1
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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-21583
Candlewood Hotel Company, Inc.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Lakepoint Office Park
9342 E. Central
Wichita, Kansas 67206
-----------------------------------------------------
(Address of principal executive offices)
(316) 631-1300
-----------------------------------------------------
(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 August 12, 1997
------------------------------ ---------------------------------
Common Stock, $.01 par value 9,025,000 shares
1
2
CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
JUNE 30, 1997
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 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 8 - 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 16
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 10,561,282 $ 33,497,118
Accounts receivable 541,809 142,584
Pre-opening costs, net of accumulated amortization
of $227,986 and $80,370, respectively 333,267 154,711
Prepaid expenses 142,307 116,568
------------ ------------
Total current assets 11,578,665 33,910,981
------------ ------------
Construction in progress - hotel properties 27,021,599 11,199,765
Property and equipment, net of accumulated
depreciation of $408,973 and $142,490, respectively 20,879,993 3,961,987
Intangible assets, net of accumulated
amortization of $32,459 and $23,057, respectively 219,147 223,286
Pre-acquisition costs 1,455,622 1,397,473
Other assets, net 4,261,940 980,451
------------ ------------
$ 65,416,966 $ 51,673,943
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable - current portion $ 65,863 $ 21,290
Accounts payable 1,183,733 2,182,843
Accrued expenses 951,817 252,219
Deferred franchise fee revenue 477,200 375,800
------------ ------------
Total current liabilities 2,678,613 2,832,152
------------ ------------
Notes payable 29,869,500 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 (2,491,288) (1,954,169)
------------ ------------
Total stockholders' equity 32,868,853 33,405,972
------------ ------------
$ 65,416,966 $ 51,673,943
============ ============
See accompanying notes to consolidated financial statements.
3
4
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES:
Hotel operations $ 1,217,953 $ 120,038 $ 1,756,541 $ 120,038
Other revenues 60,163 -- 60,163 --
----------- ----------- ----------- -----------
Total revenues 1,278,116 120,038 1,816,704 120,038
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 637,033 86,195 974,924 86,195
Corporate operating expenses 730,830 432,525 1,338,703 748,348
Depreciation and amortization 282,000 62,789 472,765 70,759
----------- ----------- ----------- -----------
Total operating costs and expenses 1,649,863 581,509 2,786,392 905,302
----------- ----------- ----------- -----------
Loss from operations (371,747) (461,471) (969,688) (785,264)
Interest income 248,216 9,205 622,932 11,496
Interest expense (39,707) -- (190,363) --
----------- ----------- ----------- -----------
Net loss $ (163,238) $ (452,266) $ (537,119) $ (773,768)
=========== =========== =========== ===========
Net loss per share $ (0.02) $ (0.09) $ (0.06) $ (0.15)
=========== =========== =========== ===========
Weighted average shares outstanding 9,025,000 5,175,000 9,025,000 5,175,000
See accompanying notes to consolidated financial statements.
4
5
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (537,119) $ (773,768)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 472,765 70,759
Change in:
Accounts receivable (399,225) (52,132)
Pre-opening costs (326,173) (112,423)
Prepaid expenses (25,739) (34,826)
Other assets (302,612) (13,557)
Accounts payable (657,309) 265,133
Accrued expenses 699,598 54,931
Deferred franchise fee revenue 101,400 --
------------ ------------
Net cash used in operating activities (974,414) (595,883)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (32,592,187) (4,296,273)
Expenditures for pre-acquisition costs (814,085) (288,318)
Increase in other assets (1,036,438) (119,488)
Expenditures for capitalized intangible assets (5,263) (362)
------------ ------------
Net cash used in investing activities (34,447,973) (4,704,441)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 14,480,771 --
Principal payments on notes payable (2,517) --
Capitalized loan fees (1,991,703) --
Members' capital contributions -- 6,160,399
Minority interest -- 39,033
------------ ------------
Net cash provided by financing activities 12,486,551 6,199,432
------------ ------------
Net increase (decrease) in cash and cash equivalents (22,935,836) 899,108
Cash and cash equivalents at beginning of period 33,497,118 123,384
------------ ------------
Cash and cash equivalents at end of period $ 10,561,282 $ 1,022,492
============ ============
See accompanying notes to consolidated financial statements.
5
6
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of Candlewood Hotel
Company, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. 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. The condensed consolidated balance sheet data at December
31, 1996 was derived from the Company's audited financial statements. 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 May 1997, the Company entered into mortgage note agreements with GMAC
Commercial Mortgage Corporation (GMAC) totaling approximately $7.1 million in
connection with the Company's Jeffersontown, KY and Blue Ash, OH hotels. Each
agreement was entered into by the Company's respective wholly-owned subsidiary
which owns the related property and hotel. The terms of the mortgage note
agreements provide for interest-only payments each month, in arrears, commencing
July 1, 1997 through May 1, 1998, at which time monthly principal and interest
payments are required. Interest is calculated at a variable rate per annum equal
to LIBOR plus 4.25%, adjusted monthly. Principal payments are calculated based
on a 25-year term using a 10% fixed interest rate. The notes mature in June 2000
and provide for two additional 12-month extension periods. Upon maturity, each
of the mortgage note agreements is expected to be refinanced by GMAC with
permanent loans having a term of 25 years and an interest rate equal to the
long-term fixed rate then being offered by the lender for loans of this type.
The mortgage note agreements are secured by the respective hotels, the land on
which they are constructed and certain funds deposited in demand deposit
accounts assigned to GMAC and are guaranteed by the Company and certain other of
the Company's wholly-owned subsidiary LLCs. The mortgage note agreements are
further guaranteed by Doubletree Corporation.
During the second quarter of 1997, the Company received initial
proceeds of approximately $1.7 million pursuant to the terms of building loan
agreements with GMAC for the Company's Southfield, MI, Hampton, VA and
Birmingham, AL hotels. Each agreement was entered into by the Company's
respective wholly-owned subsidiary which owns the related property and hotel.
The terms of the building loan agreements provide for advances, generally on a
monthly basis, based on construction costs incurred to date. Maximum borrowings
under the agreements aggregate $14.9 million. Interest on the loans is payable
monthly, in arrears, commencing on the first day of the first full calendar
month after the date of each agreement and continuing for 18 months thereafter,
at which time monthly principal and interest payments are required. Interest is
calculated at a variable rate per annum equal to LIBOR plus 4.25%, adjusted
monthly. Principal payments are calculated based on a 25-year term using a 10%
fixed interest rate. The notes mature on the first day of the first full
calendar month after the fourth anniversary and provide for two additional
12-month extension periods. Upon maturity, each of the building loan agreements
is expected to be refinanced by GMAC with permanent loans having a term of 25
years and an interest rate equal to the long-term fixed rate then being offered
by the lender for loans of this type. The building loan agreements are secured
by the respective hotels, the land on which they are constructed and certain
funds deposited
6
7
in demand deposit accounts assigned to GMAC and are guaranteed by the Company
and certain other of the Company's wholly-owned subsidiary LLCs. The building
loan agreements are further guaranteed by Doubletree Corporation.
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
NationsBank of Texas, N.A. ("NationsBank"). 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 terms of the loan agreement require monthly
interest payments 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 March 1998 and will continue until September
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 are
guaranteed by the Company and certain other of the Company's wholly-owned
subsidiary LLCs.
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 NationsBank 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 are guaranteed by the Company and certain other of the
Company's wholly-owned subsidiary LLCs. At June 30, 1997, the Company had
outstanding borrowings of $3.6 million under the terms of the construction loan
agreement.
3. 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 period and the
shares of common stock issued in conjunction with the reorganization had been
issued and outstanding for the period.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Candlewood Hotel Company, Inc. (the "Company") owns, develops, manages
and franchises value oriented business extended-stay hotels. The Company's first
corporate hotel opened in Wichita, Kansas, on May 5, 1996. In February 1997, the
Company opened its second and third corporate hotels, located in the Omaha,
Nebraska and Denver, Colorado areas, respectively. In May 1997, the Company
opened its fourth and fifth corporate hotels, located in the Louisville,
Kentucky and Cincinnati, Ohio areas, respectively. In June 1997, the Company's
first franchised hotel was opened in Hillsboro, Oregon. At June 30, 1997, the
Company had five Company-owned and one franchised hotels open, and an additional
21 Company-owned and four franchised hotels under construction in 18 states. At
June 30, 1997 the Company had under contract, and was performing due-diligence
with respect to, an additional 29 sites. 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.
Results of Operations
Comparison of fiscal quarters ended June 30, 1997 and 1996
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue, totaled $1.2 million for the quarter ended June 30, 1997 compared to
$120,038 for the quarter ended June 30, 1996. Room revenue for the quarter ended
June 30, 1997 was $1.2 million, compared to $116,113 for the quarter ended June
30, 1996. The Company's 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 for the period, was 58% for the quarter ended June 30, 1997
compared to 48% for the quarter ended June 30, 1996, and was negatively impacted
by the startup of the two new hotels opened during the quarter. During the
quarter ended June 30, 1997, the length of stay at the Company's five hotels
averaged approximately 17 days, and the average daily room rate was $49.37,
compared to nine days and $48.20 for the quarter ended June 30, 1996. The
average daily room rates for stays of fewer 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 $28.40 for the quarter ended June
30, 1997, compared to $23.13 for the quarter ended June 30, 1996, and was
negatively impacted by the startup of the two new hotels. Other revenue from
hotel operations for the quarter ended June 30, 1997 was $46,163, compared to
$3,925 for the quarter ended June 30, 1996, and consisted of guest telephone,
vending and pay-per-view movie revenues.
Hotel operating expenses for the quarter ended June 30, 1997 totaled
$637,033, compared to $86,195 for the same period in 1996, and consisted of all
expenses directly applicable to the operation of the hotels. Hotel operating
expenses do 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. The increase in hotel operating expenses in the 1997 period
was primarily due to the additional number of hotels in operation in the second
quarter of 1997.
Depreciation and amortization expense applicable to hotel operations
for the quarter ended June 30, 1997 totaled $252,001, compared to $49,056 for
the quarter ended June 30, 1996, 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.
8
9
Corporate Operations
Other revenues for the quarter ended June 30, 1997 totaled $60,163 and
resulted primarily from the recognition of franchise fee revenue earned upon the
opening in June 1997 of the Company's first franchised hotel, located in
Hillsboro, Oregon. Other revenues also included management fees received from
the Company's managed hotel, Cambridge Suites by Candlewood located in Wichita,
Kansas. In the quarter ended June 30, 1996, no other revenues were recorded as
no franchised hotels were open and no third-party hotels were managed.
Corporate operating expenses for the quarter ended June 30, 1997
totaled $730,830 compared to $432,525 for the quarter ended June 30, 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,
travel, telephone, utilities, advertising, professional fees and similar
expenses. Professional, legal and other public company costs, which resulted
from having become a public company in November 1996, accounted for
approximately $50,000 of the increase over the corresponding period in 1996,
when no such costs were incurred. The balance of the increase over the prior
period is principally attributable to the salaries, wages, fringe benefits and
travel for additional employees required to support the Company's ramp-up to the
current number of hotels open and under development.
Depreciation and amortization applicable to corporate operations for
the quarter ended June 30, 1997 totaled $29,999, compared to $13,733 for the
quarter ended June 30, 1996, and related to the furniture, equipment and
intangible assets of the corporate office. Depreciation expense is calculated
using the straight-line method over the estimated useful lives of the respective
assets, ranging from three to twenty years. Amortization expense for intangible
assets is computed using the straight-line method over the life of the
corresponding asset.
The Company earned $248,216 of interest income during the quarter ended
June 30, 1997, which resulted principally from short-term investment of excess
funds. During the quarter ended June 30, 1996, the Company earned $9,205 of
interest income. The increase in interest income was attributable to the
temporary investment of excess funds which stemmed from the initial public
offering of the Company's common stock in November 1996. The Company had
interest expense of $39,707 during the quarter ended June 30, 1997 and no
interest expense in the second quarter of 1996. Interest expense, net of
capitalized interest, resulted from the Company's secured term and construction
loans and outstanding subordinated promissory note. The Company had no
outstanding loans or notes during the quarter ended June 30, 1996.
Comparison of six months ended June 30, 1997 and 1996
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue, totaled $1.8 million for the six months ended June 30, 1997 compared to
$120,038 for the six months ended June 30, 1996. Room revenue for the six months
ended June 30, 1997 was $1.7 million, compared to $116,113 for the six months
ended June 30, 1996. The Company's 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 for the period, was 54% for the six months ended
June 30, 1997 compared to 48% for the six months ended June 30, 1996, and was
negatively impacted by the startup of the four new hotels opened during the
first six months of 1997. During the six months ended June 30, 1997, the length
of stay at the Company's five hotels averaged approximately 14 days, and the
average daily room rate was $48.28, compared to nine days and $48.20 for the six
months ended June 30, 1996. The average daily room rates for stays of fewer 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
$26.12 for the six months ended June 30, 1997, compared to $23.13 for the first
half of 1996, and was negatively impacted by the startup of the four new hotels.
Other revenue from hotel operations for the six months ended June 30, 1997 was
$69,144, compared to $3,925 for the six months ended June 30, 1996, and
consisted of guest telephone, vending and pay-per-view movie revenues.
9
10
Hotel operating expenses for the six months ended June 30, 1997 totaled
$974,924, compared to $86,195 for the six months ended June 30, 1996, and
consisted of all expenses directly applicable to the operation of the hotels.
Hotel operating expenses do 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. The increase in hotel operating expenses was
primarily due to the additional number of hotels in operation during the six
months ended June 30, 1997.
Depreciation and amortization expense applicable to hotel operations
for the six months ended June 30, 1997 totaled $412,970, compared to $49,056 for
the six months ended June 30, 1996, 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.
Corporate Operations
Other revenues for the six months ended June 30, 1997 totaled $60,163
and resulted primarily from the recognition of franchise fee revenue earned upon
the opening in June 1997 of the Company's first franchised hotel, located in
Hillsboro, Oregon. Other revenues also included management fees received from
the Company's managed hotel, Cambridge Suites by Candlewood located in Wichita,
Kansas. In the six months ended June 30, 1996, no other revenues were recorded
as no franchised hotels were open and no third-party hotels were managed.
Corporate operating expenses for the six months ended June 30, 1997
totaled $1.3 million compared to $748,348 for the six months ended June 30, 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, travel, telephone, utilities, advertising, professional fees and similar
expenses. Professional, legal and other public company costs, which resulted
from having become a public company in November 1996, accounted for
approximately $107,000 of the increase over the corresponding period in 1996,
when no such costs were incurred. The balance of the increase over the prior
period is principally attributable to the salaries, wages, fringe benefits and
travel for additional employees required to support the Company's ramp-up to the
current number of hotels open and under development.
Depreciation and amortization applicable to corporate operations for
the six months ended June 30, 1997 totaled $59,795, compared to $21,703 for the
six months ended June 30, 1996, and related to the furniture, equipment and
intangible assets of the corporate office. Depreciation expense is calculated
using the straight-line method over the estimated useful lives of the respective
assets, ranging from three to twenty years. Amortization expense for intangible
assets is computed using the straight-line method over the life of the
corresponding asset.
The Company earned $622,932 of interest income during the six months
ended June 30, 1997, which resulted principally from short-term investment of
excess funds. During the six months ended June 30, 1996, the Company earned
$11,496 of interest income. The increase in interest income was attributable to
the temporary investment of excess funds which stemmed from the initial public
offering of the Company's common stock in November 1996. The Company had
interest expense of $190,363 during the six months ended June 30, 1997, and no
interest expense in the six months ended June 30, 1996. Interest expense, net of
capitalized interest, resulted from the Company's secured term and construction
loans and outstanding subordinated promissory note. The Company had no
outstanding loans or notes during the six months ended June 30, 1996.
Liquidity and Capital Resources
During the six months ended June 30, 1997, net cash used in operating
activities totaled $974,414 compared to net cash used in operating activities of
$595,883 for the six months ended June 30, 1996. For the
10
11
1997 period, decreases in cash used in operations totaling $2.2 million resulted
from the Company's net loss, an increase in accounts receivable and prepaid
expenses associated with the increase in the number of operating hotels, an
increase in capitalized pre-opening costs and other assets related to the
increase in the number of Company hotels under construction and a decrease in
accounts payable. This amount was partially offset by increases in accrued
expenses and deferred franchise fee revenue during the period totaling $800,998
and non-cash depreciation and amortization expense of $472,765.
Net cash used in investing activities for the six months ended June 30,
1997 totaled $34.4 million, compared to $4.7 million for the six months ended
June 30, 1996, reflecting the increase in the number of properties open and
under construction. Expenditures for property and equipment totaled $32.6
million in the 1997 period, compared to $4.3 million in the 1996 period, and
primarily related to the construction of new hotels. The Company opened four
hotels and commenced construction of 18 hotels during the six months ended June
30, 1997, bringing the total number of hotels open to five and the number under
construction to 21 at June 30, 1997. In the 1996 period, only one hotel was open
and two were under construction. Increases in pre-acquisition costs and other
assets resulted in decreases in cash totaling $1.9 million for the six months
ended June 30, 1997, compared to $407,806 for the six months ended June 30,
1996.
Net cash provided by financing activities for the six months ended June
30, 1997 totaled $12.5 million, compared to $6.2 million for the six months
ended June 30, 1996. In the 1997 period, net increases in cash resulted
primarily from increases in notes payable of $14.5 million partially offset by
an increase in capitalized loan fees of $2.0 million. In the 1996 period, the
net cash provided by financing activities resulted from members' capital
contributions of $6.2 million.
The Company's material commitments for capital expenditures at June 30,
1997 totaled $76.2 million and related to the 21 hotels under construction at
that date compared to commitments of $6.8 million at June 30, 1996 related to
two hotels then under construction.
The Company's sources of liquidity on a long-term basis include cash
flow from operating Candlewood hotels, secured and unsecured borrowings,
sale/leaseback arrangements and the issuance of debt or equity securities. Also,
the Company is pursuing a private placement of convertible preferred stock or
other equity-linked securities (the "Private Placement"). The Private Placement
transaction is expected to close in the third quarter of 1997 and is expected to
raise approximately $50.0 million to be used to finance the Company's hotel
development strategy. 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
additional hotels.
The Company believes that a combination of the net proceeds from the
Private Placement, selected sale/leaseback transactions, its cash and cash
equivalents, construction financing from NationsBank of Texas, N.A. and GMAC
Commercial Mortgage Corporation along with construction loan guarantees from
Doubletree (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 1998. However, there can be no assurance that such
financing will be available or that changes will not occur that will require the
Company to seek additional capital or financing at an earlier date.
Impact of New Accounting Standards
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 and six month periods
ended June 30, 1997 and 1996 as presented in the accompanying financial
statements.
11
12
In April 1997, the American Institute of Certified Public Accountants
issued a proposed Statement of Position (SOP) Reporting on the Costs of Start-up
Activities. The proposed SOP requires that entities expense costs of start-up
activities as they are incurred. The proposed SOP, if adopted, would be
effective for financial statements for fiscal years beginning after December 15,
1997, with earlier application encouraged. The initial application of the SOP is
to be reported as a cumulative effect of a change in accounting principle. The
Company currently capitalizes hotel pre-opening costs and amortizes such costs,
commencing on the date a property is opened, over the shorter of the estimated
period of benefit or 12 months. Pre-opening costs capitalized, net of
accumulated amortization, at June 30, 1997 totaled $333,267. While the one-time
recording of the cumulative effect of the change in accounting principle could
be material, the on-going effect of the proposed new accounting principle would
be dependent upon the number and timing of new hotels opened.
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 announce
publicly the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
12
13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 19, 1997, the Company held its 1997 Annual Meeting of
Stockholders (i) to elect the Company's board of directors, and
(ii) to ratify the selection of KPMG Peat Marwick LLP as the
Company's independent auditors. The number of shares entitled to
vote was 9,025,000, and the number of shares represented in person
or by proxy was 8,763,283. Each of the current directors was
re-elected. Messrs. Costley, DeBoer, Ferris, Fix, Meyer, Salazar
and Ueberroth received 8,763,283 affirmative votes with no votes
withheld. The selection of KPMG Peat Marwick LLP as the Company's
independent auditors was ratified, with 8,763,283 affirmative
votes and no votes withheld. No other matters were put to a vote
of stockholders at the Annual Meeting.
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 June
30, 1997.
13
14
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: August 12, 1997 By: /s/ Jack P. DeBoer
--------------- --------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: August 12, 1997 By: /s/ Warren D. Fix
--------------- --------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
14
15
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- -------------
3.1 Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Specimen Certificate of Common Stock.*
4.2 Stockholder Agreement, dated September 30, 1996, 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.**
10.7 Employment Agreement between the Company and James E. Roos dated as of
June 2, 1997.
27.1 Financial Data Schedule.
* 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.
15