily
of a $4.1 million increase in other assets. The primary sources of cash for the
nine months ended September 30, 1999 were the reduction of $20.8 million in the
amount of hotels held for sale, $6.0 million of non-cash depreciation and
amortization, and an increase of $2.0 million in deferred gain on sale of
hotels. Uses of cash in 1999 consisted of a $5.3 million increase in other
assets, an increase of $3.8 million in accounts receivable, a $2.5 million
increase in the amount of deposits relating to the sale-leaseback transaction,
and a $1.7 million decrease in accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended
September 30, 2000, totaled $18.3 million, compared to $78.6 million for the
nine months ended September 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 nine months
ended September 30, 2000, we expended approximately $21.9 million, compared to
$89.0 million for the nine months ended September 30, 1999.
For the nine months ended September 30, 2000, net cash provided by
financing activities was $15.0 million compared to $58.0 million for the nine
months ended September 30, 1999. Net cash provided by financing activities
included $22.5 million in proceeds from mortgages and notes payable for the nine
months ended September 30, 2000, partially offset by $6.0 million of preferred
stock dividend payments. For the nine months ended September 30, 1999, cash
provided by financing activities consisted of $67.6 million in proceeds from
mortgages and notes payable, partially offset by $3.4 million in principal
payments on notes and $6.0 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 September 30, 2000, we had one company-owned hotel under construction
(Jersey City, New Jersey) with a total estimated cost of approximately $25.1
million. We have secured financing for this hotel. As of September 30, 2000, we
had incurred costs on this hotel of approximately $16.3 million. Under terms of
the financing, our total equity requirement for this hotel is $5.5 million, all
of which had been funded as of September 30, 2000.
We had three hotels under construction at September 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 September 30, 2000, the joint venture had
incurred costs of approximately $21.8 million on these projects. These costs
include land acquisition costs, deposits and fees for surveys, legal services,
environmental studies, and architectural
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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 September 30, 2000.
Under the terms of the agreement, if we did 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%
of the estimated total costs. As of September 30, 2000, this amount was
estimated at approximately $3.7 million. As of November 10, 2000, Boston Capital
and Mass Mutual had not required us to increase our capital contribution,
although they may require us to do so in the future. We are otherwise in
compliance with the terms of the joint venture agreement. We will continue to
identify and evaluate potential joint venture sites with these partners.
In addition to the above, at September 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 September 30, 2000,
the joint venture had incurred costs on this hotel of approximately $1.8
million. Under terms of the joint venture agreement, our total equity
requirement for this hotel is $575,000, all of which had been funded as of
September 30, 2000.
We currently have borrowed a total of $208.6 million from various credit
institutions (GMAC and regional / local banks) and Hilton Hotels Corporation
(Doubletree) in connection with the development of Candlewood hotels. The
maturity dates for these loans range from February 2001 to March 2004. Pursuant
to the terms of the agreements we have with these lenders (except for Hilton),
each loan provides for an extension period. We plan to evaluate each loan based
on a number of factors including hotel performance, interest rate, secondary
market considerations and corporate strategy to determine if we will seek an
extension or refinancing. In regards to the Doubletree debt, the first
installment of $12.5 million matures in November 2001. We are in discussions
with Hilton to negotiate an extension on this debt. As consideration for
securing an extension, we may be required to pay down a portion of the debt at
or prior to the original maturity date. We are unable to assure that we will be
able to extend the maturity date of the Doubletree debt or that permanent
financing will be available to us on acceptable terms or at all.
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.
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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 September 30, 2000, would change by
approximately $19,400. 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 September 30, 2000,
would change by approximately $1,400.
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:
- 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;
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- competition from other lodging properties;
- changes in real property tax rates;
- changes in the availability, cost and terms of financing;
- the inability to refinance our outstanding indebtedness on
acceptable terms;
- 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.
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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
September 30, 2000.
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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: November 10, 2000 By: /s/ Jack P. DeBoer
-----------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: November 10, 2000 By: /s/ Warren D. Fix
-----------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Candlewood Hotel
Company, Inc.(1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc.(11)
3.3 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of
Series A Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc.(3)
3.4 Certificate of Amendment of Certificate of Designations of Series
A Preferred Stock.(10)
3.5 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of
Series B Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc.(10)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Warrant.(9)
4.3 Amended and Restated Stockholders Agreement dated as of July 10,
1998.(10)
10.1 Form of Indemnification Agreement for Executive Officers and
Directors.(5)
10.2 Indemnification Agreement Schedule.(11)
10.3 1996 Equity Participation Plan and Form of Stock Option
Agreements.(5)
10.4 First Amendment to the 1996 Equity Participation Plan effective
as of May 18, 1998.(11)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and
Jack P. DeBoer dated as of September 1, 1996.(1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc.
and Doubletree Corporation dated as of November 11, 1996.(2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc.
to Doubletree Corporation dated as of November 11, 1996.(2)
10.8 Employment Agreement between Candlewood Hotel Company, Inc. and
James Roos dated as of September 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
September 18, 1998, by and among Candlewood Hotel Company, Inc.,
Candlewood Leasing No. 2, Inc., HPT and HPT CW II.(11)
</TABLE>
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<TABLE>
<S> <C>
10.19 Third 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 Ninth 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.
</TABLE>
-------------
(1) Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s
Quarterly Report on Form 10-Q for the period ended September 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 September 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.
30
