<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
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 March 31, 1997
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
_______________________
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)
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 March 31, 1997, there were 13,389,756 shares of the Registrant's common
stock, par value $.01 per share ("Common Stock"), issued and outstanding.
<PAGE>
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.
<TABLE>
<CAPTION>
INDEX PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of
Operations 2
Condensed Consolidated Statements of Cash
Flows 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
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
</TABLE>
ii
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 52,063 $ 17,590
Accounts receivable - Net 5,985 7,356
Loans receivable 2,687 2,687
Prepaid and other current assets 4,131 3,010
-------- --------
Total current assets 64,866 30,643
INVESTMENTS 880 880
LOANS RECEIVABLE 8,860 9,767
JOINT VENTURE INTERESTS 18,646 18,948
PROPERTY AND EQUIPMENT -- Net 166,441 157,766
MANAGEMENT CONTRACTS -- Net 2,913 2,961
DEFERRED TAX ASSET 1,200 1,200
OTHER ASSETS 9,272 9,873
-------- --------
TOTAL ASSETS $273,078 $232,038
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 4,620 $ 3,594
Accrued expenses 12,550 12,139
Current portion of long-term debt and capital lease 5,865 7,442
-------- --------
Total current liabilities 23,035 23,175
LONG-TERM DEBT 73,906 85,028
CAPITALIZED LEASE OBLIGATION 5,036 5,090
OTHER LIABILITIES 5,076 4,068
-------- --------
Total liabilities 107,053 117,361
MINORITY INTEREST 4,432 3,459
STOCKHOLDERS' EQUITY:
Common stock 134 95
Paid-in capital 214,717 161,480
Accumulated deficit (53,183) (50,386)
Foreign currency translation adjustment (75) 29
-------- --------
Total stockholders' equity 161,593 111,218
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $273,078 $232,038
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
<S> <C> <C>
REVENUE:
Hotel revenue $24,295 $12,468
Management fee and other income 459 583
Equity in earnings of unconsolidated joint
ventures 760 814
------- -------
Total revenue 25,514 13,865
------- -------
OPERATING EXPENSES:
Hotel operating expense 10,762 5,391
General and administrative 5,926 3,668
Marketing, franchise and reservation fees 2,641 1,353
Maintenance and property taxes 3,045 1,080
Rent 1,167 936
Depreciation and amortization 2,388 1,783
Minority interest 225 95
Office restructuring charge 700 --
General and administrative, related party -- 397
Provision for losses on gaming assets -- 378
------- -------
Total operating expenses 26,854 15,081
------- -------
OPERATING LOSS (1,340) (1,216)
INTEREST INCOME (EXPENSE) -- NET (1,201) (714)
GAIN ON SALE OF FIXED ASSETS 102 --
------- -------
LOSS BEFORE INCOME TAX EXPENSE (2,439) (1,930)
INCOME TAX EXPENSE (358) --
------- -------
NET LOSS $(2,797) $(1,930)
======= =======
PER SHARE INFORMATION:
Net loss $ (0.25) $ (0.33)
======= =======
Weighted average common shares outstanding 11,151 5,868
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,226 $ 639
-------- ---------
INVESTING ACTIVITIES:
Issuance of notes receivable -- (133)
Travelodge acquisition, net of cash acquired -- (98,400)
Principal payments received on loans 488 3,630
Other acquisitions and additions to property and
equipment (8,531) (5,856)
Proceeds from hotel disposals 124 --
Other assets and investments (1,189) --
-------- ---------
Net cash (used in) investing activities (9,108) (100,759)
-------- ---------
FINANCING ACTIVITIES:
Proceeds of borrowing 742 70,000
Loan closing costs -- (1,750)
Repayment on borrowings (12,781) (388)
Proceeds from sale of common stock (net of
expenses of $1.2 million) 53,276 --
Other financing activities 1,118 --
-------- ---------
Net cash provided by financing activities 42,355 67,862
-------- ---------
NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS 34,473 (32,258)
-------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,590 51,470
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,063 $ 19,212
======== =========
</TABLE>
See notes to condensed consolidated financial statements
3
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CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet of Chartwell Leisure Inc. and its
subsidiaries (the "Company") as of March 31, 1997 and the related condensed
consolidated statements of operations and cash flows for the three month
periods ended March 31, 1997 and 1996 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
1996 Annual Report on Form 10-K.
2. ACQUISITIONS AND SALE OF STOCK
TRAVELODGE ACQUISITION -- On January 23, 1996, the Company acquired the
outstanding common stock of Forte Hotels, Inc. ("FHI") for $98.8 million
plus expenses (the "Travelodge Acquisition"). 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 hotel properties, respectively, for an
aggregate purchase price of $71.6 million. The principal assets of FHI
acquired by the Company include 18 wholly-owned hotels, and joint venture
interests in 97 other lodging facilities (seven of which were subsequently
disposed of). The Company financed approximately $60.4 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 Travelodge 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.
CANADIAN ACQUISITION -- 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. Also the Company may be required 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. The
Canadian Acquisition 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, October 1, 1996.
4
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SALE OF STOCK -- On August 8, 1996, the Company sold 4 million shares of the
Company's Common Stock to an investment group ("CL Associates") primarily
consisting of members of the Fisher Brothers family and a trust for the
benefit of Gordon Getty and members of his family and a limited liability
company ("FSNL") owned principally by a trust for the benefit of Charles de
Gunzberg for an aggregate purchase price of $57.0 million.
The following presents the unaudited pro forma consolidated results of
operations for the three months ended March 31, 1996 respectively as if all
of the transactions described above occurred on January 1, 1996, giving
effect to the sale of stock and financing costs associated with the
Travelodge Acquisition and Canadian Acquisition.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
------------------------------------------
(In Thousands Except per Share Amounts)
<S> <C>
Revenue $24,607
Net Loss $(2,921)
Net loss per share $ (.50)
</TABLE>
The pro forma 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. STOCK OPTIONS
In March, 1997, the Board of Directors authorized an additional one million
shares for grant pursuant to the Company's 1994 Stock Option Plan, as
amended, bringing the total number of shares reserved for issuance to 4
million. The increase in the number of shares authorized for grant was
approved at the stockholders' meeting held on May 1, 1997. Options for
25,000 shares of common stock were granted on March 5, 1997 at an exercise
price of $14.50, representing fair market value on the date of the grant.
These options are immediately exercisable.
4. INCOME TAXES
The Company has approximately $18.4 million of tax loss carryforwards. The
amount of $18.4 million includes net operating loss carryforwards of
approximately $14.6 million of which $1.1 million expire in 2009, $9.9
million expire in 2010, $2.2 million expire in 2011 and $1.4 million expire
in 2012. Also included in the $18.4 million of tax loss carryforwards are
capital loss carryforwards of approximately $3.8 million which expire at
December 31, 2001. The loss carryforwards will be restricted over several
years pursuant to Section 382 of the Internal Revenue Code of 1986. Due to
the Company's recurring operating losses, the Company has not recorded
5
<PAGE>
any tax benefit for net operating loss carryforwards. Income tax expense of
$0.4 million for the three months ended March 31, 1997 primarily consists of
Canadian withholding and Delaware franchise tax.
5. EQUITY OFFERINGS
During the first quarter of 1997, the Company raised approximately $54.4
million of equity through a rights offering to its existing stockholders and
two private placements.
Pursuant to the rights offering, which closed on March 13, 1997, after
deducting expenses of approximately $1.2 million, the Company raised
approximately $30.0 million in net proceeds through the sale of 2,228,977
shares of Common Stock. CL Associates and FSNL, the Company's two principal
stockholders, invested approximately $15.8 million in the Company through
the exercise of rights they received.
Pursuant to the two private placements, which closed on January 31, 1997 and
March 6, 1997, respectively, the Company raised an aggregate of
approximately $23.2 million through the sale of an aggregate of 1,658,929
shares of Common Stock at $14.00 per share. After giving effect to the
rights offering and the private placements, CL Associates and FSNL together
own approximately 45% of the Company's outstanding shares of Common Stock.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
Chartwell Leisure Inc. ("Chartwell" or the "Company") owns, directly or with
joint venture partners, 129 hotel properties in both the full-service and
limited-service segments, including approximately 11,400 guest rooms, located in
25 states and six Canadian provinces. In the full-service segment, Chartwell
operates 27 hotels aggregating approximately 5,400 guest rooms (of which 5,266
rooms represent Chartwell's ownership interest) that contributed 79% of
Chartwell's hotel revenues during the three month period ended March 31, 1997.
Chartwell's remaining 102 hotels, consisting of approximately 5,945 rooms (of
which 3,483 rooms represent Chartwell's ownership interest), operate in the
limited-service segment, principally under the Travelodge brand. Chartwell's
strategy is to be an opportunistic acquirer and developer of diversified hotel
properties that it believes provide the potential for cash flow and earnings
growth, principally through rebranding, repositioning, reimaging and
remarketing.
RESULTS OF OPERATION
MARCH 31, 1997 COMPARED TO PRO FORMA MARCH 31, 1996
The pro forma financial data includes the operations of Forte Hotels, Inc.
("FHI") and Capital Properties Limited Partnership ("CPLP") for the three months
ended March 31, 1996, as if the acquisitions of the outstanding shares of common
stock of FHI (the "Travelodge Acquisition") and 20 hotels and one-half interest
in an additional hotel (the "CPLP Properties") (the "Canadian Acquisition" and
together with the Travelodge Acquisition, the "Acquisitions") had occurred on
January 1, 1996, 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 the Acquisitions.
The pro forma financial data also includes revenues and expenses associated with
the Company's gaming business which include a provision for losses on gaming
assets of $.4 million for the three month period ended March 31, 1996.
Since closing the Travelodge Acquisition on January 23, 1996, the Company has
begun rebranding certain properties, such as the Ramada Plaza hotel at JFK
International Airport (the "JFK Ramada") in New York and Portland, Oregon. It
also has instituted an extensive renovation program. The Company spent $5.3
million for capital improvements in the first quarter of 1997. Chartwell
believes the rebranding and renovation program has, and will continue to
increase Chartwell's revenue per available room ("REVPAR"). The average daily
room rate ("ADR") from properties operating for at least twelve consecutive
months rose 3.7% from $51.01 in 1996 to $52.88 in 1997. The renovation program
contributed to a small decrease in occupancy due to rooms out of service. For
example, the Travelodge in Walt Disney World had approximately 50 rooms out of
service each day for the three months ending March 31, 1997. As a result of the
increase in ADR, REVPAR grew 3.4% to $30.17, and pro forma hotel revenues
increased by $1.0 million or 4.3% from $23.3 million in 1996 to $24.3 million in
1997. Earnings before interest expense, income tax expense, and depreciation and
amortization expenses ("EBITDA") for the three months ended March 31, 1997 was
$2.3 million before giving effect to a $.7 million charge for the costs
associated with closing the Company's El Cajon, California office. Pro forma
EBITDA for the comparable 1996 period was $2.4 million before non-cash provision
for loss on gaming assets. Pro forma EBITDA decreased $.1 million in the first
quarter of 1997 compared to 1996 primarily due to $.3 million additional
expenditures in the first quarter of 1997 due to the continuation of the
Company's "Prideful Maintenance" program dealing with deferred maintenance
expense.
7
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During the fourth quarter of 1996, the Company completed its purchase price
allocation relating to the Travelodge Acquisition which resulted in a change to
the average life of the acquired assets. As a result, starting in the fourth
quarter, the Company adjusted depreciation expense to reflect the final purchase
price allocation. Had the purchase price allocation been finalized in the first
quarter of 1996, pro forma depreciation expense would have been $.8 million less
for the first quarter of 1996.
HISTORICAL THREE MONTH PERIOD ENDED MARCH 31, 1997 COMPARED TO THE COMPARABLE
1996 PERIOD
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Hotel revenue increased by $11.8 million, from $12.5 million in 1996 to $24.3
million in 1997. Approximately $7.2 million of the increase represented hotel
revenue generated from the Canadian Acquisition and approximately $4.0 million
of the increase represents an additional 22 days of operations in the March 31,
1997 results versus the March 31, 1996 results due to the Travelodge Acquisition
consummated on January 23, 1996. In the first quarter of 1997, the Company was
undergoing major renovation work at the Walt Disney World property which took
approximately 15% of the rooms out of service. The Company is also renovating a
large number of rooms in some of the limited service properties. All of these
renovations are expected to be completed in the second quarter of 1997. At the
JFK Ramada, the mild winter weather in the first quarter of 1997 resulted in
significantly less distressed airline passenger rooms compared to 1996.
RESULTS OF OPERATIONS - EXPENSE OVERVIEW
Hotel operating expense increased $5.4 million, from $5.4 million in 1996 to
$10.8 million in 1997. Approximately $2.7 million of the increase represents
hotel operating expense from the Canadian Acquisition in October, 1996 and
approximately $1.8 million represents the additional 22 days of operations in
the March 31, 1997 results due to the Travelodge Acquisition.
Selling, general and administrative expenses increased $3.6 million, from $5.0
million in 1996 to $8.6 million in 1997. Approximately $1.7 million of the
increase results from the Canadian Acquisition and approximately $1.3 million
represents the additional 22 days of operations in the March 31, 1997 results
due to the Travelodge Acquisition.
Maintenance and property tax expense increased $2.0 million, from $1.1 million
in 1996 to $3.1 million in 1997. Approximately $1.3 million of the increase
results from the Canadian Acquisition and approximately $.4 million represents
the additional 22 days of operations in the March 31, 1997 results due to the
Travelodge Acquisition.
Depreciation and amortization expense for the first quarter of 1997 increased
$.6 million when compared to the same period in 1996, primarily due to increased
depreciation and amortization as a result of the Canadian Acquisition and the
additional 22 days of operations in the March 31, 1997 results due to the
Travelodge Acquisition offset by a reduction of depreciation for the Travelodge
properties in the 1997 quarter as a result of the finalization of the purchase
price allocation.
Interest expense (net of interest income) for the first quarter of 1997
increased $.5 million compared to 1996 due to borrowings made to consummate the
Acquisitions.
8
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LIQUIDITY AND CAPITAL RESOURCES
TRAVELODGE ACQUISITION
On January 23, 1996, the Company acquired the outstanding common stock
of FHI for $98.4 million. In a related transaction prior to consummation of the
Travelodge Acquisition, HFS and MOA 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 115 hotel properties, including sole ownership of
18 wholly owned hotels and joint venture interests in 97 additional hotel
properties. Seven of the acquired FHI properties were subsequently disposed of.
The Company financed approximately $60.4 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 paid the
balance of $38.4 million with existing cash.
CANADIAN ACQUISITION
On October 1, 1996, the Company purchased the CPLP Properties and a
profits participation interest in certain hotel management contracts by paying
approximately $70 million, including approximately $6.0 million for the profits
participation interest. The acquisition included substantially all of CPLP's
existing bank debt of $63.9 million, and closing costs (including real estate
and transfer taxes of $1.8 million) and the assumption of the liability for
identified trade payables and property specific bank debt, aggregating
approximately another $7.4 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 investment in the CPLP Hotels
(the "Preferred Return"). The Company is then 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 C$2.4 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 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. The Company had made no payments as of
March 31, 1997 in accordance with the agreement.
Further in connection with the Canadian Acquisition, the Company entered
into a development agreement (the "Development Agreement") with NRG Management
Services Ltd. ("NRG"), an affiliate of Royco Hotels and Resorts, Ltd. ("Royco")
which manages the Company's Canadian hotels and any future hotels acquired by
the Company in Canada, pursuant to which NRG has agreed to identify new hotel
properties for acquisition and development in Canada on behalf of the Company.
The Development Agreement provides that the Company will pay to NRG
approximately $588,000 through October, 1997, and approximately $370,000 during
9
<PAGE>
each of the years ended October 1998 and October 1999. The Development Agreement
is terminable at will by either party after October 1, 1997. The Company made
payments totaling $91,000 for the quarter ended March 31, 1997.
Also in connection with the Canadian Acquisition, the Company entered
into a management services and franchise development agreement (the "MSFDA")
with Royco. Under the MSFDA, Royco is responsible for assisting the Company in
developing new Travelodge and Thriftlodge lodging facilities in Canada under the
Canadian Master License. As compensation for its services under the MSFDA, Royco
receives 50% of the profits generated from these management and franchise
development operations. The MSFDA also provides for the payment to Royco of
additional fees under certain circumstances, including, upon the satisfaction of
fixed performance goals and the termination of the agreement. The term of the
MSFDA commenced on September 30, 1996 and expires on December 31, 2006. The
Company has the option to renew the MSFDA for three additional terms of ten
years each. Upon the expiration of the MSFDA, or in the event the agreement is
terminated, Royco has the option to acquire the Company's interest under its
master franchise license for the Travelodge brand in Canada (the "Canadian
Master License"). Under its terms, the Canadian Master License is assignable by
the Company to Royco. Under the termination or expiration of the MSFDA, Royco
shall have the option to purchase the Canadian Master License from the Company.
CHARTWELL DE MEXICO
Through Chartwell de Mexico, the Company intends to develop hotel
facilities throughout Mexico. Chartwell de Mexico is to be funded with up to $20
million in capital contributions, of which half are to be contributed by the
Company. On September 18, 1996, the joint venture entered into a 30-year
exclusive master franchise agreement (the "Mexican Master License") with HFS,
pursuant to which the joint venture is entitled to franchise others to develop
and operate, lodging facilities in Mexico under the Travelodge and Thriftlodge
brand names. Chartwell de Mexico is obligated under the Mexican Master License
to develop in various stages up to 1,140 hotel suites or resort lodging guest
rooms by December 31, 2006. Under certain circumstances, including where the
Company does not satisfy its development obligations in accordance with a
prescribed schedule, the Mexican Master License may be terminated by HFS. The
Company invested $1.3 million in Chartwell de Mexico in the first quarter.
HILTON ALLIANCE
On January 20, 1997, the Company formed an alliance with Hilton pursuant
to which the Company will own, develop, manage and operate at least 20 Hilton
Garden Inn hotels in target markets nationwide under a franchise license. The
initial term of the agreement is three years and represents a total investment
of nearly $200 million by the Company, of which approximately $40 million is
required to be funded by the Company as equity. Hilton is in negotiations to
arrange for construction financing and permanent mortgage financing for the
Hilton Garden Inn development program. There can be no assurance that such
financing can be obtained. It is expected that 80% of the total construction
costs will be financed, and the remaining 20% will be funded by the Company. The
financing terms are expected to provide that upon obtaining a certificate of
occupancy for each Hilton Garden Inn, the construction loan allocated for such
hotel is expected to convert to a 15-year permanent mortgage. The Company
expects to begin construction shortly of its first three Hilton Garden Inns in
Sante Fe and Albuquerque, New Mexico, and Syracuse, New York.
10
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CAPITAL IMPROVEMENT PROGRAM
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. During 1997,
the Company intends to invest approximately $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, proceeds from the Rights Offering, the Brahman Private
Placement and the Baron Private Placement (as defined below) and excess cash on
hand. The Company spent $5.3 million for capital improvements in the first
quarter of 1997.
CONSOLIDATION OF OPERATIONS
The Company is in the process of evaluating its operations at its three
locations, El Cajon, New York and Calgary, with the intention of consolidating
operations and improving operating efficiencies. Exit and severance costs of $.7
million were incurred during the first quarter of 1997. Additional costs may be
incurred during 1997 in relation to closing facilities and additional severance
costs as positions are consolidated and plans are finalized.
CREDIT FACILITIES:
REVOLVING 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") and
Chase Manhattan Bank. 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 or Bear Financial Corp. ("Bear"),
which is also a subsidiary of the Company, as a subfacility under the Credit
Facility (the "Canadian Subfacility"). As of March 31, 1997, $80.7 million was
drawn on the Credit Facility, including $15 million representing issuance of
undrawn letters of credit. The Company is jointly and severally liable for all
borrowings by Chartwell Canada or Bear under the Canadian Subfacility. Pursuant
to this agreement, HFS has guaranteed $75 million of the Company's borrowings
under the Credit Facility, for which the Company pays HFS an annual fee of $1.5
million. 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.
The aggregate revolving credit commitment will reduce by $7.5 million in
1998, $17.5 million in 1999, $20 million in 2000 and 2001, and $85 million in
2002. 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.
11
<PAGE>
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) modifying the agreements relating to the
Company's indebtedness and preferred stock or its corporate charter documents.
The facility prohibits the payment of dividends.
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. The Credit Facility contains a restrictive covenant based on
the ratio of pro-forma earnings to debt as defined in the credit facility
document.
BANK OF AMERICA LOAN AGREEMENT
The Company has a loan agreement (which has been revised and extended
during April, 1997) 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 $2.0 million. The B of A
loan Agreement which was scheduled to expire on March 31, 1997, has been
extended until December 31, 1997 at which time the Company's outstanding
obligations under the agreement will become due. Revolving credit borrowings
under the B of A Loan Agreement may be made, at the option of the Company, at
short term borrowings, which have a maximum 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 (as part of
the extension, the letter of credit will be reduced to $12.0 million.). 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 $6.7 million at March 31, 1997 of which
approximately $3.6 million is allocable to the Company.
EQUITY OFFERINGS
During the first quarter of 1997, the Company raised approximately $54.4
million of equity through a rights offering to its existing stockholders (the
"Rights Offering"), a private placement (the "Brahman Private Placement") to
funds managed by affiliates of Brahman Management, LLC ("Brahman") and a private
placement (the "Baron Private Placement") to Baron Asset Fund ("Baron").
Pursuant to the Rights Offering, which closed on March 13, 1997, after
deducting expenses of approximately $1.2 million, the Company raised
approximately $30.0 million in net proceeds through the sale of 2,228,977 shares
of Common Stock. CL Associates and FSNL, the Company's two principal
stockholders, invested approximately $15.8 million in the Company through the
exercise of Rights they received. After giving effect to the Rights Offering, CL
Associates and FSNL together own approximately 45.1% of the Company's
outstanding shares of Common Stock.
Pursuant to the Brahman Private Placement and the Baron Private
Placement, which closed on January 31, 1997 and March 6, 1997, respectively, the
Company raised an
12
<PAGE>
aggregate of approximately $23.2 million through the sale of an aggregate of
1,658,929 shares of Common Stock at $14.00 per share. Brahman, which manages
investment funds including one affiliated with George Soros, purchased 1,000,000
shares of Common Stock. Baron, which is one of a family of funds managed by
Ronald Baron, purchased 658,929 shares of Common Stock. As a result of their two
purchases and after giving effect to the Rights Offering, Brahman and Baron own
approximately 9.7% and 4.9%, respectively, of the Company's outstanding shares
of Common Stock.
The Company intends to use the proceeds of the Rights Offering, the
Brahman Private Placement and the Baron Private Placement to fund the
construction of Hilton Garden Inns under the Company's recently announced
alliance with Hilton, to fund the Company's Mexican joint venture, to redevelop
the Company's existing hotels and for general corporate purposes. In addition,
as the Company from time to time evaluates potential acquisition opportunities,
the Company may also use a portion of the net proceeds to acquire additional
hotels.
NOTES OFFERING
The Company is in the process of pursuing a $100 million offering of
senior notes due 2007. In connection with the Notes Offering, it is expected
that the Company's existing $150.0 million credit facility will be terminated
and replaced with a new secured facility of approximately $60.0 million (the
"New Credit Facility") and the HFS guarantee and related $1.5 million annual fee
will be eliminated. There can be no assurance that the Company will be able to
successfully complete the Notes Offering or enter into the New Credit Facility
and consummate the related refinancing of the Credit Facility. The Company
intends to use the net proceeds from the Notes Offering to repay existing
indebtedness under the Credit Facility and for working capital and general
corporate purposes, including to fund current and future development projects.
An extraordinary charge of $1.5 million would be incurred as a result of the
early extinguishment of debt and the writeoff of the deferred financing costs
associated with the Credit Facility if the offering of the Notes is completed.
The Notes are expected to be unsecured, senior obligations of the
Company ranking pari passu in right of payment with all other existing and
future unsecured, senior indebtedness of the Company and senior in right of
payment to all other existing and future subordinated indebtedness of the
Company. The Notes will bear interest at a fixed rate and no amortization or
sinking fund payments will be required with respect to the Notes. The Company
had entered into treasury rate locks totaling $80.0 million to partially hedge
the interest rate of the proposed offering. The treasury rate locks were settled
on March 28, 1997 resulting in income from the hedge of $1.1 million. This
income has been deferred and will be amortized over the life of the note
offering.
CASH FLOWS
Cash provided by operating activities was $ 1.2 million for the three
months ended March 31, 1997 compared to $.6 million for the three months ended
March 31, 1996. The increase relates primarily to the Canadian Acquisition.
Cash used in investing activities was $9.1 million for the three months
ended March 31, 1997 compared to $100.8 million for the three months ended March
31, 1996. This change relates primarily to the Travelodge Acquisition in the
first quarter of 1996, with no similar acquisition occurring in the first
quarter of 1997.
Cash provided by financing activities was $42.4 million for the three
months ended March 31, 1997 compared to $67.9 million for the three months ended
March 31, 1996. In 1997, financing activities related to the sale of stock
through the Rights Offering, and the Brahman and
13
<PAGE>
Baron Private Placements. In 1996, finance activities related to borrowings to
finance the Travelodge Acquisition.
SEASONALITY
Room occupancy rates at its 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 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 experiences 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB Statement No. 128, "Earnings Per Share" was
released. The statement establishes standards for computing and presenting
earnings per share ("EPS") for publicly traded companies. The statement
simplifies the standards for computing earnings per share and makes them
comparable to international EPS standards. The statement is effective for
financial statements issued for periods ending after December 15, 1997. The
Company does not believe that the requirements of the statement will have a
significant impact on the presentation of EPS in the financial statements.
14
<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
(i) On January 31, 1997, the Company sold an aggregate of 1,000,000
shares of Common Stock to affiliates of Brahman Management LLC for
$14.00 per share, or an aggregate of $14 million.
(ii) On March 6, 1997, the Company sold an aggregate of 658,929
shares of Common Stock to Baron Asset Fund for $14.00 per share, or
an aggregate of $9,225,006.
The issuances of securities described in paragraphs (i) and (ii)
were not subject to the registration requirements of the Securities
Act of 1933, as amended, because they were exempt from registration
under Section 4(2) thereof for transactions by an issuer not
involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on May 1,
1997 (the "Annual Meeting).
(c) (i) A consent to a waiver of a covenant under the Amended and
Restated Stock Purchase Agreement, dated as of March 14, 1996,
by and among Chartwell Leisure Associates L.P. II, FSNL LLC
and the Company, which consent allows certain affiliates of
Chartwell Leisure Associates L.P. II to hold interests in
full-service, upper-end lodging properties, was granted at the
Annual Meeting. The holders of 4,075,348 shares of Common
Stock voted in favor of granting the consent and the holders
of 214,843 shares voted against granting the consent. The
holders of 86 shares of Common Stock abstained.
(ii) The Company's 1994 Stock Option Plan, as amended in
October 1996 and March 1997 (the "Plan") was approved at the
Annual Meeting. The holders of 9,798,084 shares of Common
Stock voted in favor of the Plan and the holders of 525,378
shares voted against the Plan. The holders of 280 shares of
Common Stock abstained.
(iii) Three Class III directors of the Company, Henry R.
Silverman, Martin L. Edelman an Marc E. Leland, were elected
at the Annual Meeting to serve on the Company's Board of
Directors for a term expiring in 2000. Mr. Silverman received
12, 228,171 votes in favor of his election, 2,642 shares
withheld. Mr. Edelman received 12,227,931
15
<PAGE>
votes in favor of his election, 2,882 shares withheld. Mr.
Leland received 12,228,271 votes in favor of his election,
2,542 shares withheld.
(iv) The appointment of Deloitte & Touche LLP as independent
auditors of the Company for its fiscal year ended December 31,
1997 was ratified at the Annual Meeting. The holders of
12,228,602 shares of Common Stock voted in favor of the
appointment of Deloitte & Touche LLP and the holders of 1,968
shares voted against the appointment of Deloitte & Touche LLP.
The holders of 243 shares of Common Stock abstained.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
(i) The Company filed a Current Report on Form 8-K/A on February 7,
1997, reporting under Item 7 certain financial information related
to the Canadian Acquisition, including (i) the Audited Financial
Statements of Capital Properties Limited Partnership as at
September 30, 1996 and 1995 and for each of the Three Years in the
Period Ended September 30, 1996 and (ii) certain Unaudited Pro
Forma Condensed Consolidated Financial Statements of the Company.
The Form 8-K/A amended the Company's Current Report on Form 8-K
filed on October 15, 1996 and the Company's Current Report on Form
8-K/A filed on December 12, 1996.
(ii) The Company filed a Current Report on Form 8-K/A on February
26, 1997, reporting under Item 7 certain financial information
related to the Canadian Acquisition, including (i) the Audited
Financial Statements of Capital Properties Limited Partnership as
at September 30, 1996 and 1995 and for each of the Three Years in
the Period Ended September 30, 1996 and (ii) certain Unaudited Pro
Forma Condensed Consolidated Financial Statements of the Company.
The Form 8-K/A amended the Company's Current Report on Form 8-K
filed on October 15, 1996, the Company's Current Report on Form 8-
K/A filed on December 12, 1996, and the Company's Current Report on
Form 8-K/A filed on February 7, 1997.
16
<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: May 14, 1997 /s/ Kenneth J. Weber
- ------------------------ -------------------------------------
Kenneth J. Weber
Chief Financial Officer (Duly
Authorized Officer of the Registrant)
(Principal Financial Officer and Principal
Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 52,063
<SECURITIES> 0
<RECEIVABLES> 8,672
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,866
<PP&E> 168,829
<DEPRECIATION> 2,388
<TOTAL-ASSETS> 273,078
<CURRENT-LIABILITIES> 23,035
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 161,459
<TOTAL-LIABILITY-AND-EQUITY> 273,078
<SALES> 24,295
<TOTAL-REVENUES> 25,514
<CGS> 0
<TOTAL-COSTS> 26,854
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,742
<INCOME-PRETAX> (2,439)
<INCOME-TAX> (358)
<INCOME-CONTINUING> (2,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,797)
<EPS-PRIMARY> (.025)
<EPS-DILUTED> (.25)
</TABLE>
