UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-21583
Candlewood Hotel Company, Inc.
------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8621 E. 21st Street North, Suite 200
Wichita, Kansas 67206
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(Address of principal executive offices)
(316) 631-1300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 2001
---------------------------- --------------------------------
Common Stock, $.01 par value 9,025,000 shares
1
CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations for the three and
nine-months ended September 30, 2001 and September 30, 2000
(unaudited) 4
Consolidated Statements of Cash Flows for the nine-months
ended September 30, 2001 and September 30, 2000 (unaudited) 5
Notes to Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 29
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, stated value, and share data)
- ---------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 261,858 $ 264,896
Hotels under construction -- 32,282
Hotels held for sale -- --
Other costs 273 192
--------- ---------
262,131 297,370
Accumulated depreciation and amortization (22,658) (16,977)
--------- ---------
Net investment in hotels 239,473 280,393
Cash and cash equivalents (including $955 and $945 of restricted
cash, respectively) 23,863 21,834
Deposits 30,086 26,334
Accounts and other receivables 5,667 4,912
Investments in joint ventures 13,656 11,467
Other assets 15,410 14,369
--------- ---------
Total assets $ 328,155 $ 359,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 192,920 $ 214,575
Accounts payable and other accrued expenses 16,689 21,686
Deferred gain on sale of hotels 17,240 15,239
Other liabilities 732 892
--------- ---------
Total liabilities 227,581 252,392
Redeemable, convertible, cumulative preferred stock ("Series A"), $1,000
stated value, 65,000 shares authorized and outstanding, net of
unaccreted offering costs (redemption value $65,000) 61,583 61,339
Redeemable, convertible, cumulative preferred stock ("Series B"), $1,000
stated value, 42,000 shares authorized and outstanding, net of
unaccreted offering costs (redemption value $42,000) 39,525 39,350
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized,
9,025,000 issued and outstanding 90 90
Additional paid-in capital 34,851 35,270
Accumulated deficit (35,475) (29,132)
--------- ---------
Total stockholders' equity (534) 6,228
--------- ---------
Total liabilities and stockholders' equity $ 328,155 $ 359,309
========= =========
See accompanying notes to consolidated financial statements.
3
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except share and per share data)
For the Quarter Ended For the Nine-months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
REVENUES:
Hotel operations $ 33,493 $ 33,624 $ 98,046 $ 97,704
Other income 1,097 1,091 2,842 2,288
----------- ----------- ----------- -----------
Total hotel operating revenues 34,590 34,715 100,888 99,992
Proceeds from sales of hotels, net of deferred
gain of $64 and $0, respectively 28,850 -- 28,850 --
Deferred gain recognition on sales of hotels 357 550 1,049 1,587
----------- ----------- ----------- -----------
Total revenues 63,797 35,265 130,787 101,579
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 19,615 16,807 55,760 51,028
Corporate operating expenses 1,509 1,648 4,884 4,604
Rent expense on leased hotels 6,807 6,294 19,468 18,852
Hotel opening costs -- 44 230 157
Depreciation and amortization 3,203 2,714 8,833 7,877
----------- ----------- ----------- -----------
Total operating costs and expenses 31,134 27,507 89,175 82,518
----------- ----------- ----------- -----------
Cost of hotels sold 29,064 -- 29,064 --
----------- ----------- ----------- -----------
3,599 7,758 12,548 19,061
Interest income 219 335 600 834
Interest expense (4,343) (5,011) (13,467) (13,543)
----------- ----------- ----------- -----------
Income (loss) before preferred stock
dividends (525) 3,082 (319) 6,352
Preferred stock dividends (2,023) (2,017) (6,002) (6,008)
----------- ----------- ----------- -----------
Net income (loss) available to common
stockholders $ (2,548) $ 1,065 $ (6,321) $ 344
=========== =========== =========== ===========
Net income (loss) per share of common
stock - basic and diluted $ (0.28) $ 0.12 $ (0.70) $ 0.04
=========== =========== =========== ===========
Weighted average shares outstanding -
basic and diluted 9,025,000 9,025,000 9,025,000 9,025,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Nine-months Ended
---------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends $ (319) $ 6,352
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 8,833 7,877
(Income) loss from joint ventures 369 (130)
Deferred gain recognition on sales of hotels (1,049) (1,587)
Change in:
Deposits (3,752) --
Accounts receivable (755) (1,026)
Other assets (2,692) (3,497)
Accounts payable and other accrued expenses (4,905) (1,247)
Deferred gain on sale of hotels 3,050 --
Other liabilities (160) (170)
-------- --------
Net cash provided by (used in) operating activities (1,380) 6,572
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in hotels completed and under construction 26,030 (18,631)
Distributions from joint ventures 1,250 --
Purchase of intangible assets (53) (6)
-------- --------
Net cash provided by (used in) investing activities 27,227 (18,637)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 9,503 22,514
Payments on mortgages and notes payable (27,297) (1,343)
Preferred stock dividends (6,024) (6,030)
Other liabilities -- (148)
-------- --------
Net cash provided by (used in) financing activities (23,818) 14,993
-------- --------
Net increase in cash and cash equivalents 2,029 2,928
Cash and cash equivalents at beginning of period 21,834 18,624
-------- --------
Cash and cash equivalents at end of period $ 23,863 $ 21,552
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 14,818 $ 15,648
======== ========
See accompanying notes to consolidated financial statements.
5
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
The Company's current business of owning, operating, franchising,
managing and developing extended-stay hotels originated in November 1995,
with the formation of Candlewood Hotel Company, L.L.C., a Delaware limited
liability company ("Candlewood LLC"). The Company was incorporated in the
State of Delaware in August 1996. In November 1996, the Company succeeded to
the business of Candlewood LLC and completed an initial public offering of
its common stock (collectively, the "Reorganization").
The accompanying unaudited consolidated financial statements of
Candlewood Hotel Company, Inc. (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. The statements include the accounts of Candlewood
Hotel Company, Inc. and its subsidiaries, including Candlewood LLC, which
was the entity through which business was conducted until completion of the
Reorganization, and various wholly-owned LLCs which own or lease certain
hotels. Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements have been
omitted. The accompanying unaudited financial statements contain all
adjustments which the Company believes are necessary for the fair
presentation of the Company's financial position and results of operations.
The condensed consolidated balance sheet data at December 31, 2000, was
derived from the Company's audited financial statements. These interim
financial statements should be read in conjunction with the Company's 2000
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for the entire
year. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
All majority-owned subsidiaries have been consolidated into the
unaudited consolidated financial statements. All intercompany transactions
have been eliminated.
B. Investment in Hotels Completed and Under Construction
Hotels Completed
Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the Hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.
Hotels under Construction
Hotels under construction represents costs incurred in the acquisition
and development of Hotels. Such costs include land acquisition costs,
construction costs, capitalized interest and construction overhead. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to Hotels completed and except for hotels held for sale,
depreciated over the asset's useful life.
6
Other Costs
Other costs consist of acquisition costs. Acquisition costs are costs
related to the acquisition of property sites. These costs are added to the
costs of the Hotels under construction when the site is acquired and
construction at the Hotel begins. Costs associated with a particular site
are expensed to operations when the Company determines it will no longer
pursue the site.
C. Cash Equivalents
The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
D. Restricted Cash
Restricted cash represents cash that, under the terms of certain loan
agreements, has been set aside for pending land acquisitions and financing.
These funds are generally applied as payments upon the closing of escrow of
related acquisitions or released to the Company shortly thereafter.
E. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of the
Company's financial instruments, which include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, approximate fair
values due to the short maturities of such instruments. The fair value of
the Company's long-term debt, which approximates carrying value, is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. The Company was required to adopt the new Statement effective
January 1, 2001. The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company.
F. Intangible Assets
Intangible assets include ownership rights, title and interest in the
Candlewood Hotel name and logo and costs for patents and trademarks. These
assets are being amortized using the straight-line method over a period of
twenty years and are included in other assets on the accompanying
consolidated balance sheets.
7
G. Deferred Financing Costs
Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on the level yield basis.
H. Revenue Recognition
Room revenue and other revenues are recognized when earned. Recognition
of franchise fee revenue is deferred until all material services or
conditions relating to the respective franchise have been substantially
performed or satisfied by the Company. Such revenue when recognized is
included in other income on the accompanying consolidated statements of
operations.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized
when the title passes to the buyer, generally upon the receipt of proceeds.
Related profit is deferred due to required support obligations under the
operating lease agreements until operations meet stipulated levels. At such
time, the deferred gain is recognized in earnings over the remaining lease
term.
I. Income Taxes
The Company is taxed as a corporation as defined in subchapter "C" under
the Internal Revenue Code for federal and state income tax purposes and
accounts for any temporary differences under the asset and liability method.
J. Opening and Organization Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training hotel personnel, such as
travel, compensation and relocation. Organization costs relate to the
formation of the Company and Subsidiaries. Such costs are expensed as
incurred.
K. Investments in Joint Ventures
The Company has certain investments in joint ventures in which it owns
50% or less of the voting equity. These investments are accounted for under
the equity method of accounting. As of September 30, 2001, the Company had
$13.7 million invested in these joint ventures. The difference between the
amount at which the investment is carried in the Company's accounting
records and the amount of the underlying equity in the net assets of the
investee is amortized into income from joint ventures over the contractual
life of the respective joint venture entity. As of September 30, 2001, this
amount was approximately $4.5 million and is included in investments in
joint ventures on the accompanying consolidated balance sheets. For the
quarters ended September 30, 2001 and 2000, equity income (loss) in joint
ventures of $256,000 and $276,000, respectively, was recorded before
recognition of the carrying value difference of $345,000 and $94,000,
respectively. These amounts are included in other income on the accompanying
consolidated statements of operations. Additionally, during the nine-months
ended September 30, 2001, the Company received distributions from its joint
ventures of $1.2 million.
The Company has a 50% ownership in one joint venture that was formed in
1999 with Boston Capital Institutional Advisors and Mass Mutual. Hotel
operations for the joint venture commenced in April 2000, and as of
September 30, 2001, the Company operated eight hotels pursuant to this
agreement. Under the terms of the agreement, if the Company did not have at
least 10 hotels open or under construction by August 31, 2000, it may be
required to increase its capital contributions relating to existing joint
venture hotels by up to 5% of the estimated total costs. As of September 30,
2001, this amount was estimated at approximately $4.3 million. As of
September 30, 2001, Boston Capital
8
and Mass Mutual had not required the Company to increase its capital
contribution, although they may require the Company to do so in the future.
The Company is otherwise in compliance with the terms of the joint venture
agreement. The Company will continue to identify and evaluate potential
joint venture sites with these partners. The following is unaudited
condensed financial information for the joint venture as of September 30,
2001 and September 30, 2000:
----------------------------------------------------------------------------
As of September 30, 2001 2000
----------------------------------------------------------------------------
(In thousands)
Hotels completed and under construction $76,896 $63,345
Other assets 5,950 4,268
------- -------
Total assets $82,846 $67,613
======= =======
Total development liabilities $75,305 $58,488
Total equity 7,541 9,125
------- -------
Total liabilities and equity $82,846 $67,613
======= =======
----------------------------------------------------------------------------
Nine-months ended September 30, 2001 2000
----------------------------------------------------------------------------
(In thousands)
Total revenue $15,496 $ 4,727
Hotel operating expenses 7,520 1,853
Hotel opening costs 150 400
Depreciation and amortization 2,080 824
Interest expense 4,592 866
------- -------
Net pre-tax income $ 1,154 $ 784
======= =======
L. Segment Reporting
The Company has two reportable segments, the operation of hotels and the
sale of hotels. Information related to the Company's reportable segments for
the nine-months ended September 30, 2001 and September 30, 2000 is as
follows:
--------------------------------------------------------------------------------
Nine-months ended September 30, 2001
--------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ ------- --------
Revenues from external customers $100,888 $28,850 $129,738
Interest expense 13,467 -- 13,467
Depreciation expense 8,302 -- 8,302
Segment profit 17,358 1,049 18,407
Hotels assets:
Hotels completed and under construction 262,131 -- 262,131
Trade accounts receivable 2,397 2,855 5,252
9
--------------------------------------------------------------------------------
Nine-months ended September 30, 2000
--------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ ------- --------
Revenues from external customers $ 99,992 $ -- $ 99,992
Interest expense 13,543 -- 13,543
Depreciation expense 7,336 -- 7,336
Segment profit 22,776 1,587 24,363
Hotels assets:
Hotels completed and under construction 287,432 -- 287,432
Trade accounts receivable 2,978 2,392 5,370
Corporate expenses account for the difference between segment profit and
net income. These expenses are not specific to the Company's reportable
segments.
M. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from such estimates.
N. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation. Such reclassifications have no
effect on the operations or equity as originally presented.
Note 2: Mortgages and Notes Payable
As of September 30, 2001, the Company had entered into separate building
loan agreements with GMAC Commercial Mortgage Corporation for 30 of the
Company's hotels. Each agreement was entered into by a separate wholly-owned
subsidiary of the Company which owns the related property and hotel; however,
each loan is cross-defaulted. The terms of the building loan agreements provide
for advances, generally on a monthly basis, based on construction costs incurred
to date. As of September 30, 2001, all loans have been completely funded.
Interest on the loans is payable monthly, in arrears, beginning on the first day
of the first full calendar month after the date of each agreement. Interest
payments are calculated at a variable rate per annum, adjusted monthly, at rates
ranging from 30-day LIBOR plus 3.40% to 4.25% (6.98% to 9.25% as of September
30, 2001). Approximately $51.5 million of the Company's debt is tied to the
30-day LIBOR interest rate with a floor of 5.0%. As a result, the Company's
interest rate on this debt cannot go below 8.75% to 9.25%. The remaining $122.4
million of debt is not subject to any LIBOR floor. Based on the individual note,
principal payments commence either 12 months following the related hotel opening
or 18 months from the related loan closing. Depending on the terms of the
individual notes, principal payments are calculated based on a 25-year
amortization schedule using a 10% fixed interest rate or the prevailing interest
rate as defined in the note. As of September 30, 2001, all loans are in their
principal amortization period. Each note matures on the first day of the first
full calendar month after the fourth anniversary of loan closing. Maturity dates
currently range from December 2001 to September 2003, as amended, with most
loans providing for two 12-month extension periods. Amounts borrowed under the
building loan agreements are secured by the respective hotels, the land on which
they are constructed and certain funds deposited in demand deposit accounts
assigned to
10
GMAC and are guaranteed by the Company and certain other of the Company's
wholly-owned subsidiary LLCs. At September 30, 2001, $173.9 million was
outstanding under these 30 building loan agreements.
The Company has entered into a loan agreement with a financial institution
for financing on one of the Company's hotels. This agreement was entered into by
a wholly-owned subsidiary of the Company that owns the related hotel and land.
Interest on the loan is payable monthly, in arrears, beginning on the first full
calendar month after the date of the agreement. Interest payments are calculated
at a variable rate per annum, adjusted monthly, at a rate equal to the 10 year
Treasury Note plus 3.08% (8.30% as of September 30, 2001). Principal payments
commence the month following loan closing and are calculated based on a
22.5-year amortization schedule using the prevailing interest rate as defined in
the note. The note matures in June 2011. The loan amount borrowed is secured by
the hotel and the land on which the hotel is constructed, certain funds
deposited in a demand deposit account assigned to the bank, as well as a
guarantee by the Company and certain other of the Company's wholly-owned
subsidiary LLCs. At September 30, 2001, $4.0 million was outstanding under this
note.
The Company had $15.0 million in unsecured indebtedness outstanding as of
September 30, 2001, with Doubletree Corporation, a wholly-owned subsidiary of
Hilton Hotels Corporation ("Doubletree"), evidenced by two promissory notes.
Interest is payable quarterly at 15%, with principal of $12.5 million and $2.5
million payable at maturity in November 2001 and July 2002, respectively.
Certain amounts borrowed under the building loan agreements are further
partially guaranteed by Doubletree. Doubletree has agreed to guarantee the
portions of certain loans made to the Company and its franchisees. The guarantee
applies to loans that exceed 56.25% of the hotel cost but not in excess of 80%
of such costs of hotels that the Company manages and 75% of the costs of hotels
not managed by the Company. It is anticipated that the guarantee will remain in
effect until the loan has been repaid. Upon an event of default, Doubletree will
have the option to meet any shortfalls or pay down the loan principal. In
exchange for the guarantee, Doubletree will receive a 5% interest in the cash
flows of the hotels and a 0.25-0.50% fee on the total loan amount outstanding.
In the event a loan is refinanced, Doubletree will receive a fee equal to 5% of
the increase in proceeds attributable to the refinancing. In the event the loan
is extinguished through the sale of the underlying property, Doubletree will
receive as a fee 5% of the gain on sale resulting from the transaction.
The Company intends to extend the maturity dates of all notes coming due in
2001, under current terms of the notes, or refinance such notes in the ordinary
course of business. In regards to the Doubletree debt, the first installment of
$12.5 million matured on November 11, 2001. The Company did not pay that
principal amount. The Company is in discussions with Doubletree regarding an
extension on this debt. As consideration for securing an extension, the Company
may be required to pay down a portion of the debt. The Company is unable to
assure that it will be able to extend the maturity date of the Doubletree debt
or that other financing will be available to the Company on acceptable terms, or
at all.
Note 3: Redeemable, Convertible, Cumulative Preferred Stock
General
The Company has authorized "blank check" preferred stock in the amount of
5,000,000 shares at $.01 par value per share. The stock may be issued with such
voting powers and such designations, preferences, privileges and other special
rights as designated by the Board of Directors. At the date of issuance of any
of the preferred stock, the Company determines whether the stock is redeemable
and the appropriate classification of the stock on the balance sheet. At
September 30, 2001, as more fully described below, the Company had 65,000 and
42,000 shares, respectively, of Series A and Series B redeemable preferred stock
issued and outstanding.
The carrying amount of the redeemable preferred stock is being increased by
periodic accretions using the interest method, so that the carrying amount will
equal the mandatory redemption amount at the
11
mandatory redemption date. For the quarter ended September 30, 2001, $419,000
was recorded as an increase to the carrying value of the preferred stock.
Series A Preferred Stock Offering
In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of "Series A" Redeemable, Convertible, Cumulative Preferred Stock
at an offering price of $1,000 per share ("Stated Value"). The net proceeds to
the Company were approximately $61.3 million, after deducting commissions and
expenses of $3.7 million.
The Preferred Stock accumulates dividends at a rate of 7.5% of the Stated
Value, per annum, payable in cash initially on August 31, 1998, and thereafter,
quarterly, including up to the date of conversion, when and if declared by the
board of directors.
Series A Preferred Stockholders have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.13 per
share. Subsequent to August 31, 1999, the Preferred Stock is redeemable in cash,
in whole or part, at the option of the Company at 200% of the Stated Value. At
September 30, 2004, the Preferred Stock is required to be redeemed under a
mandatory redemption clause, at the Stated Value plus unpaid dividends. Pursuant
to the anti-dilution protection provisions of the certificate of designation for
the Series A Preferred Stock, the conversion price (i.e. the price at which the
Preferred Stock may convert into Common Stock) was reduced from $9.50 per share
to $9.13 per share to reflect the grant of new employee stock options.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders' agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Series B Preferred Stock Offering
On August 3, 1998, the Company completed the private placement of $42.0
million of its "Series B" Redeemable, Convertible, Cumulative Preferred Stock
and warrants to purchase its common stock. In total, 42,000 shares of Series B
Preferred Stock were issued at an offering price of $1,000 per share ("Stated
Value"). Preferred stockholders were also issued, at no additional cost,
warrants to purchase 336,000 shares of common stock at $12.00 per share. These
warrants expire on July 13, 2005. The net proceeds to the Company were
approximately $39.4 million, after deducting commissions and expenses of $2.6
million.
The Series B Preferred Stock accumulates dividends at a rate of 7.5% of the
Stated Value, per annum, payable in cash initially on August 31, 1998, and
thereafter, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Series B Preferred Stockholders have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.13 per
share. Subsequent to September 30, 1999, the Series B Preferred Stock is
redeemable in cash, in whole or part, at the option of the Company at 200% of
the Stated Value. At September 30, 2004, the Series B Preferred Stock is
required to be redeemed under a mandatory redemption clause, at the Stated Value
plus unpaid dividends. Pursuant to the anti-dilution protection provisions of
the certificate of designation for the Series B Preferred Stock, the conversion
price (i.e. the price at which the Preferred Stock may convert into Common
Stock) was reduced from $9.50 per share to $9.13 per share to reflect the grant
of new employee stock options.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders' agreement.
Each Preferred Stockholder will vote together with the
12
Common Stockholders as a single class, on an as-converted basis, on all matters
to be approved by the Common Stockholders. For certain actions, approval of
two-thirds of the shares owned by Preferred Stockholders, as a single class, is
required.
Note 4: Sale-Leaseback
In November, 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell 15 hotels for a total purchase price of $100.0
million, and to lease the hotels back from the buyer under a non-cancelable
operating lease. The Company completed the sale and leaseback of five hotels in
December 1997, nine hotels in the first quarter of 1998, and one hotel in the
third quarter of 1998. In December 1998, the Company agreed to sell two
additional hotels to HPT under the terms of the 1997 transaction. The total
adjusted purchase price was $118.5 million. These hotels were sold in January
1999.
In May 1998, the Company announced a second agreement with HPT to sell and
leaseback 17 hotels for a total purchase price of $142.4 million, as amended.
The Company completed the sale and leaseback of four hotels in the third quarter
of 1998, six hotels in the third quarter of 1998, six hotels in the fourth
quarter of 1998, and one hotel in the first quarter of 1999.
In July 2001, the Company entered into another agreement with HPT to sell
and leaseback two hotels for a total purchase price of $28.9 million. The
Company completed the sale and leaseback of these hotels in August 2001. As a
result of the transaction, the Company recognized a loss of $214,000 on one
hotel in the current quarter and deferred the $64,000 gain on the other hotel.
In total, the Company has sold $289.8 million of hotels with a total
deferred gain of $19.6 million at the date the sales were completed. Such gain
has been deferred and is being recognized in income as noted in the Company's
accounting policies (Note 1). The Company recognized approximately $1.0 million
and $1.6 million of deferred gain in income in the nine-months ended September
30, 2001 and 2000, respectively. The Company has recognized $5.1 million of
deferred gain in income as of September 30, 2001. Sale proceeds, net of the
deferred gain and related cost of the Hotels sold are presented on the statement
of operations.
Terms of the sales are all cash at the close of escrow for hotels sold. The
leases call for monthly lease payments and require the Company to place a
security deposit with HPT for each property equal to one year's lease payments.
The security deposit will be released to the Company at the end of the lease
term.
The agreements provide for the Company to guarantee the payment of rent
until defined operating cash flows exceed the annual lease payments by 150% for
12 consecutive months. In connection with this obligation, the Company was
required to place a 5% deposit with HPT, upon the initial closing of each
transaction. The deposit will be refunded to the Company when cash flows from
operations exceed required lease payments by 140% of defined cash flows from
operations. The deposit was charged to cost of sales as the hotels were sold.
Upon attainment of the required coverage ratios, the portion of the deposit
refunded to the Company will be recognized in income beginning in the period
such funds, if any, are received. During the quarter ended September 30, 2001,
the Company received approximately $3.1 million previously paid as a deposit.
The amount was recorded as an increase to the deferred gain and is being
recognized into income over the remaining lease term.
Note 5: Commitments
During the quarter ended September 30, 2001, the Company re-negotiated its
operating leases to combine the separate leases entered into through the
sale-leaseback transactions. As a result, the lease term was extended with a
remaining lease term of 15 years expiring on December 2016. The monthly lease
payments were not affected by the new lease terms.
13
Note 6: Effective New Accounting Pronouncements
On June 29, 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations." Statement
141 eliminates the pooling-of-interest method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. The requirements of Statement 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 20, 2001. Additionally, Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" was issued. Under Statement 142,
goodwill and other indefinite lived intangibles are no longer amortized, but are
periodically reviewed for impairment. Intangibles with definite lives are
amortized over their useful lives. Statement 142 is effective for years
beginning after December 15, 2001. Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was
also issued for years beginning after December 15, 2001. Statement 144 revises
the measurement and recognition of impairment, specifically on assets held for
disposal.
The Company does not believe the issuance of either of these statements will
have a material impact on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Financial Statements and notes thereto.
GENERAL
Candlewood owns, operates, franchises, manages and develops Candlewood
Suites hotels to serve mid-market extended-stay business travelers. At the end
of 2000, we had a total of 72 company-operated hotels (which is comprised of
owned, leased and joint venture hotels), two managed hotels and 17 franchised
hotels located in 32 states. At September 30, 2001, we had a total of 76
company-operated hotels, two managed hotels and 26 franchised hotels located in
34 states. In addition, at September 30, 2001, we had three franchise hotels
under construction.
We classify our hotel development activities into five categories: owned,
leased, managed, joint venture and franchised. Owned hotels are those hotels
that we have independently developed and own. Leased hotels are those hotels
that we previously sold and currently lease from a third party. Managed hotels
are those hotels that we manage for a third party. Joint venture hotels are
those hotels that we developed and own with our joint venture partners.
Franchised hotels are those hotels developed and owned by third parties that
utilize one of our franchise brands, Candlewood Suites or Cambridge Suites by
Candlewood. The following tables set forth our property portfolio and hotel
development, respectively, at September 30, 2001 and September 30, 2000:
14
Number of Hotels Number of Rooms
September 30, September 30,
---------------- ---------------
2001 2000 Increase 2001 2000 Increase
---- ---- -------- ------ ------ --------
Owned 31 32 (1) 3,786 3,968 (182)
Leased 36 34 2 4,292 3,893 399
Managed 2 2 -- 179 179 --
Joint Venture 9 5 4 1,159 636 523
Franchised 26 15 11 2,637 1,652 985
---- ---- ----- ------ ------ ------
Total 104 88 16 12,053 10,328 1,725
September 30,
---------------- Increase/
2001 2000 (Decrease)
---- ---- ----------
Open Hotels
Owned 31 32 (1)
Leased 36 34 2
Managed 2 2 --
Joint Venture 9 5 4
Franchised 26 15 11
---- ---- ------
Total 104 88 16
Under Construction
Owned -- 1 (1)
Leased -- -- --
Managed -- -- --
Joint Venture -- 4 (4)
Franchised 3 6 (3)
---- ---- ------
Total 3 11 (8)
In the quarter ended September 30, 2001, we opened five franchised hotels in
the following locations:
- Wichita, Kansas
- Indianapolis, Indiana
- Hopewell/Petersburg, Virginia
- Brunswick, Georgia
- Rogers, Arkansas
Our consolidated statements of operations includes revenues and expenses for
only those hotels which are operated by consolidated subsidiaries of Candlewood
Hotel Company, Inc. (owned and leased hotels). We refer to these hotels
collectively as our corporate hotels. Revenues and expenses from franchise
hotels and unconsolidated subsidiary hotels (joint venture hotels accounted for
under the equity method of accounting) are not included in our hotel operations
revenues or expenses. Franchise fees, royalty fees, management fees, equity
income from investment in joint ventures and other fees received from franchise
and joint venture hotels are included in other income in our consolidated
statements of operations. As of September 30, 2001, we managed two non-joint
venture hotels. Our management fees are based on a percentage of gross revenues,
operating profits and cash flow.
We believe that a significant element of our future growth and expansion
will be provided through the franchising of hotels. At September 30, 2001, we
had 23 signed franchise agreements for hotels not yet under construction. These
contracts provide for a variety of conditions and may never result in the
opening of a hotel. Additionally, we are actively marketing management contracts
to existing and prospective franchisees to utilize our management experience and
expertise to manage their hotels.
15
Our results of operations are measured by our revenue per available room
(RevPAR), which is a factor of occupancy and room rate. We intend to focus on
increasing occupancy levels at each of our newly opened hotels until such time
as the occupancy levels reach stabilization. Once occupancy levels stabilize at
a corporate hotel, we review the daily pricing rates of that hotel. We believe
that this practice is a prevailing standard in the U.S. lodging industry.
In three separate sale-leaseback transactions, we have sold and leased back
certain of our hotels from Hospitality Properties Trust, or HPT, a real estate
investment trust. The provisions of the transactions allow us to operate, as
lessee, over a defined lease term, hotels that we developed. The transactions
were closed in stages, beginning in December 1997 and ending in August 2001. The
results from operations for 2001 and 2000 reflect the transactions. As a result
of the sale-leaseback transactions, we have recorded rent expense on the hotels
leased back from HPT. As the hotels are leased and not owned, the financial
statements do not reflect any depreciation and amortization or interest expense
for these hotels after the date of sale. The proceeds from the sale of the
hotels is recorded net of the deferred gain on sale. Under generally accepted
accounting principles, the gain must be deferred and not recognized into
earnings until certain operating performance levels are achieved. See Note 4 to
Consolidated Financial Statements. We will continue to evaluate the potential
for future sale-leaseback transactions.
In October 2001, we announced a layoff of approximately 10% of our corporate
office personnel and restructured our operations field administration
organization, which included a reduction in the number of multi-unit operations
personnel. These layoffs are primarily in response to the slowing economy and
the decline in business travel following the World Trade Center attacks. We have
taken these steps, in addition to others, to preserve our financial resources
and our competitive advantage in the marketplace. As a result of the severance
packages and other costs associated with these layoffs, we do not expect to see
any reduction in hotel operating and corporate operating expenses until the
first quarter of 2002.
RESULTS OF OPERATIONS
Comparison of fiscal quarters ended September 30, 2001 and September 30, 2000
Hotel Operations
Hotel Operations Revenue
For the quarter ended September 30, 2001, hotel operations revenue for
corporate hotels totaled $33.5 million, compared to $33.6 million for the
quarter ended September 30, 2000. Hotel operations revenue includes room revenue
and other revenue (e.g., guest telephone and sales of products from the
Candlewood cupboard). The slight decrease in revenue is primarily due to lower
hotel room rates, the reduction in business travel experienced as a result of
the slowing economy and to a lesser extent the impact of the World Trade Center
attacks. As a result, we expect our revenue to decline during the fourth quarter
of 2001. The decrease in revenue was partially offset by the impact of the
opening of the Jersey City, New Jersey corporate hotel in April 2001. The
following table sets forth the operating statistics for corporate hotels for the
three months ended September 30, 2001 and September 30, 2000:
16
For the three-months ended
September 30,
--------------------------
2001 2000 Change
------ ------ ------
Occupancy 76.5% 77.4% (0.9)%
Average Daily Rate $57.10 $58.09 $(0.99)
Revenue per available room $43.66 $44.99 $(1.33)
Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 76.5% for the quarter ended September 30, 2001, compared to
77.4% for the quarter ended September 30, 2000. Occupancy in the third quarter
continued to be negatively influenced by the effect of the slowing economy on
our customers' businesses and to a lesser extent the impact of the World Trade
Center attacks on business travel. Overall, the decrease in occupancy was
experienced in both short and long-term stays, but was particularly prevalent in
our short-term stays, which we consider to be stays of six nights or less. We
cannot predict when or whether current occupancy levels and room rates can be
maintained or improved.
The average daily room rate for corporate hotels for the quarter ended
September 30, 2001 was $57.10, compared to $58.09 for the quarter ended
September 30, 2000. Average daily room rates are determined by dividing room
revenue by the number of guestrooms occupied on a daily basis for the applicable
period. The decrease in average daily rate was primarily due to a reduction in
the number of short-term stays (six nights or less) which are charged at a
higher daily rate. This was partially offset by the opening of the Jersey City
hotel, which has a significantly higher room rate than other corporate hotels.
Other factors that influence average daily room rates include lower rates for
long-term stays (seven or more nights), higher rates for our one-bedroom suites
and higher rates in certain hotel locations. It is our practice to continuously
review individual markets to assess the impact of competition on local supply
and demand and establish room rates that balance occupancy to produce optimal
revenue.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $43.66 for the quarter ended September
30, 2001, compared to $44.99 for the quarter ended September 30, 2000. The
decrease in revenue per available room was primarily due to the decrease in the
average daily rate.
Future occupancy and room rates may be impacted by a number of factors
including:
- the number and geographic location of new hotels;
- the season in which new hotels open;
- competition;
- market acceptance of our hotels;
- general economic conditions;
- unexpected events, such as the World Trade Center attacks; and
- the profitability of the businesses' of our core customers.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended September 30, 2001 totaled
$19.6 million, compared to $16.8 million for the quarter ended September 30,
2000. Hotel operating expenses consist of all expenses directly applicable to
the operation of the hotels, including corporate allocations for various
operating, marketing and accounting functions. The largest portion of hotel
operating expenses consisted of salaries, wages and fringe benefits. The balance
of hotel operating expenses was comprised of normal operating items, such as
utilities, property taxes, insurance, supplies, promotional materials,
maintenance items and similar expenses. The increase in hotel operating expenses
is largely due to increased wages, increased promotional cost associated with
our Amazon.com web-site sales promotion, operating costs for the new Jersey City
hotel, increased property taxes, higher utility costs and costs related to the
17
restructuring of the operations field administration team. In an effort to
improve product consistency and revenue management, effective January 1, 2001,
we restructured our operations field administration to include several
operations area coaches and area sales directors in addition to the regional
operations directors. In response to slowing economy and the decline in business
travel following the World Trade Center attacks, in October 2001, we
restructured our operations field administration organization, which included a
reduction in the number of multi-unit operations personnel. As a result of the
severance packages and other costs associated with this layoff, we do not expect
to see any reduction in hotel operating expenses until the first quarter of
2002.
Rent Expense on Leased Hotels
Rent expense on the 36 leased hotels for the quarter ended September 30,
2001 was $6.8 million, compared to $6.3 million for the 34 leased hotels for the
quarter ended September 30, 2000. Rent expense is comprised of two elements, a
base fixed rent and a contingent rent. Contingent rent expense is a variable
expense based on a property achieving improved year over year revenue growth and
is calculated on an individual property basis. The increase in rent expense is
due to the sale and leaseback of two additional hotels in the third quarter of
2001.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and include
costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. There were no opening costs for the quarter ended
September 30, 2001, as we had no hotel openings or projects under construction
during the quarter. Opening costs for the quarter ended September 30, 2000
totaled $44,000.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations (e.g.,
building, furniture, fixtures and equipment) for the quarter ended September 30,
2001 totaled $3.0 million, compared to $2.5 million for the quarter ended
September 30, 2000. This increase in depreciation and amortization expense was
largely due to the opening of the Jersey City, New Jersey hotel in April 2001.
This hotel was built in a higher priced, primary market where construction costs
are higher. In addition, leasehold improvement depreciation expense was higher
due to increased capital expenditures at our leased hotels, and software
amortization expense increased as a result of the full quarter impact of the
field property management system purchased in the third quarter of 2000. For
both 2001 and 2000, depreciation and amortization expense does not reflect any
expense for properties sold in the sale leaseback transactions. In accordance
with generally accepted accounting principles, we do not depreciate assets held
for sale. As of September 30, 2001 and September 30, 2000, we had no assets
which were held for sale. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years.
Corporate Operations
Other Income
Other income for the quarter ended September 30, 2001 totaled $1.1 million,
unchanged from the quarter ended September 30, 2000. Other income consists
primarily of royalty fees (revenue-based fees received over the life of a
franchise agreement), franchise fees (a one-time fee received upon execution of
a franchise agreement), management fees and joint venture equity income. Equity
income represents our share of the profits of unconsolidated joint venture
hotels. Franchise fee income (including application and royalty fees) for the
quarter ended September 30, 2001 totaled $836,000, compared to $639,000 for the
quarter ended September 30, 2000. The growth in franchise fee income is due to
the increase in the number of franchise hotels in operation, and the increased
revenue generated by those franchise hotels that had completed or were near
completion of their ramp-up phase. We had 26 franchised hotels
18
(excluding the Boston Capital joint venture hotels and the East Lansing,
Michigan joint venture hotel) open as of September 30, 2001, compared to 15 at
September 30, 2000. The eight Boston Capital joint venture hotels and the East
Lansing, Michigan joint venture hotel (classified as joint venture hotels in our
property table) are Candlewood franchise hotels that we manage. As a result, we
receive royalty fees, management fees and equity income from these hotels. The
first of these hotels did not open until April 2000. Management fee income for
the quarter ended September 30, 2001 totaled $350,000, compared to $269,000 for
the quarter ended September 30, 2000. The increase in management fee income was
due to the management fees received from the eight Boston Capital joint venture
hotels and the East Lansing, Michigan joint venture hotel. For the quarter ended
September 30, 2001, we recorded a loss of $88,000 on our joint venture hotels,
compared to $183,000 of income for the quarter ended September 30, 2000. This
loss is due to the amortization of the difference between the amount at which
the Boston Capital joint venture investment is carried on our accounting records
and the amount of the underlying equity in the net assets of the joint venture.
We sold two hotels to HPT during the quarter ended September 30, 2001 and
recognized $357,000 of the total deferred gain on hotels sold. For the quarter
ended September 30, 2000, we recognized $550,000 of the deferred gain on hotels
sold.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended September 30, 2001
totaled $1.5 million, compared to $1.6 million for the quarter ended September
30, 2000, and included all expenses not directly related to the development or
operations of specific hotels. The largest portion of corporate operating
expenses consisted of salaries, wages and fringe benefits. The balance of other
corporate operating expenses was comprised of normal operating costs, such as
travel, office space lease, professional fees, utilities and similar expenses.
The decrease in 2001 corporate operating expenses was primarily due to the
reduction in corporate incentive bonus costs. This was partially offset by
higher salaries and wages, a change in the capitalization of internal hotel
development costs, and the accounting treatment afforded certain internal
personnel costs related to the development and installation of the new field
property management system in 2000. Beginning in June 2001, in response to the
limited amount of hotel development activity we have experienced in 2001, we
ceased capitalization of internal real estate development costs. As for the
field property management system, pursuant to accounting Statement of Position
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use," certain specific internal personnel costs were capitalized as
part of the system. This project was completed in the third quarter of 2000 and
the costs of these personnel have since been recorded as an expense.
In response to slowing economy and the decline in business travel following
the World Trade Center attacks, in October 2001, we announced a layoff of
approximately 10% of our corporate office personnel. As a result of the
severance packages and other costs associated with this layoff, we do not expect
to see any reduction in corporate operating expenses until the first quarter of
2002.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
quarter ended September 30, 2001 totaled $182,000, compared to $179,000 for the
quarter ended September 30, 2000. Depreciation and amortization reflects
depreciation of the leasehold improvements and furnishings in our corporate
office, and depreciation of financial system hardware, software and peripheral
equipment. Depreciation expense is calculated using the straight-line method
over the estimated useful lives of the respective assets, ranging from three to
twenty years. Amortization expense for intangible assets (e.g., operating rights
and trademarks) is computed using the straight-line method over a period of
twenty years.
Interest Income and Expense
19
Interest income for the quarter ended September 30, 2001 was $219,000,
compared to $335,000 for the quarter ended September 30, 2000. Interest income
for the quarters ended September 30, 2001 resulted primarily from the temporary
investment of cash provided by operations and proceeds from the third quarter
2001 sale-leaseback transaction. For the quarter ended September 30, 2000,
interest income resulted primarily from the temporary investment of cash
provided by operations. The decrease for the quarter ended September 30, 2001 is
largely due to lower cash levels and lower investment rate yields.
Interest expense, net of capitalized interest, for the quarter ended
September 30, 2001 was $4.3 million, compared to $5.0 million for the quarter
ended September 30, 2000. The decrease in interest expense is due to lower LIBOR
interest rates and lower debt levels during the third quarter ended September
30, 2001, partially offset by a reduction in the amount of interest capitalized
to development projects. We had fewer projects under construction in the third
quarter of 2001, thereby reducing the amount of interest capitalized.
Sales of Hotels
We have sold to and leased back from HPT 36 hotels, two of which were sold
during the third quarter 2001. One of these hotels was sold at a loss of
$214,000, which we have recorded in the quarter ended September 30, 2001. The
$64,000 gain from the sale of the other hotel has been deferred and will be
recognized over the remaining lease term. In total, we have recorded $19.6
million of deferred gain on the sales, a portion of which was been recorded in
income in the quarters ended September 30, 2001 and September 30, 2000. The
following table sets forth the sales proceeds, rent expense and earnings related
to our leased hotels for the quarters ended September 30, 2001 and September 30,
2000 (in thousands):
For the three-months ended
September 30,
--------------------------
2001 2000
------- ------
Proceeds from sale of hotels, net
of deferred gain of $64 and 0,
respectively $28,850 $ --
Cost of hotels sold $29,064 $ --
Rent expense on leased hotels $ 6,807 $6,294
Gain recognized into earnings $ 357 $ 550
20
Comparison of nine-months ended September 30, 2001 and September 30, 2000
Hotel Operations
Hotel Operations Revenue
For the nine-months ended September 30, 2001, hotel operations revenue
totaled $98.0 million, compared to $97.7 million for the nine-months ended
September 30, 2000. The increase in revenue reflects the increased revenue
generated in 2001 due to the opening of the Jersey City, New Jersey hotel. This
was partially offset by a reduction in overall hotel performance as a result of
the slowing economy and the slowdown in business travel experienced in the wake
of the World Trade Center attacks. The following table sets forth the operating
statistics for corporate hotels for the nine-months ended September 30, 2001 and
September 30, 2000:
For the nine-months ended
September 30,
---------------------
2001 2000 Change
------ ------ ------
Occupancy 74.4% 77.7% (3.3)%
Average Daily Rate $58.60 $57.09 $ 1.51
Revenue per available room $43.57 $44.36 $(0.79)
The average occupancy rate for corporate hotels for the nine-months ended
September 30, 2001 was 74.4%, compared to 77.7% for the nine-months ended
September 30, 2000. The decrease in occupancy was a result of the slowing
economy and the effect it has had on our customers' businesses.
The average daily room rate for corporate hotels for the nine-months ended
September 30, 2001 was $58.60, compared to $57.09 for the nine-months ended
September 30, 2000. The increase in average daily rate was primarily due to the
opening of the Jersey City hotel in April 2001. Revenue per available room was
$43.57 for the nine-months ended September 30, 2001, compared to $44.36 for the
nine-months ended September 30, 2000. The decrease in revenue per available room
is primarily due to the lower average occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the nine-months ended September 30, 2001
totaled $55.8 million, compared to $51.0 million for the nine-months ended
September 30, 2000. The increase in hotel operating expenses was due to
increased wages, operating costs for the new hotel in Jersey City, higher
maintenance and utility costs, increased promotional costs related to the
Amazon.com web-site sales promotion, costs related to the restructuring of the
operations field administration team and increased property taxes.
Rent Expense on Leased Hotels
For the nine-months ended September 30, 2001, we incurred rent expense of
$19.5 million for leased hotels, compared to $18.9 million for the nine-months
ended September 30, 2000. The increase in rent expense in 2001 is due to the
sale and leaseback of two additional hotels in the third quarter 2001 and an
increase in contingent rent expense incurred on certain properties.
Hotel Opening Costs
Opening costs for the nine-months ended September 30, 2001 totaled $230,000,
compared to $157,000 for the nine-months ended September 30, 2000. The increase
in opening costs is a result of the opening of the Jersey City, New Jersey hotel
in April 2001, which is located in a higher-priced, primary market.
21
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations for the
nine-months ended September 30, 2001 totaled $8.3 million, compared to $7.3
million for the nine-months ended September 30, 2000. The increase in
depreciation and amortization expense was primarily a result of the opening of
the Jersey City, New Jersey hotel. In addition, leasehold depreciation was
higher due to increased capital expenditures at our leased hotels, and software
amortization expense increased as a result of the full nine-month impact of the
field property management system purchased in the third quarter of 2000.
Corporate Operations
Other Income
Other income for the nine-months ended September 30, 2001 totaled $2.8
million, compared to $2.3 million for the nine-months ended September 30, 2000.
Franchise fee income (including application and royalty fees) for the
nine-months ended September 30, 2001 totaled $2.2 million, compared to $1.7
million for the nine-months ended September 30, 2000. The growth in franchise
fee income is due to the increase in the number of franchise hotels in
operation, and the increased revenue generated by those franchise hotels that
had completed or were near completion of their ramp-up phase. Management fee
income for the nine-months ended September 30, 2001 totaled $985,000, compared
to $437,000 for the nine-months ended September 30, 2000. The increase in
management fee income was due to the management fees received from the eight
Boston Capital joint venture hotels and the East Lansing, Michigan joint venture
hotel. For the nine-months ended September 30, 2001, we recorded a loss of
$369,000 on our joint venture hotels, compared to $129,000 of income for the
nine-months ended September 30, 2000. This loss is due to the amortization of
the difference between the amount at which the Boston Capital joint venture
investment is carried on our accounting records and the amount of the underlying
equity in the net assets of the joint venture.
We sold two hotels to HPT during the nine-months ended September 30, 2001
and recognized $1.0 of the total deferred gain on hotels sold. For the
nine-months ended September 30, 2000, we recognized $1.6 million of the deferred
gain on hotels sold.
Corporate Operating Expenses
Corporate operating expenses for the nine-months ended September 30, 2001
totaled $4.9 million, compared to $4.6 million for the nine-months ended
September 30, 2000. Corporate operating expenses increased in 2001 due to
increased wages and a reduction in capitalized development costs. These
increases were offset by a reduction in incentive bonus and travel costs.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
nine-months ended September 30, 2001 totaled $530,000, compared to $542,000 for
the nine-months ended September 30, 2000.
Interest Income and Expense
Interest income for the nine-months ended September 30, 2001 was $600,000,
compared to $834,000 for the nine-months ended September 30, 2000. Interest
income for the nine-month period ended September 30, 2001 resulted primarily
from the temporary investment of cash provided by operations and the third
quarter 2001 sale-leaseback transaction. For the nine-month period ended
September 30, 2000, interest income resulted primarily from the temporary
investment of cash provided by operations. The decrease for the nine-months
ended September 30, 2001 is largely due to lower investment rate yields.
22
Interest expense, net of capitalized interest, for the nine-months ended
September 30, 2001 was $13.5 million, unchanged from the nine-months ended
September 30, 2000. During the nine-months ended September 30, 2001 we
experienced higher debt levels than in the same period in 2000 and had a
reduction in the amount of interest capitalized, as a result of having fewer
projects under construction. These factors were offset in entirety by lower
LIBOR interest rates.
Sales of Hotels
We have sold to and leased back from HPT 36 hotels, two of which were sold
during the nine-months ended September 30, 2001. One of these hotels was sold at
a loss of $214,000, which we have recorded in the nine-months ended September
30, 2001. The $64,000 gain from the sale of the other hotel has been deferred
and will be recognized over the remaining lease term. In total, we have recorded
a deferred gain on sales of hotels of $19.6 million, a portion of which has been
recorded in income in the nine-months ended September 30, 2001 and September 30,
2000. The following table sets forth the rent expense and earnings related to
our leased hotels for the nine-month periods ended September 30, 2001 and
September 30, 2000 (in thousands):
For the nine-months ended
September 30,
-------------------------
2001 2000
------- -------
Proceeds from sale of hotels, net
of deferred gain of $64 and $0,
respectively $28,850 $ --
Cost of hotels sold $29,064 $ --
Rent expense on leased hotels $19,468 $18,852
Gain recognized into earnings $ 1,049 $ 1,587
Liquidity and Capital Resources
We had cash and cash equivalents of $23.9 million at September 30, 2001,
compared to $21.6 million at September 30, 2000. Net cash used in operating
activities totaled $1.4 million for the nine-months ended September 30, 2001,
compared to $6.6 million of cash provided by operating activities for the
nine-months ended September 30, 2000. Uses of cash for the nine-months ended
September 30, 2001 consisted of a decrease of $4.9 million in accounts payable
and other accrued expenses, an increase in sale-leaseback deposits of $3.8
million, a $2.7 million increase in other assets and $1.0 million of deferred
gain recognition on sale of hotels. The increase in other assets is largely due
to the funding of the furniture, fixtures and equipment ("FF&E") cash reserve
accounts. These accounts are stipulated in the lending agreements and the cash
reserved is for replacement and refurbishment of hotel furniture and fixtures.
Sources of cash for the nine-months ended September 30, 2001 consisted primarily
of $8.8 million of non-cash depreciation and amortization expense and $3.1
million of deferred gain on sale of hotels. For the nine-months ended September
30, 2000, uses of cash consisted primarily of a $3.5 million increase in other
assets (primarily FF&E) and a $1.6 million of deferred gain recognition on sale
of hotels. Other uses of cash included a $1.2 million decrease in accounts
payable and other accrued expenses and a $1.0 million increase in accounts
receivable. The primary sources of cash for the nine-months ended September 30,
2000 were $6.4 million of net income from operations and $7.9 million of
non-cash depreciation and amortization expense.
Net cash provided by investing activities for the nine-months ended
September 30, 2001 totaled $27.2 million, compared to $18.6 million of net cash
used in investing activities for the nine-months ended September 30, 2000.
Sources of cash for the nine-months ended September 30, 2001 consisted of
proceeds from the sale of hotels and cash distributions from the joint ventures.
Cash used in investing activities for the nine-months ended September 30, 2001
consisted of expenditures for property and equipment and investment in joint
venture hotels. For the nine-months ended September 30, 2000, net cash used in
investing activities consisted of expenditures for property and equipment in
connection with
23
the completed hotels, the construction of new hotels, investment in joint
venture hotels, and acquisition costs for potential development sites.
For the nine-months ended September 30, 2001, net cash used in financing
activities was $23.8 million, compared to $15.0 million of net cash provided by
financing activities for the nine-months ended September 30, 2000. Net cash used
in financing activities during the nine-months ended September 30, 2001 included
$27.3 million of principal payments on notes payable and $6.0 million of
preferred stock dividend payments, partially offset by $9.5 million of proceeds
from mortgages and notes payable. The principal payments on notes payable
related primarily to the payoff of loans associated with the sale of the two
hotels to HPT and payments made to extend or refinance notes which matured
during the nine-months ended September 30, 2001. For the nine-months ended
September 30, 2000, net cash provided by financing activities consisted of $22.5
million in proceeds from mortgages and notes payable, partially offset by $1.3
million of principal payments on notes payable and $6.0 million of preferred
stock dividend payments.
Under the terms of the agreement with Boston Capital and Mass Mutual, since
we did not have at least 10 joint venture hotels open or under construction by
August 31, 2000, we may be required to increase our capital contribution to
existing joint venture hotels by up to 5% of the estimated total costs. As of
September 30, 2001, we had eight hotels open with none under construction and
the additional capital contribution amount was estimated at approximately $4.3
million. As of November 12, 2001, Boston Capital and Mass Mutual had not
required us to increase our capital contribution, although they may require us
to do so in the future. We are otherwise in compliance with the terms of the
joint venture agreement. We will continue to identify and evaluate potential
joint venture sites with these partners.
We currently have borrowed a total of $192.9 million from various credit
institutions (GMAC and one other financial institution) and Hilton Hotels
Corporation (Doubletree) in connection with the development of Candlewood
hotels. The maturity dates for these loans range from December 2001 to June
2011, as amended, with interest rates, which range from 6.98% to 9.25% on
non-Doubletree loans ($177.9 million) to a fixed 15.0% on the Doubletree loan
($15.0 million). Approximately $27.4 million and $116.3 million of the total
debt matures in 2001 and 2002, respectively. We currently do not have sufficient
cash available to pay off the principal amount of these loans.
Pursuant to the terms of the agreements we have with the credit
institutions, each loan provides for an extension period. In regards to the debt
maturing in the balance of 2001 ($15.0 million), we plan to exercise our
contractual right and extend this debt for another year. It is our practice to
evaluate each loan based on a number of factors, including hotel performance,
interest rate, secondary market considerations and corporate strategy, to
determine if we will seek an extension or refinancing. We cannot provide any
assurance that we will be able to extend the maturity dates of our indebtedness
beyond the extension periods provided for in our debt agreements or refinance
any of our indebtedness on terms acceptable to us, or at all.
In regards to the Doubletree debt, the first installment of $12.5 million
matured on November 11, 2001. We did not pay that principal amount. We are in
discussions with Doubletree regarding an extension on this debt. As
consideration for securing an extension, we may be required to pay down a
portion of the debt at or prior to the original maturity date. We are unable to
assure that we will be able to extend the maturity date of the Doubletree debt
or that other financing will be available to us on acceptable terms, or at all.
Our inability to repay or refinance our debt obligations could result in
litigation and have a material adverse effect on our business and results of
operations.
As of September 30, 2001, we have guaranteed approximately $57.5 million of
the construction debt on the Boston Capital joint venture properties. Maturity
dates for this debt range from October 2002 to December 2007. This debt is not
included in our consolidated financial statements.
24
Pursuant to a mandatory redemption clause in the Certificates of Designation
for the Series A and Series B Cumulative Convertible Preferred Stock, we are
required to redeem the Series A and Series B Preferred Stock in September 2004.
The mandatory redemption amount is equal to the Stated Value of the Series A
($65.0 million) and Series B ($42.0 million) Preferred Stock plus unpaid
dividends. The Series A and Series B Preferred Stock accumulate dividends at a
rate of 7.5% with dividend payments made quarterly and in preference to any
dividend on our Common Stock. These payments are approximately $2.0 million per
quarter. Failure to pay these dividends results in an automatic adjustment to
the conversion price of the Preferred Stock and may result in an increase in our
dividend rate. We have not paid dividends on our Common Stock. We currently do
not anticipate paying any cash dividends on the Common Stock in the foreseeable
future. After payment of dividends on the Series A and Series B Preferred Stock,
we intend to retain any future earnings for reinvestment in the development and
expansion of our business.
We believe that a combination of our cash and cash equivalents, cash from
operations, borrowed funds from third-party lenders (if approved on an
individual basis) and construction loan guarantees from Doubletree will be
sufficient to provide capital for operations through December 2002. We will be
required to invoke contractual extensions or refinance a significant amount of
debt that is scheduled to mature during the balance of 2001 and 2002.
From time to time we will consider strategic acquisitions as a means of
growth, which may require additional capital. We continue to consider a number
of financing alternatives, including credit facilities, the issuance of equity,
debt or equity-linked securities and joint ventures, which are necessary to
provide the capital needed to build or acquire additional hotels. We are unable
to assure that we will be able to obtain financing on a timely basis, on
acceptable terms, or at all.
Impact of New Accounting Standards
On June 29, 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations." Statement
141 eliminates the pooling-of-interest method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. The requirements of Statement 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 20, 2001. Additionally, Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" was issued. Under Statement 142,
goodwill and other indefinite lived intangibles are no longer amortized, but are
periodically reviewed for impairment. Intangibles with definite lives are
amortized over their useful lives. Statement 142 is effective for years
beginning after December 15, 2001. Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was
also issued for years beginning after December 15, 2001. Statement 144 revises
the measurement and recognition of impairment, specifically on assets held for
disposal.
We do not believe the issuance of either of these statements will have a
material impact on our results of operations or financial position.
Quantitative and Qualitative Disclosure of Market Risk
Our earnings are affected by changes in interest rates as the majority of
our outstanding indebtedness is at variable rates based on LIBOR. If interest
rates change by .01 percent, the market value of our mortgages and notes
payable, based on the outstanding balance effected by LIBOR at September 30,
2001, would change by approximately $18,000. Additionally, we have market risk
on our short-term investments, which are considered cash equivalents, due to
changes in interest rates. If interest rates increase by .01 percent, the market
value of our short-term investments, based on the outstanding balance at
September 30, 2001, would change by approximately $2,000.
25
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted in years beginning after June 15, 2000. We
adopted the new Statement effective January 1, 2001. The Statement requires us
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Because of our minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or the financial position of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document
as well as some of our statements in periodic press releases and some oral
statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as "believes," "anticipates," "estimates,"
"expects" or similar expressions. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:
Adverse Economic Conditions May Negatively Impact Our Occupancy Rates and
Results of Operations. Since our core customers are extended-stay business
travelers, moderate or severe economic downturns or adverse economic conditions
negatively affect our operations. These economic conditions may be widespread or
isolated to one or more geographic regions. Economic downturns generally cause a
decline in the occupancy rates of our hotels as our core customers limit their
extended-stay travel. The tragedy at the World Trade Center caused significant
short-term declines in occupancy and rate. Decreases in our occupancy rates
result in a decrease in our operating revenue. In addition, as our occupancy
rates decrease, we expect that competition will increase and that the average
daily room rate of our hotels will be negatively impacted. As a result,
recessions or other general economic conditions may have a negative impact on
our results of operations and financial condition.
We have Never Been Profitable. At September 30, 2001, we operated 76 hotels.
This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:
- the inability to maintain high occupancy rates or to attract guests for
extended-stays;
- the inability to achieve expected nightly rates;
- the inability to operate the hotels at expected expense levels;
- the ability to attract and retain quality personnel; and
- liability for accidents and other events occurring at hotel properties.
26
If we are unable to efficiently and effectively operate our hotels, we may never
be profitable.
We May be Unable to Service or Repay our Debt Obligations. Our ability to
make payments on, to repay or to refinance our indebtedness and to make our
scheduled preferred stock dividends will depend upon our ability to generate
capital in the future. Approximately $27.4 million and $116.3 million of our
total debt matures in 2001 and 2002, respectively. Of this amount, $12.5 million
matured on November 11, 2001. We cannot make any assurances that our business
will generate sufficient cash flow from operations to fund our debt obligations
as they become due including the amount due in November 2001. In addition, we
may need to refinance all or a portion of our indebtedness on or before the
maturity date. We do not currently have sufficient capital to pay all of our
debts if they were due today and cannot provide any assurances that we will be
able to refinance any of our indebtedness on commercially reasonable terms, or
at all. Our ability to make payments on, to repay or to refinance our
indebtedness and to make our scheduled preferred stock dividends also is, to a
certain extent, subject to general economic, competitive, legislative,
regulatory and other factors beyond our control. Our inability to make payments
on, to repay, or to refinance our debt obligations or preferred stock could
result in litigation and have a material adverse effect on our business and
results of operations. See - "Liquidity and Capital Resources."
Our Need for Continued Capital and Additional Financing Could Materially
Adversely Affect our Business and Results of Operations. The development of
hotels is capital intensive. We have and expect to continue to seek financing of
up to 80% of the cost of certain Candlewood-developed hotels utilizing
Doubletree's guarantee to facilitate such financing. The use of the Doubletree
guarantee reduces our profit opportunity, if any, with respect to certain
Candlewood-developed hotels. The Doubletree guarantee is currently limited to
$30 million of total funds guaranteed. Funding of the loans for each hotel will
be subject to approval of the third-party lender on an individual hotel basis,
upon satisfaction of various conditions. We cannot provide assurance that the
third-party lenders will approve any financing applications we submit, that
their approval will be timely, that we will be able to utilize the Doubletree
guarantee, or that we will be able to finance greater than 70% of the cost of
any Candlewood-developed hotel. If our applications are not approved or our
loans are not funded on a timely basis, we may be unable to construct additional
Candlewood hotels and may experience delays in our planned development of
hotels. We have no current arrangements with respect to, or sources of,
additional debt financing. Additionally, we cannot assure that additional
financing will be available when needed or upon terms acceptable to us. If we
are unable to arrange for additional capital or financing, we may not be able to
develop further hotels.
Our Growth is largely Dependant on Franchising and Developing Hotels. We
intend to grow primarily by franchising and developing additional Candlewood
hotels. Our ability to develop hotels and obtain franchisees involves
substantial risks, including:
- there are a limited number of franchising opportunities;
- we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;
- our new franchising brand, Cambridge Suites by Candlewood, may not be
accepted by or appeal to potential franchisees;
- unavailability of financing to Candlewood or to potential franchisees on
favorable terms, or at all;
- delays in completion of construction of franchised or developed hotels;
- termination of signed franchise and development agreements;
- incurring substantial costs if we abandon a franchising or development
project prior to completion;
- our or a franchisee's failure to obtain all necessary zoning and
construction permits;
- competition for suitable development sites from our competitors, some of
whom may have greater financial resources than Candlewood;
27
- our actual costs exceeding budgeted or contracted amounts; and
- our developed properties not achieving desired revenue or profitability
levels once opened.
If we are unable to successfully franchise and develop hotels on time or within
budget, or at all, our business and results of operations would suffer.
We Depend on a Single Type of Lodging Facility. We intend to exclusively
develop, manage and franchise Candlewood Suites and Cambridge Suites by
Candlewood hotels. We currently do not intend to develop any lodging facilities
other than hotels focused on extended-stay business travelers and do not intend
to develop lodging facilities with other franchisors. Accordingly, we will be
subject to risks inherent in concentrating investments in a single type of
lodging facility, such as a shift in demand or a reduction in business following
adverse publicity, which could have a material adverse effect on our business
and results of operations. In addition, we have a limited history upon which we
can gauge consumer acceptance of our hotels and, accordingly, we cannot provide
assurance that our hotels will be readily accepted by guests who are looking for
conventional or extended-stay hotel accommodations. Furthermore, we compete
against other facilities with substantially greater brand recognition.
We are Subject to Real Estate Investment Risks. Our investment in our hotels
will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate investments
is significantly dependent upon our ability to maintain or increase cash
provided by operating our investments. The value of our hotels and the income
from our hotels may be materially adversely affected by:
- changes in national economic conditions;
- changes in general or local economic conditions and neighborhood
characteristics;
- competition from other lodging facilities;
- changes in the availability, cost and terms of financing;
- the ongoing need for capital improvements;
- changes in operating expenses;
- changes in real property tax rates;
- changes in governmental rules and policies;
- the impact of present or future environmental laws;
- natural disasters; and
- other factors which are beyond our control.
In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to dispose
of an investment when we find disposition advantageous or necessary, or that the
sale price of any disposition will recoup or exceed the amount of our
investment.
Our Hotels May Experience Seasonal Fluctuations. Based upon our experience
operating extended-stay hotels, we expect that occupancy and revenues may be
lower than normal during the months of November, December and January due to the
holiday season. Because many of our expenses do not fluctuate with occupancy,
declines in occupancy may cause fluctuations or decreases in our quarterly
earnings.
We Depend on Key Personnel. Our success depends to a significant extent upon
the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief Financial
Officer. The loss of the services of either of these individuals could have a
material adverse effect upon our business and results of operations.
Certain of these factors are discussed in more detail elsewhere in this Form
10-Q and the Company's other filings with the Securities and Exchange
Commission.
28
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2001.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: November 12, 2001 By: /s/ Jack P. DeBoer
-----------------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: November 12, 2001 By: /s/ Warren D. Fix
-----------------------------------------
Warren D. Fix, Executive Vice
President and Chief Financial Officer
30
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation of Candlewood Hotel Company,
Inc.(1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc.(10)
3.3 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof of Series A
Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc.(3)
3.4 Certificate of Amendment of Certificate of Designations of Series A
Preferred Stock.(8)
3.5 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof of Series B
Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc.(8)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Warrant.(7)
4.3 Amended and Restated Stockholders Agreement dated as of July 10,
1998.(8)
10.1 Form of Indemnification Agreement for Executive Officers and
Directors.(4)
10.2 Indemnification Agreement Schedule.(9)
10.3 1996 Equity Participation Plan and Form of Stock Option
Agreements.(4)
10.4 First Amendment to the 1996 Equity Participation Plan effective as of
May 18, 1998.(9)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and
Jack P. DeBoer dated as of September 1, 1996.(1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc. and
Doubletree Corporation dated as of November 11, 1996.(2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc. to
Doubletree Corporation dated as of November 11, 1996.(2)
10.8 Series A Cumulative Convertible Preferred Stock Purchase Agreement
dated as of August 27, 1997.(3)
10.9 Amended and Restated Registration Rights Agreement dated as of
July 10, 1998.(8)
10.10 Purchase and Sale Agreement, dated as of November 19, 1997, by and
among Candlewood Hotel Company, Inc. and certain of its affiliates,
as sellers, and HPT, as purchaser.(5)
10.11 First Amendment to Purchase and Sale Agreement and Agreement to Lease
and Fourth Amendment to Lease Agreement and Incidental Documents,
dated as of January 7, 1999, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 1, Inc., HPT and HPT CW, and seventeen
entities which are parties thereto.(9)
10.12 Agreement to Lease, dated as of November 19, 1997, by and between
Candlewood Hotel Company, Inc. and HPT.(5)
10.13 Purchase and Sale Agreement, dated as of May 14, 1998, by and among
Candlewood Hotel Company, Inc. and certain of its affiliates, as
sellers, and HPT, as purchaser.(6)
10.14 First Amendment to Purchase and Sale Agreement, Agreement to Lease,
Lease Agreement and Incidental Documents, dated as of June 18, 1998,
by and among Candlewood Hotel Company, Inc., Candlewood Leasing
No. 2, Inc., HPT and HPT CW II.(9)
10.15 Second Amendment to Purchase and Sale Agreement, Agreement to Lease,
Lease Agreement and Incidental Documents, dated as of July 31, 1998,
by and among Candlewood Hotel Company, Inc., Candlewood Leasing No.
2, Inc., HPT and HPT CW II.(7)
10.16 Third Amendment to Purchase and Sale Agreement and Agreement to Lease
and Sixth Amendment to Lease Agreement and Incidental Documents,
dated as of December 23, 1998, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 2, Inc., HPT, HPT CW II and seventeen
entities which are parties thereto.(9)
10.17 Agreement to Lease, dated as of May 14, 1998, by and between
Candlewood Hotel Company, Inc. and HPT.(6)
10.18 Securities Purchase Agreement dated as of September 30, 1998.(8)
10.19 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel
Company, Inc. and Vantage Point Properties, Inc.(9)
31
10.20 Amended and Restated Stock Pledge Agreement, dated as of August 10,
2001, by Candlewood Hotel Company, Inc. for the benefit of HPT CW.
10.21 Amended and Restated Security Agreement by and between Candlewood
Leasing No. 1, Inc. and HPT CW.
10.22 Amended and Restated Assignment and Security Agreement by and between
Candlewood Leasing No. 1, Inc. and HPT CW.
10.23 Amended and Restated Lease Agreement by and between Candlewood
Leasing No. 1, Inc. and HPT CW.
10.24 Third Amendment to Agreement to Lease by and between Candlewood Hotel
Company, Inc. and HPT.
10.25 Amended and Restated Guaranty Agreement by Candlewood Hotel Company,
Inc. for the benefit of HPT CW and HPT.
10.26 Purchase and Sale Agreement by and among Candlewood Hotel Company,
Inc., Candlewood Philadelphia-Mt. Laurel, NJ, LLC, Candlewood Las
Vegas, NV, LLC and HPT.
11.1 Statement re Computation of Per Share Earnings -- not applicable.
- -----------
(1) Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(9) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended March 31, 2001.
32