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 June 30, 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 June 30, 1997, there were 13,406,531 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.
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 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 15
Security Holders
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
ii
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
June 30, December 31,
ASSETS: 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 51,237 $ 17,590
Accounts receivable - Net 6,137 7,356
Loans receivable 8,270 2,687
Prepaid and other current assets 5,125 3,010
----------- -----------
Total current assets 70,769 30,643
INVESTMENTS 500 500
LOANS RECEIVABLE 2,834 9,767
JOINT VENTURE INTERESTS 19,589 19,328
PROPERTY AND EQUIPMENT - Net 171,085 157,766
MANAGEMENT CONTRACTS - Net 2,866 2,961
DEFERRED TAX ASSET 1,200 1,200
OTHER ASSETS 9,206 9,873
----------- -----------
TOTAL ASSETS $ 278,049 $ 232,038
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 5,099 $ 3,594
Accrued expenses 12,066 12,139
Current portion of long-term debt and capital lease 5,875 7,442
----------- -----------
Total current liabilities 23,040 23,175
LONG-TERM DEBT 77,283 85,028
CAPITALIZED LEASE OBLIGATION 4,981 5,090
OTHER LIABILITIES 1,219 4,068
Total liabilities 106,523 117,361
MINORITY INTEREST 4,444 3,459
STOCKHOLDERS' EQUITY:
Common stock 134 95
Paid-in capital 214,655 161,480
Accumulated deficit (47,656) (50,386)
Foreign currency translation adjustment (51) 29
----------- -----------
Total stockholders' equity 167,082 111,218
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,049 $ 232,038
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUE:
Hotel revenue $ 31,175 $ 19,029 $ 55,470 $ 31,497
Other income 2,029 1,050 2,488 1,633
Equity in earnings of unconsolidated joint ventures 1,360 1,696 2,120 2,510
------------- ------------- ------------- -----------
Total revenue 34,564 21,775 60,078 35,640
------------- ------------- ------------- -----------
OPERATING EXPENSES:
Hotel operating expense 11,226 8,068 22,134 13,459
General and administrative 6,701 4,349 12,481 8,016
Marketing, franchise and reservation fees 2,833 1,936 5,474 3,289
Maintenance and property taxes 3,165 1,486 6,210 2,566
Rent 1,366 1,396 2,534 2,332
Depreciation and amortization 2,359 2,467 4,746 4,250
Minority interest 517 350 742 447
Office restructuring charge 80 - 780 -
General and administrative, related party - 375 - 772
Provision for losses on gaming assets - 9,069 - 9,447
------------- ------------- ------------- -----------
Total operating expenses 28,247 29,496 55,101 44,578
------------- ------------- ------------- -----------
OPERATING INCOME (LOSS) 6,317 (7,721) 4,977 (8,938)
INTEREST INCOME (EXPENSE) - NET (513) (1,219) (1,714) (1,933)
GAIN (LOSS) ON SALE OF FIXED ASSETS (98) - 4 -
------------- ------------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 5,706 (8,940) 3,267 (10,871)
INCOME TAX EXPENSE (181) - (538) -
------------- ------------- ------------- -----------
NET INCOME (LOSS) $ 5,525 $ (8,940) $ 2,729 $ (10,871)
============= ============== ============= ===========
PER SHARE INFORMATION:
Net Income (Loss) $ 0.40 $ (1.52) $ 0.22 $ (1.85)
============= ============== ============= ===========
Weighted average common shares outstanding 13,812 5,868 12,539 5,868
============= ============== ============= ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 and 1996
(In Thousands)
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,934 $ 1,553
------------ -------------
INVESTING ACTIVITIES:
Issuance of notes receivable (20) (263)
Travelodge acquisition, net of cash acquired - (99,175)
Principal payments received on loans 982 6,276
Other acquisitions and additions to property and equipment (15,507) (2,781)
Proceeds from hotel disposals 352 -
Investment in Chartwell de Mexico (1,292) -
Other assets and investments (361) -
----------- -------------
Net cash (used in) investing activities (15,846) (95,943)
-------------- -------------
FINANCING ACTIVITIES:
Proceeds of borrowing 997 70,000
Loan closing costs - (1,622)
Repayment on borrowings (12,655) (10,986)
Proceeds from sale of common stock (net of expenses of $1.2 million) 53,217 -
--------------- ------------
Net cash provided by financing activities 41,559 57,392
-------------- -------------
NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS 33,647 (36,998)
------------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,590 51,470
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,237 $ 14,472
============= =============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet of Chartwell Leisure Inc. and its
subsidiaries (the "Company" or "Chartwell") as of June 30, 1997 and the
related condensed consolidated statements of operations and cash flows for
the six month period ended June 30, 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 Travelodge 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 included 18 wholly-owned hotels, and joint venture
interests in 97 other lodging facilities (twelve of which were
subsequently disposed). 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.
The Travelodge 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, January 23, 1996.
Canadian Acquisition - On October 1, 1996, the Company acquired (the
"Canadian Acquisition") 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
Company paid approximately $70.0 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 $7.0 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 Canadian Acquisition 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
<PAGE>
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 six months ended June 30, 1996 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.
Six Months Ended
June 30, 1996
- ----------------------------------------------------------------
(In Thousands Except per Share Amounts)
Revenue $55,314
Net Loss $(9,837)
Net loss per share $(.99)
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
20,000 shares of common stock were granted on May 5, 1997 at an exercise
price of $12.25, representing fair market value on the date of the grant.
4. INCOME TAXES
As of December 31, 1996, the Company had approximately $16.9 million of
tax loss carryforwards. The amount of $16.9 million includes net operating
loss carryforwards of approximately $13.1 million of which $1.1 million
expire in 2009, $9.9 million expire in 2010, and $2.1 million expire in
2011. Also included in the $16.9 million of tax loss carryforwards are
capital loss carryforwards of approximately $3.8 million which expire at
December 31, 2001. The use of 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 prior to the second
quarter of 1997, the Company has not recorded any tax benefit for net
operating loss carryforwards. Income tax expense of $0.5 million for the
six months ended June 30, 1997 primarily consists of Canadian withholding
and state franchise tax.
5
<PAGE>
5. PRESENTATION
Certain items have been reclassified from the prior year to conform with
the current period's presentation.
6. SUBSEQUENT EVENTS
Sale of Casino Building and Barge - On August 4, 1997, the Company sold
its interest in a barge and other related assets to Boomtown, Inc. for net
proceeds of $0.3 million. Since the book value of this asset had been
written down to zero, the Company will recognize a gain on sale of $0.3
million.
Prepayment of Rainbow Casino Corporation Loan Receivable - In August 1997,
the Company collected in full its loan receivables from Rainbow Casino
Corporation. The balance of the receivable at June 30, 1997 was $6.2
million. In connection with this receipt, the Company will incur a charge
of $.4 million for the write-off of the deferred costs associated with the
loan receivable.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
Chartwell owns, directly or with joint venture partners, 122 hotel
properties (plus three sub-leased properties) in both the full-service and
limited-service segments, with an aggregate of 11,072 guest rooms, located
in 25 states and six Canadian provinces. In the full-service segment,
Chartwell operates 30 hotels aggregating 5,915 guest rooms (of which 5,730
rooms represent Chartwell's ownership interest) that contributed
approximately 73% of Chartwell's hotel revenues during the six month
period ended June 30, 1997, and approximately 71% of the Company's
property level hotel earnings before interest expense, income tax expense,
and depreciation and amortization expenses ("EBITDA") during the six month
period ended June 30, 1997. Chartwell's remaining 92 hotels, consisting of
5,157 rooms (of which 2,227 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. As an owner of
hotels, the Company's goal is to capitalize on positive industry
fundamentals, and to produce strong earnings growth due to the operating
leverage inherent in hotel ownership.
SECOND QUARTER HIGHLIGHTS
o Net income of $5.5 million and earnings per share of $.40 in the
three months ended June 30, 1997 were record results for the
Company.
o Revenue per available room ("REVPAR") on a pro forma basis for
those hotels operating for at least 12 consecutive months
increased approximately 6.2% for the three months ended June 30,
1997 compared to the three months ended June 30, 1996.
o Chartwell made solid progress with its development program with
nine hotels currently under development with construction
commencing on two locations as follows:
<TABLE>
<S> <C> <C> <C> <C>
Expected Expected Expected
Location Franchise No. of Rooms Opening Owners
1) Dallas, Texas Wingate 114 1st Qtr 1998 (A)
2) Mexico City, Mexico Hilton 129 1st Qtr 1998 (B)
- ---------------------------- -------------- ----------------- --------------- -----------
</TABLE>
o The following locations are under development:
Expected Expected
Location Franchise No. of Rooms Owners
--------
1 Santa Fe, New Mexico Hilton Garden Inn 123 (A)
2 Albuquerque, New Mexico Hilton Garden Inn 123 (A)
3 San Diego, California Hilton Garden Inn 159 (A)
4 Indianapolis, Indiana Hilton Garden Inn 159 (A)
5 Syracuse, New York Hilton Garden Inn 159 (C)
6 Willow Grove, Pennsylvania Hilton Garden Inn 159 (C)
7 Juarez, Mexico Hilton Garden Inn 159 (B)
(A) Wholly Owned
(B) Owned by Chartwell de Mexico in which Chartwell Leisure
is a 50% partner.
(C) Joint Venture with Pioneer Development Corp.
7
<PAGE>
o The Company spent approximately $8.7 million for capital
improvements at its hotels.
o The Company entered into a joint venture with Pioneer
Development Corp. to jointly develop and own Hilton Garden Inns
in certain eastern cities.
o The Company has hired the investment banking firms Bear Stearns
& Co., Inc. and Chase Securities Inc. to help the Company
consider strategic alternatives, including a possible sale of
the Company.
RESULTS OF OPERATION
June 30, 1997 Compared to Pro Forma June 30, 1996
The pro forma financial data includes the operations of Forte Hotels,
Inc. and Capital Properties Limited Partnership for the six months
ended June 30, 1996, as if the Travelodge Acquisition and the Canadian
Acquisition (together, the "Acquisitions") had occurred on January 1,
1996, giving effect to financing costs associated with the
acquisitions, depreciation and amortization associated with the
acquired properties and the sale of 4 million shares of newly issued
common stock on August 8, 1996. 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 $9.4
million for the six month period ended June 30, 1996.
The Company spent $5.3 million for capital improvements at its hotels
in the first quarter of 1997 and $8.7 million in the second quarter of
1997. The Company also implemented a hotel-wide policy called "Prideful
Maintenance" which stresses the importance of making necessary and
preventative maintenance and repairs. As a result of the upgrade
program, maintenance and repairs increased approximately $0.9 million
in the first six months of 1997 compared to the same period in 1996.
Chartwell believes the rebranding and renovation program has increased,
and will continue to increase Chartwell's REVPAR. The average daily
room rate ("ADR") from properties operating for at least twelve
consecutive months rose 3.6% from $52.34 in 1996 to $54.21 in 1997. As
a result of the increase in ADR, REVPAR grew 5.2% to $34.49, and hotel
revenues increased by $4.8 million or 8.7% from $55.3 million in 1996
to $60.1 million in 1997. Rooms out of service as a result of the
renovation work are not excluded when computing the REVPAR numbers
shown above. EBITDA for the six months ended June 30, 1997 was $11.3
million before giving effect to a $0.8 million charge for the costs
associated with closing the Company's El Cajon, California office. Pro
forma EBITDA for the comparable 1996 period was $9.9 million before
non-cash provision for loss on gaming assets.
HOTEL OPERATING PERFORMANCE (U.S. AND CANADA)
Chartwell's REVPAR increased in the three months and six months ended
June 30, 1997 compared to REVPAR during the same periods in 1996.
Results are as follows:
Three Months Ended
-------------------------------------------------------------------
June 30, 1997 June 30, 1996 (1) Increase
Occupancy 70.0% 68.2% 2.6%
ADR $55.22 $53.41 3.4%
REVPAR $38.65 $36.41 6.2%
Six Months Ended
-------------------------------------------------------------------
June 30, 1997 June 30, 1996 (1) Increase
Occupancy 63.6% 62.7% 1.4%
ADR $54.21 $52.34 3.6%
REVPAR $34.49 $32.80 5.2%
(1) Pro forma
8
<PAGE>
U.S. HOTEL OPERATING PERFORMANCE
In the United States, Chartwell's REVPAR increased in the three months
and six months ended June 30, 1997 compared to the REVPAR during the
same period in 1996. The REVPAR growth was fueled by increases in ADR.
Results for Chartwell's U.S. Hotels are as follows:
Three Months Ended
--------------------------------------------------------------------
June 30, 1997 June 30, 1996 Increase (Decrease)
Occupancy 69.7% 69.9% (.3%)
ADR $64.21 $60.93 5.4%
REVPAR $44.73 $42.56 5.1%
Six Months Ended
--------------------------------------------------------------------
June 30, 1997 June 30, 1996 (1) Increase (Decrease)
Occupancy 64.9% 66.1% (1.8%)
ADR $62.42 $59.17 5.5%
REVPAR $40.52 $39.09 3.7%
(1) Pro forma
CANADIAN HOTEL OPERATING PERFORMANCE
Chartwell's REVPAR for its Canadian Hotels increased to $30.05 for the
second quarter of 1997 as compared to $27.23 during the second quarter
of 1996 (pro forma), an increase of 10.4%. Chartwell has recently
completed a $4.0 million capital improvement and renovation program of
its Canadian Hotels.
Three Months Ended
---------------------------------------------------------------
June 30, 1997 June 30, 1996 (1) Increase
Occupancy 70.5% 65.6% 7.5%
ADR $42.63 $41.47 2.8%
REVPAR $30.05 $27.23 10.4%
Six Months Ended
---------------------------------------------------------------
June 30, 1997 June 30, 1996 (1) Increase
Occupancy 61.8% 57.7% 7.1%
ADR $42.01 $41.00 2.5%
REVPAR $25.95 $23.67 9.6%
(1) Pro forma
Historical Six Month Period Ended June 30, 1997 Compared to the
Comparable 1996 Period
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Hotel revenue increased by $24.0 million, from $31.5 million in 1996 to
$55.5 million in 1997. Approximately $17.5 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
9
<PAGE>
operations in the June 30, 1997 results versus the June 30, 1996 results
due to the fact that the Travelodge Acquisition was consummated on
January 23, 1996.
RESULTS OF OPERATIONS - EXPENSE OVERVIEW
Hotel operating expense increased $8.6 million, from $13.5 million in
1996 to $22.1 million in 1997. Approximately $6.0 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 June 30, 1997 results due to the Travelodge
Acquisition.
General and administrative expense increased $4.5 million, from $8.0
million in 1996 to $12.5 million in 1997. Approximately $1.5 million of
the increase results from the Canadian Acquisition and approximately $0.8
million represents the additional 22 days of operations in the June 30,
1997 results due to the Travelodge Acquisition. Included in general and
administrative expense for the six month ended June 30, 1997 are
professional fees of $0.4 million relating to the termination of a
proposed notes offering and $0.4 million relating to due diligence costs
associated with an acquisition which was never consummated.
Marketing, franchise and reservation fees expense increased $2.2 million,
from $3.3 million in 1996 to $5.5 million in 1997. Approximately $1.6
million of the increase results from the Canadian Acquisition and
approximately $0.6 million represents the additional 22 days of
operations in the June 30, 1997 results due to the Travelodge
Acquisition.
Maintenance and property tax expense increased $3.6 million, from $2.6
million in 1996 to $6.2 million in 1997. Approximately $2.6 million of
the increase results from the Canadian Acquisition and approximately $0.4
million represents the additional 22 days of operations in the June 30,
1997 results due to the Travelodge Acquisition. The Company also
implemented a hotel-wide policy called "Prideful Maintenance" which
stresses the importance of making necessary and preventative maintenance
and repairs. As a result of the upgrade program, maintenance and repairs
increased approximately $0.9 million in the first six months of 1997
compared to the same period in 1996.
Depreciation and amortization expense for the first six months of 1997
increased $0.5 million as 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 June
30, 1997 results due to the Travelodge Acquisition offset by a reduction
of depreciation in the 1997 period for the properties purchased in the
Travelodge Acquisition as a result of the finalization of the purchase
price allocation.
Interest expense (net of interest income) for the first six months of
1997 decreased $0.2 million compared to 1996 primarily due to an increase
in interest income from additional cash received in the Rights Offering
and two private placements (described below).
Liquidity and Capital Resources
As of June 30, 1997, Chartwell has approximately $82.3 million of
outstanding long-term debt and approximately $51.2 million of cash. In
addition, Chartwell has approximately $72.0 million available under its
Chase Credit Facility and $2.9 million available under its Bank of
America Credit Facility.
The biggest component of long-term debt is approximately $66.0 million
drawn under the Chase Facility. The money has been borrowed in Canadian
funds (C $91.0 million) and currently bears interest at a
10
<PAGE>
rate of 4.1%. Borrowing in Canadian dollars has the additional advantage
of providing a foreign currency hedge against the Canadian denominated
revenues received from the Company's Canadian hotels.
The total weighted average interest rate on the long-term debt is
approximately 6.4% as of June 30, 1997 (inclusive of a $1.5 million
annual guarantee fee payable to HFS, Inc. for its guarantee of a portion
of the Chase facility).
The Company's ratio of current assets to current liabilities at June 30,
1997 was 3.1:1.
In connection with the Canadian Acquisition on October 1, 1996, 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 $0.6 million through its expiration in October, 1997.
Chartwell de Mexico
Chartwell de Mexico, a joint venture in which the company owns a 50%
interest, intends to develop hotel facilities throughout Mexico.
Chartwell de Mexico is to be funded with up to $20.0 million in capital
contributions, of which half are to be contributed by the Company. On
September 18, 1996, the joint venture purchased a 30-year exclusive
master franchise agreement (the "Mexican Master License") from 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
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. Currently, Chartwell de Mexico has identified 60 sites in 15
cities, gained control of four sites, begun development on two sites and
construction on one site (a Hilton, at the Mexico City Airport). The
Company invested $1.3 million in Chartwell de Mexico in the first six
months of 1997.
U.S. Hilton Alliance
On January 20, 1997, the Company entered into a "Memorandum of
Understanding" with Hilton Hotels Corporation ("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 $200.0 million by the Company, of which
approximately $40.0 million is expected to be funded by the Company as
equity. The Company and Hilton are 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. Hilton is expected to guarantee up to 25% of all
construction financing. The Company has seven Hilton Garden Inns under
development.
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
11
<PAGE>
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 $20.0 million in capital improvements (of which
approximately $14.0 million has been spent through June 30, 1997), in
addition to amounts budgeted for regular capital improvements. 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 hotels and increase profitability.
Restructuring Program
The company is in the process of consolidating certain corporate
functions from its office in El Cajon, California to Calgary, Canada with
the intention of achieving cost savings and improving operating
efficiencies. Exit and severance cost of $0.8 million were incurred
during the six months ended June 30, 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.
Recent Developments
In June, 1997, the Board of Directors of the Company determined that in
light of current market conditions, it would in be in the best interests
of the Company's shareholders to consider various alternatives to enhance
shareholder value, including a possible sale of the Company. Chartwell
has hired the investment banking firms Bear, Stearns & Co., Inc. and
Chase Securities Inc. to help the Company consider strategic
alternatives, including a possible sale of the Company. Bear Stearns has
contacted various potential buyers of the Company on the Company's
behalf.
12
<PAGE>
Credit Facilities:
Revolving Credit Facility
The Company is a party to a credit facility (the "Credit Facility")
with the Chase Manhattan Bank and other banks named therein. The Credit
Facility provides that the Company may borrow up to $150.0 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$95.0 million of the Commitment is
available to be borrowed as a subfacility under the Credit Facility. As
of June 30, 1997, $77.9 million was drawn on the Credit Facility,
inclusive of $12.0 million of letters of credit. Pursuant to this
agreement, HFS has guaranteed $75.0 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.
The aggregate revolving credit commitment is scheduled to be reduced
by $7.5 million in 1998, $17.5 million in 1999, $20.0 million in 2000 and
2001, and $85.0 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.
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 $50.0 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; and (vi) prohibiting 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.
13
<PAGE>
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 $10.0 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 is
scheduled to expire on 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, as 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. All
borrowings fully amortize during their term. The borrowings under the B
of A Loan Agreement are secured by a $12.0 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. The Company primarily utilizes B of A loans to
finance capital improvements for the U.S. joint venture hotels.
Borrowings under the B of A Loan Agreement were approximately $7.1
million at June 30, 1997 of which approximately $3.8 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 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% 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 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 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.
14
<PAGE>
Notes Offering
The Company terminated its proposed $100.0 million offering of senior
notes due 2007 and incurred professional fee expenses in the amount of
$0.4 million which are recorded in general and administrative expense.
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
proceeds from the hedge of $1.1 million. These proceeds were recorded in
the first quarter 1997 as other liabilities pending the outcome of the
note offering. Since the note offering was terminated in the second
quarter of 1997, hedge income was recognized and recorded in Other
Income.
Cash Flows
Cash provided by operating activities was $7.9 million for the six
months ended June 30, 1997 compared to $1.6 million for the six months
ended June 30, 1996. The increase relates primarily to the Canadian
Acquisition and an increase in earnings in 1997 compared to 1996.
Cash used in investing activities was $15.8 million for the six months
ended June 30, 1997 compared to $95.9 million for the six months ended
June 30, 1996. This change relates primarily to the Travelodge
Acquisition, with no similar acquisition occurring in 1997.
Cash provided by financing activities was $41.6 million for the six
months ended June 30, 1997 compared to $57.4 million for the six months
ended June 30, 1996. In 1997, financing activities related to the sale of
stock through a Rights Offering, and two private placements. In 1996,
finance activities related to borrowings to finance the Travelodge
Acquisition.
Seasonality
Room occupancy and 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.
15
<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
On May 1, 1997, the Company held its annual meeting of stockholders, (the
"Annual Meeting"). Three Class III Directors of the Company, Henry R.
Silverman, Martin L. Edelman and Marc E. Leland, were elected 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 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.
Also at the Annual Meeting, a proposal to approve 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 ("CL Associates"), FSNL LLC and the Company, which consent would
allow certain affiliates of CL Associates to hold interests in
full-service, upper-end lodging properties, was approved. The holders of
4,075,348 shares of Common Stock voted in favor of the proposal and the
holders of 214,843 shares voted against the proposal. The holders of 86
shares of Common Stock abstained.
Also at the Annual Meeting, a proposal to approve the Company's 1994
Stock Option Plan, as amended in October, 1996 and March, 1997, was
approved. The holders of 9,798,084 shares of Common Stock voted in favor
of the proposal and the holders of 525,378 shares voted against the
proposal. The holders of 280 shares of Common Stock abstained.
Also at the Annual Meeting, the appointment of Deloitte and Touche LLP as
independent auditors of the Company for its fiscal year ending December
31, 1997 was ratified. The holders of 12,228,602 shares of Common Stock
voted in favor of the ratification and the holders of 1,968 shares voted
against the ratification. The holders of 243 shares of Common Stock
abstained.
Item 5. Other Information
Not Applicable.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
17
<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: August 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)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONDENSED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 51,237
<SECURITIES> 0
<RECEIVABLES> 14,407
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,769
<PP&E> 171,085
<DEPRECIATION> 0
<TOTAL-ASSETS> 278,049
<CURRENT-LIABILITIES> 23,040
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 166,948
<TOTAL-LIABILITY-AND-EQUITY> 278,049
<SALES> 55,470
<TOTAL-REVENUES> 60,078
<CGS> 0
<TOTAL-COSTS> 55,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,207
<INCOME-PRETAX> 3,267
<INCOME-TAX> 538
<INCOME-CONTINUING> 2,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,729
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
