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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-12708
CANDLEWOOD HOTEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (316) 631-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 21, 1997 was $39,410,760 based on the closing sales
price of such stock on such date.
The number of shares outstanding of the registrant's common stock, as of
March 21, 1997 was 9,025,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders to be held on May 19, 1997 are incorporated by this reference into
Part III as set forth herein.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements,
including without limitation statements containing the words "believes,"
"anticipates," "estimates," "expects" and words of similar import. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
adverse changes in national or local economic conditions, competition from other
lodging properties, changes in real property tax rates and in the availability,
cost and terms of financing, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements, changes in operating expenses, adverse changes in governmental
rules and fiscal policies, civil unrest, acts of God, including earthquakes and
other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other factors referenced in this Annual
Report on Form 10-K. Certain of these factors are discussed in more detail
elsewhere in this Annual Report on Form 10-K, including without limitation under
the captions "Certain Business Considerations and Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business and Properties." Given these uncertainties, undue reliance should not
be placed on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
INTRODUCTION
Candlewood Hotel Company, Inc. (the "Company") is in the business of
developing, owning, operating, managing and franchising Candlewood extended-stay
hotels. Candlewood hotels and their amenities are designed to appeal
particularly to business travelers seeking extended-stay accommodations by
combining the convenience of a hotel with many of the comforts of an apartment
and providing well appointed, high quality lodging at affordable prices. The
Company's goal is to rapidly develop and franchise Candlewood hotels to
capitalize on what the Company believes is an underserved demand for mid-priced
extended-stay hotels and to develop a leading national brand within that segment
of the extended-stay market, which the Company believes is characterized by
average daily rates of approximately $40 to $50. The Company believes that the
experience of its senior management team will be instrumental in executing its
growth strategy. Jack P. DeBoer, the Company's founder, Chairman and President,
is credited by the lodging industry with creating the extended-stay concept. The
Company also expects to derive substantial benefits from its strategic alliance
with Doubletree Corporation ("Doubletree"). As of December 31, 1996, the Company
owned and operated one Candlewood hotel and was constructing seven additional
hotels.
HISTORY
The Company's current business of developing, owning, operating, franchising
and managing 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 membership interests in Candlewood LLC were owned by
Doubletree, JPD Corporation, a Kansas corporation owned by Mr. DeBoer and
certain trusts, the beneficiaries of which are certain members of his family
(the "DeBoer
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Trusts"), and the Warren D. Fix Family Partnership (the "Fix Partnership"), a
Kansas limited partnership, the general partner and majority owner of which is
Mr. Warren Fix, a director and the Executive Vice President and Chief Financial
Officer of the Company (collectively, Doubletree, Mr. DeBoer, the DeBoer Trusts
and the Fix Partnership are referred to herein as the "Initial Stockholders").
The Company was incorporated in the State of Delaware in August 1996 to succeed
to the business of Candlewood LLC (collectively, the "Reorganization"). In
November 1996 the Company completed an initial public offering of its common
stock.
The principal executive offices of the Company are located at Lakepoint
Office Park, 9342 East Central, Wichita, Kansas 67206, telephone (316) 631-1300.
HOTEL DEVELOPMENT AND FRANCHISE OPERATIONS
Development and Ownership
As of December 31, 1996, the Company owned and operated one Candlewood hotel
and was constructing seven additional hotels. Through the development of
Company-owned hotels, Candlewood expects to be able to obtain a presence in key
markets and to achieve economies of scale in management, marketing and
purchasing.
The Company's real estate division is evaluating a variety of sites for
purchase and construction of Candlewood hotels. The Company has entered into
agreements with several commercial brokers, including CB Commercial, New America
Network and certain independent brokers, that identify potential sites for
Candlewood hotels. The Company intends to build Candlewood hotels within 15
minutes of employment centers, including large corporate headquarters, and
within five minutes of services such as restaurants and grocery stores. The
Company expects to expand throughout the United States, and no area of the
country has been excluded from the Company's expansion plans. To date, the
Company has targeted locales for the development of Candlewood hotels in which
the Company has identified properties which were zoned for hotel use or in which
the Company believed it could obtain any necessary zoning, conditional use and
building permits within a six month period.
As of December 31, 1996, the Company had acquired or contracted to acquire
sites for the construction of Candlewood hotels in the following areas:
AREA SITE Status
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Wichita, Kansas Completed
Birmingham, Alabama Under construction
Denver, Colorado Under construction
Kansas City, Kansas Under construction
Louisville, Kentucky Under construction
Omaha, Nebraska Under construction
Cincinnati, Ohio Under construction
Hampton, Virginia Under construction
Phoenix, Arizona (2) Under Contract
Los Angeles, California Under Contract
Colorado Springs, Colorado Under Contract
Denver, Colorado Under Contract
Washington, D.C. Under Contract
Jacksonville, Florida Under Contract
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AREA SITE Status
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Wichita, Kansas Under Contract
Detroit, Michigan Under Contract
New York, New York Under Contract
Philadelphia, Pennsylvania (2) Under Contract
Knoxville, Tennessee Under Contract
Fort Worth, Texas Under Contract
Houston, Texas (3) Under Contract
Salt Lake City, Utah (2) Under Contract
There can be no assurance that present or future development will proceed in
accordance with the Company's expectations. The contracts which the Company
enters into for the purchase of potential hotel sites provide for numerous
investigations and other diligence, including environmental studies and title
reports, prior to the closing of the sale of the real property. The Company
reserves the right to terminate each contract if it is not satisfied with the
results of the investigations and diligence. There can be no assurance that the
Company will acquire properties, complete the development and construction of
hotels or that any such development or construction will be completed on time or
within budget.
The Company's construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels owned by the Company. The
construction division has identified and approved six major contractors in
various regions of the United States, each of which has extensive experience in
the construction of lodging facilities. Each of the approved contractors has
agreed to construction contracts on a cost-plus basis with a ceiling on total
expense that are expected to limit cost overruns. Any savings in the
construction costs will be shared by the Company and the general contractors.
The Company's construction division is responsible for site visits and
inspection during construction and, upon completion of construction, must
approve a hotel's quality before it can commence operations. The Company
estimates that average construction time on each hotel will be approximately
eight months, subject to delays due to weather and other circumstances.
The Company's 107 room hotel in Wichita, Kansas was developed for a cost,
excluding land, of approximately $3.6 million (or approximately $33,500 per
room), including building structure, improvements, furniture, fixtures,
equipment and pre-opening costs. The Company believes that its construction
costs are relatively low due to a number of factors, including careful site
selection, economical and durable exterior and interior finishes and refined and
standardized building systems and processes. The Company anticipates, however,
that the cost to develop a facility will vary significantly by geographic
location in large part due to variable real estate and construction costs. The
cost of the Company's real estate in the Wichita, Denver, Louisville, Omaha,
Cincinnati, Birmingham, Hampton and Kansas City areas was approximately
$250,000, $435,000, $655,000, $630,000, $269,000, $823,000, $284,000, and
$422,000, respectively.
Hotel Franchising
The Company has initiated a national franchising program which it believes
will accelerate the establishment of its market presence and brand awareness on
a national level, generate incremental revenues at an attractive margin, attract
franchisees and create opportunities to obtain management contracts with respect
to franchised properties. The Company intends to pursue its franchising program
not only through the sale of single-site franchises but also through entering
into development agreements under which the Company will grant, in exchange for
nominal consideration, the right to obtain franchises to construct and operate
Candlewood hotels in an exclusive geographic territory, which exclusive rights
may be rescinded by the Company if the developer fails to submit franchise
applications pursuant to a development schedule. In June 1996 the Company
entered into a development agreement with Studio West Hotel Development Company
("SWHDC") which grants SWHDC options to obtain franchises to construct and
operate up to 22 hotels in Northern California, Oregon and Washington. This
development
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agreement grants options to the developer to submit site approvals and
applications and to execute franchise agreements for five Candlewood hotels in
1996, seven hotels in 1997, seven hotels in 1998 and three hotels in 1999. SWHDC
executed all five franchise agreements allotted in 1996. The Company is
exploring opportunities to sign franchise and development agreements with
several other entities and was a party to two additional franchise agreements
with other entities as of December 31, 1996.
In pursuing its franchising strategy, the Company intends to draw upon Mr.
DeBoer's experience with the Residence Inn chain, which included approximately
60 franchised hotels at the time of its sale to Marriott International, Inc. In
addition, the Company intends to draw on the experience of Doubletree which has
developed an aggressive franchising program. By accelerating the roll-out of
Candlewood hotels through its franchising program, the Company's objective is to
benefit from economies of scale in management, marketing and purchasing.
The Company intends to make the services and expertise of its real estate,
construction and operations divisions available to its franchisees in order to
ensure high quality facilities and customer service. The Company's real estate
division intends to work with its franchisees to review sites for development of
franchised hotels. The Company's construction division will advise on the
construction and development of franchised hotels. A representative of the
Company's construction division will visit franchised hotel sites during the
construction phase and will inspect and approve each franchised Candlewood hotel
before it commences operations. In addition, after commencing operations, all
franchised Candlewood hotels will be subject to periodic inspection and
verification that they are in compliance with the Company's quality control
program and maintenance and updating standards. While the Company may grant
franchises in geographic locations where the Company owns and operates hotels,
in such circumstances the Company intends to require that it manage the hotels
owned by its franchisees in order to coordinate direct sales efforts in the
region.
The Company has arranged with a third party lender for financing for the
development of Candlewood hotels. As part of its financial relationship with the
Company, the third party lender is expected to provide construction loans of up
to 80% of the cost of new Candlewood hotels, upon satisfaction of various
conditions by the franchisee. Following stabilization, franchisees are expected
to be able to convert these construction loans into long-term financing through
the third party lender. Doubletree has agreed to guarantee certain portions of
certain of the loans made to the Company or its franchisees pursuant to this
arrangement, subject to certain restrictions and limitations. Doubletree has
agreed to guarantee the amount of certain loans in excess of approximately 56%
of the hotel cost. The amount of such loans will not exceed 75% of the hotel
cost, unless Candlewood manages the hotel, in which case such loans will not
exceed 80% of the hotel cost. 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 profits
and residual value of the hotel and a 0.25-0.50% fee on the total loan amount
outstanding. Most franchisees will require financing for the construction of
their hotels, and there can be no assurance that financing or guarantees (by
Doubletree or otherwise) will be available on terms satisfactory to the
franchisee, or at all.
In June 1996, the Company entered into a development agreement with Studio
Ventures, L.L.C. ("Studio Ventures") which granted Studio Ventures the option to
obtain franchises to construct and operate up to 24 Candlewood hotels in
specific communities in Kentucky, North Carolina, Ohio, South Carolina and
Tennessee. Studio Ventures did not submit applications for franchises within the
time frames set forth in the development schedule, and the Company subsequently
terminated Studio Ventures' exclusive territorial rights under this development
agreement in October 1996.
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Franchise agreements are executed when the Company and the franchisee agree
on a site and prior to commencement of construction. The Company has entered
into franchise agreements for the establishment of Candlewood hotels in the
following areas:
Milpitas, California Hillsboro, Oregon
Pleasanton, California Dallas, Texas
Sacramento, California Bellevue, Washington
Syracuse, New York
SWHDC commenced construction of the Hillsboro, Oregon hotel in August 1996 and
expects to commence operations in the second quarter of 1997. Construction is
expected to commence on the remaining four hotels at various dates through the
third quarter of 1997. SWHDC is entitled to terminate a franchise agreement
after a hotel is open and operating for three years, with a termination fee
being required and penalties invoked, including monetary penalties and
cancellation of the development agreement. SWHDC has informed the Company that
it has raised $30 million of equity financing for the development of Candlewood
hotels in its territory.
By granting exclusive rights in a territory, the Company must rely on the
developer, to the exclusion of the Company or other franchisees, to franchise
hotels at such locations as the developer chooses and at such times as specified
in the development schedule. As a result of development agreements, the Company
may become dependent upon a few developers to construct and operate Candlewood
hotels in key geographic areas. The Company is a party to only one development
agreement, and there can be no assurance that the Company will enter into
additional development agreements. Development agreements do not obligate the
developer to build or open any Candlewood hotels. Development agreements
establish schedules for the submission of franchise applications, which must be
signed before construction of a Candlewood hotel is commenced. If a developer
fails to franchise any hotels according to the development schedule, the Company
will be entitled to revoke the developer's exclusive territorial rights. There
can be no assurance that the franchised hotels will be opened at the time
specified in the agreements, or at all. There can be no assurance that any
additional franchise agreements will be signed, either pursuant to development
agreements or independently, or that any Candlewood hotels will be opened
pursuant to the terms and the times specified in the development agreements, the
franchise agreements, or at all. Failure to franchise hotels according to the
schedules set forth in the development agreements could result in delays in
construction in certain territories and have a material adverse effect on the
Company's business and results of operations.
HOTELS
The standard Candlewood hotel will contain approximately 75 -- 135 rooms,
comprised of studios and one-bedroom suites, both of which contain business and
other amenities consistent with amenities found in upscale, full-service hotels.
The studios have been designed as spacious, well appointed rooms which the
Company believes are larger than most full-service hotel rooms. Up to 25% of the
rooms in a standard Candlewood hotel may be one-bedroom suites designed to
accommodate guests who are willing to pay a premium rate for a bedroom separated
from the kitchen and office area. Neither the Company's hotel in Wichita nor its
hotels under construction in the Denver and Omaha areas will contain one-bedroom
suites; however, the Company's hotels in the Cincinnati, Louisville, Birmingham,
Hampton and Kansas City areas will contain one-bedroom suites.
Candlewood hotels offer upscale accommodations at competitive rates within
the mid-priced extended-stay market which the Company believes will be
attractive to guests staying six nights or longer. Each Candlewood studio and
one-bedroom suite will offer amenities designed to accommodate the needs of the
business traveler, such as two phones with two incoming direct dial lines and
computer connections, an oversized wooden desk with a quad-outlet to accommodate
office equipment needs, an
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executive chair, a bulletin board, a guest chair and personalized, remote
accessible phone mail. Each Candlewood room will contain a 25-inch television,
video cassette player, compact disk player, an iron and ironing board and a
fully equipped kitchen, including a full-size refrigerator, full-size microwave
oven, dishwasher, two burner stovetop, coffee maker, toaster, and a complete set
of utensils and cookware. Also, each Candlewood hotel will be equipped with an
exercise room, a guest laundry facility and a convenient dry cleaning drop with
same-day service.
The majority of extended-stay hotels are either in the upscale sector of the
market, such as Residence Inn, Homewood Suites, Hawthorn Suites and Summerfield
Suites (most with average daily rates in excess of $80), or the economy sector,
such as Suburban Lodge, Extended Stay America, Homestead Village and Villager
Lodge (most with average daily rates generally less than $35). The Company
believes that these brands do not meet the needs of a large number of travelers
who desire well appointed, high quality, spacious accommodations with full
kitchens, but with room rates in the mid-priced segment of the extended-stay
market. Candlewood hotels are designed to accommodate what the Company believes
to be an underserved segment of the extended-stay market. In addition, the
Company believes that the high quality of Candlewood hotels relative to their
moderate daily rate will attract certain guests who otherwise would stay at
traditional hotels. The Company anticipates that the average daily rate at
Candlewood hotels will be approximately $45 -- $55 per studio, in most areas of
the country, which is significantly lower than full-service hotels with
comparable room features and amenities and generally competitive with
traditional limited-service hotels that do not offer the high quality
appointments and amenities of the Company's rooms. Accordingly, the Company
believes that Candlewood hotels will be particularly attractive to business
travelers, including professionals on temporary work assignment, consultants,
travelers conducting or participating in training seminars and government
employees.
MARKETING AND SALES
The Company has designed Candlewood hotels to provide high quality,
comfortable and attractive accommodations together with the amenities desired by
the extended-stay business traveler. The rooms contain high quality furniture
and fixtures, consistent with those found in upscale full-service hotels, to
achieve the highest level of guest satisfaction and to reduce maintenance cost.
The Company believes that the high quality of its rooms will attract business
travelers in the mid-priced segment of the extended-stay market, which the
Company believes is underserved by the current supply of rooms. The Company also
believes that its design and pricing will result in longer stays, higher
occupancy rates and a more stable revenue stream.
To ensure quality customer service, every Candlewood general manager and
director of sales will be required to successfully complete classroom courses
and an on-the-job training program covering direct sales, hotel operations,
marketing and maximization of operating efficiencies. Each hotel will have an
on-site general manager who will be responsible for the Company's quality
control standards and procedures which govern management, operations,
maintenance, regulatory compliance, reporting and marketing. The Company's
operations division will conduct periodic inspections of each Candlewood hotel
to ensure compliance with the Company's quality control standards.
The Company's sales and marketing division has begun to target institutions
and employers located in proximity to its properties in Wichita, Denver, Omaha
and other areas. The sales and marketing division has also developed a direct
mail campaign. In addition, each hotel will have an on-site director of sales
dedicated to marketing and direct sales efforts. Through these direct sales
efforts, the Company believes it can maintain consistently high occupancy levels
and generate longer stays by its guests.
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The Company has established a toll free telephone number to enable guests to
make reservations at any of the Company's hotels. The number uses an automated
response system that directs the caller to the specific hotel desired, and
reservations are then booked directly with that hotel's personnel. In addition,
the Company has entered into discussions with Doubletree concerning utilization
of Doubletree's central reservation system to facilitate reservations at
Candlewood hotels. The Company anticipates that callers to the toll free
telephone number dedicated to Doubletree reservations will be referred to or
booked at Candlewood hotels only if Doubletree does not have a hotel in a
particular locale or if there are no vacancies at Doubletree hotels in a
particular locale.
THE LODGING INDUSTRY
Overview
Lodging industry revenue and the room supply/demand balance have improved in
each year since 1991, according to industry sources which the Company believes
to be reliable. The industry is estimated to have generated its third
consecutive year of pre-tax profits in 1996 at a record of approximately $10.0
billion, up 32% from pre-tax profits of approximately $7.6 billion in 1995. Room
supply and demand historically have been sensitive to shifts in economic growth,
resulting in cyclical changes in average daily room rates and occupancy rates.
The industry's profitability has been fueled by five consecutive years in which
the growth in total room demand has exceeded the growth in total room supply by
approximately 1.7%, 2.2%, 2.6%, 1.1% and 0.8% in 1992, 1993, 1994, 1995 and
1996, respectively, as estimated by Smith Travel Research. This sustained,
favorable imbalance between supply and demand has enabled the industry to
increase revenue per available room ("RevPAR") every year since 1991. According
to Smith Travel Research, RevPAR for the industry as a whole grew 3.2%, 5.6%,
6.5%, 6.0% and 7.7% in 1992, 1993, 1994, 1995, and 1996, respectively, over each
of the previous periods.
The Extended-Stay Segment
The Company's hotels compete in the mid-priced extended-stay segment of the
lodging industry. According to industry sources which the Company believes to be
reliable, of the approximately 3.4 million guest rooms available in the United
States as of December 31, 1996, there were only approximately 58,000 or 1.7%
dedicated extended-stay rooms concentrated at approximately 506 properties. The
consumer research firm of D.K. Shifflet has estimated that in 1995 approximately
195 million business non-convention room nights were associated with stays of
four nights or more, while there were only approximately 18.6 million room
nights available at extended-stay lodging facilities. These statistics indicate
that the majority of extended-stay travelers are staying in traditional hotel
rooms.
The Company believes that the majority of existing extended-stay rooms are
in the upscale and economy segments of the extended-stay market, leaving the
mid-priced segment underserved by the existing supply and type of rooms. Of the
approximately 506 extended-stay properties, the Company believes that
approximately 317, or approximately 63%, operate in the upscale segment,
approximately 131, or approximately 26%, operate in the economy segment, and
only approximately 58 properties, or 11%, operate in the mid-priced segment.
Based on the published occupancy rates for other extended-stay hotels and D.K.
Shifflet's estimate that approximately 50% of extended-stay demand is in the
mid-priced segment, the Company believes that there is strong demand for
mid-priced extended-stay hotels. The Company believes mid-priced extended-stay
hotels provide guests with many of the amenities of an upscale extended-stay
hotel at a more affordable price, attracting both upscale guests who wish to
save money and economy guests who desire high quality amenities.
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The lodging industry, and the extended-stay segment in which the Company
operates, may be adversely affected by changes in national or local economic
conditions and other local market conditions, such as an oversupply of hotel
rooms or a reduction in demand for hotel space in a geographic area, changes in
travel patterns, extreme weather conditions, changes in governmental regulations
which influence or determine wages, prices or construction costs, changes in
interest rates, the availability of financing for operating or capital needs or
changes in real estate tax rates and other operating expenses. In addition, due
in part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. Downturns or prolonged adverse conditions in the real
estate or capital markets or in national or local economies, the inability of
the Company or its franchisees to secure financing for the development of
Candlewood hotels or an oversupply of hotel rooms coupled with a reduction in
demand could have a material adverse impact on the Company's business and
results of operations.
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its properties in geographic locations where other extended-stay hotels
may be located. The Company expects to compete for guests and development sites
with both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual
extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction industry and others in the lodging industry.
The number of competitive lodging facilities in a particular area could have a
material adverse effect on occupancy, average daily rate and revenues of the
Candlewood hotels.
Competition for franchise agreements in the lodging industry is intense. The
Company expects to compete with national and regional brand franchisors, most of
which have greater name recognition and financial resources and a more
established market presence than the Company. The Company believes that
competition for franchise agreements is based principally upon: the perceived
value and validity of the brand; the nature and quality of services provided to
franchisees; the franchisees' view of the relationship of building cost and
operating expenses to the potential for revenues and profitability during
operation and upon sale; and the franchisees' ability to finance construction
and operation of the hotel. No assurance can be given that the Company will be
successful in establishing brand awareness or the other factors on which
franchisors compete, retaining its current franchisee or competing for or
obtaining additional franchisees. Failure to maintain and attract franchisees
could have a material adverse effect on the Company's business and results of
operations.
The Company anticipates that competition within the extended-stay lodging
market will increase substantially in the foreseeable future. A number of other
lodging chains and developers have developed or are attempting to develop
extended-stay lodging facilities that may compete with the Company's facilities.
In particular, some of these entities target the mid-priced segment of the
extended-stay market in which the Company competes. The Company may compete for
guests and for development sites with certain of these established entities that
have greater financial resources than the Company and better relationships with
lenders and real estate sellers. Further, there can be no assurance that new or
existing competitors will not significantly reduce their rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in markets in which the Company competes, thereby materially adversely affecting
the Company's business and results of operations.
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GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, the Company and its franchisees are subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
Company is also subject to federal regulations and certain state laws that
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
noncompetition provisions and termination or nonrenewal of a franchise. Some
states require that certain materials be approved before franchises can be
offered or sold in that state. The failure to obtain permits or licenses or
approvals to sell franchises, or an increase in the minimum wage rate, employee
benefit costs or other costs associated with employees, could adversely affect
the Company's business and results of operations. Both at the federal and state
level from time to time, there are proposals under consideration to increase the
minimum wage.
Under the Americans With Disabilities Act, all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA requirements
in the designs for its facilities, no assurance can be given that a material ADA
claim will not be asserted against the Company, which could result in a judicial
order requiring compliance, and the expenditure of substantial sums to achieve
compliance, an imposition of fines, or an award of damages to private litigants.
These and other initiatives could adversely affect the Company as well as the
lodging industry in general.
ENVIRONMENTAL MATTERS
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations. In addition, in the event any future legislation is adopted, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. The Company attempts to
minimize its exposure to potential environmental liability through its site
selection procedures. The Company typically enters into contracts to purchase
real estate subject to certain contingencies. Prior to exercising its option and
purchasing the property, the Company conducts a Phase I environmental assessment
(which generally includes a physical inspection and database search, but not
soil or groundwater analyses).
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership or operation of
hotels, the Company may be potentially liable for any such costs. Although the
Company is currently not aware of any material environmental claims pending or
threatened against it or any of its managed or franchised hotels, no assurance
can be given that a material environmental claim will not be asserted against
the Company or against the Company and its managed or franchised hotels. The
cost of defending against claims of liability or of remediating a contaminated
property could have a material adverse effect on the results of operations of
the Company.
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PROPRIETARY RIGHTS
"Candlewood" is a registered service mark of the Company on the principal
register of the United States Patent and Trademark Office. The Certificate of
Registration was issued on December 24, 1996. The Company has filed an
application for federal service mark registration of its twin-circle flame logo
and has registered both "Candlewood" and the logo as service marks in the State
of Kansas. An application for registration of "Your Studio Hotel" on the
principal register of the U.S. Patent and Trademark Office has been denied by
the examiner, and the Company anticipates moving the application to the
secondary register which does not provide the protection afforded by
registration on the principal register but lays a basis for establishing a claim
to such rights in the future. The Company also claims common law rights to the
trade name and service marks for various Candlewood products.
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company of its size in its business. While
management believes that its insurance coverage is adequate, if the Company were
held liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and adversely
affected. Specifically, there are certain types of hotel-related losses,
generally of a catastrophic nature, such as earthquakes and floods, that may be
uninsurable or not economically insurable. The Company uses its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to obtaining appropriate insurance on the Company's hotels at a
reasonable cost and on suitable terms. This may result in insurance coverage
that in the event of a loss would be insufficient to pay the full current market
value or current replacement cost of the Company's lost investment. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it unfeasible to use insurance proceeds to replace a
hotel after it has been damaged or destroyed. Under these circumstances, the
insurance proceeds received by the Company might not be adequate to restore its
economic position with respect to such hotel. In addition, property and casualty
insurance rates may increase depending on claims experience, insurance market
conditions and the replacement value of the Company's hotels.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed 45
persons, 9 of whom were employed at the Company's hotel in Wichita, 7 of whom
were employed in positions related to the Company's other hotels under
construction and 29 of whom were employed in the Company's corporate
headquarters. The Company's employees are not subject to any collective
bargaining agreements, and management believes that its relationship with its
employees is good.
PROPERTIES
As of December 31, 1996, the Company owned the property in Wichita, Kansas
on which its 107 room hotel is located. The Company also owned properties in the
Cincinnati, Ohio, Denver, Colorado, Louisville, Kentucky, Omaha, Nebraska,
Birmingham, Alabama, Kansas City, Kansas and Hampton, Virginia areas and had
commenced construction of Candlewood hotels at those sites. The hotels in the
Denver and Omaha areas, when completed, are expected to contain 131 and 130
studios, respectively, and approximately 57,000 square feet. The hotels in the
Cincinnati and Louisville areas, when completed, are each expected to contain 65
studios, 12 one-bedroom suites and approximately 39,000 square feet.
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In addition to the properties described above, the Company also maintains
its corporate headquarters in Wichita, Kansas. The Company leases its office
space on a short-term basis. These offices are sufficient to meet the Company's
present needs, and the Company does not anticipate any difficulty in securing
additional office space, as needed, on terms acceptable to the Company.
CERTAIN BUSINESS CONSIDERATIONS AND RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and elsewhere in this Annual Report on Form 10-K.
Limited Operating History; Risks of Operations. The Company began operating
its first extended-stay hotel in May 1996 and has a limited operating history
upon which to evaluate the Company's performance and its claims about the
proposed construction, operation, features, rates and demand for Candlewood
hotels, among other things. In addition, as of December 31, 1996 the Company
operated only one hotel, which hotel has not generated sufficient cash to cover
the Company's operating expenses. The Company has incurred losses to date and
there can be no assurance that the Company will be profitable in the future.
Given the substantial development and financing expenses relating to the
Company's expansion, it expects to sustain net losses for the foreseeable future
and such losses could be larger than those previously reported. Operation of
individual hotels and a chain of multiple hotels is subject to numerous risks
including the inability to operate the hotels at expected expense levels, the
inability to maintain high occupancy rates or to attract guests for extended
stays, liability for accidents and other events occurring at hotel properties
and the inability to achieve expected nightly rates. If the Company is unable to
efficiently and effectively operate its hotels, the Company's business and
results of operations would be materially and adversely effected.
Future Capital Needs and Risks of Additional Financing. The development of
hotels is capital intensive. The Company has arranged with a third party lender
to finance up to 60% of the cost of individual Company-developed hotels. The
Company has and expects to continue to seek financing of up to 80% of the cost
of certain Company-developed hotels utilizing Doubletree's guarantee to
facilitate such financing. The use of the Doubletree guarantee reduces the
Company's profit opportunity, if any, with respect to certain Company-developed
hotels. 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. There can be no assurance that any financing applications submitted
by the Company will be approved by the third party lender on a timely basis, or
at all, that the Company will be able to utilize the Doubletree guarantee, or
that the Company will be able to finance greater than 60% of the cost of any
Company-developed hotel with the third party lender. If the applications are not
approved or if loans are not funded on a timely basis, the Company may be unable
to construct additional Candlewood hotels, may experience delays in its planned
development of hotels, and expects that it will be required to seek additional
financing. In addition, the Company's ability to meet its debt service
obligations will depend upon the future performance of the Company's operations,
which, in turn, is subject to prevailing economic conditions and to financial,
business and other factors beyond its control. The Company has no current
arrangements with respect to, or sources of, additional financing. Additionally,
no assurance can be given that financing will be available to the Company when
needed or upon terms acceptable to the Company. If such capital or financing is
unavailable, the Company may not be able to develop further hotels.
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Development Risks. The Company intends to grow primarily by developing and
franchising additional Candlewood extended-stay hotels. Development involves
substantial risks, including: costs exceeding budgeted or contracted amounts;
delays in completion of construction; failing to obtain all necessary zoning and
construction permits; financing not being available on favorable terms;
developed properties not achieving desired revenue or profitability levels once
opened; competition for suitable development sites from competitors, some of
whom have greater financial resources than the Company; incurring substantial
costs if a development project must be abandoned prior to completion; changes in
governmental rules, regulations and interpretations; and changes in general
economic and business conditions. There can be no assurance that the Company
will acquire properties, complete the development and construction of hotels or
that any such development or construction will be completed on time or within
budget.
Risks Associated with Rapid Growth; Reliance on Doubletree. The Company's
rapid development plans will require the implementation of specialized
operational and financial systems and will require additional management,
operational and financial resources. For example, the Company will be required
to recruit and train property managers and other personnel for each new hotel as
well as additional personnel at its headquarters. There can be no assurance that
the Company will be able to achieve its planned rate of expansion or manage its
expanding operations effectively. If the Company is unable to manage its growth
effectively, the Company's business and results of operations could be
materially and adversely effected. The Company expects to derive substantial
benefits from its strategic alliance with Doubletree. However, Doubletree is
under no obligation to provide any services or to provide any benefits to the
Company. If such services or benefits are provided, there can be no assurance
that they will be provided on terms that are beneficial to the Company or, that
if provided, will not be cancelled at any time.
Dependence on Single Type of Lodging Facility and Single Brand. The Company
intends exclusively to develop, manage and franchise Candlewood hotels. The
Company currently does not intend to develop any lodging facilities other than
extended-stay hotels in the mid-priced segment of the market and does not intend
to develop lodging facilities with other franchisors. Accordingly, the Company
will be subject to risks inherent in concentrating investments in a single type
of lodging facility and a single franchise brand, such as a shift in demand or a
reduction in business following adverse publicity related to the brand, which
could have a material adverse effect on the Company's business and results of
operations. The Company has limited history upon which it can gauge consumer
acceptance of its hotels, and there can be no assurance that the Company's
hotels will be readily accepted by guests who are looking for extended-stay
hotel accommodations. Further, the Company's hotels will compete against other
facilities with substantially greater brand recognition.
Real Estate Investment Risks. The Company's investment in its hotels will be
subject to varying degrees of risk related to the ownership and operation of
real property. The underlying value of the Company's real estate investments is
significantly dependent upon its ability to maintain or increase cash provided
by operating such investments. The value of the Company's hotels and income from
the 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 real
property tax rates, changes in the availability, cost and terms of financing,
the impact of present or future environmental laws, the ongoing need for capital
improvements, changes in operating expenses, changes in governmental rules and
policies, natural disasters and other factors which are beyond the control of
the Company. Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. There can be no assurance that the Company will be
able to dispose of an investment when it finds disposition advantageous or
necessary or that the sale price of any disposition will recoup or exceed the
amount of the Company's investment.
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Dependence on Key Personnel. The Company's success depends to a significant
extent upon the efforts and abilities of its senior management and key
employees, particularly, Mr. Jack P. DeBoer, Chairman of the Board, President
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 the Company's business and results of
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's initial public offering of common stock was effected as of
November 5, 1996. The common stock is listed on the Nasdaq National Market under
the symbol "CNDL". The following table sets forth, for the calendar periods
indicated, the range of high and low closing prices for the common stock, as
reported by the Nasdaq National market:
1996 High Low
- ---- ---- ---
Fourth Quarter* $10 1/8 $8 1/4
- ---------------
* Reflective of the period from November 5, 1996 (commencement of the
Company's initial public offering) until December 31, 1996.
The closing sales price of the Company's common stock on March 21, 1997 was
$10. The approximate number of stockholders of record on March 21, 1997 was 27.
The Company has not paid dividends on its Common Stock. The Company
currently intends to retain any future earnings for reinvestment in the
development and expansion of its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. The payment of
dividends in the future will be at the discretion of the Board of Directors and
will be dependent upon the Company's financial condition, results of operations,
capital requirements and other factors deemed relevant by the Board of
Directors. Pursuant to the terms of the Stockholders Agreement among the Initial
Stockholders, so long as the Initial Stockholders hold in excess of 50% of the
outstanding shares of the Company's Common Stock, the approval of the Initial
Stockholders is required before the Company can declare or pay any dividends.
The Company anticipates that future financing, including any lines of credit,
may restrict or prohibit the Company's ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
year ended December 31, 1996 and the period from October 1, 1995 (inception) to
December 31, 1995 have been derived from the audited consolidated financial
statements of the Company and notes thereto included elsewhere in this Form
10-K. The selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto of the Company.
Period from
October 1, 1995
Year Ended (Inception) to
December 31, 1996 December 31, 1995(1)
----------------- --------------------
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 685,697 $ -
Hotel operating expenses.......................... 365,692 -
Corporate operating expenses...................... 1,671,450 204,361
Depreciation and amortization..................... 248,650 4,625
Loss from operations.............................. (1,600,095) (208,986)
Interest income................................... 328,047 -
Interest expense.................................. (80,926) -
Net loss.......................................... (1,352,974) (208,986)
Pro forma net loss per share (2).................. (0.23) (0.04)
Pro forma weighted average shares outstanding (2). 5,764,071 5,175,000
December 31, 1996 December 31, 1995
----------------- -----------------
BALANCE SHEET DATA:
Cash and cash equivalents......................... $33,497,118 $ 123,384
Total assets...................................... 51,673,943 1,283,341
Accounts payable.................................. 2,182,843 64,695
Notes payable..................................... 15,457,109 -
Minority interest................................. - 8,427
Members' equity................................... - 1,182,687
Stockholders' equity.............................. 33,405,972 -
- -------------
(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period
from October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, the Company's statements of
operations have been presented as if the Company's operations began on
October 1, 1995.
(2) Pro forma net loss per share is based on (i) the 5,175,000 shares of
Common Stock of the Company issued in conjunction with the
Reorganization as if such shares had been issued and outstanding for
all periods presented, (ii) the 3,850,000 shares of Common Stock of the
Company (based on the weighted shares outstanding during the period)
issued in conjunction with the Company's initial public offering in
November 1996 and (iii) the amount of pro forma net loss as if the
Company had operated as a C Corporation for all periods presented. See
Notes 1.b and 1.l of Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto appearing elsewhere herein.
OVERVIEW
The Company began operations in October 1995 to develop, own, operate,
manage and franchise Candlewood extended-stay hotels, designed particularly for
the business traveler. The Company began construction of its first Candlewood
hotel in Wichita, Kansas in October 1995. Construction of this hotel was
completed and the hotel opened in May 1996. In May and June 1996, respectively,
the Company began construction of two additional hotels, one in each of the
Omaha, Nebraska and Denver, Colorado areas, which opened in the first quarter of
1997. In September 1996, the Company began construction of two additional
hotels, one in each of the Cincinnati, Ohio and Louisville, Kentucky areas,
which are scheduled to open in the second quarter of 1997. In December 1996, the
Company began construction of three more hotels, one in each of the Birmingham,
Alabama, Kansas City, Kansas and Hampton, Virginia areas, which are scheduled to
open in the fourth quarter of 1997. As of December 31, 1996, the Company had 19
potential Candlewood sites under contract and had agreements in principle or
letters of intent with respect to 22 potential sites. There can be no assurance
that the Company will be successful in purchasing or developing any of these
sites or that the Company will achieve its expected rate of development.
In addition to the construction of Company-owned Candlewood hotels, the
Company intends to expand through its national franchising program. The Company
entered into a development agreement dated as of June 11, 1996 with Studio West
Hotel Development Company, LLC ("SWHDC") which, in exchange for nominal
consideration, grants SWHDC the option to obtain franchises to construct and
operate 22 Candlewood hotels in Northern California, Oregon and Washington. This
development agreement grants SWHDC options to obtain franchises to construct and
operate five Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven
Candlewood hotels in 1998, and three Candlewood hotels in 1999. On July 25,
1996, the Company entered into a franchise agreement with SWHDC relating to the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHDC began
construction of this hotel in August 1996 and expects to commence operations in
the second quarter of 1997. In addition, the Company has entered into franchise
agreements with SWHDC for the establishment of Candlewood hotels in Milpitas,
Pleasanton, and Sacramento, California and in Bellevue, Washington. Development
agreements do not obligate the developer to build or open any Candlewood hotels;
however, such agreements allow the Company to terminate the developer's
exclusive territorial rights if the developer fails to submit franchise
applications pursuant to a development schedule. There can be no assurance that
any Candlewood hotels will be opened pursuant to the terms and at the times
specified in the development agreements, the franchise agreements, or at all.
RESULTS OF OPERATIONS
Hotel Operations -- Wichita Hotel
As of December 31, 1996, the Company owned and operated one Candlewood hotel
in Wichita, Kansas, which opened on May 5, 1996. The following table presents
summary financial information for the Wichita, Kansas hotel for the period from
May 5, 1996 to December 31, 1996. The results of operations for this period are
not necessarily indicative of the future results of operations of the Wichita
hotel or of other Company-owned hotels.
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May 5, 1996
(Commencement of
Operations) to
December 31, 1996
-----------------
Room revenue..................................................... $ 659,317
Other revenue.................................................... 26,380
Hotel operating expenses......................................... 365,692
Depreciation and amortization.................................... 179,851
Room revenue for the period from May 5, 1996 to December 31, 1996, was
$659,317. The average occupancy rate for the same period was 56%. Occupancy
rates are determined by dividing the number of guest rooms occupied on a daily
basis by the total number of guest rooms available at the facility. During the
same period, the length of stay averaged approximately 13 days and the average
daily room rate was $47.71. The Company believes that the average daily room
rate was favorably affected by stays that were shorter than six days, as these
shorter stays commanded a slightly higher rate. Other revenue for the hotel
consists of guest telephone, vending and pay-per-view movie revenues. Revenue
per available room (RevPAR) was $26.77 for the period ended December 31, 1996.
Hotel operating expenses for the period from May 5, 1996 to December 31,
1996, totaled $365,692. Hotel operating expenses consisted of all expenses
directly applicable to the operation of the hotel and did not include an
allocation of corporate operating expenses. The largest portion of hotel
operating expenses was salaries, wages and fringe benefits. The balance of hotel
operating expenses was comprised of normal operating items, such as electricity,
gas and other utilities, property taxes, insurance, cleaning supplies,
promotional materials, maintenance items, and similar expenses.
Depreciation and amortization expense for the period from May 5, 1996 to
December 31, 1996, was $179,851. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years, except in the case of pre-opening expenses,
which are amortized over no more than the first 12 months of operations. For the
period from May 5, 1996 to December 31, 1996, depreciation expense reflects
amounts for the pro-rata portion of a full year.
Corporate Operations
Corporate operating expenses included all expenses not directly related to
the development or operation of specific hotels. Such expenses, which totaled
approximately $1.7 million for the year ended December 31, 1996, were related
principally to salaries, wages and fringe benefits. The balance of other
corporate operating expenses was comprised of normal operating costs, such as
office space lease, telephone, utilities, advertising and professional fees and
similar expenses.
Depreciation and amortization for the year ended December 31, 1996 totaled
$68,799 and related to the furniture, equipment and intangible assets of the
corporate office. Depreciation was calculated using the straight-line method
over the estimated useful lives of the respective assets, ranging from three to
twenty years. Amortization expenses for intangible assets is computed using the
straight-line method over the life of the corresponding asset.
The Company earned $328,047 of interest income for the year ended December
31, 1996 which related principally to short-term investment of excess funds,
including the proceeds from the Company's initial public offering of Common
Stock.
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LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, cash used in operating activities
totaled $227,487. The net loss during the year was approximately $1.4 million,
resulting primarily from the need to employ corporate staff in anticipation of,
and preparation for, the addition of future hotel facilities. Increases in
accounts receivable, prepaid expenses, capitalized pre-opening costs and other
assets also resulted in the use of cash during the period. These uses were
offset by increases in accounts payable, accrued expenses and deferred franchise
fee revenue and by expenses not requiring the use of cash.
Cash used by investing activities for the year ended December 31, 1996
totaled approximately $14.9 million. The Company's expenditures for property and
equipment in connection with the construction of new hotels totaled
approximately $13.1 million. Increases in pre-acquisition costs and other assets
also resulted in the use of cash.
During the year ended December 31, 1996, the primary source of cash was the
net proceeds from the Company's initial public offering, which totaled
approximately $35.0 million. Cash was also provided by loan proceeds totaling
$15.5 million, $12.5 million of which was attributable to the subordinated
credit facility extended to the Company by Doubletree. Capital contributions to
Candlewood LLC by the Members prior to the reorganization were distributed to
the Members in exchange for shares of Company common stock pursuant to the
terms of the Reorganization. Capitalized loan fees of $477,825 resulted in a
use of cash in 1996.
The net loss for the period ended December 31, 1995 of $208,986 resulted
from development stage activities. Increases in accounts payable and accrued
expenses provided cash flow from operating activities during the period,
partially offsetting the net loss.
Expenditures for property and equipment for the period ended December 31,
1995 of $880,596 related to construction activities for the Company's first
hotel located in Wichita, Kansas. Other investing activities related to
capitalized organizational costs and certificates of deposit.
Net cash provided by financing activities during the period ended December
31, 1995, resulted from members' capital contributions in the amount of
approximately $1.2 million.
To date, the Company's material commitments for capital expenditures have
consisted exclusively of amounts committed in connection with the development
and construction of Candlewood hotels. At December 31, 1996, the Company had
material commitments for capital expenditures of approximately $22.9 million
related to the construction of the Denver, Omaha, Louisville, Cincinnati,
Birmingham, Kansas City and Hampton area hotels.
Before the closing of the initial public offering of the Company's common
stock, the Company's operations were financed primarily through capital provided
by Doubletree. In connection with the Company's Reorganization, Doubletree
agreed to extend to the Company a five year, $15.0 million subordinated credit
facility. Prior to the Offering, Doubletree loaned to the Company approximately
$12.5 million, including a preferred return amounting to approximately $392,000
on its capital contributions, which is subordinated to debt incurred in the
development of hotels and the Company's line of credit, if any is established in
the future. Amounts outstanding under the credit facility bear interest at
annual rates of 7% and 10% for the first and second 12 month periods following
funding, respectively, and 15% thereafter. The determination of the applicable
interest rates for the initial amounts loaned under the credit facility is based
on the date equivalent amounts were originally contributed to Candlewood LLC.
Interest on borrowings under the facility is payable quarterly.
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The Company has arranged with a third party lender to finance up to 60% of
the cost of individual Company-developed hotels. The Company has and expects to
continue to seek financing of up to 80% of the cost of certain Company-developed
hotels utilizing a guarantee of certain indebtedness by Doubletree to facilitate
such financing. In return for such guarantee, Doubletree would receive a 5%
interest in the profits and residual value of the respective hotel and a 0.25%
to 0.50% fee on the total loan amount outstanding. In addition, the Company,
through its Subsidiaries, has entered into a $3.0 million term loan agreement
and promissory note, dated as of October 15, 1996, with NationsBank related to
its Wichita hotel. The Company has also obtained separate term loan commitments
from NationsBank in the amounts of $4.0 million and $4.1 million for each of its
hotels under construction in the Denver and Omaha areas, respectively.
The Company's anticipated sources of liquidity on a long-term basis include
cash flow from completed Candlewood hotels, secured and unsecured borrowings,
sale/leaseback arrangements and the issuance of debt or equity securities.
The Company believes that a combination of its cash and cash equivalents and
cash from operations, together with its subordinated credit facility and
construction loan guarantees from Doubletree, construction financing from
NationsBank and third party lenders (if approved on an individual basis) and
additional sources of liquidity will be sufficient to provide capital for
development and operations into the fourth quarter of 1997. There can be no
assurance that changes will not occur that will require the Company to seek
additional capital or financing at an earlier date. The Company has no current
arrangements with respect to, or sources of, such additional financing, and
there can be no assurance that additional financing will be available when
needed or upon terms acceptable to the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
which is effective for the Company beginning January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. There is no impact on the
consolidated financial statements as of December 31, 1996 as a result of
adoption of this statement.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which is effective for the Company beginning January 1, 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The provisions of Statement No. 123 will not have a material effect on the
consolidated financial condition or operating results of the Company as the
Company does not intend to adopt the fair value based measurement concept.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report
(see page F-1).
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1 Election of Directors" and under the caption
"Executive Officers of the Company" of the registrant's definitive Proxy
statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 14, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" of the registrant's definitive Proxy
statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 14, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
registrant's definitive Proxy statement for its 1997 Annual Meeting to be filed
with the Securities and Exchange Commission on or before April 14, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information
appearing under the caption "Certain Transactions" of the registrant's
definitive Proxy statement for its 1997 Annual Meeting to be filed with the
Securities and Exchange Commission on or before April 14, 1997.
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PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors'
Report are filed as part of this Report (see page F-1).
2. Financial Statement Schedules. No such schedules are required.
3. Exhibits
The list of exhibits contained in the Index to Exhibits is filed as part of
this Report (see page E-1).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 26, 1997 CANDLEWOOD HOTEL COMPANY, INC.
By: /s/ Jack P. DeBoer
----------------------------------
Jack P. DeBoer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date Signed
--------- ----- -----------
/s/ Jack P. DeBoer President, Chief Executive March 26, 1997
- ----------------------------
Jack P. DeBoer Officer and Director
(Principal Executive Officer)
/s/ Warren D. Fix Executive Vice President, March 26, 1997
- ----------------------------
Warren D. Fix Chief Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
/s/ Gary E. Costley Director March 26, 1997
- ----------------------------
Gary E. Costley
/s/ Richard J. Ferris Director March 26, 1997
- ----------------------------
Richard J. Ferris
/s/ Russell W. Meyer, Jr. Director March 26, 1997
- ----------------------------
Russell W. Meyer, Jr.
/s/ Tony M. Salazar Director March 26, 1997
- ----------------------------
Tony M. Salazar
/s/ Peter V. Ueberroth Director March 26, 1997
- ----------------------------
Peter V. Ueberroth
25
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1995................................. F-3
Consolidated Statements of Operations for the Year Ended December 31, 1996 and the
Period from October 1, 1995 (Inception) to December 31, 1995......................... F-4
Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1996
and the Period from October 1, 1995 (Inception) to December 31, 1995 ................ F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 1996
the Period from October 1, 1995 (Inception) to December 31, 1995..................... F-6
Notes to Consolidated Financial Statements................................................ F-7
F-1
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Candlewood Hotel Company, Inc.:
We have audited the accompanying consolidated balance sheets of Candlewood Hotel
Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1996 and the period from October 1, 1995 (date of
inception) to December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Candlewood Hotel
Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the year ended December 31, 1996
and the period from October 1, 1995 (date of inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Wichita, Kansas
February 21, 1997
F-2
27
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ----------
ASSETS
Cash and cash equivalents ....................................... $ 33,497,118 $ 123,384
Accounts receivable ............................................. 142,584 2,975
Pre-opening costs, net of accumulated amortization of $80,370 ... 154,711 --
Prepaid expenses ................................................ 116,568 945
------------ ----------
Total current assets .................................. 33,910,981 127,304
------------ ----------
Construction in progress - hotel property ....................... 11,199,765 842,656
Property and equipment, net of accumulated
depreciation of $142,490 and $301, respectively ............... 3,961,987 37,639
Intangible assets, net of accumulated amortization of
$23,057 and $4,324, respectively .............................. 223,286 239,345
Pre-acquisition costs ........................................... 1,397,473 6,397
Other assets .................................................... 980,451 30,000
------------ ----------
$ 51,673,943 $1,283,341
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable - current portion ................................. $ 21,290 $ --
Accounts payable ................................................ 2,182,843 64,695
Accrued expenses ................................................ 252,219 27,532
Deferred franchise fee revenue .................................. 375,800 --
------------ ----------
Total current liabilities ............................. 2,832,152 92,227
------------ ----------
Notes payable ................................................... 15,435,819 --
Minority interests .............................................. -- 8,427
Members' equity ................................................. -- 1,182,687
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued ................................................ -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
9,025,000 issued and outstanding ........................... 90,250 --
Additional paid-in capital .................................... 35,269,891 --
Accumulated deficit ........................................... (1,954,169) --
------------ ----------
Total stockholders' equity ............................ 33,405,972 --
------------ ----------
Commitments .....................................................
------------ ----------
$ 51,673,943 $1,283,341
============ ==========
See accompanying notes to consolidated financial statements.
F-3
28
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996 and the Period from
October 1, 1995 (Inception) to December 31, 1995
1996 1995
----------- -----------
REVENUES:
Room revenue ................................. $ 659,317 $ --
Other revenue ................................ 26,380 --
----------- -----------
Total revenues ............................. 685,697 --
----------- -----------
COSTS AND EXPENSES:
Hotel operating expenses ..................... 365,692 --
Corporate operating expenses ................. 1,671,450 204,361
Depreciation and amortization ................ 248,650 4,625
----------- -----------
Total costs and expenses ................... 2,285,792 208,986
----------- -----------
Loss from operations ......................... (1,600,095) (208,986)
Interest income .............................. 328,047 --
Interest expense ............................. (80,926) --
----------- -----------
Net loss ................................. $(1,352,974) $ (208,986)
=========== ===========
Net loss per share, pro forma ................ $ (0.23) $ (0.04)
Weighted average shares outstanding,
pro forma................................... 5,764,071 5,175,000
See accompanying notes to consolidated financial statements.
F-4
29
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1996 and the Period from
October 1, 1995 (Inception) to December 31, 1995
Total Additional Total
Members' Common Paid-in Accumulated Stockholders'
Equity Stock Capital Deficit Equity
------------ ------- ----------- ----------- ------------
Balance at October 1, 1995 ... $ -- $ -- $ -- $ -- $ --
Capital contribution ......... 1,391,673 -- -- -- 1,391,673
Net loss ..................... (208,986) -- -- -- (208,986)
------------ ------- ----------- ----------- ------------
Balance at December 31, 1995 . 1,182,687 -- -- -- 1,182,687
Members' capital contribution 10,981,692 -- -- -- 10,981,692
Distribution to Member ....... (11,973,165) -- -- (392,209) (12,365,374)
Issuance of common stock,
net of offering costs ... -- 38,500 34,921,441 -- 34,959,941
Exchange of members' interests
for common stock ........ (191,214) 51,750 348,450 (208,986) --
Net loss ..................... -- -- -- (1,352,974) (1,352,974)
------------ ------- ----------- ----------- ------------
Balance at December 31, 1996 . $ -- $90,250 $35,269,891 $(1,954,169) $ 33,405,972
============ ======= =========== =========== ============
See accompanying notes to consolidated financial statements.
F-5
30
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996 and the Period from
October 1, 1995 (Inception) to December 31, 1995
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $ (1,352,974) $ (208,986)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............. 248,650 4,625
Change in:
Accounts receivable ....................... (139,609) (2,975)
Pre-opening costs ......................... (235,081) --
Prepaid expenses .......................... (115,623) (945)
Other assets .............................. (1,999) --
Accounts payable .......................... 768,662 64,695
Accrued expenses .......................... 224,687 27,532
Deferred franchise fee revenue ............ 375,800 --
------------ -----------
Net cash used in operating activities ..... (227,487) (116,054)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ........ (13,074,161) (880,596)
Increase in pre-acquisition costs .............. (1,391,076) (6,397)
Increase in other assets ....................... (477,984) (30,000)
Expenditures for capitalized intangible
assets........................................ (2,674) (43,669)
------------ -----------
Net cash used in investing activities ..... (14,945,895) (960,662)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable .................................. 15,457,109 --
Net proceeds from issuance of common stock ..... 34,959,941 --
Distribution to member ......................... (12,365,374) --
Members' capital contributions ................. 10,981,692 1,191,673
Capitalized loan fees .......................... (477,825) --
Minority interest .............................. (8,427) 8,427
------------ -----------
Net cash provided by financing activities . 48,547,116 1,200,100
------------ -----------
Net increase in cash and cash equivalents ...... 33,373,734 123,384
Cash and cash equivalents at beginning
of period..................................... 123,384 --
------------ -----------
Cash and cash equivalents at end of period ..... $ 33,497,118 $ 123,384
============ ===========
See accompanying notes to consolidated financial statements.
F-6
31
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. DESCRIPTION OF BUSINESS
The Company develops, constructs, owns, operates, manages and franchises a
new nationwide hotel chain under the name Candlewood Hotel. The hotels are
designed to serve extended-stay, value oriented, guests with high quality,
fully equipped studio units. The first hotel commenced operations on May 5,
1996, and as of December 31, 1996, the Company had one hotel in operation
in Wichita, Kansas, two additional hotels under construction in the Omaha,
Nebraska and Denver, Colorado areas, which will open in the first quarter
of 1997, and five additional hotels under construction, which will open at
various other times in 1997.
b. REORGANIZATION
Candlewood Hotel Company, Inc. (together with its predecessor, the
"Company") was incorporated in August 1996 to succeed to the business of
Candlewood Hotel Company, L.L.C., a Delaware limited liability company
("Candlewood LLC"), in anticipation of the initial public offering of
3,850,000 shares of the Company's common stock, $.01 par value per share.
Candlewood LLC was formed in November 1995 to develop, own, operate and
franchise Candlewood extended-stay hotels designed particularly for the
business traveler. Candlewood LLC began construction of its first
Candlewood hotel in Wichita, Kansas in the fourth quarter of 1995, and
construction was completed and the hotel opened in May 1996. In May and
June 1996, respectively, Candlewood LLC began construction of its second
and third hotels, located in the Omaha, Nebraska and Denver, Colorado
areas. In September 1996, Candlewood LLC began construction of its fourth
and fifth hotels, located in the Cincinnati, Ohio and Louisville, Kentucky
areas. The properties in the Wichita, Omaha, Denver, Cincinnati and
Louisville areas are owned by separate limited liability companies which
were organized as subsidiaries of Candlewood LLC (the "Subsidiary LLCs").
On November 8, 1996, the Company completed an initial public offering of
3,850,000 shares of common stock at an initial public offering price of
$10.00 per share (the "Offering"). The net proceeds to the Company from the
Offering, after deducting the underwriting discounts and commissions and
expenses of the Offering, were approximately $35.0 million. The Company
intends to use approximately $33.0 million of the net proceeds from the
Offering to fund the national expansion of the Company through the
development of Company-owned Candlewood hotels and approximately $2.0
million for working capital and general corporate purposes. Pending the use
of proceeds described above, the net proceeds of the Offering have been
invested in interest-bearing, short-term, investment grade securities.
Prior to the Offering, the membership interests in Candlewood LLC were
owned 50% by Doubletree Corporation ("Doubletree"), 42.5% by JPD
Corporation, a Kansas corporation owned by Mr. Jack P. DeBoer, the
Company's President, and certain trusts (the "DeBoer Trusts"), and 7.5% by
the Warren D. Fix Family Partnership, L.P. (the "Fix Partnership"), the
general partner and majority owner of which is Mr. Warren Fix, the
Executive Vice President and Chief Financial Officer of the Company.
F-7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Immediately prior to the Offering, Doubletree and the Fix Partnership
contributed to the Company all of their outstanding membership interests in
Candlewood LLC and certain minority interests which they held in the
Subsidiary LLCs. At the same time, Mr. DeBoer and the DeBoer Trusts
contributed to the Company 100% of the stock of JPD Corporation, the assets
of which were substantially comprised of its membership interest in
Candlewood LLC and the Subsidiary LLCs. In consideration of such transfer,
each of Doubletree and the Fix Partnership were issued shares of the
Company's common stock in proportion to their ownership interests in
Candlewood LLC immediately prior to such transfer, and Mr. DeBoer and the
DeBoer Trusts, collectively, were issued shares of the Company's common
stock in proportion to JPD Corporation's ownership interest in Candlewood
LLC immediately prior to such transfer. As a result, the ownership of the
common stock of the Company by Doubletree, the Fix Partnership and the
shareholders of JPD Corporation, totaling 5,175,000 shares immediately
prior to the Offering, was in the same proportion as their ownership of
membership interests in Candlewood LLC immediately prior to the
reorganization of the Company.
In addition, prior to the Offering, approximately $12.4 million previously
contributed to Candlewood LLC by Doubletree, including a preferred return
amounting to approximately $392,000 on its capital contributions, was
distributed by Candlewood LLC to Doubletree. Doubletree concurrently
extended to the Company a $15.0 million subordinated credit facility, of
which the amount of the distribution to Doubletree was funded in connection
with the reorganization of the Company. The terms of the distribution to
Doubletree, as well as the subsequent loan by Doubletree to the Company,
were determined by the members of Candlewood LLC in the course of
arms-length negotiations.
c. BASIS OF PRESENTATION
The accompanying consolidated financial 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 above-discussed reorganization. All significant
intercompany balances and transactions have been eliminated in
consolidation.
d. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. 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. Interest costs for the construction of hotels are
capitalized and amortized over the related assets' estimated useful lives.
The Company capitalized interest costs of $93,985 in 1996.
e. INTANGIBLE ASSETS
Pursuant to the terms of the Limited Liability Company Agreement of
Candlewood LLC, JPD Corporation contributed the ownership rights, title and
interest in the Candlewood Hotel name and logo and certain other
intangibles to the Company at the agreed-upon value of $200,000. Such
amount is included in intangible assets and is being amortized using the
straight-line method over a period of twenty years. Intangible assets also
include certain other organization costs which are being amortized using
the straight-line method over a period of five years.
F-8
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
f. PRE-OPENING COSTS
Costs which are incurred prior to the opening of a property and are related
to the hiring and training of hotel personnel, such as compensation, travel
and relocation, are capitalized and amortized, commencing on the date a
property is opened, over the shorter of the estimated period of benefit or
twelve months.
g. PRE-ACQUISITION COSTS
The Company incurs various costs related to the acquisition of property
sites. These costs are recorded as pre-acquisition costs until the property
is acquired, at which time the costs are reclassified to construction in
progress-hotel property. In the event that the acquisition is not
consummated, the costs are charged to operations.
h. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are
established for deferred tax assets when it is more likely than not that
such deferred tax assets will not result in a benefit to the Company. Prior
to the Reorganization, the Company was not a taxable entity and any
proportionate share of the Company's taxable income or loss was included in
the respective Member's income tax return.
i. STATEMENTS OF CASH FLOWS
The Company considers all short-term, highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
At the balance sheet date, cash and cash equivalents consisted of demand
deposit accounts in banks and short-term investment grade securities.
Noncash financing and investing activities for the period from October 1,
1995 to December 31, 1995 included a capital contribution of $200,000 made
by a Member in the form of intangible assets. Noncash financing activity
included approximately $1.3 million for capital expenditures on
construction in progress, which amount was included in accounts payable as
of December 31, 1996. Cash paid for interest totalled $30,885 in 1996.
j. 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.
F-9
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
k. REVENUE RECOGNITION
Room revenue and other revenue are recognized when earned. Recognition of
initial 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.
l. PER SHARE INFORMATION
Pro forma net loss per share information is presented as if (i) the Company
had operated as a taxable entity (C Corporation) for the period from
October 1, 1995 (inception) to December 31, 1995 and for the entire year
ended December 31, 1996 and (ii) the reorganization described above had
been effective as of October 1, 1995 and the shares of common stock issued
in conjunction with the reorganization had been issued and outstanding for
all periods presented.
m. LONG-LIVED ASSETS
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121").
FAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has determined that no impairment loss need be
recognized at December 31, 1996.
n. STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, FAS 123 also allows entities to apply the
provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations, which
require compensation expense to be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. The Company has elected to apply the provisions of APB 25 and
provide the pro forma disclosure provisions of FAS 123.
F-10
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1995
---------- -------
Hotel property and equipment:
Land $ 266,760 $ --
Buildings and improvements 2,791,559 --
Furniture, fixtures and equipment 655,108 --
---------- -------
3,713,427 --
Less accumulated depreciation 93,316 --
---------- -------
Hotel property and equipment, net 3,620,111 --
---------- -------
Corporate property and equipment:
Furniture, fixtures and equipment 349,958 13,295
Leasehold improvements 41,092 24,645
---------- -------
391,050 37,940
Less accumulated depreciation 49,174 301
---------- -------
Corporate property and equipment, net 341,876 37,639
---------- -------
$3,961,987 $37,639
========== =======
3. LEASES
The Company leases corporate office space and certain equipment under
operating leases expiring at various dates through May 2001. Rental expense
for the year ended December 31, 1996 and the period ended December 31, 1995
was $94,352 and $13,188, respectively.
Future minimum lease payments under noncancelable operating leases having
remaining terms in excess of one year at December 31, 1996 are as follows:
Year Ending
December 31,
------------
1997 $ 117,953
1998 117,953
1999 115,174
2000 110,598
2001 19,348
----------
$ 481,026
==========
4. NOTES PAYABLE
Notes payable is comprised of the following:
1996 1995
----------- -------------
Term note $ 3,000,000 $ --
Subordinated promissory note 12,457,109 --
----------- -------------
15,457,109 --
Less current portion 21,290 --
----------- -------------
$15,435,819 $ --
=========== =============
F-11
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has entered into a $3.0 million term loan agreement and promissory
note with a bank related to its Wichita, Kansas hotel. The loan agreement has
been entered into by a subsidiary of the Company and owner of the property and
the hotel and is guaranteed by the Company and certain other of the Company's
wholly-owned subsidiary LLCs. Interest on the loan is payable monthly at a
variable rate per annum equal to the bank's prime rate plus 1/2%. Principal
amortization payments based on a 25-year term will begin in June 1997, and
will continue until April 1999. The loan may be extended for one additional
year if certain conditions are met and upon payment of a specified extension
fee. During the one year extension period, the Company will continue to make
interest payments and principal amortization payments based on a 25-year term.
Amounts borrowed under the loan are secured by the hotel and the land on which
it is constructed and certain funds deposited in a demand deposit account
assigned to the bank. The loan is cross-collateralized and cross-defaulted.
In connection with the Company's reorganization, Doubletree agreed to extend
to the Company a five year, $15.0 million subordinated credit facility. Prior
to the Offering, Doubletree loaned to the Company $12.5 million, which is
subordinated to debt incurred in the development of hotels and the Company's
line of credit, if any is established in the future. The subordinated credit
facility matures in November 2001. Amounts outstanding under the credit
facility bear interest at annual rates of 7% and 10% for the first and second
12 month periods following funding, respectively, and 15% thereafter. The
determination of the applicable interest rates for the initial amounts loaned
under the credit facility is based on the date that equivalent amounts were
originally contributed to Candlewood LLC. Interest on borrowings under the
facility is payable quarterly. At December 31, 1996, outstanding borrowings
under the facility totaled $12.5 million.
The scheduled maturities of notes payable for 1997 through 2001 are:
Year Ending
December 31,
------------
1997 $ 21,290
1998 38,991
1999 2,939,719
2000 --
2001 12,457,109
-----------
$15,457,109
===========
5. STOCKHOLDERS' EQUITY
On November 8, 1996, the Company completed an initial public offering of
3,850,000 shares of common stock at an initial public offering price of $10.00
per share. The proceeds to the Company, after expenses of the offering and
giving effect to the underwriter's discount of $2,695,000, were $34,959,941.
F-12
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. STOCK OPTIONS
The Company has one stock option plan, the 1996 Equity Participation Plan (the
"Plan"), in which options may be granted to key personnel to purchase shares
of the Company's common stock at a price not less than the current market
price at the date of the grant. The options vest annually and ratably over the
four-year period from the date of grant and expire ten years after the grant
date. An aggregate of 900,000 shares has been authorized for issuance. The
Plan also provides for the issuance of stock appreciation rights, restrictive
stock or other awards, none of which have been granted. Activity in the stock
option plan is as follows:
Price
Range 1996
------ --------
Options outstanding, beginning of year -- --
Granted $10.00 355,200
Exercised -- --
Canceled $10.00 (1,000)
------ --------
Options outstanding, end of year $10.00 354,200
====== ========
Number of options exercisable at end of year -- --
Shares at end of year available for future issuance $10.00 545,800
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. If the Company had elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by FAS No.
123, net loss and net loss per share would have been increased to the pro
forma amounts indicated in the table below:
1996
-----------
Net loss, as reported $(1,352,974)
Net loss, pro forma (1,390,202)
Net loss per share, as reported (0.23)
Net loss per share, pro forma (0.24)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0.0%
Expected stock price volatility 12.41%
Risk-free interest rate 6.02%
Expected life of options 5 years
The weighted average fair value of options granted during 1996 is $2.74 per
share.
F-13
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. EMPLOYEE BENEFITS PLAN
Effective June 1, 1996, the Company established the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "Plan") for its employees.
Generally, all full-time employees who are over 21 years of age and have
completed 12 months of service are eligible to participate in the Plan and
are permitted to contribute up to 15% of their individual compensation,
subject to certain limitations established by the Internal Revenue Service
for plans of this type. The Company may, but is not obligated to, make
contributions on behalf of each participant at the rate of up to 50% of
the participant's contribution, not to exceed 6% of the employee's
compensation. For the year ended December 31, 1996, there were no matching
contributions provided by the Company.
8. RELATED PARTY TRANSACTIONS
The Company obtains insurance coverages and leases its corporate office
space and certain equipment from a related party which is partially owned
by the Company's president. Such payments for insurance coverages totaled
$22,873 for the year ended December 31, 1996 and were not significant for
the period ended December 31, 1995. Such payments for rent of corporate
office space and reimbursement for leasehold improvements and equipment,
totaled $114,532 and $9,984 for the year ended December 31, 1996 and the
period ended December 31, 1995, respectively.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes.
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
1996 1995
Deferred Tax Assets:
Deferred franchise fee revenue $ 150,320 $ --
Excess book depreciation over tax 25,893 --
--------- -----------
Total gross deferred tax assets 176,213 --
Valuation allowance (80,981) --
--------- -----------
Total net deferred tax assets 95,232 --
--------- -----------
Deferred Tax Liabilities:
Excess tax depreciation over book 20,572 --
Financial basis in excess of tax basis of intangible assets 74,660 --
--------- -----------
Total gross deferred tax liabilities 95,232 --
--------- -----------
Net deferred tax assets $ -- $ --
========= ===========
F-14
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. 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.
F-15
40
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Specimen Certificate of Common Stock.*
4.2 Form of Stockholder Agreement among Doubletree Corporation, JPD Corporation and
the Warren D. Fix Family Partnership, L.P.*
10.1 Form of Indemnification Agreement for executive officers and directors.*
10.2 1996 Equity Participation Plan and form of stock option agreements*
10.3 Employment Agreement between the Company and Jack P. DeBoer dated as of
September 1, 1996.*
10.4 Development Agreement between the Company and Studio West Hotel Development
Company, L.L.C. dated June 11, 1996.*
10.5 Incorporation and Registration Rights Agreement dated as of September 1, 1996
among Doubletree Corporation, JPD Corporation and the Warren D. Fix Family
Partnership, L.P.*
10.6 Credit Facility Agreement between the Company and Doubletree Corporation dated as
of November 11, 1996.
10.7 Subordinated Promissory Note from the Company to Doubletree Corporation dated as
of November 11, 1996.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
- --------
* Incorporated by reference from the Company Registration Statement on
Form S-1, Registration No. 333-12021.
E-1