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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-21583
CANDLEWOOD HOTEL COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8621 E. 21st Street North, Suite 200
Wichita, Kansas 67206
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(Address of principal executive offices)
(316) 631-1300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 11, 1999
- ---------------------------- --------------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value, stated value and share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 225,717 $ 150,401
Hotels under construction 46,627 67,447
Other costs 4,296 16,591
--------- ---------
276,640 234,439
Accumulated depreciation and amortization (6,716) (1,907)
--------- ---------
Net investment in hotels 269,924 232,532
Cash and cash equivalents (including $4,854 and $521 of
restricted cash, respectively) 18,729 23,155
Deposits 26,334 23,847
Accounts and other receivables 6,594 3,566
Other assets 16,978 10,258
--------- ---------
Total assets $ 338,559 $ 293,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 179,001 $ 114,742
Accounts payable and other accrued expenses 26,278 40,277
Deferred gain on sale of hotels 17,876 16,771
Other liabilities 1,160 1,449
--------- ---------
Total liabilities 224,315 173,239
Redeemable, convertible, cumulative preferred stock
("Series A"), $1,000 stated value, 65,000
shares authorized and outstanding, net of
offering costs 61,339 61,339
Redeemable, convertible, cumulative preferred stock
("Series B"), $1,000 stated value, 42,000
shares authorized and outstanding, net of
offering costs 39,350 39,398
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 (21,805) (15,978)
--------- ---------
Total stockholders' equity 13,555 19,382
--------- ---------
Total liabilities and stockholders' equity $ 338,559 $ 293,358
========= =========
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 Quarter Ended For the Nine-Months Ended
--------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUES:
Hotel operations $ 29,585 $ 14,120 $ 77,758 $ 31,367
Other income 538 106 981 394
----------- ----------- ----------- -----------
Total hotel operating revenues 30,123 14,226 78,739 31,761
Proceeds from sale of hotels, net of deferred
gain of $2,317 and 9,130, respectively -- 30,216 24,283 134,730
Deferred gain recognition on sales of hotels 395 104 904 298
----------- ----------- ----------- -----------
Total revenues 30,518 44,546 103,926 166,789
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 15,609 7,478 43,753 17,545
Corporate operating expenses 1,067 776 3,535 2,513
Rent expense on leased hotels 6,227 3,662 18,581 7,708
Hotel opening costs 208 -- 1,005 --
Abandoned site costs -- 43 863 43
Depreciation and amortization 2,364 1,232 5,959 2,031
----------- ----------- ----------- -----------
Total operating costs and expenses 25,475 13,191 73,696 29,840
Cost of hotels sold -- 30,216 24,283 134,730
----------- ----------- ----------- -----------
5,043 1,139 5,947 2,219
Interest income 171 451 763 937
Interest expense (3,099) -- (6,513) (38)
----------- ----------- ----------- -----------
Income (loss) before income taxes 2,115 1,590 197 3,118
Income tax -- (636) -- (866)
----------- ----------- ----------- -----------
Income (loss) before preferred dividends 2,115 954 197 2,252
Preferred stock dividends (2,023) (1,898) (6,003) (4,315)
----------- ----------- ----------- -----------
Net income (loss) available to common
stockholders $ 92 $ (944) $ (5,806) $ (2,063)
=========== =========== =========== ===========
Net income (loss) per share of common
stock - basic and diluted $ 0.01 $ (0.10) $ (0.64) $ (0.23)
=========== =========== =========== ===========
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)
Nine months Ended Nine months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 197 $ 2,252
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 5,959 2,031
Deferred gain recognition on sales of hotels (904) (298)
Abandoned site costs 863 43
Change in:
Hotels completed and under construction -
held for sale 20,776 4,653
Deposits (2,487) (12,466)
Accounts receivable (3,796) (2,377)
Opening costs 718 (2,115)
Other assets (5,343) (1,526)
Accounts payable and other accrued expenses (1,733) 3,278
Deferred gain on sale of hotels 2,009 6,195
Other liabilities (84) 1,137
--------- ---------
Net cash provided by operating activities 16,175 807
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
Construction (89,041) (71,606)
Change in site acquisition costs 10,714 (10,819)
Purchase of intangible assets (256) (38)
--------- ---------
Net cash used in investing activities (78,583) (82,463)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 67,613 111,028
Payments on mortgages and notes payable (3,354) (78,892)
Net proceeds from issuance of preferred stock -- 39,312
Preferred stock dividends (6,024) (4,919)
Other liabilities (205) (207)
Expenditures for private placement (48) --
--------- ---------
Net cash provided by financing activities 57,982 66,322
--------- ---------
Net decrease in cash and cash equivalents (4,426) (15,334)
Cash and cash equivalents at beginning of period 23,155 35,355
--------- ---------
Cash and cash equivalents at end of period $ 18,729 $ 20,021
========= =========
See accompanying notes to consolidated financial statements.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
The Company's current business of owning, operating, managing,
developing and franchising 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 consolidated financial statements of
Candlewood Hotel Company, Inc. (the "Company") have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. The statements include the accounts of Candlewood Hotel
Company, Inc. and its subsidiaries, including Candlewood LLC, which was the
entity through which business was conducted until completion of the
Reorganization, and various wholly-owned LLCs which own or lease certain hotels.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements have been omitted. The
accompanying unaudited financial statements contain all adjustments (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, 1998 was derived from the Company's audited financial statements. These
interim financial statements should be read in conjunction with the Company's
1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the entire year. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
B. Investment in Hotels Completed and Under Construction
Hotels Completed
Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the hotels are completed, depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
ranging from three to forty years. Maintenance and repairs are charged to
operations as incurred.
Hotels under Construction
Hotels under construction represents costs incurred in the acquisition
and development of hotels. Such costs include land acquisition costs,
construction costs, capitalized interest and construction overhead. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to hotels completed and, except for hotels held for sale,
depreciated over the asset's useful life.
Other Costs
Other costs consist of acquisition costs. Acquisition costs are costs
related to the acquisition of property sites. These costs are added to the costs
of the hotels under construction when the site is acquired and construction at
the hotel begins. Costs associated with a particular site are expensed to
operations when the Company determines it will no longer pursue the site
acquisition.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
C. Cash Equivalents
The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
D. Restricted Cash
Restricted cash represents cash that, under the terms of certain
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.
Additional restricted cash includes funds held in escrow pending sale of certain
properties.
E. Revenue Recognition
Room revenue and other revenues are recognized when earned. Recognition
of franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue when recognized is included in other
income.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds. Related
profit is deferred due to required support obligations under the operating lease
agreements until operations meet stipulated levels. At such time, the deferred
gain is recognized in earnings over the remaining lease term.
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. Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") which was effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports beginning in the second year of
implementation. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 did not affect the results of operations or financial position
of the Company.
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CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company has two reportable segments, the operation of hotels and
the sale of hotels. Information related to the Company's reportable segments is
as follows:
Nine months ended September 30, 1999
- -----------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
hotels Hotels Total
------------ -------- --------
Revenues from external customers $ 78,739 $ 24,283 $103,022
Interest expense 6,513 -- 6,513
Depreciation expense 5,477 -- 5,477
Segment profit 10,928 904 11,832
Hotels assets:
Hotels completed and under construction 272,344 -- 272,344
Trade accounts receivable 3,583 2,803 6,386
Nine months ended September 30, 1998
- -----------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
hotels Hotels Total
------------ -------- --------
Revenues from external customers $ 31,761 $134,730 $166,491
Interest expense 38 -- 38
Depreciation expense 1,830 -- 1,830
Segment profit 4,678 298 4,976
Hotels assets:
Hotels completed and under construction 168,687 40,000 208,687
Trade accounts receivable 1,371 2,947 4,318
Corporate expenses account for the difference between segment profit
and net income. These expenses are not specific to the Company's reportable
segments.
H. Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training hotel personnel, such as travel,
compensation and relocation.
During the fourth quarter of 1998, the Company elected early adoption
of Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
(SOP 98-5). SOP 98-5 requires that hotel opening costs be expensed as incurred.
I. 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.
J. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation. Such reclassifications have no
effect on the operations or equity as originally presented.
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K. Investments in Joint Ventures
The Company owns certain investments in joint ventures that it accounts
for under the equity method of accounting. As of September 30, 1999, the Company
had $2.3 million of investment in joint ventures. This amount is included in
other assets on the balance sheet. The operations of the ventures are not
significant as of September 30, 1999; therefore, no equity income or loss has
been reflected in the Company's financial statements. Additionally, $15.7
million has been incurred on projects that the Company intends to contribute to
a joint venture. This amount is included in hotels under construction on the
balance sheet.
Note 2: Mortgages and Notes Payable
As of September 30, 1999, the Company had entered into separate
building loan agreements with GMAC Commercial Mortgage Corporation for 30 of the
Company's hotels. Each agreement was entered into by a separate wholly-owned
subsidiary of the Company which owns the related property and hotel; however,
each loan is cross-defaulted. The terms of the building loan agreements provide
for advances, generally on a monthly basis, based on construction costs incurred
to date. 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% (8.77% to 9.63% as of September
30, 1999). Based on the individual note, principal payments commence either 12
months following the related hotel opening or 18 months from the related loan
closing. Depending on the terms of the individual notes, principal payments are
calculated based on a 25-year amortization schedule using a 10% fixed interest
rate or the prevailing interest rate as defined in the note. Each note matures
on the first day of the first full calendar month after the fourth anniversary
of loan closing and provides for two 12-month extension periods. Maturity dates
currently range from March 2001 to September 2003. 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. At September 30, 1999, $151.2 million
was outstanding under these 30 building loan agreements.
The Company has entered into loan agreements with various local and
regional banks for financing on four of the Company's hotels. Each of the
agreements was entered into by wholly owned subsidiaries of the Company that own
the related hotel and land. Interest on the loans is payable monthly at either a
fixed or variable rate per annum depending on the note. As of September 30,
1999, interest on the loans ranged from 7.90% to 9.50% with maturity dates
ranging from February 2000 to May 2001. Principal amortization payments are made
monthly and based on terms ranging from 20 to 25 years. These payments will
continue until maturity. Each of the loans 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 the original
amortization term. Amounts borrowed under the loans are secured by the hotel and
the land on which the hotel is constructed, certain funds deposited in demand
deposit accounts assigned to the bank, as well as a guarantee by the Company and
certain other of the Company's wholly-owned subsidiary LLCs. At September 30,
1999, $12.8 million was outstanding under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as
of September 30, 1999 with Promus Hotel Corporation, evidenced by two promissory
notes. Interest is payable quarterly at 15%, with principal of $12.5 million and
$2.5 million payable at maturity in November 2001 and July 2002, respectively.
Certain amounts borrowed under the building loan agreements are further
partially guaranteed by Promus Hotel Corporation. Promus has agreed to guarantee
the portions of certain loans made to the Company and its franchisees. The
guarantee applies to loans that exceed 56.25% of the hotel cost but not in
excess of 80% of such costs of hotels that the Company manages and 75% of the
costs of hotels not managed by the Company. It is anticipated that the guarantee
will remain in effect until the loan has been repaid. Upon an event of default,
Promus will have the option to meet any shortfalls or pay down the loan
principal. In exchange for the guarantee, Promus will receive a 5% interest in
the cash flows of the hotels and a 0.25-0.50% fee on the total loan amount
outstanding. In the event a loan is refinanced, Promus will receive a fee equal
to 5% of the increase in proceeds attributable to the refinancing. In the event
the loan is extinguished through the sale of the underlying property, Promus
will receive as a fee 5% of the gain on sale resulting from the transaction.
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Note 3: Redeemable, Convertible, Cumulative Preferred Stock
General
The Company has authorized "blank check" preferred stock in the amount
of 5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of issuance
of any of the preferred stock, the Company determines whether the stock is
redeemable and the appropriate classification of the stock on the balance sheet.
At September 30, 1999, as more fully described below, the Company had 65,000 and
42,000 shares of Series A and Series B redeemable preferred stock, respectively,
issued and outstanding.
Series A Preferred Stock Offering
In October 1997, the Company completed a $65.0 million private
placement of 65,000 shares of Series A Redeemable, Convertible, Cumulative
Preferred Stock (the "Series A 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 Series A Preferred Stock accumulates dividends at a rate of 7.5% of
the Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, dividends are paid quarterly, up to the date of conversion, when and
if declared by the board of directors.
Series A Preferred Stockholders have the right to convert their shares
of Series A Preferred Stock 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 Series A 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 Series A Preferred Stock will be redeemed under a mandatory redemption
clause, at the Stated Value plus unpaid dividends.
Certain of the Series A Preferred Stockholders have voting rights
related to the nomination and election of directors as defined in a stockholders
agreement. Each Series A 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 the Series A Preferred Stockholders, as a
single class, is required.
Series B Preferred Stock Offering
On August 3, 1998, the Company completed the private placement of $42.0
million of its Series B Redeemable, Convertible, Cumulative Preferred Stock (the
"Series B Preferred Stock") and warrants to purchase its common stock. In total,
42,000 shares of Series B Preferred Stock were issued at an offering price of
$1,000 per share (the "Stated Value"). The Series B Preferred Stockholders were
also issued, at no additional cost, warrants to purchase an aggregate of 336,000
shares of common stock at $12.00 per share. These warrants expire on July 13,
2005. The net proceeds to the Company were approximately $39.3 million, after
deducting commissions and expenses of $2.7 million.
The Series B Preferred Stock accumulates dividends at a rate of 7.5% of
the Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, dividends are paid quarterly, up to the date of conversion, when and
if declared by the board of directors.
Series B Preferred Stockholders have the right to convert their shares
of Series B Preferred Stock at any time at their option into shares of common
stock at the conversion price of $9.50 per share. Subsequent to September 30,
1999, the Series B Preferred Stock will be redeemable in cash, in whole or part,
at the option of the Company at 200% of the Stated Value. At September 30, 2004,
the Series B Preferred Stock will be redeemed under a mandatory redemption
clause, at the Stated Value plus unpaid dividends.
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Certain of the Series B Preferred Stockholders have voting rights
related to the nomination and election of directors as defined in a stockholders
agreement. Each Series B 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 the Series B Preferred Stockholders, as a
single class, is required.
Note 4: Sale-Leaseback
In November 1997, the Company entered into an agreement with an
affiliate of Hospitality Properties Trust ("HPT") to sell 15 hotels for a total
purchase price of $100.0 million, and to lease the hotels back from the buyer
under a 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 December 1998, the Company
agreed to sell two additional hotels to HPT under the terms of the 1997
transaction for $18.5 million. These hotels were sold in January 1999.
In May 1998, the Company entered into a second agreement with HPT to
sell and leaseback 17 hotels for a total purchase price of $142.4 million, as
amended. The Company completed the sale and leaseback of six hotels in the
second quarter of 1998, four hotels in the third quarter of 1998, and six hotels
in the fourth quarter of 1998. The remaining hotel was sold in January 1999.
The Company received cash at the close of escrow for hotels sold. The
lease term for the noncancelable operating leases is approximately 14 years for
the 17 hotels in the first transaction and 13 years for the 17 hotels in the
second transaction, with all leases expiring on December 31, 2011. The leases
call for monthly lease payments and require the Company to place a security
deposit with HPT for each property equal to one year's lease payments. The
security deposit will be released to the Company at the end of the lease term.
The agreements 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 deposit with HPT equal to 5% of the purchase price, upon the
initial closing of each transaction. The deposit will be refunded to the Company
when cash flows from operations exceed required lease payments by 140% of
defined cash flows from operations. The deposit is charged to cost of sales as
the hotels are sold. Upon attainment of the required coverage ratios, the
portion of the deposit refunded to the Company will be recognized in income
beginning in the period such funds, if any, are received.
As of September 30, 1999, the Company had completed the sale of all 34
hotels. The cumulative sales price for the three hotels sold in 1999 was $26.6
million with a total deferred gain on the sale of the hotels of $2.3 million.
The cumulative sales price for the 34 hotels sold to HPT was $260.9 million with
a total gain on the sales of the hotels of $19.3 million, of which $17.9 million
is deferred as of September 30, 1999. Such gain has been deferred and will be
recognized in income as noted in the Company's accounting policies (Note 1). The
Company has recognized $904,000 of deferred gain in income in 1999. Sale
proceeds, net of the deferred gain and related cost of the Hotels sold, are
presented on the statement of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.
GENERAL
Candlewood owns, operates, manages, develops and franchises hotels
serving mid-market extended-stay business travelers. Our overall results of
operations and financial position are significantly influenced by our
development activity. The following tables set forth the Company's hotel
openings and development comparison for the periods indicated:
1999 Year to Date Hotel Openings:
1999
---------------------------------------------
As of As of
December 31, September 30,
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 1999
------------ -------- -------- -------- -------------
Open Hotels
Company - Operated 53 5 5 1 64
Franchised 9 1 -- -- 10
--- --- --- --- ---
Total 62 6 5 1 74
=== === === === ===
We opened one company-operated hotel in the third quarter of 1999 in
Miami, Florida.
Development Comparison:
Number of Hotels
As of September 30,
------------------------------
Increase /
1999 1998 (Decrease)
---- ---- ----------
Open Hotels
Company - Operated 64 38 26
Franchised 10 7 3
--- --- ---
Total 74 45 29
Under Construction
Company - Owned 3 27 (24)
Joint Venture 6 -- 6
Franchised 3 3 --
--- --- ----
Total 12 30 (18)
Properties Owned
Company - Owned 1 4 (3)
Under Contract
Company - Owned 1 28 (27)
At the end of 1998, we had a total of 53 company-operated hotels and
nine franchised hotels located in 26 different states. At September 30, 1999, we
had a total of 64 company-operated hotels and 10 franchised hotels in operation
located in 29 different states. In addition, at September 30, 1999, we had a
total of three company-owned hotels, six joint venture hotels and three
franchise hotels under construction. Our portfolio also included one parcel of
undeveloped property that we had acquired previous to the third quarter of 1999.
We are attempting to secure financing for the development of this property. As
of September 30, 1999, we had one new development site under
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contract on which we were performing market-feasibility due diligence. The
contracts into which we enter 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. We have the right
to terminate each contract if we are not satisfied with the results of the
investigations and due diligence. We are unable to assure that we 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
addition, if we abandon a contract, we may write-off certain costs that would
otherwise be capitalized. For the nine months ended September 30, 1999 we have
written off $863,000 of costs on development projects we abandoned, all of which
was written off in the second quarter. We intend to continue developing
additional hotels through either new construction or acquisition of existing
properties and are evaluating various financing arrangements. We are unable to
assure such development opportunities or the related financing will be available
and, if available, under terms acceptable to us. We will continue to perform
periodic evaluations of our development projects and make adjustments to our
development strategy as warranted.
We believe that a significant element of our future growth and
expansion will be provided through the franchising of hotels. During the past
six months, we have assembled an experienced franchise sales team to lead our
efforts in this area. During the quarter ended September 30, 1999, we received
12 franchise applications and entered into six franchise agreements. We are
unable to assure that we will enter into any additional franchise agreements or
that franchisees will complete the development and construction of hotels.
In two separate sale-leaseback transactions, we have sold and leased
back certain of our hotels from HPT, a real estate investment trust. The
provisions of the transactions allow us to operate, as lessee, over a defined
lease term, hotels that we developed or will develop. The transactions were
closed in stages, beginning in 1997 and ending in early 1999. Five hotels were
sold and leased back in 1997 and 26 hotels sold and leased back during 1998. The
remaining three hotels were sold and leased back in January 1999. The results
from operations for 1999 and 1998 reflect the transactions. As a result of the
sale-leaseback transactions, we have recorded rent expense on the hotels leased
back from HPT. As the hotels are leased and not owned, the financial statements
do not reflect any depreciation and amortization or interest expense for these
hotels after the date of sale. The proceeds from the sale of the hotels is
recorded net of the deferred gain on sale. Under generally accepted accounting
principles, the gain must be deferred and not recognized into earnings until
certain operating performance levels are achieved.
The following table sets forth our operating property portfolio as of
September 30, 1999 and 1998:
Number of Hotels Number of Rooms
September 30, September 30,
------------------- -------------------
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ----- ----- --------
Company Operated:
Company Owned 30 13 17 3,530 1,455 2,075
Leased 34 25 9 3,893 2,777 1,116
--- --- --- ----- ----- -----
Total 64 38 26 7,423 4,232 3,191
Franchised 10 7 3 1,118 813 305
--- --- --- ----- ----- -----
Total System 74 45 29 8,541 5,045 3,496
=== === === ===== ===== =====
Our results are dependent upon our revenue per available room (RevPAR)
which is a function of occupancy and room rate. Accordingly, we intend to remain
focused on occupancy levels at each of our hotels until such time as the
occupancy levels reach stabilization. Due to our rapid expansion, the overall
occupancy rate has been negatively impacted by the lower occupancy typically
experienced during the ramp-up period for newly opened facilities. This negative
impact on occupancy is expected to diminish as the ratio of new property
openings during a period to total properties in operation at the end of the
period decreases. Once our hotels' occupancy levels have stabilized, we review
the nightly pricing rates of our hotels. We believe that this practice is a
prevailing standard in the lodging industry.
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RESULTS OF OPERATIONS
Comparison of fiscal quarters ended September 30, 1999 and 1998
Hotel Operations
Hotel Operations Revenue
Hotel operations revenue, which includes room revenue and other revenue
(e.g., guest telephone, vending and pay per view movie rental), totaled $29.6
million for the quarter ended September 30, 1999, compared to $14.1 million for
the quarter ended September 30, 1998. The increase in revenue reflects the
increase in the number of hotels in operation during the third quarter of 1999
as compared to the third quarter of 1998. The following table sets forth our
operating statistics for the three months ended September 30, 1999 and 1998:
For the three
months ended
September 30,
-------------------
1999 1998 Change
------ ------ ------
Occupancy 72.1% 70.6% 1.5%
Average Daily Rate $58.39 $54.26 $4.13
Revenue per available room $42.13 $38.31 $3.82
Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 72.1% for the quarter ended September 30, 1999, compared to
70.6% for the quarter ended September 30, 1998. Occupancy in the third quarter
was positively influenced by the increase in occupancy experienced by those
hotels that had completed or were near completion of their ramp-up phase. The
overall increase in the occupancy rate was partially offset by a decrease in
occupancy as a result of our efforts to increase room rates at some of our more
established properties. It is our practice to continuously review individual
markets to assess the impact of competition on local supply and demand and
establish room rates that balance occupancy to produce optimal revenue.
The average daily room rate for the quarter ended September 30, 1999
was $58.39, compared to $54.26 for the quarter ended September 30, 1998. Average
daily room rates are determined by dividing room revenue by the number of
guestrooms occupied on a daily basis for the applicable period. The increase in
average daily rate was largely due to increases in rates charged at previously
opened properties and higher introductory rates for new hotel openings. Other
factors that influenced average daily room rates included:
o stays of less than one week, which are charged at a higher nightly
rate,
o higher rates for our one-bedroom suites, and
o higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $42.13 for the quarter ended September
30, 1999, compared to $38.31 for the quarter ended September 30, 1998.
We cannot predict whether current occupancy and room rates can be
maintained. Future occupancy and room rates may be impacted by a number of
factors including:
o the number and geographic location of new hotels,
o the season in which new hotels open,
o competition,
o market acceptance of our hotels, and
o general economic conditions.
We consider a property to have completed its ramp-up phase somewhere
between six and twelve months following hotel opening. The ramp-up phase is
dependent on the supply and demand characteristics of individual markets as well
as the effectiveness of our local sales efforts. The following table sets forth
the
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performance of company-operated hotels open greater than 12 months as of July 1,
1999 and 1998:
For the three
months ended
September 30,
-----------------
1999 1998 Change
------ ------ ------
Number of hotels 33 5 28
Average age (in months) 18.5 16.2 2.3
Occupancy 73.1% 79.6% (6.5)%
Average Daily Rate $59.00 $51.58 $ 7.42
Revenue per available room $43.14 $41.04 $ 2.10
Occupancy for the 33 hotels open at least one year as of July 1, 1999,
compared to the five hotels open at least one year as of July 1, 1998, declined
by 6.5 percentage points. This decline was due in large part to our efforts to
increase room rates. The average daily room rate increased by 14.4% while the
average occupancy rate decreased by 8.2% from the same quarter in 1998. Despite
the decline in occupancy rates, revenue per available room increased by 5.2% for
the quarter ended September 30, 1999, compared to the quarter ended
September 30, 1998.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended September 30, 1999
totaled $15.6 million, compared to $7.5 million for the quarter ended September
30, 1998. Hotel operating expenses consist 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 is largely due to the
increased number of hotels in operation during the third quarter of 1999 as
compared to the third quarter of 1998.
Rent Expense on Leased Hotels
We incurred rent expense in the third quarter of 1999 of $6.2 million
for the 34 hotels leased as of September 30, 1999, compared to $3.7 million of
expense in the third quarter of 1998 for the 25 hotels leased as of September
30, 1998. The increase in rent expense reflects the sale and leaseback of nine
additional hotels since September 30, 1998 and the pro-rated effect on rent
expense of the timing of previous hotel sales transactions.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. During the fourth quarter of 1998, we elected early
adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires opening costs to be expensed as
incurred. Prior to adoption of SOP 98-5, we capitalized and amortized opening
costs using the straight-line method over a period of twelve months.
Amortization expense on opening costs for 1998 is included in depreciation and
amortization on the statement of operations. Opening costs for the quarter ended
September 30, 1999 totaled $208,000. There was no opening cost expensed for the
quarter ended September 30, 1998; however, we did record $554,000 of
amortization expense in the quarter for opening costs that had been capitalized.
The remaining unamortized hotel opening costs were expensed in full in December
1998, as a result of our adoption of SOP 98-5.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the quarter ended
September 30, 1999 totaled $2.2 million, compared to $1.2 million for the
quarter ended September 30, 1998. Depreciation and amortization expense for the
quarter ended September 30, 1998 included amortization of capitalized opening
costs prior to the adoption of SOP 98-5. The increase in depreciation and
amortization expense in the third quarter of 1999, compared to 1998, was a
result of the increase in the number of company-owned hotels in operation. In
accordance with generally accepted accounting principles, the
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Company does not depreciate assets held for sale. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to forty years.
Corporate Operations
Other Income
Other income for the quarter ended September 30, 1999 totaled $538,000,
compared to $106,000 for the quarter ended September 30, 1998. Other income
consists primarily of franchise fees and royalty fees from franchise hotels and
management fees received from managed hotels. At September 30, 1999, we had 10
franchised hotels in operation, compared to seven hotels at September 30, 1998.
The growth in other income in 1999, compared to 1998, reflects an increase in
franchise fee, royalty fee and management fee income.
We did not sell any hotels in the third quarter of 1999; however, we
did recognize gain on hotels that were previously sold. For the quarter ended
September 30, 1999, we recognized $395,000 of gain on hotels sold, compared to
$104,000 in the quarter ended September 30, 1998.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended September 30, 1999
totaled $1.1 million, compared to $776,000 for the quarter ended September 30,
1998, 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 in 1999 is due to the expansion of our franchise
sales and service team and increases in general personnel and field information
system support costs. These increases were needed to launch our franchise sales
program and provide support and services to the increased number of hotels in
operation.
Abandoned Site Costs
We did not realize any abandoned site costs in the quarter ended
September 30, 1999. For the quarter ended September 30, 1998, we recorded
$43,000 in abandoned site costs. Abandoned site costs represent costs related to
certain development sites that we have decided not to develop.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for
the quarter ended September 30, 1999 totaled $182,000 compared to $77,000 for
the quarter ended September 30, 1998. The increase in depreciation and
amortization reflects the leasehold improvements and furnishings purchased in
1999 for new corporate offices and the depreciation of new systems hardware and
peripheral equipment. Depreciation expense is calculated using the straight-line
method over the estimated useful lives of the respective assets, ranging from
three to twenty years. Amortization expense for intangible assets (e.g.,
operating rights, trademarks) is computed using the straight-line method over
the life of the corresponding asset.
Interest Income and Expense
We earned $171,000 of interest income for the quarter ended September
30, 1999, compared to $451,000 for the quarter ended September 30, 1998.
Interest income for the quarter ended September 30, 1998 resulted primarily from
the temporary investment of proceeds received from the sale-leaseback
transaction.
We had interest expense, net of capitalized interest, of $3.1 million
for the quarter ended September 30, 1999. There was no interest expense recorded
in the third quarter of 1998 as interest was capitalized as part of our
development activity. The interest expense for the quarter ended September 30,
1999 was a direct result of the slowdown in our development activity during the
third quarter of 1999. We had fewer projects under construction in the third
quarter of 1999 thereby limiting the amount of interest that could be
capitalized.
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Sales of Hotels
As of September 30, 1999, we have sold to and leased back from HPT 34
hotels. A deferred gain was recorded on the sales, a portion of which has been
recorded in income in 1998 and 1999. The following table sets forth the activity
for the three months ended September 30, 1999 and September 30, 1998 (in
thousands, except number of hotels):
For the three months
ended
September 30,
----------------------
1999 1998
------ -------
Number of hotels sold - quarter -- 4
Proceeds from sales of hotels,
net of deferred gain $ -- $30,216
Rent expense on leased hotels $6,227 $ 3,662
Gain recognized into earnings $ 395 $ 104
Comparison of nine months ended September 30, 1999 and 1998
Hotel Operations
Hotel Operations Revenue
For the nine months ended September 30, 1999, hotel operations revenue
totaled $77.8 million, compared to $31.4 million for the nine months ended
September 30, 1998. The increase in revenue reflects the increase in the number
of hotels in operation during the nine months ended September 30, 1999. The
following table sets forth our operating statistics for the nine months ended
September 30, 1999 and 1998:
For the nine
months ended
September 30,
---------------------
1999 1998 Change
------ ------ ------
Occupancy 67.0% 67.6% (0.6)%
Average Daily Rate $59.22 $53.79 $ 5.43
Revenue per available room $39.68 $36.36 $ 3.32
Average occupancy rate was 67.0% for the nine months ended September
30, 1999, compared to 67.6% for the nine months ended September 30, 1998. In
1999, we made an effort to increase rates in certain markets. As a result, the
occupancy rate at certain of our hotels has been negatively impacted. The
negative impact associated with the increase in pricing was largely offset by
the increasing occupancy of hotels that had completed or were near completion of
their ramp-up phase.
For the nine months ended September 30, 1999, our average daily rate
was $59.22, compared to $53.79 for the nine months ended September 30, 1998. The
increase in average daily rate was largely due to increases in rates charged at
previously opened properties and higher introductory rates for new hotel
openings. Revenue per available room was $39.68 for the nine months ended
September 30, 1999, compared to $36.36 for the nine months ended September 30,
1998.
The following table sets forth the performance for the nine months
ended September 30, 1999 and September 30, 1998 of hotels open greater than 12
months as of July 1, 1999 and 1998:
For the nine
months ended
September 30,
-------------------
1999 1998 Change
------- ------ -------
Number of hotels 33 5 28
Average age (in months) 18.5 16.2 2.3
Occupancy 70.2% 74.1% (3.9)%
Average Daily Rate $60.28 $51.19 $9.09
Revenue per available room $42.34 $37.92 $4.42
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Occupancy for the 33 hotels open at least one year as of July 1, 1999,
compared to the five hotels open at least one year as of July 1, 1998, declined
by 3.9 percentage points. This decline was due in large part to our efforts to
increase room rates. The average daily room rate increased by 17.8% while the
average occupancy rate decreased by 5.3% for the nine months ended September 30,
1999 compared to the nine months ended September 30, 1998. Despite the decline
in occupancy rates, revenue per available room increased by 11.7% in 1999 over
the same nine-month period in 1998.
Hotel Operating Expenses
Hotel operating expenses for the nine months ended September 30, 1999
totaled $43.8 million, compared to $17.5 million for the nine months ended
September 30, 1998. The increase in hotel operating expenses was largely due to
the increased number of hotels in operation at September 30, 1999.
Rent Expense on Leased Hotels
For the nine months ended September 30, 1999, we incurred rent expense
of $18.6 million for leased hotels, compared to $7.7 million for the nine months
ended September 30, 1998. The increase in rent expense reflects the sale and
leaseback of nine additional hotels since September 30, 1998 and the pro-rated
effect on rent expense of the timing of previous hotel sales transactions.
Hotel Opening Costs
For the nine months ended September 30, 1999, opening costs totaled
$1.0 million. There was no opening cost expensed for the nine months ended
September 30, 1998; however, we did record $833,000 of amortization expense in
the period for opening costs that had been capitalized. The remaining
unamortized hotel opening costs were expensed in full in December 1998, as a
result of our adoption of SOP 98-5.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
for the nine months ended September 30, 1999 totaled $5.5 million, compared to
$1.8 for the nine months ended September 30, 1998. Depreciation and amortization
expense for 1998 included amortization of capitalized opening costs prior to the
adoption of SOP 98-5. The increase in depreciation and amortization expense for
the nine months ended September 30, 1999, compared to 1998, was a result of the
increase in the number of company-owned hotels in operation during the nine
months ended September 30, 1999.
Corporate Operations
Other Income
Other income for the nine months ended September 30, 1999 totaled $1.0
million, compared to $394,000 for the nine months ended September 30, 1998. The
growth in other income in 1999, compared to 1998, reflects an increase in
royalty, franchise fee and management fee income.
In addition, during the first quarter of 1999, we sold three additional
hotels as part of a sale-leaseback transaction. The total sales price for these
hotels was $26.6 million. A deferred gain of $2.3 million was recorded on the
sales. For the nine months ended September 30, 1999, we recognized $904,000 of
gain on hotels sold, compared to $298,000 for the nine months ended
September 30, 1998.
Corporate Operating Expenses
For the nine months ended September 30, 1999, corporate operating
expenses totaled $3.5 million, compared to $2.5 million for the nine months
ended September 30, 1998. The increase in 1999 is due to the expansion of our
franchise sales and service team and increases in general personnel and field
information system support costs. These increases were needed to launch our
franchise sales program and provide support and services to the increased number
of hotels in operation.
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Abandoned Site Costs
Abandoned site costs totaled $863,000 for the nine months ended
September 30, 1999, compared to $43,000 for the nine months ended September 30,
1998.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations
totaled $482,000 for the nine months ended September 30, 1999, compared to
$200,000 for the nine months ended September 30, 1998. The increase in
depreciation and amortization reflects the leasehold improvements and
furnishings purchased in 1999 for new corporate offices and the depreciation of
new systems hardware and peripheral equipment.
Interest Income and Expense
Interest income totaled $763,000 for the nine months ended September
30, 1999, compared to $937,000 for the nine months ended September 30, 1998.
Interest income for both nine-month periods resulted primarily from the
short-term investment of excess funds received from the sale-leaseback
transaction and net proceeds from the Series B Preferred Stock offering.
Interest expense, net of capitalized interest, totaled $6.5 million for
the nine months ended September 30, 1999, compared to $38,000 for the nine
months ended September 30, 1998. The increase in interest expense was the result
of the slowdown in our development activity during 1999. We began construction
of fewer projects in 1999 thereby limiting the amount of interest that could be
capitalized.
Sales of Hotels
As of September 30, 1999, we have sold to and leased back from HPT 34
hotels. A deferred gain was recorded on the sales, a portion of which has been
recorded in income in 1998 and 1999. The following table sets forth the activity
for the nine months ended September 30, 1999 and September 30, 1998 (in
thousands, except number of hotels):
For the nine months ended
September 30,
-------------------------
1999 1998
-------- ---------
Number of hotels sold - nine months 3 20
Number of hotels sold - total 34 25
Proceeds from sales of hotels, net
of deferred gain $24,283 $134,730
Rent expense on leased hotels $18,581 $ 7,708
Gain recognized into earnings $ 904 $ 298
Liquidity and Capital Resources
We had cash and cash equivalents of $18.7 million at September 30,
1999, compared to $20.0 million at September 30, 1998. Net cash provided by
operating activities totaled $16.2 million for the nine months ended September
30, 1999, compared to $807,000 for the nine months ended September 30, 1998. The
primary sources of cash for the nine-month period ended September 30, 1999 were
$197,000 of net income from operations, a reduction of $20.8 million in the
amount of hotels held for sale, an increase of $2.0 million in deferred gain on
sale of hotels, and $6.0 million of non-cash depreciation and amortization
expense. Uses of cash consisted primarily of a $5.3 million increase in other
assets, an increase of $3.8 million in accounts and other receivables, a $2.5
million increase in the amount of deposits, and a decrease of $1.7 million in
accounts payable and accrued expenses. The primary sources of cash for the nine
month period ended September 30, 1998 were $2.3 million in net income from
operations, an increase of $6.2 million in deferred gain on sale of hotels and a
reduction of $4.7 million in the amount of hotels held for sale. Additional
sources of cash were the $3.3 million increase in accounts payable and accrued
expenses and $2.0 million of non-cash depreciation and amortization expense. The
1998 sources of cash were partially offset by an increase of $12.5 million in
the amount of deposits pursuant to the sale-leaseback transaction, a $2.4
million increase in accounts receivable, and a $2.1 million increase in
pre-opening costs.
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Net cash used in investing activities for the nine months ended
September 30, 1999 totaled $78.6 million, compared to $82.5 million for the nine
months ended September 30, 1998. Our expenditures for property and equipment in
connection with the completed hotels, the construction of new hotels,
acquisition costs for properties under contract, and the costs of hotels sold
accounted for the majority of the cash used. For the nine months ended September
30, 1999, we expended approximately $89.0 million on construction, compared to
$71.6 million for the nine months ended September 30, 1998.
For the nine months ended September 30, 1999, net cash provided by
financing activities was $58.0 million. This amount primarily consisted of $67.6
million in proceeds from mortgages and notes payable, partially offset by $6.0
million in preferred stock dividend payments and $3.4 million of principal
payments on notes. The principal payments primarily related to the payoff of
promissory note balances for the hotels sold as part of the sale-leaseback
transaction in January 1999. For the nine months ended September 30, 1998, net
cash provided by financing activities was $66.3 million as the amount of
proceeds from mortgages and notes payable exceeded the amount of payments on the
notes. These payments primarily related to the payoff of promissory note
balances for certain of our hotels pursuant to the sale-leaseback transaction.
During the year 2000, two of our notes mature. The aggregate amount of these
notes at September 30, 1999 is $5.0 million. Provisions within the loan
agreements allow us to extend these notes for one year.
At September 30, 1999, we had three company-owned hotels under
construction with a total estimated cost of approximately $62.0 million. We have
secured financing on all three hotels. As of September 30, 1999, we had incurred
costs of approximately $27.2 million on these projects. Under terms of the
financing, our total equity requirement for these properties is $17.5 million,
$16.1 million of which had been funded as of September 30, 1999. In addition to
the company-owned hotels under construction, at September 30, 1999 we owned one
property on which construction had not begun. We are attempting to secure
financing for this project.
We had six hotels under construction at September 30, 1999 as part of
our joint venture development agreement with Boston Capital Institutional
Advisors. The total estimated cost of construction for these six hotels is $64.7
million. As of September 30, 1999, we had incurred costs of approximately $15.7
million on these projects. These costs include land acquisition costs, deposits
and fees for surveys, legal services, environmental studies, and architectural
drawings. Our total equity requirement per the loan agreements for these six
hotels is $7.3 million, all of which had been funded as of September 30, 1999.
In addition, we have one joint venture property under contract at September 30,
1999 with an estimated total project cost of $9.8 million.
We believe that a combination of our cash and cash equivalents, cash
from operations, borrowed funds from third-party lenders (if approved on an
individual basis) and construction loan guarantees from Promus Hotel Corporation
will be sufficient to provide capital for development of projects currently
under construction, payment of preferred dividends and operations through
December 2000. In addition, from time to time we will consider strategic
acquisitions as a means of growth, which would similarly require additional
capital. We are actively considering and/or pursuing a number of financing
alternatives, including credit facilities, the issuance of debt and joint
ventures which are necessary to provide the capital needed to build or acquire
additional hotels. We are unable to assure that we will be able to obtain
financing on a timely basis, on acceptable terms, or at all. Failure to obtain
such financing could result in the delay or abandonment of some or all of our
development and expansion plans, losses of deposits or other committed capital,
and could have a material adverse effect on our business and results of
operations.
We have not paid dividends on our Common Stock. We currently do not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Dividend payments on the Series A and Series B Preferred Stock are paid
quarterly and in preference to the Common Stock. These payments are
approximately $2.0 million per quarter. After payment of dividends on the Series
A and Series B Preferred Stock, we intend to retain any future earnings for
reinvestment in the development and expansion of our business.
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. Any of our
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a
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system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
We have established a plan to resolve the Year 2000 issue. The plan
consists of four phases: assessment, remediation, testing, and implementation.
A. Assessment - We have completed our assessment of all systems, both
information technology and non-information technology, that could be
significantly affected by the Year 2000 issue. The results of the
assessment of our systems are as follows:
(1) Our core financial systems - All hardware and software were
replaced in 1998 as part of the successful implementation of a new
accounting system. The new system has been certified to be fully
compliant with the Year 2000 issue by the vendor.
(2) Other corporate office systems - These systems include the local
area network, phone systems, E-mail, imaging systems, word
processing, spreadsheets, and scheduling software. All of these
systems have been evaluated, tested and found to be in compliance.
(3) Hotel property management system - Our initial assessment found our
property management system not to be Year 2000 compliant. National
Guest Systems has written an upgrade to the IS4 software to make it
Year 2000 compliant. This upgrade was installed in the hotels in
January of 1999. National Guest Systems has represented to us that
the software is now fully compliant.
(4) Other hotel systems purchased from third-party vendors - These
systems include the elevators, voice mail, energy management and
HVAC system, phone switches, room key systems, fire and security
systems, and any other equipment or systems that have an "embedded"
chip that records the date. We have requested and obtained written
verification from all of our major vendors that their product is
Year 2000 compliant. Furthermore, the plans given to our
contractors specify that all systems are Year 2000 compliant.
B. Remediation - As previously mentioned, our assessment indicated that
only one of our systems was not Year 2000 compliant. This is our
property management software purchased from National Guest Systems.
National Guest Systems has since modified the software, adding a
four-digit year instead of the two-digit year previously used. This
modification has been installed in our hotels and is currently in use.
National Guest Systems has represented to us that the software is now
fully Year 2000 compliant. No other issues have been detected in any of
our systems.
C. Testing - The testing phase of our plan involved actually using the
software with dates into the next year and testing the results. We
successfully completed our testing of corporate office and field
operations systems, including the property management system, in the
third quarter and did not encounter any problems or issues.
D. Implementation - We have remedied any Year 2000 issues that we have
identified and tested the modifications made to ensure all systems are
Year 2000 compliant.
To date the only costs we have incurred as a result of the Year 2000
issue have been the internal costs of labor to perform the assessment and
testing of our systems. We do not anticipate incurring any other costs as a
result of the Year 2000 issue. We estimate that the total amount of internal
labor incurred by us to assess, remedy and test the systems will be less than
$100,000.
We have contingency plans for certain critical applications and are
working on such plans for others. These contingency plans involve, among other
actions, data backup and retrieval, manual workarounds and adjustments to
staffing strategies.
Failure to address the Year 2000 issue by third-party vendors that we
rely upon could have a material adverse effect on our business and results of
operations. Examples of third-party vendors include utility providers, phone
service providers, and banks and data processing providers. Disruptions in the
operation of airlines and central reservation systems, as well as a general
disruption in the national or regional economy, would also have an adverse
impact on our business and results of operations. We are unable to estimate the
likelihood or impact of these events.
Quantitative and Qualitative Disclosure of Market Risk
Our earnings are affected by changes in interest rates as a portion of
our outstanding indebtedness is at variable rates based on LIBOR. For each
interest rate change of .01 percent, the market value of our mortgages and notes
payable, based on the outstanding balance at September 30, 1999, would change by
approximately $16,400. Additionally, we have market risk on our short-term
investments, which are considered cash equivalents, due to changes in interest
rates. For each interest rate change of .01 percent, the market value of our
short-term investments, based on the outstanding balance at September 30, 1999,
would change by approximately $1,300.
21
22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Form
10-Q as well as some of our statements in periodic press releases and some oral
statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as "believes," "anticipates," "estimates,"
"expects" or similar expressions. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guarantees of future performance and we have no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:
o the market acceptance of the Candlewood brand,
o the ability to attract and retain franchisees,
o the risk that signed franchise agreements may not result in the
construction or opening of hotels,
o the ability to maximize revenue per available room through the
management of occupancy and rate,
o the ability to attract and retain quality personnel,
o operating performance of the Company's hotels,
o adverse changes in national or local economic conditions,
o competition from other lodging properties,
o changes in real property tax rates,
o changes in the availability, cost and terms of financing,
o the impact of present or future environmental legislation,
o the ongoing need for capital improvements,
o adverse changes in governmental rules and fiscal policies,
o adverse changes in zoning laws,
o civil unrest,
o acts of God, including earthquakes and other natural disasters
(which may result in uninsured losses), and
o acts of war.
Certain of these factors are discussed in more detail elsewhere in this Form
10-Q and the Company's other filings with the Securities and Exchange
Commission.
22
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
23
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: November 11, 1999 By: /s/ Jack P. DeBoer
---------------------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: November 11, 1999 By: /s/ Warren D. Fix
---------------------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
24
25
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Candlewood Hotel Company, Inc. (1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc. (11)
3.3 Certificate of Designations, Preferences and Relative, Participating, Optional and
Other Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Cumulative Convertible Preferred Stock of Candlewood
Hotel Company, Inc. (3)
3.4 Certificate of Amendment of Certificate of Designations of Series A Preferred Stock. (10)
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 Indemnification Agreement Schedule. (11)
10.3 1996 Equity Participation Plan and Form of Stock Option Agreements. (5)
10.4 First Amendment to the 1996 Equity Participation Plan effective as of May 18, 1998. (11)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and Jack P. DeBoer dated
as of September 1, 1996. (1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc. and Doubletree
Corporation dated as of November 11, 1996. (2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc. to Doubletree
Corporation dated as of November 11, 1996. (2)
10.8 Employment Agreement between Candlewood Hotel Company, Inc. and James Roos dated as of
June 2, 1997. (4)
10.9 Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of August
27, 1997. (3)
10.10 Amended and Restated Registration Rights Agreement dated as of July 10, 1998. (10)
10.11 Purchase and Sale Agreement, dated as of November 19, 1997, by and among Candlewood
Hotel Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser. (6)
10.12 First Amendment to Purchase and Sale Agreement and Agreement to Lease and Fourth
Amendment to Lease Agreement and Incidental Documents, dated as of January 7, 1999, by
and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 1, Inc., HPT and HPT
CW, and seventeen entities which are parties thereto. (11)
10.13 Agreement to Lease, dated as of November 19, 1997, by and between Candlewood Hotel
Company, Inc. and HPT. (6)
10.14 Lease Agreement, dated as of December 24, 1997, by and between HPTCW, as landlord, and
Candlewood Leasing No. 1, Inc., as tenant. (6)
10.15 Guaranty Agreement, dated as of December 24, 1997, by Candlewood Hotel Company, Inc.
for the benefit of HPTCW and HPT. (6)
10.16 Stock Pledge Agreement, dated as of December 24, 1997, by Candlewood Hotel Company,
Inc. for the benefit of HPTCW. (6)
10.17 Purchase and Sale Agreement, dated as of May 14, 1998, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser. (7)
10.18 First Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement
and Incidental Documents, dated as of June 18, 1998, by and among Candlewood Hotel
Company, Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (11)
10.19 Second Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement
and Incidental Documents, dated as of July 31, 1998, by and among Candlewood Hotel
Company, Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (9)
26
EXHIBIT INDEX (Continued)
Exhibit
Number Description
- ------- -----------
10.20 Third Amendment to Purchase and Sale Agreement and Agreement to Lease and Sixth
Amendment to Lease Agreement and Incidental Documents, dated as of December 23, 1998,
by and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 2, Inc., HPT, HPT
CW II and seventeen entities which are parties thereto. (11)
10.21 Agreement to Lease, dated as of May 14, 1998, by and between Candlewood Hotel Company,
Inc. and HPT. (7)
10.22 Lease Agreement, dated as of May 21, 1998, by and between HPTCW, as landlord, and
Candlewood Leasing No. 2, Inc., as tenant. (7)
10.23 Guaranty Agreement, dated as of May 14, 1998, by Candlewood Hotel Company, Inc. for
the benefit of HPTCW and HPT. (7)
10.24 Stock Pledge Agreement, dated as of May 27, 1998, by Candlewood Hotel Company, Inc.
for the benefit of HPTCW. (7)
10.25 Securities Purchase Agreement dated as of September 30, 1998. (10)
10.26 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel Company, Inc. and
Vantage Point Properties, Inc. (11)
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 Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1997.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'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 Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(11) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.