SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
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 0-24794
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CHARTWELL LEISURE INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3326054
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
605 Third Avenue
23rd Floor
New York, New York 10158
(Address of principal executive offices, including zip code)
(212) 692-1400
(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $.01 per share
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
As of November 1, 1996, there were 9,468,300 shares of the Registrant's Common
Stock issued and outstanding.
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CHARTWELL LEISURE INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause the Company's actual results in future periods
to be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Company's filings with the Securities
and Exchange Commission during the past 12 months.
INDEX PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of 2
Operations
Condensed Consolidated Statements of Cash 3
Flows
Notes to Condensed Consolidated Financial 4
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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CHARTWELL LEISURE INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1996 1995
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CURRENT ASSETS:
Cash and cash equivalents $ 17,802 $ 51,470
Accounts receivable - net 5,689 -
Loans receivable - net 1,314 10,481
Receivable from joint ventures - net 1,999 -
Prepaid and other current assets 984 837
------------ ------------
Total current assets 27,788 62,788
INVESTMENTS 2,225 16,700
LOANS RECEIVABLE - net 11,310 7,166
JOINT VENTURE INTERESTS 16,934 -
PROPERTY AND EQUIPMENT - Net 83,710 -
MANAGEMENT CONTRACTS - Net 9,101 -
OTHER ASSETS 7,161 420
------------ ------------
TOTAL ASSETS $ 158,229 $ 87,074
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,426 $ 552
Current portion of long-term debt 880 -
----------- -----------
Total current liabilities 11,306 552
----------- -----------
LONG-TERM DEBT 17,379 -
OTHER LIABILITIES 107 -
----------- -----------
Total liabilities 28,792 552
MINORITY INTEREST 3,609 -
STOCKHOLDERS' EQUITY:
Common stock 95 55
Paid-in capital 161,521 106,697
Accumulated deficit (35,874) (20,280)
Foreign currency translation adjustment 86 -
Unrealized gain on securities available for sale - 50
Total stockholders' equity 125,828 86,522
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 158,229 $ 87,074
=========== ==========
See notes to condensed consolidated financial statements.
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
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REVENUE:
Hotel revenue $ 22,614 $ - $ 54,111 $ -
Management fee and other income 1,309 - 2,942 -
Equity in earnings of unconsolidated joint
ventures 2,594 - 5,104 -
---------- ---------- ---------- ----------
Total revenue 26,517 - 62,157 -
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Hotel operating expense 9,045 - 22,451 -
General and administrative 4,537 576 10,936 2,062
Marketing, franchise & reservation fees 2,330 - 5,619 -
Maintenance and property taxes 1,730 - 4,296 -
Rent 1,510 - 3,842 -
Depreciation and amortization 2,365 - 6,615 -
Other 1,549 - 3,219 -
Minority interest 531 - 978 -
General and administrative related party 375 899 1,147 2,464
Gaming development costs - 9,779 - 14,953
Provision for losses on gaming assets 4,793 - 14,240 -
---------- ---------- ---------- ----------
Total operating expenses 28,765 11,254 73,343 19,479
---------- ---------- ---------- ----------
OPERATING LOSS (2,248) (11,254) (11,186) (19,479)
INTEREST INCOME (EXPENSE) - NET (786) 987 (2,719) 3,138
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEM (3,034) (10,267) (13,905) (16,341)
INCOME TAX EXPENSE (BENEFIT) 213 (299) 213 709
---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM $ (3,247) $ (9,968) $ (14,118) $ (17,050)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (1,477) - (1,477) -
---------- ---------- ---------- ----------
NET LOSS $ (4,724) (9,968) $ (15,595) $ (17,050)
========== ========== ========== ==========
PER SHARE INFORMATION:
Loss before extraordinary item $ (.40) $ (1.95) $ (2.12) $ (3.34)
---------- ---------- ---------- ----------
Extraordinary item (.18) - (.22) -
---------- ---------- ---------- ----------
Net Loss $ (.58) $ (1.95) $ (2.34) $ (3.34)
========== ========== ========== ==========
Weighted average common shares outstanding 8,198 5,103 6,651 5,112
========== ========== ========== ==========
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See notes to condensed consolidated financial statements.
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 7,724 $ (6,868)
---------- ----------
INVESTING ACTIVITIES:
Issuance of loans receivable (270) (801)
Joint venture interests and investments in casino projects - (850)
Principal payments received on loans 10,898 7,423
Travelodge acquisition, net of cash acquired (99,449) -
Other acquisitions and additions to property and equipment (9,874) -
Proceeds from sale of investments 130 -
Other assets and investments (4,428) -
----------- -----------
Net cash (used in) provided by investing activities (102,993) 5,772
FINANCING ACTIVITIES:
Proceeds of borrowing 70,000 -
Loan closing costs (3,269) -
Repayment on borrowings (59,995) -
Net proceeds of stock offering 54,865 -
----------- -----------
Net cash provided by financing activities 61,601 -
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (33,668) (1,096)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,470 44,233
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,802 $ 43,137
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See notes to condensed consolidated financial statements
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet of Chartwell Leisure Inc. and
subsidiaries (the "Company") as of September 30, 1996, and the related
condensed consolidated statements of operations and cash flows for the
three and nine month periods ended September 30, 1996 and 1995 are
unaudited. In the opinion of management, all adjustments necessary for a
fair presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results are
not necessarily indicative of results for a full year.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q and do not contain certain information included in
the Company's annual consolidated financial statements. The year-end
condensed consolidated balance sheet was derived from the Company's
audited financial statements. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes
incorporated by reference in the 1995 Annual Report on Form 10-K.
2. ACQUISITIONS AND SALE OF STOCK
On January 23, 1996, the Company acquired the outstanding common stock of
Forte Hotels, Inc. ("FHI") for $98.4 million plus expenses, less certain
working capital adjustments totaling approximately $3.1 million. In
related transactions on January 23, 1996, prior to consummation of the FHI
acquisition, HFS Incorporated ("HFS") and Motels of America, Inc. acquired
from FHI the Travelodge franchise system and 19 motel properties,
respectively, for an aggregate purchase price of $71.6 million. The
principal assets of FHI acquired by the Company include 17 wholly-owned
hotels, and joint venture interests in 97 other lodging facilities. The
Company financed $60 million of the purchase price with proceeds from a
bank revolving credit facility and $38.4 million with existing cash. HFS
provided advisory services in connection with the acquisition for which
the Company paid a $2.0 million fee.
The FHI acquisition described above was accounted for by the purchase
method. The operating results of the acquired company are included in the
consolidated statements of operations from its acquisition date, January
23, 1996.
On October 1, 1996, the Company acquired from Capital Properties Limited
Partnership ("CPLP") 20 hotels and a one-half interest in an additional
hotel, consisting of approximately 3500 guest rooms, which hotels are
located throughout Canada and franchised under the "Travelodge" brand name
(the "Canadian Acquisition"). The Company paid approximately $70 million
to purchase substantially all of CPLP's existing bank debt and to pay
certain specified closing costs (including real estate taxes and transfer
taxes), as well as its assumption of liability for identified trade
payables and property specific bank debt, aggregating approximately
another $7 million. In addition, the Company will be obliged to make
certain contingent payments to CPLP's constituent partners following a
preferred return to the Company. In connection with the acquisition of
CPLP on October 1, 1996, the Company borrowed $65.9 million under its
credit facility.
On September 30, 1996, the Company entered into an exclusive thirty year
master franchise agreement with HFS, pursuant to which the Company will be
entitled to develop and operate, or to franchise others to develop and
operate, lodging facilities in Canada under the "Travelodge" and
"Thriftlodge" names. The Company will be required to pay to HFS or its
affiliates certain fees, including development fees, franchise fees,
royalty fees based on gross room revenues, and certain other customary
fees, such as for travel agency, marketing and consulting services.
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On February 14, 1996, the Company entered into an agreement with Chartwell
Leisure Associates L.P. II ("CL Associates") and FSNL LLC ("FSNL") to sell
4 million newly issued shares of the Company's unregistered common stock
to Chartwell and FSNL for $57 million. This transaction was completed on
August 8, 1996. Chartwell and FSNL own approximately 52% of the
outstanding common stock of the Company. HFS provided advisory services in
connection with the transaction for which the Company paid a fee of $1.14
million.
The following presents the unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1996 and 1995 as if the
transactions described above occurred on January 1, 1995, giving effect to
the sale of stock and financing costs associated with the FHI acquisition
and Canadian Acquisition.
Nine Months Ended
September 30,
1996 1995
---------------------------------------
(In Thousands Except per Share Amounts)
(Unaudited)
Revenue $ 92,283 $ 83,333
Net loss before
extraordinary item $(10,917) $(14,900)
Net loss per share before
extraordinary item $ (1.11) $ (1.64)
The proforma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that
may occur in the future.
3. CREDIT FACILITY
The Company is a party to a Credit Facility among the Company, Chartwell
Canada Corp., which is a subsidiary of the Company ("Chartwell Canada"),
The Bank of Nova Scotia, as Syndication Agent, The Chase Manhattan Bank as
Administrative Agent, and the Banks from time to time parties thereto (the
"Credit Facility"). The Credit Facility provides that the Company may
borrow up to $150 million under a revolving credit commitment (the
"Commitment"), which may be utilized for the incurrence of revolving
credit loans or the issuance of letters of credit. An amount of up to C$95
million of the Commitment is available to be borrowed by Chartwell Canada
and Bear Financial Corp. ("Bear"), which are subsidiaries of the Company,
as a Subfacility under the Credit Facility (the "Canadian Subfacility").
The Company is jointly and severally liable for all borrowings by
Chartwell Canada and Bear under the Canadian Subfacility. HFS has
guaranteed $75 million of the Company's obligations under the Credit
Facility. Total borrowings and letters of credit outstanding as of
September 30, 1996, under the Credit Facility were $11.0 million and $15.0
million, respectively. On October 1, 1996, in connection with the CPLP
acquisition the Company borrowed C$90 million ($65.9 million U.S.) under
the Credit Facility. All outstanding obligations under the credit facility
mature in August 2002. The Company used the Credit Facility to refinance
its prior credit facility. An extraordinary charge of $1.5 million was
incurred as a result of the early extinguishment of debt and the write-off
of the deferred financing costs associated with the prior credit facility.
Borrowings under the Credit Facility are available to the Company to
finance the acquisition of hotel properties and to finance the Company's
working capital and general corporate requirements. Borrowings
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under the Canadian Subfacility were used to finance the acquisition of
hotels from CPLP and to pay the fees and expenses related to the Canadian
Acquisition. Borrowings under the Credit Facility are subject to
customary conditions including no material adverse change in the Company's
operating performance.
Revolving loans denominated in U.S. dollars under the Credit Facility are
available as base rate loans or Eurodollar loans. Revolving loans
denominated in Canadian dollars under the Credit Facility are available as
Eurodollar loans. Interest on the outstanding principal amount of each
base rate loan is payable at an annual rate equal to the highest of (A)
.5% in excess of the Federal Reserve reported certificate of deposit rate,
(B) .5% in excess of the federal funds rate or (C) the prime lending rate
of The Chase Manhattan Bank. Interest on the outstanding principal amount
of each Eurodollar loan is payable at an annual rate equal to the sum of
the applicable margin (which is within a range of .40% to .875% based on
the principal amount of revolving loans and letters of credit outstanding)
plus the Eurodollar rate. The Company is obligated to pay a commitment fee
on the unutilized portion of the facility at an annual rate of .2% to
.375% depending on the principal amount of revolving loans and letters of
credit outstanding. The Company is also obligated to pay a fee in respect
of each outstanding letter of credit equal to the applicable margin of the
stated amount of the letter of credit, plus an additional fee equal to the
higher of (A) $500 and (B) a rate per annum agreed to in writing by the
Company and the issuing bank of the letter of credit.
The aggregate revolving credit commitment will reduce by $7.5 million in
1998 and 1999 and $10 million each year thereafter. To the extent
outstanding borrowings exceed the resulting commitment amount, principal
will be required to be repaid. The revolving credit commitment amount also
will be reduced, and to the extent outstanding borrowings exceed the
resulting commitment amount, principal will be repaid upon the occurrence
of certain events.
The Credit Facility contains covenants restricting, with certain
exceptions, the Company and its subsidiaries and joint ventures from: (i)
creating, incurring or assuming any liens; (ii) merging or consolidating
or disposing of its assets, or acquiring assets from any other person;
(iii) changing the nature of their respective businesses; (iv) incurring
indebtedness other than existing subordinated indebtedness not to exceed
$50 million to finance permitted acquisitions and other permitted
specified in the Credit Facility; (v) paying dividends or making
restricted payments; and (vi) modifying the agreements relating to the
Company's indebtedness and preferred stock or its corporate charter
documents.
In addition, the Credit Facility requires that the Company, in certain
cases on a stand alone basis and in other cases on a consolidated basis
with its subsidiaries and joint ventures, satisfy certain financial ratio
coverage tests, including maintenance of net worth, minimum interest
coverage, and maximum leverage coverages.
4. MEXICO JOINT VENTURE
On July 12, 1996, the Company's subsidiary entered into a joint venture
with a subsidiary of Grupo Piasa, a Mexican hotel company, for the purpose
of developing and operating, or franchising others to operate, lodging
facilities in Mexico under the "Travelodge" and "Thriftlodge" trade names.
The joint venture entered into an exclusive thirty year master franchise
agreement with HFS, pursuant to which the joint venture will be entitled
to develop and operate, or to franchise others to develop and operate,
lodging facilities in Mexico under the "Travelodge" and "Thriftlodge"
names. The Company will require the joint venture to pay to HFS or its
affiliates certain fees, including development fees, franchise fees,
royalty fees based on gross room revenues, and certain other customary
fees, such as for travel agency, marketing and consulting services.
5. RELATED PARTY TRANSACTION
During March 1996, the Company entered into a lease with an affiliate of
Chartwell and an unaffiliated third party, as landlords, pursuant to which
the Company has leased approximately 18,700 square feet of office space
for a period of 10 years. Under this lease, the Company is obligated to
pay approximately $542,000 per year for each of the first five years, and
approximately $600,000 per year for each of the last five years of the
term
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of the lease for the use of such office space. The terms of this lease
are, in the opinion of the Company, substantially similar to the market
terms that would be available from a third party for similar property.
6. STOCK OPTIONS
Options for 310,000 shares of common stock were granted under the
Company's 1994 Stock Option Plan on January 23, 1996 at an exercise price
of $10.625, representing fair market value on the date of grant.
Additional options were granted under the Company's 1994 Stock Option Plan
(i) for 900,000 shares of common stock on March 4, 1996 at an exercise
price of $13.25, (ii) 75,000 shares of common stock on April 11, 1996 at
an exercise price of $13.25, (iii) 30,000 shares of common stock on August
8, 1996 at an exercise price of $16.875 and (iv) 200,000 shares of common
stock on August 15, 1996 at an exercise price of $16.00. Such exercise
prices represent the fair market value on the dates of such grants.
7. INCOME TAXES
Deferred tax assets of $7.6 million at December 31, 1995 increased by
approximately $6.2 million during the nine months ended September 30,
1996. Such deferred tax assets are offset by a 100% valuation allowance.
The Company has approximately $16.1 million of loss carryforwards for
federal income tax purposes, expiring through 2010.
The amount of $16.1 million includes net operating loss carryforwards of
approximately $12.3 million and capital loss carryforwards of
approximately $3.8 million. The loss carryforward available to offset
future taxable income will be restricted over several years pursuant to
Section 382 of the Internal Revenue Code of 1986.
Income tax expense of $0.2 million for the nine months ended September 30,
1996 primarily consists of Delaware Franchise Tax and Mississippi
Corporate Income Tax.
8. INVESTMENTS
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Investments consists of the following ($000's):
September 30, 1996 December 31, 1995
<S> <C> <C>
Investment in Boomtown Biloxi (a) $ -0- $4,840
Investment in Prescott (b) -0- 4,767
Investment in common stock of Century Casinos, Inc. (c) 150 425
Investment in preferred stock of Odyssey Gaming -0- 3,752
Corporation (d)
Investment in Funtricity 1,825 1,836
Alpha Hospitality Warrants (e) 250 1,080
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$2,225 $16,700
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(a) The Company is leasing a casino and barge in Biloxi, Mississippi to
an unrelated third party under a 25 year lease. Rental income is
equal to 16% of the facility's EBITDA net of marketing fees payable
to HFS, Inc. Historically, the Company has not received cash flow
after the marketing fees. The Company does not anticipate receiving
cash flow during the remaining term of the lease and believes that
the value after 25 years may be negligible. As a result, the Company
has fully reserved for this investment as of June 30, 1996 through
the provision for losses on gaming assets.
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(b) The Company has a 19.9% limited partner interest in Prescott
Convention Center Limited Partnership ("PCC"). PCC owns a hotel and a
convention center with a leased casino. Historically, the Company has
not received net distributions after marketing fees payable to HFS
and based on discussions with the general partner does not anticipate
receiving net distributions in the future. As a result, the Company
has fully reserved approximately $4.8 million for this investment as
of September 30, 1996 through the provision for losses on gaming
assets.
(c) At September 30, 1996, the market value of the stock was $150,000. A
$75,000 writedown to market value was included in the provision for
losses on gaming assets in the second quarter. During September, 1996
100,000 shares were sold for $130,000 resulting in a loss of $45,000.
(d) The investment in Odyssey Gaming Corporation ("Odyssey") approximates
$3.8 million prior to reserve and consists of non-voting preferred
stock convertible into common stock representing a 20% interest in
Odyssey. Odyssey's principal investment is a five percent profits
interest in a proposed casino in Massachusetts. As of June 30, 1996,
Odyssey has no assets and was automatically dissolved by the Delaware
Secretary of State for failure to pay its taxes and file annual
reports. It is highly unlikely this casino will open due to the
difficulties incurred to date in obtaining a gaming license. The
Company has fully reserved against this asset through the provision
for losses on gaming assets.
(e) These warrants were written down by $830,000 to fair value utilizing
the Black-Scholes option valuation model at December 31, 1995 and a
comparison to the fair market value of similar marketable securities
issued by Alpha Hospitality Corp. at September 30, 1996.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company was engaged in the development of casino gaming
facilities until the third quarter of 1995, when the Company announced a
decision by its Board of Directors to curtail future gaming investments and
focus on investments and acquisitions in non-gaming industries. In December
1995, the Company's Board of Directors decided that the Company should pursue a
new strategic direction with a focus on becoming a hotel owner and operator.
Also in December, 1995, the Company's Board of Directors approved the sale to
Chartwell Leisure Associates L.P. II ("CL Associates") of 904,930 newly issued
shares of the Company's Common Stock, representing approximately 16.6% of the
Company's Common Stock outstanding after giving effect to the issuance, for a
total purchase price of $8,483,719, or $9.375 per share (the "CL Associates
1995 Investment").
On January 23, 1996, the Company acquired the outstanding common stock of Forte
Hotels, Inc. ("FHI") for $98.4 million plus expenses, less certain working
capital adjustments totaling approximately $3.1 million. In related
transactions on January 23, 1996, prior to consummation of the FHI acquisition,
HFS Incorporated ("HFS") and Motels of America, Inc. acquired from FHI the
Travelodge franchise system and 19 motel properties, respectively, for an
aggregate purchase price of $71.6 million. The principal assets of FHI acquired
by the Company consisted of 18 wholly-owned hotels and motels, and joint
venture interests in 97 other lodging properties. The Company financed $60
million of the purchase price with proceeds from a bank revolving credit
facility and $38.4 million with existing cash. HFS provided advisory services
in connection with the acquisition for which the Company paid a $2.0 million
fee.
On August 8, 1996, the Company completed the sale to CL Associates and FSNL LLC
("FSNL") of 4 million newly issued shares of the Company's Common Stock for a
total purchase price of $57 million, or $14.25 per share (the "CL
Associates/FSNL Investment"). As a result of the CL Associates/FSNL Investment,
CL Associates and FSNL acquired in the aggregate approximately 52% of the
outstanding shares of Common Stock of the Company.
On October 1, 1996, the Company acquired from Capital Properties Limited
Partnership ("CPLP") 20 hotels and a one-half interest in an additional hotel,
consisting of approximately 3,500 guest rooms, which hotels are located
throughout Canada and franchised under the "Travelodge" brand name (the
"Canadian Acquisition"). The Company paid approximately $70 million to purchase
substantially all of CPLP's existing bank debt and to pay certain specified
closing costs (including real estate taxes and transfer taxes), as well as its
assumption of liability for identified trade payables and property specific
bank debt, aggregating approximately $7 million, and the allocation of
contracts to manage the CPLP properties with a fair value of $6.0 million
acquired in the Canadian Acquisition. In addition, the Company will be obliged
to make certain contingent payments to CPLP's constituent partners following a
13% per annum preferred return to the Company. In connection with the Canadian
Acquisition on October 1, 1996, the Company borrowed approximately $65.9
million under its Credit Facility.
While the Company's focus throughout 1996 has been on owning and operating
hotels, management has continued to evaluate the recoverability of the
Company's gaming assets and has recorded provisions for losses on gaming assets
to continue to carry such assets at their estimated net realizable value. As a
result of loss provisions recorded of $14.2 million in the nine months ended
September 30, 1996, the carrying value of the Company's remaining gaming assets
equals $9.1 million. These assets include loans to a casino of $6.9 million
which is performing in accordance with its contractual terms and other
investments (which are not producing earnings) totaling $2.2 million at
September 30, 1996. Management continues to evaluate the recoverability of
these investments and will record future loss provisions to the extent
necessary. The winding down of the gaming assets has had a significant negative
effect on operations in 1996. As a result of the $14.2 million provision for
losses on gaming assets, the Company reported an operating loss of $11.2
million for the nine months ended September 30, 1996. Without the non cash
losses on gaming assets, the Company would have reported operating income of $3
million for the same period. Management believes that gaming related assets
at September 30, 1996 are stated at the lower of cost or estimated net
realizable value, the continued uncertainty surrounding the ability of these
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assets to generate positive cash flow results in the potential for future
write-downs to present these assets at their estimated net realizable value in
subsequent periods. Based on the relatively small remaining investment in
gaming assets, management believes that future operations will not be impacted
in a significant way by the Company's remaining gaming investments.
The Company believes that comparisons of its results during the period ended
September 30, 1996 to prior periods should take into account these changes in
the Company's primary business.
RESULTS OF OPERATION
Pro Forma
The pro forma financial data includes the operations of Forte Hotels and CPLP
for the nine months ended September 30, 1996 and 1995 as if the acquisitions
had occurred on January 1, 1995, giving effect to depreciation and amortization
associated with the acquired properties and the sale of 4 million shares of
newly issued Common Stock on August 8, 1996 and financing costs associated with
acquisitions. The pro forma financial data also includes revenues and expenses
associated with the Company's gaming business which include provisions for
losses on gaming assets of $14.2 million for the nine months ended September
30, 1996 and gaming development costs of $14.9 million for the period ending
September 30, 1995. The pro forma financial data does not include any potential
eventual cost savings or revenue enhancements that management believes may be
realized following the complete consolidation of the Forte Hotels and CPLP
operations.
Pro forma hotel revenues increased by $8.0 million, or 10.7%, from $74.6
million in 1995 to $82.6 million in 1996. Occupancy increased 1.5% to 68.5% and
the average daily rate increased 7.6% to $54.68 for the first nine months of
1996 compared to the first nine months of 1995. Since acquiring the
Travelodge/Thriftlodge properties on January 23, 1996, the Company has begun
its rebranding of certain properties, which has had a positive impact on both
occupancy and rates. One property that has been rebranded is the hotel at JFK
airport in New York which became a Ramada Plaza hotel. Further, occupancy
improved in the 1996 period over 1995 comparable with the hotel industry. As a
result of the increases in occupancy and rates, REVPAR increased to $37.46 or
10.1% over the comparable nine month period in 1995. The number of properties
on a pro forma basis decreased by one during this period, which had a
negligible impact on the REVPAR increase on a same hotel basis.
Historical Three And Nine Month Period Ended September 30, 1996 Compared To The
Comparable 1995 Period
Since the Company's January 23, 1996 acquisition, its operations have been
focused on the lodging business. Therefore, the results of operations for the
three and nine months ended September 30, 1996 is not comparable to the prior
years' periods when the Company was engaged in the development of prospective
gaming facilities. Therefore, substantially all the categories of revenue and
expense (other than gaming development costs and provisions for gaming losses)
are related to the ownership and management of hotel and motel properties in
1996 with no comparative amounts for 1995. Accordingly, the Company's operating
results for the three and nine month periods ended September 30, 1996 from
operations other than lodging activities and 1995 (when the Company did not
engage in lodging activities) consist of modest investment revenue. In
addition, during the first nine months of 1996, the Company's interest expense
was $4.6 million on acquisition debt while the Company had no interest bearing
debt load in 1995. Gaming development costs expense for the three and nine
months ended September 30, 1995 primarily consisted of writedowns of gaming
assets and related expenses associated with terminated transactions. In the
nine months ended September 30, 1996, in connection with the Company's
ongoing periodic evaluation of its gaming assets, the Company provided $14.2
million in non-cash reserves on its gaming assets to account for estimated
impairment on the value of these investments. These losses were based on the
Company's evaluation of the ability to generate cash flow, which have been
negatively impacted by the environment for alternative gaming venues and the
inability to obtain gaming licenses in certain cases. The Company's provision
related to the following investments:
C/M: 11752.0012 425099.3
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<PAGE>
a) The Boomtown, Mississippi investment approximates $4.8 million prior to
the writedown. The Company is leasing a casino and barge in Biloxi,
Mississippi to an unrelated third party under a 25 year lease. Rental
income is equal to 16% of the facility's EBITDA net of marketing fees
payable to HFS, Inc. Historically, the Company has not received cash flow
after the marketing fees. The Company does not anticipate receiving cash
flow during the remaining term of the lease and believes that the value
after 25 years may be negligible. As a result the Company has fully
reserved against this investment as of June 30, 1996.
b) The Company has a 19.9% limited partner interest in Prescott Convention
Center Limited Partnership ("PCC"). PCC owns a hotel and a convention
center with a leased casino. Historically, the Company has not received
net distributions after marketing fees payable to HFS and based on
discussions with the general partner does not anticipate receiving net
distributions in the future. As a result the Company has fully reserved
approximately $4.8 million for this investment as of September 30, 1996
through the provision for losses on gaming assets.
c) Century Casinos, Inc. common stock was written down to the market value of
the stock which was $150,000 at September 30, 1996. A $75,000 writedown
was included in the provision for losses on gaming assets in the second
quarter to reflect the writedown to market value. During September 1996,
100,000 shares were sold for $130,000 resulting in a loss of $45,000.
d) The Odyssey Gaming Corporation's investment approximates $3.8 million
prior to the writedown and consists of non-voting preferred stock
convertible into common stock representing a 20% interest in Odyssey
Gaming Corporation. As of June 30, 1996 Odysssey has no assets and was
automatically dissolved by the Delaware Secretary of State for failure to
pay its taxes and file annual reports. The Company has fully reserved
against this investment as of June 30, 1996.
e) The Alpha warrants were written down by $830,000 to fair value utilizing
the Black-Scholes option valuation model at December 31, 1995 and a
comparison to the fair market value of similar marketable securities
issued by Alpha Hospitality Corp. at September 30, 1996.
In the second quarter of 1995, the Company expensed $1.8 million of
professional and loan commitment fees associated with the terminated Par-A-Dice
transaction and expensed a $1.0 million valuation allowance established for the
Company's investment in Century Casinos, Inc. common stock following the State
of Indiana's June, 1995 unfavorable decision towards Century's proposed casino
in Switzerland County, Indiana. The Company expensed approximately $1.4 million
of professional fees, primarily in the first quarter of 1995, incurred in
connection with the Company's proposed merger with Boomtown, Inc. which was
terminated in April 1995.
LIQUIDITY AND CAPITAL RESOURCES
On January 23, 1996 the Company acquired the outstanding common stock of FHI
for approximately $98.4 million, plus expenses, less certain working capital
adjustments totalling approximately $3.1 million. In a related transaction
prior to consummation of the Travelodge Acquisition, HFS and Motels of America,
Inc. acquired from FHI the Travelodge franchise system and 19 hotel properties,
respectively, for an aggregate purchase price of $71.6 million. The principal
assets of FHI acquired by the Company consisted of fee and leasehold interests
in 18 wholly owned hotels and joint venture interests in 97 additional hotel
properties. The Company financed $60 million of the purchase price and related
expenses of the Travelodge Acquisition with proceeds from the Company's former
Credit Facility with Chemical Bank and Bankers Trust Company and $38.4 million
with existing cash.
On January 23, 1996, the Company issued a $15.0 million standby letter of
credit in favor of Bank of America National Trust Trust and Savings Association
to secure borrowings under the Company's loan agreement with that bank.
On February 14, 1996, the Company entered into an agreement with CL Associates
and FSNL to sell 4 million newly issued shares of the Company's common stock to
CL Associates and FSNL for $57 million. This transaction was completed on
August 8, 1996. CL Associates and FSNL own approximately 52% of the outstanding
stock of the
C/M: 11752.0012 425099.3
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<PAGE>
Company. HFS provided advisory services in connection with the transaction for
which the Company paid a fee of $1.14 million.
The Company completed the Canadian Acquisition by paying approximately $70
million to purchase substantially all of CPLP's existing bank debt and to pay
certain specified closing costs (including real estate and transfer taxes) and
by assuming the liability for identified trade payables and property specific
bank debt, aggregating approximately another $7 million.
In connection with the Canadian Acquisition, the Company became obligated to
make certain payments to CPLP in future years pursuant to a Future Payments
Agreement (the "Future Payments Agreement"). Generally, the Company is
obligated to pay to CPLP a percentage of net cash flow ("Remaining Cash Flow")
generated by the hotels acquired from CPLP (the "CPLP Hotels") remaining after
all expenses have been paid and the Company has received a cumulative,
compounded, 13% per annum preferred return on its net cash investment in the
CPLP Hotels (the "Chartwell Preferred Return"). The Company is required to pay
CPLP (i) 100% of Remaining Cash Flow up to C$600,000, (ii) 16% of the next
C$1.8 million of Remaining Cash Flow after C$600,000 and (iii) 25% of Remaining
Cash Flow in excess of $C2.4 million. The Company is also required to pay an
amount equal to 25% of the net capital proceeds realized by the Company from
any sales and refinancings of any CPLP Hotel, after payment to the Company of
its investment in the CPLP Hotels, the Chartwell Preferred Return and
transaction costs. The Company is able to terminate its obligation to make
these payments to CPLP at any time after December 31, 2000 but no later than
October 1, 2008, upon making a termination payment of no less than C$800,000,
calculated in accordance with the terms of the Future Payments Agreement.
No payment from the Company to CPLP would have been due on a pro forma basis
for the fiscal year ended December 31, 1995 (or the nine months ended September
30, 1996) under these arrangements.
The Company has launched a major capital improvement program to increase room
and occupancy rates by improving the quality of its properties. As part of this
program, the Company expects to upgrade the interior and exterior of all U. S.
and Canadian properties that do not meet corporate standards. By mid-1997, the
Company intends to have invested in excess of $20 million in capital
improvements, in addition to amounts budgeted for regular capital maintenance.
Once this capital initiative is completed, the Company intends to maintain a
regular program of capital improvements, including the renovation and
refurbishment of certain of its existing hotels. The program is expected to
enhance the competitiveness of its Travelodge hotels and increase
profitability. The Company intends to finance this capital expenditure program
with borrowings under the Credit Facility and excess cash on hand.
The Company is a 50% partner in a joint venture, Chartwell de Mexico, along
with Grupo Piasa, S.A. de C.V. Chartwell de Mexico, which was formed for the
purpose of developing and operating Travelodge hotels throughout Mexico, is to
be funded with up to $20 million in capital contributions, of which half are to
be contributed by the Company.
Credit Facilities
General: HFS has agreed to extend up to $75 million in guarantees, security and
other credit enhancements to secure the Company's credit facilities until
February 28, 2003. Pursuant to this agreement, HFS has guaranteed $75 million
of the Company's borrowings under the Credit Facility.
The Company is a party to a Credit Facility among the Company, Chartwell Canada
Corp., which is a subsidiary of the Company ("Chartwell Canada"), The Bank of
Nova Scotia, as Syndication Agent, The Chase Manhattan Bank, as Administrative
Agent, and the Banks from time to time parties thereto (the "Credit Facility").
The Credit Facility provides that the Company may borrow up to $150 million
under a revolving credit commitment (the "Commitment"), which may be utilized
for the incurrence of revolving credit loans or the issuance of letters of
credit. An amount of up to C$95 million of the Commitment is available to be
borrowed by Chartwell
C/M: 11752.0012 425099.3
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<PAGE>
Canada or Bear Financial Corp. ("Bear"), which is also a subsidiary of the
Company, as a Subfacility under the Credit Facility (the "Canadian
Subfacility"). The Company is jointly and severally liable for all borrowings
by Chartwell Canada or Bear under the Canadian Subfacility. HFS has guaranteed
$75 million of the Company's obligations under the Credit Facility. As of
October 1, 1996 approximately U.S.$11 million aggregate principal amount of
revolving loans and C$90 million (approximately U.S. $66 million) aggregate
principal amount of revolving loans were outstanding under the Credit Facility.
In addition, as of October 1, 1996, the Company had incurred obligations under
the Credit Facility of approximately $15 million representing borrowings for
letters of credit. All outstanding obligations under the Credit Facility mature
in August 2002.
Borrowings under the Credit Facility are available to the Company to finance
the acquisition of hotel properties and to finance the Company's working
capital and general corporate requirements. Borrowings under the Canadian
Subfacility were used to finance the acquisition of hotels from CPLP and to pay
the fees and expenses related to the Canadian Acquisition.
Revolving loans denominated in US dollars under the Credit Facility are
available as base rate loans or Eurodollar loans. Revolving loans denominated
in Canadian dollars under the Credit Facility are available as Eurodollar
loans. Interest on the outstanding principal amount of each base rate loan is
payable at an annual rate equal to the highest of (A) .5% in excess of the
Federal Reserve reported certificate of deposit rate, (B) .5% in excess of the
federal funds rate or (C) the prime lending rate of The Chase Manhattan Bank.
Interest on the outstanding principal amount of each Eurodollar loan is payable
at an annual rate equal to the sum of the applicable margin (which is within a
range of .40% to .875% based on the principal amount of revolving loans and
letters of credit outstanding) plus the Eurodollar rate. The Company is
obligated to pay a commitment fee on the unutilized portion of the facility at
an annual rate of .2% to .375% depending on the principal amount of revolving
loans and letters of credit outstanding. The Company is also obligated to pay a
fee in respect of each outstanding letter of credit equal to the applicable
margin on the stated amount of the letter of credit, plus an additional fee
equal to the higher of (A) $500 and (B) a rate per annum agreed to in writing
by the Company and the issuing bank of the letter of credit.
The aggregate revolving credit commitment will reduce by $7.5 million in 1998
and 1999 and $10 million each year thereafter. To the extent outstanding
borrowings exceed the resulting commitment amount, principal will be required
to be repaid. The revolving credit commitment amount also will be reduced and,
to the extent outstanding borrowings exceed the resulting commitment amount,
principal will be repaid upon the occurrence of certain events.
The Credit Facility contains covenants restricting, with certain exceptions,
the Company and its subsidiaries and joint ventures from: (i) creating,
incurring or assuming any liens; (ii) merging or consolidating or disposing of
its assets, or acquiring assets from any other person; (iii) changing the
nature of their respective businesses; (iv) incurring indebtedness other than
existing indebtedness, subordinated indebtedness not to exceed $50 million to
finance permitted acquisitions and other permitted indebtedness specified in
the Credit Facility; (v) paying dividends or making restricted payments; and
(vi) modifying the agreements relating to the Company's indebtedness and
preferred stock or its corporate charter documents.
In addition, the Credit Facility requires that the Company, in certain cases on
a stand alone basis and in other cases on a consolidated basis with its
subsidiaries and joint ventures, satisfy certain financial ratio coverage
tests, including maintenance of net worth, minimum interest coverage, and
maximum leverage coverages.
Bank of America Loan Agreement: The Company has a loan agreement with Bank of
America National Trust and Savings Association ("B of A"). That loan agreement
(the "B of A Loan Agreement") permits the Company and certain of the joint
ventures through which it owns hotels to make revolving credit borrowings in an
aggregate amount of up to $10 million and provides for an uncommitted Credit
Facility, which is available at the sole discretion of B of A, in an aggregate
amount of up to $5 million. Borrowings under the B of A Loan Agreement may be
made until December 31, 1996. Revolving credit borrowings under the B of A Loan
Agreement may be made, at the option of the Company, as short term borrowings,
which have a maximum
C/M: 11752.0012 425099.3
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<PAGE>
maturity of six months, or medium term borrowings, which have a maximum
maturity of five years. Short term borrowings bear interest, at the option of
the Company, at the B of A prime rate, 1/2 of 1% in excess of the B of A
offshore rate or 3/4 of 1% in excess of the B of A CD rate. Medium term
borrowings bear interest at the B of A prime rate. The borrowings under the B
of A Loan Agreement are secured by a $15 million standby letter of credit
issued under the Credit Facility. The Company is obligated to pay a commitment
fee at an annual rate of .1875% on the unutilized portion of the B of A Loan
Agreement. Borrowings under the B of A Loan Agreement were approximately $6.3
million at September 30, 1996.
CASH FLOWS
Cash provided by (used in) operating activities was $7.7 million for the nine
months ended September 30, 1996 compared to $(6.9) million for the nine months
ended September 30, 1995. The change relates primarily to the change in focus
to the lodging industry which produced operating cash flow and the elimination
of gaming development costs.
Cash (used in) provided by investing activities was ($103.0) million for the
nine months ended September 30, 1996 compared to $5.8 million for the nine
months ended September 30, 1995. This change related primarily to the
Travelodge acquisition and related costs offset by the receipt of principal
payments on loans.
Cash provided by financing activities was $61.6 million for the nine months
ended September 30, 1996 compared to $-0- for the nine months ended
September 30, 1995. This change resulted from net borrowing proceeds and
proceeds from the sale of stock to Chartwell and FSNL.
SEASONALITY
The hotel industry is seasonal in nature. Room occupancy rates at the Company's
hotels are affected by normally recurring seasonal patterns and, in most
locations in the United States and Canada, are higher in the late spring
through early fall months (May through October) than during the balance of the
year, with the lowest occupancy rates occurring in the first quarter of the
year. As a result, the Company expects to experience seasonal lodging revenue
patterns similar to the hotel industry with the summer months, due to the
increase in leisure travel, producing a higher revenue than other periods
during the year.
C/M: 11752.0012 425099.3
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<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is not party to any litigation which it believes will
have a material impact on the financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The CL Associates/FSNL Investment was completed on August 8,
1996. The CL Associates/FSNL Investment was approved by the
affirmative vote of the holders of a majority of the shares of
the Company's Common Stock present, in person or by proxy, and
entitled to vote at the Company's annual meeting held on August
8, 1996 (the "Annual Meeting").
(c) (i) The CL Associates/FSNL Investment was approved at the Annual
Meeting. The holders of 3,921,652 shares of Common Stock voted
in favor of the CL Associates/FSNL Investment and the holders of
10,487 shares voted against the CL Associates/FSNL Investment.
The holders of 1700 shares of Common Stock abstained.
(ii) The filing of Certificate of Amendment to the Company's
Certificate of Incorporation which provided for the change of
the Company's name from National Lodging Corp. to Chartwell
Leisure Inc. was approved at the Annual Meeting. The holders of
4,142,688 shares of Common Stock voted in favor of name change
and the holders of 1,334 shares voted against the name change.
The holders of 230 shares of Common Stock abstained.
(iii) Three Class II Directors of the Company, James E. Buckman,
Stephen P. Holmes and Michael J. Kennedy, were elected to serve
on the Company's Board of Directors for a term expiring in 1999.
Mr. Buckman received 4,996,076 votes in favor of his election,
20,166 shares withheld. Mr. Holmes received 4,996,076 votes in
favor of his election, 20,166 shares withheld. Mr. Kennedy
received 4,996,076 votes in favor of his election, 20,166 shares
withheld. At the time of the closing of the CL Associates/FSNL
Investment, Mr. Buckman and Robert F. Smith, a Class I Director
whose term would have expired in 1998, resigned as Directors of
the Company and Dr. Guido Goldman and Rachel Robinson were
elected to the Company's Board of Directors.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
C/M: 11752.0012 425099.3
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<PAGE>
27.1 Financial Data Schedule.
(b) The Company filed a Current Report on Form 8-K dated October 1,
1996, reporting that the Company had acquired 20 hotels and a
one-half interest in an additional hotel, all of which are
located in Canada.
C/M: 11752.0012 425099.3
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<PAGE>
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.
CHARTWELL LEISURE INC.
Date: November 12, 1996 Kenneth J. Weber
- ----------------------- ---------------------------
Kenneth J. Weber Chief Financial Officer
(Duly Authorized Officer of the Registrant)
(Principal Financial Officer and Principal
Accounting Officer)
C/M: 11752.0012 425099.3
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONDENSED FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,802
<SECURITIES> 0
<RECEIVABLES> 9,002
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,788
<PP&E> 83,710
<DEPRECIATION> 0
<TOTAL-ASSETS> 158,229
<CURRENT-LIABILITIES> 11,306
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 125,733
<TOTAL-LIABILITY-AND-EQUITY> 158,229
<SALES> 54,111
<TOTAL-REVENUES> 62,157
<CGS> 0
<TOTAL-COSTS> 73,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,631
<INCOME-PRETAX> (13,905)
<INCOME-TAX> 213
<INCOME-CONTINUING> (14,118)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,477)
<CHANGES> 0
<NET-INCOME> (15,595)
<EPS-PRIMARY> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
