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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-21583
Candlewood Hotel Company, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 48-1188025
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(State of Incorporation) (I.R.S. Employer Identification No.)
Lakepoint Office Park
9342 E. Central
Wichita, Kansas 67206
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(Address of principal executive offices)
(316) 631-1300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 14, 1997
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Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
MARCH 31, 1997
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 22,909,481 $ 33,497,118
Accounts receivable 193,404 142,584
Pre-opening costs, net of accumulated amortization
of $146,785 and $80,370, respectively 214,723 154,711
Prepaid expenses 85,126 116,568
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Total current assets 23,402,734 33,910,981
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Construction in progress - hotel properties 15,873,966 11,199,765
Property and equipment, net of accumulated
depreciation of $243,647 and $142,490, respectively 13,438,341 3,961,987
Intangible assets, net of accumulated
amortization of $27,769 and $23,057, respectively 219,172 223,286
Pre-acquisition costs 2,762,121 1,397,473
Other assets, net 1,677,081 980,451
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$ 57,373,415 $ 51,673,943
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable - current portion $ 34,174 $ 21,290
Accounts payable 1,040,898 2,182,843
Accrued expenses 286,863 252,219
Deferred franchise fee revenue 471,600 375,800
------------ ------------
Total current liabilities 1,833,535 2,832,152
------------ ------------
Notes payable 22,507,789 15,435,819
Commitments
Stockholders' equity:
Preferred stock -- --
Common stock 90,250 90,250
Additional paid-in capital 35,269,891 35,269,891
Accumulated deficit (2,328,050) (1,954,169)
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Total stockholders' equity 33,032,091 33,405,972
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$ 57,373,415 $ 51,673,943
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See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
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REVENUES:
Room revenue $ 515,606 $ --
Other revenue 22,982 --
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Total revenues 538,588 --
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OPERATING COSTS AND EXPENSES:
Hotel operating expenses 337,891 --
Corporate operating expenses 607,873 315,823
Depreciation and amortization 190,765 7,970
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Total operating costs and expenses 1,136,529 323,793
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Loss from operations (597,941) (323,793)
Interest income 374,716 2,291
Interest expense (150,656) --
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Net loss $ (373,881) $ (321,502)
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Net loss per share $ (0.04) $ (0.06)
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Weighted average shares outstanding 9,025,000 5,175,000
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (373,881) $ (321,502)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 190,765 7,970
Change in:
Accounts receivable (50,820) (3,308)
Pre-opening costs (126,427) --
Prepaid expenses 31,442 (7,892)
Accounts payable (602,718) 618,851
Accrued expenses 34,644 73,205
Deferred franchise fee revenue 95,800 --
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Net cash provided by (used in) operating activities (801,195) 367,324
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (14,790,940) (1,677,505)
Increase in pre-acquisition costs (1,364,648) (136,791)
Increase in other assets (490,405) (50,000)
Expenditures for capitalized intangible assets (598) (3,434)
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Net cash used in investing activities (16,646,591) (1,867,730)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable 7,084,854 --
Members' capital contributions -- 2,089,554
Capitalized loan fees (224,705) --
Minority interest -- 10,446
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Net cash provided by financing activities 6,860,149 2,100,000
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Net increase (decrease) in cash and cash equivalents (10,587,637) 599,594
Cash and cash equivalents at beginning of period 33,497,118 123,384
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Cash and cash equivalents at end of period $ 22,909,481 $ 722,978
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See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements have been omitted. The accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring adjustments and
including eliminations of all significant intercompany transactions and
accounts) which the Company believes are necessary for the fair presentation of
financial position and results of operations. These interim financial statements
should be read in conjunction with the Company's 1996 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The results of operations for
interim periods are not necessarily indicative of the results which may be
expected for the entire year. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
2. Notes Payable
In January 1997, the Company received initial proceeds pursuant to the
terms of a $4.0 million construction loan agreement and promissory note for the
Company's Englewood, Colorado hotel entered into between a bank and a
wholly-owned subsidiary of the Company. The terms of the construction loan
provide for advances, generally on a monthly basis, based on construction costs
incurred to date. Interest on the loan is payable monthly at a variable rate per
annum equal to the lesser of the bank's prime rate plus 0.5% or LIBOR plus
2.75%. Principal amortization payments based on a 25-year term will begin in
April 1998 and will continue until June 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 and is guaranteed by the Company and certain other of the
Company's wholly-owned subsidiary LLCs. At March 31, 1997, the Company had
outstanding borrowings of $3.2 million under the terms of the construction loan
agreement.
In March 1997, the Company entered into a $3.9 million term loan
agreement and promissory note for the Company's Omaha, Nebraska hotel with a
bank. The term loan agreement was entered into by one of the Company's
wholly-owned subsidiaries, which is the owner of the property and the hotel. The
interest and principal payment terms are essentially the same as those of the
construction loan agreement discussed above except that principal amortization
payments based on a 25-year term will begin in March 1998. 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 and
is guaranteed by the Company and certain other of the Company's wholly-owned
subsidiary LLCs.
2. Per Share Information
Per share information for the period prior to the Company's
reorganization in November 1996 is presented on a pro forma basis as if (i) the
Company had operated as a taxable entity (C Corporation) for the period and (ii)
the reorganization had been effective at the beginning of the
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period and the shares of common stock issued in conjunction with the
reorganization had been issued and outstanding for the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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Comparison of fiscal quarters ended March 31, 1997 and 1996
General
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The Company's first hotel opened in Wichita, Kansas, on May 5, 1996.
Consequently, there are no comparable data available for hotel operations in the
first quarter of 1996. At March 31, 1997, the Company had three hotels open, one
each in the following areas: Denver, Colorado, Omaha, Nebraska, and Wichita,
Kansas. The Company had an additional 17 hotels under construction at March 31,
1997 in various cities throughout the United States. The results of operations
for this period are not necessarily indicative of the future results of
operations of these hotels or of other Company-owned hotels.
Hotel Operations
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Room revenue for the quarter ended March 31, 1997 was $515,606. The
average occupancy rate, which is determined by dividing the number of guest
rooms occupied on a daily basis by the total number of guest rooms available at
the Company's three hotels for the period, was 48.1% and was negatively impacted
by the startup of two new hotels during the quarter. During the same period, the
length of stay averaged approximately 10 days, and the average daily room rate
was $45.98. The average daily room rates for stays that were shorter than six
days generally command a slightly higher rate than extended stays and favorably
affect the average daily rate. Revenue per available room (RevPAR) was $22.11
for the quarter ended March 31, 1997 and was negatively impacted by the startup
of two new hotels. Other revenue for the quarter ended March 31, 1997 was
$22,982 and consisted of guest telephone, vending and pay-per-view movie
revenues.
Hotel operating expenses for the quarter ended March 31, 1997 totaled
$337,891, and consisted of all expenses directly applicable to the operation of
the hotels. It did not include any allocation of corporate operating expenses.
The largest portion of hotel operating expenses consisted of salaries, wages and
fringe benefits. The balance of hotel operating expenses was comprised of normal
operating items, such as electricity, gas and other utilities, property taxes,
insurance, cleaning supplies, promotional materials, maintenance items and
similar expenses.
Depreciation and amortization expense applicable to hotel operations
for the quarter ended March 31, 1997 totaled $160,969 and related to the
building, furniture, fixtures, equipment and capitalized pre-opening expenses of
the hotels. 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 twelve months of operations. Depreciation and amortization
expense for the quarter ended March 31, 1997 reflects amounts for a pro-rata
portion of the full year.
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Corporate Operations
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Corporate operating expenses for the quarter ended March 31, 1997
totaled $607,873 compared to $315,823 for the quarter ended March 31, 1996 and
included all expenses not directly related to the development or operations of
specific hotels. The largest portion of corporate operating expenses consisted
of salaries, wages and fringe benefits. The balance of other corporate operating
expenses was comprised of normal operating costs, such as office space lease,
telephone, utilities, advertising and professional fees and similar expenses.
During the 1997 first quarter, the Company incurred certain expenses resulting
from having become a publicly-traded company and no such expenses were incurred
in the first quarter of 1996. Such costs amounted to approximately $57,000.
Depreciation and amortization applicable to corporate operations for
the quarter ended March 31, 1997 totaled $29,796, compared to $7,970 for the
quarter ended March 31, 1996, and related to the furniture, equipment and
intangible assets of the corporate office. Depreciation and amortization was
calculated using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to twenty years. Amortization expense for
intangible assets is computed using the straight-line method over the life of
the corresponding asset. Depreciation and amortization expense for the quarter
ended March 31, 1997 reflects amounts for a pro-rata portion of the full year.
The Company earned $374,716 of interest income during the first quarter
of 1997, which resulted principally from short-term investment of excess funds.
During the first quarter of 1996, the Company earned $2,291 of interest income,
which resulted from overnight investment of idle funds.
Liquidity and Capital Resources
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During the three months ended March 31, 1997, net cash used in
operating activities totaled $801,195 compared to net cash provided by operating
activities of $367,324 for the three months ended March 31, 1996. Decreases in
cash resulted from an increase in accounts receivable of $50,820 and pre-opening
costs of $126,427 as well as a decrease in accounts payable of $602,718.
Increases in cash resulted from a decrease in prepaid expenses of $31,442 and
increases in accrued expenses of $34,644 and deferred franchise fee revenue of
$95,800.
Net cash used in investing activities for the three months ended March
31, 1997 totaled $16.6 million, compared to $1.9 million for the three months
ended March 31, 1996. Expenditures for property and equipment totaled $14.8
million in the 1997 period, compared to $1.7 million in the 1996 period, and
primarily related to the construction of new hotels. The Company commenced
construction of twelve hotels during the quarter, bringing the total number of
hotels under construction to 17 at March 31, 1997. In the 1996 period, only one
hotel was under construction. Increases in pre-acquisition costs and other
assets resulted in decreases in cash totaling $1.9 million for the first quarter
of 1997, compared to $190,225 for the first quarter of 1996.
Net cash provided by financing activities for the three months ended
March 31, 1997 totaled $6.9 million, compared to $2.1 million for the three
months ended March 31, 1996. In the 1997 period, net increases in cash resulted
from increases in notes payable of $7.1 million and in capitalized loan fees of
$224,705. In the 1996 period, the net increase in cash resulted from members'
capital contributions of $2.1 million.
The Company's material commitments for capital expenditures at March
31, 1997 totaled $61.3 million and related to the 17 hotels under construction
at that date.
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The Company's 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, 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. However, 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 Standard
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The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128") which
replaces the current accounting standard regarding computation of earnings per
share. Statement 128 requires a dual presentation of basic earnings per share
(based on the weighted average number of common shares outstanding) and diluted
earnings per share which reflects the potential dilution that could occur if
contracts to issue securities (such as stock options) were exercised. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. The Company believes that adoption of FAS 128 will not have a material
effect on the earnings per share amounts for the three months ended March 31,
1997 and 1996 as presented in the accompanying financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q 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 Form 10-Q.
Certain of these factors are discussed in more detail elsewhere in the Company's
filings with the Securities and Exchange Commission. 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: May 14, 1997 By: /s/ Jack P. DeBoer
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Jack P. DeBoer, President
and Chief Executive Officer
Date: May 14, 1997 By: /s/ Warren D. Fix
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Warren D. Fix, Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Seequentially
Numbered
Exhibit No. Description Page
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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 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.*
10.5 Credit Facility Agreement between the Company and Doubletree Corporation
dated as of November 11, 1996.**
10.6 Subordinated Promissory Note from the Company to Doubletree Corporation
dated as of November 11, 1996.**
27.1 Financial Data Schedule.
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* Incorporated by reference pursuant to Rule 12b-32 from the Company's
Registration Statement on Form S-1 (Registration No. 333-12021).
** Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
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