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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 June 30, 1998
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 June 30, 1998
---------------------------- ----------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
Investment in hotels completed and under
construction:
Hotels completed $ 75,357 $ 75,589
Hotels under construction 95,878 46,320
Other costs 9,219 7,973
--------- ---------
180,454 129,882
Accumulated depreciation and amortization (856) (1,109)
--------- ---------
Net investment in hotels 179,598 128,773
Cash and cash equivalents (including $1,310 and
$1,510 of restricted cash, respectively) 11,735 35,355
Deposits 19,095 8,594
Accounts and other receivables 4,964 3,266
Other assets 7,773 5,819
--------- ---------
Total assets $ 223,165 $ 181,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 73,813 $ 63,416
Accounts payable and other accrued expenses 40,625 16,040
Deferred gain on sale of hotels 11,915 6,807
Other liabilities 1,586 1,494
--------- ---------
Total liabilities 127,939 87,757
Redeemable, convertible preferred stock (Series "A"),
$1,000 stated value, 65,000 shares authorized
and outstanding, net of offering costs 61,339 61,461
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized 9,025,000 issued and outstanding 90 90
Additional paid-in capital 35,270 35,270
Accumulated deficit (1,473) (2,771)
--------- ---------
Total stockholders' equity 33,887 32,589
--------- ---------
Total liabilities and stockholders' equity $ 223,165 $ 181,807
========= =========
See accompanying notes to consolidated financial statements
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except share and per share data)
For the
For the Quarter Ended Six-Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ------------ ------------ ------------
REVENUES:
Hotel operations $ 10,330 $ 1,218 $ 17,247 $ 1,757
Other income 114 60 288 60
----------- ----------- ----------- -----------
Total hotel operating revenues 10,444 1,278 17,535 1,817
Proceeds from sale of hotels, net
of deferred gain of $6,446 55,592 -- 104,514 --
Gain recognized on sale of hotels 154 -- 194 --
----------- ----------- ----------- -----------
Total revenues 66,190 1,278 122,243 1,817
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 5,658 842 10,067 1,377
Corporate operating expenses 929 526 1,737 937
Rent expense on leased hotels 2,624 -- 4,046 --
Depreciation and amortization 452 282 799 473
----------- ----------- ----------- -----------
Total operating costs and
expenses 9,663 1,650 16,649 2,787
Cost of hotels sold 55,592 -- 104,514 --
----------- ----------- ----------- -----------
935 (372) 1,080 (970)
Interest income 124 248 486 623
Interest expense -- (39) (38) (190)
----------- ----------- ----------- -----------
Pre-tax income (loss) 1,059 (163) 1,528 (537)
Income tax (230) -- (230) --
----------- ----------- ----------- -----------
Net income (loss) 829 (163) 1,298 (537)
Preferred stock dividends (1,215) -- (2,417) --
----------- ----------- ----------- -----------
Net loss available to common
stockholders $ (386) $ (163) $ (1,119) $ (537)
=========== =========== =========== ===========
Net loss per share of common
stock basic and diluted $ (0.04) $ (0.02) $ (0.12) $ (0.06)
=========== =========== =========== ===========
Weighted average shares
outstanding - basic and diluted 9,025,000 9,025,000 9,025,000 9,025,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,298 $ (537)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 799 473
Change in:
Deposits (10,501) --
Accounts receivable (1,854) (399)
Opening costs (640) (326)
Other assets (743) (549)
Accounts payable and other accrued expenses 4,779 (299)
Other liabilities 194 101
--------- ---------
Net cash used in operating activities (6,668) (1,536)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
construction (137,455) (35,004)
Increase in acquisition costs (606) (59)
Purchase of intangible assets (25) (6)
--------- ---------
Cash used in investing activities (138,086) (35,069)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of hotels 110,960 --
Payments on mortgages and notes payable (61,277) (3)
Proceeds from mortgages and notes payable 71,674 14,481
Expenditures for private placement (122) --
Payments on capital leases (101) --
--------- ---------
Net cash provided by financing activities 121,134 14,478
--------- ---------
Net increase (decrease) in cash and cash
equivalents (23,620) (22,127)
Cash and cash equivalents at beginning of period 35,355 33,792
--------- ---------
Cash and cash equivalents at end of period $ 11,735 $ 11,665
========= =========
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
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 Company was incorporated in the State of
Delaware in August, 1996, and in November, 1996, the Company succeeded to the
business of Candlewood LLC and completed an initial public offering of its
common stock (collectively, the "Reorganization").
The accompanying unaudited financial statements of Candlewood Hotel
Company, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. The statements include the accounts of Candlewood Hotel Company, Inc. and
its subsidiaries, including Candlewood LLC, which was the entity through which
business was conducted until completion of the Reorganization, and various
wholly-owned LLCs which own or lease certain hotels. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements have been omitted. The accompanying unaudited
financial statements contain all adjustments (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 the Company's financial position and results of operations. The
condensed consolidated balance sheet data at December 31, 1997 was derived from
the Company's audited financial statements. These interim financial statements
should be read in conjunction with the Company's 1997 Annual Report on Form
10-K, as amended, 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.
B. Investment in Hotels Completed and Under Construction
Hotels Completed. Hotels completed are stated at cost and include the
related furniture, fixtures and equipment. Once the hotels are completed,
depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Maintenance and
repairs are charged to operations as incurred.
Hotels Under Construction. Hotels under construction represents costs
incurred in the acquisition and development of hotels. Such costs include land
acquisition costs, construction costs, capitalized interest and construction
overhead. Interest costs for the construction of hotels are capitalized. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to hotels completed and depreciated over the asset's useful life.
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Other Costs. Other costs include opening and acquisition costs. Opening
costs are costs incurred prior to the opening of a hotel and are related to the
hiring and training of hotel personnel, such as compensation, travel and
relocation. Such costs are capitalized and amortized, commencing on the date a
property is opened, over the shorter of the estimated period of benefit or
twelve months. Acquisition costs are costs related to the acquisition of
property sites. These costs are added to the costs of the hotels under
construction when the site is acquired and construction at the hotel begins.
Costs associated with a particular site are expensed to operations when the
Company determines it will no longer pursue the site.
C. Cash and Cash Equivalents
The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
D. Restricted Cash
Restricted cash represents cash that, under the terms of certain letters
of credit, has been set aside for pending land acquisitions. These funds are
applied as payments upon the closing of escrow of related acquisitions.
E. Revenue Recognition
Room revenue and other revenue are recognized when earned. Recognition
of franchise fee revenue, included in other income, is deferred until all
material services or conditions relating to the respective franchise have been
substantially performed or satisfied by the Company.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds. Related
profit is deferred under generally accepted accounting principles until
operating performance levels are achieved. At such time, the deferred gain is
recognized in earnings over the remaining lease term.
F. Income Taxes
The Company is taxed as a corporation as defined in subchapter "C" under
the Internal Revenue Code for federal and state income tax purposes and accounts
for any temporary differences under the asset and liability method.
G. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements. The assumed conversion of the Company's Series A and Series B
Preferred Stock and the outstanding options to purchase the Company's common
stock would be antidilutive and, therefore, are not included in the reported
diluted earnings per share calculation.
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H. 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.
I. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform with the current period presentation. Such reclassifications have no
effect on the operations or equity as originally presented.
Note 2: Notes Payable
As of June 30, 1998, the Company had entered into building loan
agreements with GMAC Commercial Mortgage Corporation for 24 of the Company's
hotels. Each agreement was entered into by a separate wholly-owned subsidiary of
the Company which owns the related property and hotel. The terms of the building
loan agreements provide for advances, generally on a monthly basis, based on
construction costs incurred to date. Interest on the loans is payable monthly,
in arrears, beginning on the first day of the first full calendar month after
the date of each agreement. Interest payments are calculated at a variable rate
per annum, adjusted monthly, at rates ranging from LIBOR plus 3.40% to 4.25%.
Based on the individual note, principal payments commence either 12 months
following related hotel opening or 18 months from related loan closing.
Depending on the terms of the individual notes, principal payments are
calculated based on a 25-year amortization schedule using either a 10% fixed
interest rate or the prevailing interest rate under the note. The notes mature
on the first day of the first full calendar month after the fourth anniversary
and provide for two 12-month extension periods. Amounts borrowed under the
building loan agreements are secured by the respective hotels, the land on which
they are constructed and certain funds deposited in demand deposit accounts
assigned to GMAC and are guaranteed by the Company and certain other of the
Company's wholly-owned subsidiary LLCs. Certain amounts borrowed under the
building loan agreements are further partially guaranteed by Doubletree
Corporation, a wholly-owned subsidiary of Promus Hotel Corporation. At June 30,
1998, $51.3 million was outstanding under these 24 building loan agreements.
The Company has entered into a promissory note with NationsBank of
Texas, N.A. ("NationsBank") relating to the Company's Overland Park, Kansas
hotel. The agreement was entered into by a wholly-owned subsidiary of the
Company which owns the related property and hotel. 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 begin in September, 1998, and will continue until February,
2000 at which time the note matures. The loan may be extended for one year if
certain conditions are met and upon payment of a specified extension fee. During
the one-year extension period, the Company will be required to 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
they are constructed and certain funds deposited in demand deposit accounts
assigned to NationsBank and are guaranteed by the Company and certain other of
the Company's wholly-owned subsidiary LLCs. At June 30, 1998, $4.0 million was
outstanding under the note.
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The Company had $15.0 million in subordinated indebtedness outstanding
as of June 30, 1998 with Doubletree Corporation, evidenced by two promissory
notes. Interest is payable quarterly at rates ranging from 7.0% to 15.0%, with
principal of $12.5 million and $2.5 million payable at maturity in November,
2001, and July, 2002, respectively.
At June 30, 1998, the Company had $3.5 million of short-term promissory
notes related to the acquisition of certain property sites. The notes range in
maturity from 30 to 180 days with interest payable at maturity at rates ranging
from 9.0% to 12.0%.
Note 3: Preferred Stock
General
The Company has authorized "blank check" preferred stock in the amount
of 5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of issuance
of any preferred stock, the Company determines whether the stock is redeemable
and the appropriate classification of the stock on the balance sheet. At June
30, 1998 and December 31, 1997, as more fully described below, 65,000 shares of
Series A redeemable preferred stock were issued and outstanding.
Series "A" Preferred Stock Offering
In order to help finance the continued nationwide development of
Company-owned hotels, in October 1997, the Company completed a $65.0 million
private placement (the "Private Placement") of 65,000 shares of Series "A"
Preferred Stock (the "Preferred Stock") at an offering price of $1,000 per share
(the "Stated Value"). The net proceeds to the Company were approximately $61.3
million, after deducting commissions and expenses of $3.7 million.
The Preferred Stock accumulates dividends at a rate of 7.5% of the
Stated Value, per annum, payable in cash initially on August 31, 1998 and
quarterly, including up to the date of conversion; thereafter, dividends are
paid when and if declared by the board of directors.
Preferred Stockholders will have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.50 per
share. Subsequent to August 31, 1999, the Preferred Stock will be redeemable in
cash, in whole or part, at the option of the Company at 200% of the Stated
Value. At August 31, 2004, the Preferred Stock will be redeemed under a
mandatory redemption clause, at the Stated Value plus unpaid dividends.
Preferred Stockholders have certain voting rights related to the
nomination and election of directors as defined in the stock purchase agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
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Note 4: Sale-Leaseback
In November, 1997, the Company entered into an agreement with
Hospitality Properties Trust ("HPT"), to sell 15 hotels for a total purchase
price of $100 million, and to lease the hotels back from the buyer under a
noncancelable operating lease. The Company completed the sale and leaseback of
five hotels in December, 1997, nine hotels in the first quarter of 1998, and one
hotel in the second quarter of 1998.
In May, 1998, the Company announced a second agreement with HPT to sell
and leaseback 17 hotels for a total purchase price of $141.4 million. The
Company expects to use the proceeds, after repayment of debt and expenses, for
the continued national expansion of its hotel brand. The first closing was
completed on May 21, 1998 and as of June 30, 1998, six of the 17 hotels had been
sold. The remainder of the transaction is expected to close in several phases
and be completed by the end of 1998 or the first quarter of 1999.
Both transactions with HPT bear similar terms. Terms of the sale are all
cash at the close of escrow for hotels sold. The lease term for the
noncancelable operating leases is 14 years for the 15 hotels in the first
transaction and 13 years for the 17 hotels in the second transaction. The leases
call for monthly lease payments and a security deposit equal to one year's lease
payments.
The agreements also provide for the Company to guarantee the payment of
rent until defined operating cash flows exceed the annual lease payments by 150%
for 12 consecutive months. In connection with this obligation, the Company was
required to place a 5% guaranty deposit with HPT, upon the initial closing of
each transaction; the deposit will be refunded to the Company when cash flows
from operations exceed required lease payments by 140% of defined cash flows
from operations. The guaranty deposit is charged to cost of sales as the hotels
are sold. Upon attainment of the required coverage ratios, a portion of the
guaranty deposit refunded to the Company will be recognized in income in
accordance with generally accepted accounting principles beginning in the period
such funds are received.
As of June 30, 1998, the Company had completed the sale of 21 hotels, 16
of which have been sold in 1998. The cumulative sales price for the 21 hotels is
$146.9 million with a total deferred gain on the sale of the hotels of $11.9
million. Such gain will be recognized into income as required support
obligations stipulated in the operating lease agreements are met.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OPERATIONS
General
The Company owns, develops, operates, manages and franchises hotels
serving mid-market extended-stay business travelers. The Company's overall
results of operations and financial position are significantly influenced by its
development activity. The Company began operations in October, 1995, and opened
it's first hotel in May, 1996. At the end of 1997, the Company operated 21
hotels located in 16 different states. During the first quarter of 1998, the
Company opened two new company-operated hotels and two new franchised hotels.
During the second quarter of 1998, the Company opened 10 new company-operated
hotels. At June 30, 1998, the Company had a total of 33 company-operated hotels
and five franchised hotels in operation, located in 19 different states. The
Company also began construction on ten additional company-owned properties
during the second quarter. At the end of the quarter, the Company had a total of
29 company-owned hotels and five
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franchised hotels under construction, and was performing market-feasibility due
diligence with respect to 33 potential development sites under contract in 29
states. The contracts into which the Company enters for the purchase of
potential hotel sites provide for numerous investigations and other due
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 due diligence. There can be no assurance that the Company
will acquire properties or complete the development and construction of hotels
or that any such development or construction will be completed on time or within
budget.
In order to fully utilize the Company's financial resources and
accelerate the roll-out of hotels, the Company has agreed to sell and leaseback
certain of its hotels from HPT.. The provisions of the sale-leaseback
transaction allows the Company to operate, as lessee, on a long-term basis,
hotels which it has developed or will develop and to retain a portion of
improved hotel economics under certain circumstances. Quarterly and year to date
results from operations for the three months and six months ended June 30, 1998,
reflect the ongoing transaction with HPT. For this reason, care should be
exercised when drawing comparison to 1997 results. In place of depreciation and
amortization of assets and interest expense, the Company has recorded rent
expense on hotels leased back from HPT under an operating lease agreement.
Proceeds from the sale of hotels is recorded net of the deferred gain on sale.
The gain is deferred under generally accepted accounting principles until
operating performance levels are achieved. At such time, the deferred gain will
be recognized in earnings over the remaining lease term.
The Company's operating results are significantly influenced by several
factors including (i) the demand for and supply of extended-stay lodging in the
Company's markets, (ii) occupancy and average daily rates, (iii) the
effectiveness of hotel operations, (iv) the cost at which the Company can
develop additional extended-stay lodging properties and (v) other factors
discussed in the Company's Annual Report on Form 10-K. The Company's overall
occupancy and average daily rates during any period are further influenced by
the number of hotels in their first 12 months of operation, during which
occupancy rates are typically lower. Newly opened properties typically
experience lower occupancies during their first 12 months of operation and as a
result average occupancy rates are impacted by the ratio of newly opened
properties to total properties. Capital and credit market conditions which
affect the Company's cost of capital may influence future operating results, as
well. 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, 1998 and 1997
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue (e.g. guest telephone, vending, pay-per-view movie rental), totaled
$10.3 million for the quarter ended June 30, 1998, compared to $1.2 million for
the quarter ended June 30, 1997. The increase in room revenue was a result of
the operations of the 33 hotels open at June 30, 1998, compared to the
operations of the five hotels open at June 30, 1997. 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 69.4% for the quarter ended June 30, 1998, compared to 57.5% for the
quarter ended June 30, 1997, and was positively impacted by the increasing
occupancy of hotels which had completed or were near completion of their ramp-up
phase. During the quarter ended June 30, 1998, the average daily room rate was
$53.15 compared to $49.37 for the quarter ended
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June 30, 1997. Revenue per available room (RevPAR) was $36.88 for the quarter
ended June 30, 1998, compared to $28.40 for the quarter ended June 30, 1997. The
increase in average daily room rate and RevPAR was positively impacted by the
Company's entry into higher priced markets and the gradual increase in rates and
occupancy percentages for certain hotels which had completed or were near
completion of their ramp-up phase.
Hotel operating expenses for the quarter ended June 30, 1998, totaled
$5.7 million, compared to $842,000 for the same period in 1997, and consisted of
all expenses directly applicable to the operation of the hotels. The largest
portion of hotel operating expenses consisted of salaries, wages and fringe
benefits. The balance of hotel operating expenses was comprised of normal
operating items, such as utilities, property taxes, insurance, supplies,
promotional materials, maintenance items and similar expenses. At June 30, 1998,
the Company had 33 hotels in operation, compared to five hotels at June 30,
1997, and the increase in hotel operating expenses in the second quarter of 1998
compared to 1997 was a result of this growth.
Depreciation and amortization expense applicable to hotel operations
(e.g. building, furniture, fixtures, equipment and capitalized opening costs)
for the quarter ended June 30, 1998, totaled $386,000, compared to $252,000 for
the quarter ended June 30, 1997. The increase in depreciation and amortization
expense in the second quarter of 1998 compared to 1997 was a result of the
increase in the number of company-owned hotels in operation during the 1998
period. In accordance with generally accepted accounting principles, the Company
did not depreciate certain assets held for sale pursuant to sale-leaseback
transactions during the quarter ended June 30, 1998. 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
opening costs, which are amortized over no more than the first twelve months of
operations.
Corporate Operations
Other income for the quarter ended June 30, 1998, totaled $114,000,
compared to $60,000 for the quarter ended June 30, 1997. Other income consists
primarily of franchise fees and royalty fees from franchise hotels and
management fees received from a managed hotel, Cambridge Suites, located in
Wichita, Kansas. At June 30, 1998, the Company had five franchised hotels in
operation, compared to one hotel at June 30, 1997. The growth in other income in
the second quarter of 1998 compared to 1997 was due to royalty income from the
franchised hotels and timing of recognition of franchise fee income.
The Company sold seven hotels to HPT during the second quarter of 1998
for a total sales price of $55.0 million. For the quarter ended June 30, 1998,
the Company recognized $154,000 in earnings from gain on hotels sold based on
hotel operating performance. The Company also incurred rent expense in the
second quarter of $2.6 million on the 21 hotels sold to HPT as of June 30, 1998.
There was no sale-leaseback activity recorded in the three month period ended
June 30, 1997.
Corporate operating expenses for the quarter ended June 30, 1998,
totaled $929,000 compared to $526,000 for the quarter ended June 30, 1997, 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, utilities, advertising, professional fees and similar expenses. 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 increase in hotels in operation, under construction and properties
on which the Company was performing due diligence.
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Depreciation and amortization applicable to corporate operations for the
quarter ended June 30, 1998, totaled $66,000, compared to $30,000 for the
quarter ended June 30, 1997, and related to the furniture, equipment and
intangible assets of the corporate office. The increase in depreciation and
amortization reflects the increase in furniture, fixtures and equipment required
as the corporate office support staff expands to meet the Company's growth
needs. Depreciation expense is calculated using the straight-line method over
the estimated useful lives of the respective assets, ranging from three to
twenty years. Amortization expense for intangible assets (e.g. operating rights,
trademarks, logos) is computed using the straight-line method over the life of
the corresponding asset.
The Company earned $124,000 of interest income during the quarter ended
June 30, 1998, which resulted principally from short-term investment of excess
funds. For the quarter ended June 30, 1997, the Company earned $248,000 of
interest income related to the temporary investment of excess funds which
stemmed from the initial public offering of the Company's common stock. The
Company capitalized all interest expense for the quarter ended June 30, 1998,
compared to $39,000 for the quarter ended June 30, 1997. The decrease in
interest expense was a result of the use of the proceeds from the Private
Placement and sale-leaseback transactions to fund the Company's expansion in
1998 rather than the use of borrowed funds.
Comparison of six months ended June 30, 1998 and 1997
Hotel Operations
Revenue from hotel operations, which includes room revenue and other
revenue (e.g. guest telephone, vending, pay-per-view movie rental), totaled
$17.2 million for the six months ended June 30, 1998, compared to $1.8 million
for the six months ended June 30, 1997. The increase in room revenue was a
result of the operations of the 33 hotels open at June 30, 1998, compared to the
operations of the five hotels open at June 30, 1997. 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 65.3% for the six months ended June 30, 1998, compared to 54.1% for
the six months ended June 30, 1997, and was positively impacted by the
increasing occupancy of hotels which had completed or were near completion of
their ramp-up phase. During the six months ended June 30, 1998, the average
daily room rate was $53.42 compared to $48.28 for the quarter ended June 30,
1997. Revenue per available room (RevPAR) was $34.88 for the six months ended
June 30, 1998, compared to $26.12 for the six months ended June 30, 1997. The
increase in average daily room rate and RevPAR was positively impacted by the
Company's entry into higher priced markets and the gradual increase in rates and
occupancy percentages for certain hotels which had completed or were near
completion of their ramp-up phase.
Hotel operating expenses for the six months ended June 30, 1998, totaled
$10.1 million, compared to $1.4 million for the same period in 1997, and
consisted of all expenses directly applicable to the operation of the hotels.
The largest portion of hotel operating expenses consisted of salaries, wages and
fringe benefits. The balance of hotel operating expenses was comprised of normal
operating items, such as utilities, property taxes, insurance, supplies,
promotional materials, maintenance items and similar expenses. The increase in
hotel operating expenses was primarily due to the additional number of hotels in
operation during the six months ended June 30, 1998.
Depreciation and amortization expense applicable to hotel operations
(e.g. building, furniture, fixtures, equipment and capitalized opening costs)
for the six months ended June 30, 1998,
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totaled $676,000, compared to $413,000 for the six months ended June 30, 1997.
The increase in depreciation and amortization expense in the first quarter of
1998 compared to 1997 was a result of the increase in the number of
company-owned hotels in operation during the 1998 period. In accordance with
generally accepted accounting principles, the Company did not depreciate certain
assets held for sale pursuant to sale-leaseback transactions during the six
months ended June 30, 1998. 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 opening costs, which
are amortized over no more than the first twelve months of operations.
Corporate Operations
Other income for the six months ended June 30, 1998, totaled $288,000,
compared to $60,000 for the six months ended June 30, 1997. Other income
consists primarily of franchise fees and royalty fees from franchise hotels and
management fees received from a managed hotel, Cambridge Suites, located in
Wichita, Kansas. At June 30, 1998, the Company had five franchised hotels in
operation, compared to one hotel at June 30, 1997. The growth in other income in
1998 compared to 1997 was due to royalty income from the franchised hotels and
timing of recognition of franchise fee income.
The Company sold 16 hotels to HPT during the six months ended June 30,
1998 for a total sales price of $111.0 million. A deferred gain of $6.4 million
was recorded on the sale. For the six months ended June 30, 1998, the Company
recognized $194,000 in earnings from gain on hotels sold, based on hotel
operating performance. The Company also incurred rent expense on leased hotels
of $4.0 million on the 21 hotels sold to HPT as of June 30, 1998. There was no
sale-leaseback activity recorded in the six month period ended June 30, 1998.
Corporate operating expenses for the six months ended June 30, 1998,
totaled $1.7 million compared to $937,000 for the six months ended June 30,
1997, 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, utilities, advertising, professional fees and
similar expenses. 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 increase in hotels in operation, under
construction and properties on which the Company was performing due diligence.
Depreciation and amortization applicable to corporate operations for the
quarter ended June 30, 1998, totaled $123,000, compared to $60,000 for the six
months ended June 30, 1997, and related to the furniture, equipment and
intangible assets of the corporate office. The increase in depreciation and
amortization reflects the increase in furniture, fixtures and equipment required
as the corporate office support staff expands to meet the Company's growth
needs. Depreciation expense is calculated using the straight-line method over
the estimated useful lives of the respective assets, ranging from three to
twenty years. Amortization expense for intangible assets (e.g. operating rights,
trademarks, logos) is computed using the straight-line method over the life of
the corresponding asset.
The Company earned $486,000 of interest income during the six months
ended June 30, 1998, which resulted principally from short-term investment of
excess funds. For the six months ended June 30, 1997, the Company earned
$623,000 of interest income related to the temporary investment of excess funds
which stemmed from the initial public offering of the Company's common stock.
The Company had interest expense, net of capitalized interest, of $38,000 for
the six months
14
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ended June 30, 1998, compared to $190,000 for the six months ended June 30,
1997. The decrease in interest expense was a result of the use of the proceeds
from the Private Placement and sale-leaseback transaction to fund the Company's
expansion in 1998 rather than the use of borrowed funds.
Liquidity and Capital Resources
In two closings, on July 13, 1998 and August 3, 1998, the Company
completed a private placement whereby the Company issued 42,000 shares of its
Series B Cumulative Convertible Preferred Stock, par value $.01 per share, at a
price of $1,000 per share. In addition, the Company issued 336,000 warrants to
purchase Common Stock at $12.00 per share. In total, $42.0 million in proceeds
was received, before placement fees and other placement-related costs. The
Company intends to use the net proceeds of the private placement to support the
continued development of the Company's extended-stay hotels and other general
corporate purposes.
In May 1998, the Company announced a second agreement with HPT to sell
and leaseback 17 hotels for a total purchase price of $141.4 million. As of June
30, 1998, six of the 17 hotels had been sold. The remainder of the transaction
is expected to close in several phases and be completed by the end of 1998 or
the first quarter of 1999.
At June 30, 1998, the Company had commitments to complete construction
of 29 extended-stay properties with a total cost of approximately $232 million.
The Company believes that a combination of its cash and cash equivalents and
cash from operations, borrowed funds from third party lenders (if approved on an
individual basis), together with its subordinated credit facility and
construction loan guarantees from Doubletree, and proceeds from the private
placement and sale-leaseback will be sufficient to provide capital for
development and operations into the fourth quarter of 1998. 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. Capital resources in
addition to those described above will be needed to fund the Company's planned
development. The Company may establish credit facilities or issue long-term debt
or additional equity securities. There can be no assurance that the Company will
be able to obtain financing on a timely basis, on acceptable terms or at all.
Failure to obtain such financing could result in the delay or abandonment of
some or all of the Company's development and expansion plans and could have a
material adverse effect on the Company.
During the six months ended June 30, 1998, net cash used in operating
activities totaled $6.7 million compared to the six months ended June 30, 1997
when the Company used $1.5 million in operating activities. For the 1998 period,
increases in deposits of $10.5 million resulted from the 10% security deposit
and 5% guaranty deposit required for the additional 16 hotels sold pursuant to
the sale leaseback agreements with HPT. This amount was partially offset by a
$4.8 million increase in accounts payable and accrued expenses related to the 33
hotels in operation and 29 hotels under construction.
Net cash used in investing activities for the six months ended June 30,
1998, totaled $138.1 million, compared to $35.1 million for the six months ended
June 30, 1997, reflecting the expenditures for completion of hotels that were
sold and the increase in the number of properties open and under construction.
At June 30, 1998, the Company had 33 hotels open and 29 under construction
compared to five open hotels and 21 hotels under construction at June 30, 1997.
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Net cash provided by financing activities for the six months ended June
30, 1998, totaled $121.1 million, compared to $14.5 million for the six months
ended June 30, 1997. The increase in cash reflects the $111.0 million proceeds
from the sale of the 16 hotels in 1998. In the 1997 period, the cash provided by
financing activities was related to proceeds from mortgages and notes payable.
The Company has not paid dividends on its Common Stock. The Company
currently does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future. The Series A and Series B Preferred Stock accumulate
dividends which are payable quarterly in cash, initially on August 31, 1998.
After payment of dividends on the Preferred Stock, the Company intends to retain
any future earnings for reinvestment in the development and expansion of its
business.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Based on its
recent assessment, management of the Company does not anticipate that any
significant modification or replacement of the Company's software will be
necessary for its computer systems to properly utilize dates beyond December 31,
1999, or that the Company will incur significant operating expenses to make any
such computer system improvements. The Company is in the process of contacting
its suppliers, lenders, and service providers regarding their need to make any
software modifications or replacements. The Company is not able to determine,
however, whether their failure to make such software corrections will have an
effect on the Company's operations or financial condition.
Impact of New Accounting Standards
In April, 1998, the American Institute of Certified Public Accountants
issued a Statement of Position (SOP 98-5), Reporting on the Costs of Start-up
Activities. The SOP requires that entities expense costs of start-up activities
as they are incurred. Except for certain entities, this SOP is effective for
financial statements for fiscal years beginning after December 15, 1998, 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 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. Opening costs capitalized, net of accumulated
amortization, at June 30, 1998, totaled $2.4 million. Candlewood expects to
adopt the SOP in the fourth quarter of 1998, at which time a cumulative effect
of the change in accounting principle will be recorded.
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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
other 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In two closings, on July 13, 1998 and August 3, 1998, the Company
completed a private placement whereby the Company issued 42,000
shares of its Series B Cumulative Convertible Preferred Stock, par
value $.01 per share, at a price of $1,000 per share. In addition,
the Company issued 336,000 warrants to purchase Common Stock at
$12.00 per share. The purchasers of the Preferred Stock consisted of
a group of institutional investors and individuals who are
"accredited investors" within the meaning of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Act"). The sales
were made in reliance on an exemption from registration pursuant to
Section 4(2) of the Act, as transactions by an issuer not involving a
public offering. The contents of the Company's current report on form
8-K filed on August 10, 1998 are incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 18, 1998, the Company held its 1998 Annual Meeting of
Stockholders 1) to elect the Company's board of directors, and 2) to
amend the Company's Equity Participation Plan to increase the number
of authorized shares of Common Stock available for issuance from
900,000 to 1,676,710. The number of shares entitled to vote was
9,025,000 shares of the Company's Common Stock and 65,000 shares of
the Company's Series A Preferred Stock. On an as-converted basis, the
total number of shares of Common Stock available to vote was
15,867,105. The total number of shares represented in person or by
proxy to vote was 10,193,972 for the election of the directors and
9,783,632 for the amendment to the Equity Participation Plan. Each of
the current directors was re-elected. Messrs. Costley, Cresci,
DeBoer, Ferris, Fix, Morris, Pados, Perocchi and Salazar received
10,192,772 affirmative votes with 1,200 votes against. The amendment
to the Equity Participation Plan passed with 9,128,845 affirmative
votes, 651,055 votes against, and 3,732 votes abstained. No other
matters were put to a vote of stockholders at the Annual Meeting.
ITEM 5. OTHER INFORMATION
New SEC rules regarding shareholder proposals became effective on
June 29, 1998. Pursuant to these new rules, if the Company has not
received notice by March 4, 1999 of any matter a shareholder intends
to propose for a vote at the 1999 Annual Meeting of Shareholders,
then a proxy solicited by the Board of Directors may be voted on such
matter in the discretion of the proxy holder, without discussion of
the matter in the proxy statement soliciting such proxy and without
such matter appearing as a separate item on the proxy card.
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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
On June 9, 1998, the Company filed Report on Form 8-K, reporting the
Sale/Leaseback Transaction entered into with HPT on May 14, 1998.
On August 6, 1998, the Company filed Report on Form 8-K/A, amending
the Form 8-K filed on June 9, 1998. This filing disclosed certain
amendments and the pro forma financial information relating to the
Sale/Leaseback Transaction.
On August 10, 1998, the Company filed Report on Form 8-K, reporting
the issuance of the Company's Series B Cumulative Convertible
Preferred Stock.
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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: August 14, 1998 By: /s/ JACK P. DEBOER
-----------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: August 14, 1998 By: /s/ WARREN D. FIX
-----------------------------------
Warren D. Fix, Executive Vice
President and Chief Financial
Officer
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
3.3 Amended Bylaws of the Company(10)
3.4 Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of Series A
Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc.(3)
3.5 Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of Series B
Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc.(10)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Warrant(9)
4.3 Amended and Restated Stockholders Agreement dated as
of July 10, 1998(10)
10.1 Form of Indemnification Agreement for executive officers
and directors.(5)
10.2 1996 Equity Participation Plan and form of stock
option agreements.(5)
10.3 First Amendment to the 1996 Equity Participation Plan
effective as of May 18, 1998
10.4 Employment Agreement between the Company and Jack P. DeBoer
dated as of September 1, 1996.(1)
10.5 Credit Facility Agreement between the Company and
Doubletree Corporation dated as of November 11, 1996.(2)
10.6 Subordinated Promissory Note from the Company to
Doubletree Corporation dated as of November 11, 1996.(2)
10.7 Employment Agreement between the Company and James
Roos dated as of June 2, 1997.(4)
10.8 Series A Cumulative Convertible Preferred Stock
Purchase Agreement dated as of August 27, 1997.(3)
10.9 Purchase and Sale Agreement, dated as of November
19, 1997, by and among the Company and certain of its
affiliates, as sellers, and HPT, as purchaser.(6)
10.10 Agreement to Lease, dated as of November 19, 1997,
by and between the Company and HPT.(6)
10.11 Lease Agreement, dated as of December 24, 1997, by
and between HPTCW, as landlord, and Candlewood Leasing
No. 1, Inc., as tenant.(6)
10.12 Guaranty Agreement, dated as of December 24, 1997,
by the Company for the benefit of HPTCW and HPT.(6)
10.13 Stock Pledge Agreement, dated as of December 24,
1997, by the Company for the benefit of HPTCW.(6)
10.14 Purchase and Sale Agreement, dated as of May 14,
1998, by and among the Company and certain of its
affiliates, as sellers, and HPT, as purchaser.(7)
10.15 Agreement to Lease, dated as of May 14, 1998, by
and between the Company and HPT.(7)
10.16 Lease Agreement, dated as of May 21, 1998, by and
between HPTCW, as landlord, and Candlewood Leasing
No. 2, Inc., as tenant.(7)
10.17 Guaranty Agreement, dated as of May 14, 1998, by
the Company for the benefit of HPTCW and HPT.(7)
10.18 Stock Pledge Agreement, dated as of May 21, 1998, by
the Company for the benefit of HPTCW.
10.19 Second Amendment to Purchase and Sale Agreement,
Agreement to Lease, Lease Agreement and Incidental
Documents dated as of July 31, 1998(9)
10.20 Securities Purchase Agreement dated as of June 30,
1998(10)
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Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
10.21 Amended and Restated Registration Rights Agreement
dated as of July 10, 1998(10)
11.1 Statement re Computation of Per Share Earnings - not
applicable.
27.1 Financial Data Schedule.
- -------------------
(1) Incorporated by reference pursuant to Rule 12b-32 from the Company's
Registration Statement on Form S-1 (Registration No. 333-12021).
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 8, 1997.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(6) Incorporated by reference from the Company's Current Report on Form 8-K
filed January 7, 1998.
(7) Incorporated by reference from the Company's Current Report on Form 8-K
filed June 9, 1998.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997 filed July 30, 1998.
(9) Incorporated by reference from the Company's Current Report on Form 8-K/A
filed August 6, 1998.
(10) Incorporated by reference from the Company's Current Report on Form 8-K
filed August 10, 1998.
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