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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
(Address of principal executive offices)
(316) 631-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2001
-------------------------- -------------------------
Common Stock, $.01 par value 9,025,000 shares
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CANDLEWOOD HOTEL COMPANY, INC.
FORM 10 - Q
FOR THE QUARTER ENDED
MARCH 31, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations for the three months
ended March 31, 2001 and March 31, 2000
(unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000
(unaudited) 5
Notes to Consolidated Financial Statements 6 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
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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)
- -------------------------------------------------------------------------------
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 265,117 $ 264,896
Hotels under construction 26,151 32,282
Other costs 243 192
--------- ---------
291,511 297,370
Accumulated depreciation and amortization (19,243) (16,977)
--------- ---------
Net investment in hotels 272,268 280,393
Cash and cash equivalents (including $946 and $945 of restricted
cash, respectively) 17,239 21,834
Deposits 26,334 26,334
Accounts and other receivables 5,227 4,912
Investments in joint ventures 13,387 11,467
Other assets 14,164 14,369
--------- ---------
Total assets $ 348,619 $ 359,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 211,550 $ 214,575
Accounts payable and other accrued expenses 17,123 21,686
Deferred gain on sale of hotels 14,893 15,239
Other liabilities 857 892
--------- ---------
Total liabilities 244,423 252,392
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 39,350
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 (31,853) (29,132)
--------- ---------
Total stockholders' equity 3,507 6,228
--------- ---------
Total liabilities and stockholders' equity $ 348,619 $ 359,309
========= =========
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)
Three-Months Ended
--------------------------------
March 31, 2001 March 31, 2000
-------------- --------------
REVENUES:
Hotel operations $ 31,184 $ 30,240
Other income 677 450
----------- -----------
Total hotel operating revenues 31,861 30,690
Deferred gain recognition on sales of hotels 346 523
----------- -----------
Total revenues 32,207 31,213
----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 17,875 16,965
Corporate operating expenses 1,509 1,403
Rent expense on leased hotels 6,326 6,259
Hotel opening costs 98 93
Depreciation and amortization 2,777 2,551
----------- -----------
Total operating costs and expenses 28,585 27,271
----------- -----------
3,622 3,942
Interest income 247 232
Interest expense (4,610) (3,918)
----------- -----------
Income (loss) before preferred stock dividends (741) 256
Preferred stock dividends (1,979) (1,995)
----------- -----------
Net loss available to common stockholders $ (2,720) $ (1,739)
=========== ===========
Net loss per share of common stock - basic and diluted $ (0.30) $ (0.19)
=========== ===========
Weighted average shares outstanding - basic and diluted 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)
Three Months Ended
---------------------------------
March 31, 2001 March 31, 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends $ (741) $ 256
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,777 2,551
(Income) Loss from joint ventures 167 -
Deferred gain recognition on sales of hotels (346) (523)
Change in:
Accounts receivable (315) (17)
Other assets (519) (2,263)
Accounts payable and other accrued expenses (6,863) (1,223)
Deferred gain on sale of hotels - (5)
Other liabilities (35) (108)
-------- --------
Net cash used in operating activities (5,875) (1,332)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in hotels completed and under construction 2,023 (9,330)
Change in site acquisition costs 400 -
Purchase of intangible assets - (1)
-------- --------
Net cash provided by (used in) investing activities 2,423 (9,331)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 2,957 10,286
Payments on mortgages and notes payable (2,121) (305)
Preferred stock dividends (1,979) (1,995)
Other liabilities - (73)
-------- --------
Net cash provided by (used in) financing activities (1,143) 7,913
-------- --------
Net decrease in cash and cash equivalents (4,595) (2,750)
Cash and cash equivalents at beginning of period 21,834 18,624
-------- --------
Cash and cash equivalents at end of period $ 17,239 $ 15,874
======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,414 $ 4,879
======== ========
===============================================================================
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, franchising,
managing and developing 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, 2000, was
derived from the Company's audited financial statements. These interim
financial statements should be read in conjunction with the Company's 2000
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
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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.
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 loan
agreements, has been set aside for pending land acquisitions and financing.
These funds are generally applied as payments upon the closing of escrow of
related acquisitions or released to the Company shortly thereafter.
E. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of the
Company's financial instruments, which include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, approximate
fair values due to the short maturities of such instruments. The fair value
of the Company's long-term debt, which approximates carrying value, is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. We were required to adopt the new Statement
effective January 1, 2001. The Statement requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Because of the
Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
F. Intangible Assets
Intangible assets include ownership rights, title and interest in the
Candlewood Hotel name and logo and costs for patents and trademarks. These
assets are being amortized using the straight-line method over a period of
twenty years and are included in other assets on the accompanying
consolidated balance sheets.
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G. Deferred Financing Costs
Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on the level yield basis.
H. 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 on the accompanying consolidated
statements of operations.
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.
I. 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.
J. Opening and Organization 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. Organization costs relate to the
formation of the Company and Subsidiaries. Such costs are expensed as
incurred.
K. Investments in Joint Ventures
The Company has certain investments in joint ventures in which it owns
50% or less of the voting equity that are accounted for under the equity
method of accounting. As of March 31, 2001, the Company had $13.4 million
invested in these joint ventures, of which $2.5 million (in non-cash
transactions, net of $3.9 million of debt) was contributed during the
quarter ended March 31, 2001. The difference between the amount at which
the investment is carried in the Company's accounting records and the
amount of the underlying equity in the net assets of the investee is
amortized into income from joint ventures over the contractual life of the
respective joint venture entity. As of March 31, 2001, this amount was
approximately $3.9 million and is included in investments in joint ventures
on the accompanying consolidated balance sheets. For the quarters ended
March 31, 2001 and 2000, equity income (loss) in joint ventures of $45,000
and $0, respectively, was recorded before amortization of the carrying
value difference of $212,000 and $0, respectively. These amounts are
included in other income on the accompanying consolidated statements of
operations. Additionally, during the quarter ended March 31, 2001, the
Company received distributions from its joint ventures of $400,000.
The Company has one joint venture that was formed in 1999 with Boston
Capital Institutional Advisors and Mass Mutual in which it has a 50%
ownership. Hotel operations for the joint venture commenced in April 2000,
and as of March 31, 2001, the Company operated seven hotels and had
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one additional hotel under construction pursuant to this agreement. Under
the terms of the agreement, if the Company did not have at least 10 hotels
open or under construction by August 31, 2000, it may be required to
increase its capital contributions relating to existing joint venture
hotels by up to 5% of the estimated total costs. As of March 31, 2001, this
amount was estimated at approximately $4.3 million. As of March 31, 2001,
Boston Capital and Mass Mutual had not required the Company to increase its
capital contribution, although they may require the Company to do so in the
future. The Company is otherwise in compliance with the terms of the joint
venture agreement. The Company will continue to identify and evaluate
potential joint venture sites with these partners. The following is
unaudited condensed financial information for the joint venture as of March
31, 2001 and March 31, 2000:
- -------------------------------------------------------------------------------
As of March 31, 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Hotels completed and under construction $78,201 $34,814
Other assets 5,074 2,751
------- -------
Total assets $83,275 $37,565
======= =======
Total development liabilities $74,991 $30,388
Total equity 8,284 7,177
------- -------
Total liabilities and equity $83,275 $37,565
======= =======
- ------------------------------------------------------------------------------
Three months ended March 31, 2001
- ------------------------------------------------------------------------------
(In thousands)
Total revenue $4,534
Hotel operating expenses 2,217
Hotel opening costs 92
Depreciation and amortization 659
Interest expense 1,370
------
Net pre-tax income $ 196
======
L. Segment Reporting
The Company has two reportable segments, the operation of hotels and
the sale of hotels. Information related to the Company's reportable
segments for the three months ended March 31, 2001 and March 31, 2000 is as
follows:
Three months ended March 31, 2001
- -------------------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ -------- ---------
Revenues from external customers $ 31,861 $ - $ 31,861
Interest expense 4,610 - 4,610
Depreciation expense 2,601 - 2,601
Segment profit 5,059 346 5,405
Hotels assets:
Hotels completed and under construction 291,268 - 291,268
Trade accounts receivable 2,537 2,274 4,811
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Three months ended March 31, 2000
- -------------------------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ -------- ---------
Revenues from external customers $ 30,690 $ - $ 30,690
Interest expense 3,918 - 3,918
Depreciation expense 2,367 - 2,367
Segment profit 5,099 523 5,622
Hotels assets:
Hotels completed and under construction 279,977 - 279,977
Trade accounts receivable 2,223 2,141 4,364
Corporate expenses account for the difference between segment profit
and net income. These expenses are not specific to the Company's reportable
segments.
M. 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.
N. 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.
Note 2: Mortgages and Notes Payable
As of March 31, 2001, 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% (8.61% to 9.53% as of March 31, 2001).
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 September 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 March 31, 2001, $172.9 million
was outstanding under these 30 building loan agreements.
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The Company has entered into loan agreements with various local and
regional banks for financing on three 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, in
arrears, beginning on the first full calendar month after the date of each
agreement. Interest payments are calculated monthly at either a fixed or
variable rate per annum depending on the note. As of March 31, 2001, interest on
the loans ranged from 7.73% to 11.50% with maturity dates ranging from May 2001
to March 2004. 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 March 31, 2001, $23.7 million was outstanding
under these notes.
The Company had $15.0 million in unsecured indebtedness outstanding as of
March 31, 2001, with Doubletree Corporation, a wholly-owned subsidiary of Hilton
Hotels Corporation ("Doubletree"), 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 Doubletree. Doubletree 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, Doubletree will
have the option to meet any shortfalls or pay down the loan principal. In
exchange for the guarantee, Doubletree will receive a 5% interest in the 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, Doubletree 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, Doubletree will
receive as a fee 5% of the gain on sale resulting from the transaction.
The Company intends to extend the maturity dates of all notes coming due in
2001, under current terms of the notes, or refinance such notes in the ordinary
course of business. See Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Liquidity and Capital
Resources" and - "Special Note Regarding Forward Looking Statements."
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 March
31, 2001, as more fully described below, the Company had 65,000 and 42,000
shares, respectively, of Series A and Series B redeemable preferred stock issued
and outstanding.
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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
at an offering price of $1,000 per share ("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 thereafter,
quarterly, including up to the date of conversion, when and if declared by the
board of directors.
Series A Preferred Stockholders 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 is redeemable in cash,
in whole or part, at the option of the Company at 200% of the Stated Value. At
September 30, 2004, the Preferred Stock is required to be redeemed under a
mandatory redemption clause, at the Stated Value plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders' 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.
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
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 ("Stated
Value"). Preferred stockholders were also issued, at no additional cost,
warrants to purchase 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 $39.4 million, after deducting commissions and expenses of $2.6
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, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Series B Preferred Stockholders 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 September 30, 1999, the Series B Preferred Stock is
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 is
required to be redeemed under a mandatory redemption clause, at the Stated Value
plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders' 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 $100.0
million, and to lease the hotels back from the buyer under a non-cancelable
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. These hotels
were sold in January 1999.
In May 1998, the Company announced 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 four hotels in the second
quarter of 1998, six hotels in the third quarter of 1998, six hotels in the
fourth quarter of 1998, and one hotel in the first quarter of 1999.
Terms of the sales are all cash at the close of escrow for hotels sold. The
lease term for the non-cancelable 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 5% 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 deposit was charged to cost of sales as the hotels were 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.
In total, the Company has sold $260.9 million of hotels with a total
deferred gain of $19.6 million at the date the sales were completed. Such gain
has been deferred and is being recognized in income as noted in the Company's
accounting policies (Note 1). The Company recognized approximately $346,000 of
deferred gain in income in the quarter ended March 31, 2001, compared to
$523,000 in the quarter ended March 31, 2000. In total, the Company has
recognized $4.4 million of deferred gain in income. Sale proceeds, net of the
deferred gain and related cost of the Hotels sold are presented on the statement
of operations.
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, franchises, manages and develops Candlewood
Suites hotels to serve mid-market extended-stay business travelers. At the end
of 2000, we had a total of 72 company-operated hotels (which is comprised of
owned, leased and joint venture hotels), two managed hotels and 17 franchised
hotels located in 32 states. At March 31, 2001, we had a total of 74
company-operated hotels, two managed hotels and 19 franchised hotels located in
32 states. In addition, at March 31, 2001, we had
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one company-owned hotel, one joint venture hotel and seven franchise hotels
under construction. The joint venture hotel under construction at March 31, 2001
is being constructed pursuant to the development agreement with Boston Capital
and Mass Mutual.
Our overall results of operations and financial position are significantly
influenced by our development activity. We divide our hotel development
activities into five categories: owned, leased, managed, joint venture and
franchised. Owned hotels are those hotels that we have independently developed
and own. Leased hotels are those hotels that we previously sold and currently
lease from a third party. Managed hotels are those hotels that we manage for a
third party. Joint venture hotels are those hotels that we developed and own
with our joint venture partners. Franchised hotels are those hotels developed
and owned by third parties that utilize one of our franchise brands, Candlewood
Suites or Cambridge Suites by Candlewood. The following tables set forth our
property portfolio and hotel development, respectively, at March 31, 2001 and
March 31, 2000:
Number of Hotels Number of Rooms
March 31, March 31,
---------------- ----------------
2001 2000 Increase 2001 2000 Increase
------ ------ -------- ------ ------ --------
Owned 32 32 - 3,971 3,810 161
Leased 34 34 - 3,893 3,893 -
Managed 2 2 - 179 179 -
Joint Venture 8 - 8 1,035 - 1,035
Franchised 19 11 8 2,110 1,240 870
------ ------ ------ ------ ------ ------
Total 95 79 16 11,188 9,122 2,066
March 31,
---------------
Increase/
2001 2000 (Decrease)
---- ---- ----------
Open Hotels
Owned 32 32 -
Leased 34 34 -
Managed 2 2 -
Joint Venture 8 - 8
Franchised 19 11 8
--- --- ---
Total 95 79 16
Under Construction
Owned 1 1 -
Leased - - -
Managed - - -
Joint Venture 1 7 (6)
Franchised 7 6 1
--- --- ---
Total 9 14 (5)
We opened two joint venture and two franchised hotels in the first quarter
of 2001 in the following areas:
Joint venture:
o Orange County, California
o East Lansing, Michigan
Franchised:
o Topeka, Kansas
o Raleigh, North Carolina
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Our consolidated statements of operations includes revenues and expenses
for only those hotels which are operated by consolidated subsidiaries of
Candlewood Hotel Company, Inc. (owned and leased hotels). We refer to these
hotels collectively as our corporate hotels. Revenues and expenses from
franchise hotels and unconsolidated subsidiary hotels (joint venture hotels
accounted for under the equity method of accounting) are not included in our
hotel operations revenues or expenses. Franchise fees, royalty fees, management
fees, equity income from investment in joint ventures and other fees received
from franchise and joint venture hotels are included in other income in our
consolidated statements of operations.
Our results of operations are dependent upon our revenue per available room
(RevPAR) which is a factor of occupancy and room rate. We intend to focus on
increasing occupancy levels at each of our newly opened hotels until such time
as the occupancy levels reach stabilization. Once occupancy levels stabilize at
a corporate hotel, we review the daily pricing rates of that hotel. We believe
that this practice is a prevailing standard in the U.S. lodging industry.
Traditionally, the overall occupancy rate for our corporate hotels 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.
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. The transactions were closed in stages, beginning in
1997 and ending in early 1999. The results from operations for 2001 and 2000
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. See Note 4 to Consolidated Financial Statements. We will continue to
evaluate the potential for future sale-leaseback transactions.
As of March 31, 2001, we managed two hotels, the Cambridge Suites by
Candlewood and the Hotel at Old Town, both located in Wichita, Kansas. Our
revenues for managing these hotels consist primarily of management fees that are
based on a percentage of gross revenues, operating profits, cash flow or a
combination thereof.
We believe that a significant element of our future growth and expansion
will be provided through the franchising of hotels. At March 31, 2001, we had 24
signed franchise agreements for hotels not yet under construction. These
contracts provide for a variety of conditions and may never result in the
opening of a hotel. Additionally, we are actively marketing management contracts
to existing and prospective franchisees to utilize our management experience and
expertise to manage their hotels. We intend to continue to pursue select hotel
development opportunities, however, we can make no assurance that we will be
able to develop hotels in 2001.
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RESULTS OF OPERATIONS
Comparison of fiscal quarters ended March 31, 2001 and March 31, 2000
Hotel Operations
Hotel Operations Revenue
For the quarter ended March 31, 2001, hotel operations revenue for
corporate hotels totaled $31.2 million, compared to $30.2 million for the
quarter ended March 31, 2000. Hotel operations revenue includes room revenue and
other revenue (e.g., guest telephone and sales of products from the Candlewood
cupboard). The increase in revenue reflects the increased revenue generated by
hotels that had completed or were near completion of their ramp-up phase. The
following table sets forth the operating statistics for corporate hotels for the
three months ended March 31, 2001 and March 31, 2000:
For the three months ended
March 31,
--------------------------
2001 2000 Change
------- ------ ------
Occupancy 72.1% 75.5% (3.4)%
Average Daily Rate $ 59.16 $ 55.64 $ 3.52
Revenue per available room $ 42.67 $ 42.02 $ 0.65
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 March 31, 2001, compared to
75.5% for the quarter ended March 31, 2000. Occupancy in the first quarter was
negatively influenced by the effect of the slowing economy on our customers'
businesses. Overall, the decrease in occupancy was experienced in both short and
long-term stays, but was particularly prevalent in our long-term stays, which we
consider to be stays of seven or more nights. As customers reduced expenses and
postponed capital expenditure outlays, we lost some of our lower price-point
long-term stay business. In the short-term (six months or less), we expect our
long-term stay business to continue to be price sensitive. 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. We cannot predict whether current occupancy levels and
room rates can be maintained.
The average daily room rate for corporate hotels for the quarter ended
March 31, 2001 was $59.16, compared to $55.64 for the quarter ended March 31,
2000. 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 primarily due to the higher proportion of
short-term stays (six nights or less) which are charged at a higher daily rate.
Other factors that influence average daily room rates include higher rates for
our one-bedroom suites and higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $42.67 for the quarter ended March 31,
2001, compared to $42.02 for the quarter ended March 31, 2000.
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;
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o market acceptance of our hotels;
o general economic conditions; and
o the profitability of the businesses' of our core customers.
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. We had 65 corporate hotels open
as of December 31, 1999. The following table sets forth the performance of these
hotels for the quarters ended March 31, 2001 and March 31, 2000, respectively:
For the three months ended
March 31,
---------------------------
2001 2000 Change
---------- --------- ---------
Number of hotels 65 65 -
Average age (in months as of
January 1, 2001 and 2000) 30.1 18.1 12
Occupancy 71.4% 75.6% (4.2)%
Average Daily Rate $ 59.42 $ 55.56 $ 3.86
Revenue per available room $ 42.40 $ 42.01 $ 0.39
The average occupancy rate for the 65 corporate hotels open as of December
31, 1999 decreased 4.2 occupancy points in the first quarter of 2001 to 71.4%,
compared to 75.6% for the same quarter in 2000. The decrease was due in large
part to the decrease in our long-term stay business. The average daily rate
increased $3.86 or 6.9% in the first quarter of 2001 compared to the first
quarter of 2000. This increase is the result of the higher proportion of
short-term stay business, which is charged at a higher daily rate. Revenue per
available room increased to $42.40 in the first quarter of 2001, compared to
$42.01 in the first quarter of 2000, as a result of the increase in the average
daily rate.
Hotel Operating Expenses
Hotel operating expenses for the quarter ended March 31, 2001 totaled $17.9
million, compared to $17.0 million for the quarter ended March 31, 2000. Hotel
operating expenses consist of all expenses directly applicable to the operation
of the hotels, including corporate allocations for various operating, marketing
and accounting functions. 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 full
quarter impact of the hotel opened in the first quarter of 2000, the variable
nature of certain hotel operating expenses, increased wages, and general
economic wage and price increases.
Rent Expense on Leased Hotels
Rent expense on the 34 leased hotels for the quarter ended March 31, 2001
was $6.3 million, unchanged from the quarter ended March 31, 2000. Rent expense
is comprised of two elements, a base fixed rent and a contingent rent.
Contingent rent expense is a variable expense based on a property achieving
improved year over year revenue growth and is calculated on an individual
property basis.
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. Opening costs for the
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quarter ended March 31, 2001 totaled $98,000, compared to $93,000 for the
quarter ended March 31, 2000.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations (e.g.,
building, furniture, fixtures and equipment) for the quarter ended March 31,
2001, totaled $2.6 million, compared to $2.4 million for the quarter ended March
31, 2000. This increase in depreciation and amortization expense was a result of
the full quarter impact of the hotel opened in the first quarter of 2000. This
hotel was built in a higher priced, primary market where construction costs are
higher. For both 2001 and 2000, depreciation and amortization expense does not
reflect any expense for properties sold in the sale leaseback transactions. In
accordance with generally accepted accounting principles, we do not depreciate
assets held for sale. As of March 31, 2000 and March 31, 1999, we had no assets
which were 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 March 31, 2001 totaled $677,000,
compared to $450,000 for the quarter ended March 31, 2000. Other income consists
primarily of royalty fees (revenue-based fees received over the life of the
franchise agreement), franchise fees (a one-time fee received upon execution of
a signed franchise agreement), management fees and joint venture equity income.
Equity income represents our share of the profits of unconsolidated joint
venture hotels. Franchise fee income (including application and royalty fees)
for the quarter ended March 31, 2001 totaled $555,000, compared to $399,000 for
the quarter ended March 31, 2000. The growth in royalty fee income is due to the
increase in the number of franchise hotels in operation, and the increased
revenue generated by those franchise hotels that had completed or were near
completion of their ramp-up phase. We had 19 franchised hotels (excluding the
Boston Capital joint venture hotels and the East Lansing, Michigan joint venture
hotel) open as of March 31, 2001, compared to 11 at March 31, 2000. The seven
Boston Capital joint venture hotels and the East Lansing, Michigan joint venture
hotel (classified as joint venture hotels in our property table) are Candlewood
franchise hotels that we manage. As a result, we receive royalty fees,
management fees and equity income from these hotels. The first of these hotels
did not open until April 2000. Management fee income for the quarter ended March
31, 2001 totaled $290,000, compared to $51,000 for the quarter ended March 31,
2000. The increase in management fee income was due to the management fees
received from the seven Boston Capital joint venture hotels and the East
Lansing, Michigan joint venture hotel. For the quarter ended March 31, 2001, we
recorded a loss of $167,000 on our joint venture hotels, compared to $0 for the
quarter ended March 31, 2000.
We did not sell any hotels during the quarter ended March 31, 2001;
however, we recognized $346,000 of the deferred gain on hotels that were
previously sold. For the quarter ended March 31, 2000, we recognized $523,000 of
the deferred gain on hotels sold.
Corporate Operating Expenses
Corporate operating expenses for the quarter ended March 31, 2001 totaled
$1.5 million, compared to $1.4 million for the quarter ended March 31, 2000, 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
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fees and similar expenses. The increase in 2001 is a result of the accounting
treatment afforded certain internal personnel costs related to the development
and installation of the new field property management system in 2000. Pursuant
to accounting Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use", certain specific personnel
costs were capitalized to the field property management system. This project was
completed in the third quarter of 2000 and the costs of these personnel have
since been recorded as an expense.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
quarter ended March 31, 2001 totaled $176,000, compared to $184,000 for the
quarter ended March 31, 2000. Depreciation and amortization reflects
depreciation of the leasehold improvements and furnishings purchased in 1999 for
the new corporate office, and depreciation of the financial system hardware,
software and peripheral equipment purchased in 1999. 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 and trademarks) is computed using the
straight-line method over a period of twenty years.
Interest Income and Expense
Interest income for the quarter ended March 31, 2001 was $247,000, compared
to $232,000 for the quarter ended March 31, 2000. Interest income for the
quarters ended March 31, 2001 and March 31, 2000, resulted primarily from the
temporary investment of cash provided by operations.
Interest expense, net of capitalized interest, for the quarter ended March
31, 2001 was $4.6 million, compared to $3.9 million for the quarter ended March
31, 2000. The increase for the quarter ended March 31, 2001 is largely due to
the increased level of debt and fewer projects under construction, thereby
reducing the amount of interest capitalized.
Sales of Hotels
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 the
quarters ended March 31, 2001 and March 31, 2000. The following table sets forth
the rent expense and earnings related to our leased hotels for the quarters
ended March 31, 2001 and March 31, 2000 (in thousands):
For the three months ended
March 31,
--------------------------
2001 2000
------ ------
Rent expense on leased hotels $6,326 $6,259
Gain recognized into earnings $ 346 $ 523
Liquidity and Capital Resources
We had cash and cash equivalents of $17.2 million at March 31, 2001,
compared to $15.9 million at March 31, 2000. Net cash used in operating
activities totaled $5.9 million for the quarter ended March 31, 2001, compared
to $1.3 million for the quarter ended March 31, 2000. Uses of cash for the
quarter ended March 31, 2001 consisted primarily of a $741,000 loss from
operations and a $6.9 million decrease in accounts payable and other accrued
expenses. Sources of cash for the quarter ended March 31, 2001 consisted
primarily of $2.8 million of non-cash depreciation and amortization expense. For
the
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quarter ended March 31, 2000, uses of cash consisted primarily of a $2.3 million
increase in other assets and a $1.2 million decrease in accounts payable and
other accrued expenses. The primary sources of cash for the quarter ended March
31, 2000 were $256,000 of net income from operations and $2.6 million of
non-cash depreciation and amortization expense.
Net cash provided by investing activities for the quarter ended March 31,
2001 totaled $2.4 million, compared to $9.3 million of net cash used in
investing activities for the quarter ended March 31, 2000. For the quarter ended
March 31, 2001, sources of cash provided by investing activities resulted from
the reimbursement from the Boston Capital joint venture for assets contributed
to the venture in excess of our equity requirement and cash distributions from
the joint venture. For the quarter ended March 31, 2000, net cash used in
investing activities consisted of expenditures for property and equipment in
connection with the completed hotels, the construction of new hotels, investment
in joint venture hotels, and acquisition costs for potential development sites.
For the quarter ended March 31, 2001, net cash used in financing activities
was $1.1 million, compared to $7.9 million of net cash provided by financing
activities for the quarter ended March 31, 2000. Net cash used in financing
activities during the quarter ended March 31, 2001 included $2.1 million of
principal payments on notes payable and $2.0 million of preferred stock dividend
payments, partially offset by $3.0 million of proceeds from mortgages and notes
payable. The principal payments on notes payable related primarily to payments
made to extend notes which matured during the first quarter of 2001. For the
quarter ended March 31, 2000, net cash provided by financing activities
consisted of $10.3 million in proceeds from mortgages and notes payable,
partially offset by $305,000 of principal payments on notes payable and $2.0
million of preferred stock dividend payments.
At March 31, 2001, we had one company-owned hotel under construction
(Jersey City, New Jersey) with a total estimated cost (including capitalized
interest) of approximately $26.5 million. We have an $18.0 million construction
loan to develop this hotel which matures in September 2003 and bears interest at
LIBOR plus 4.25% (9.53% as of March 31, 2001). Under terms of the financing, our
total equity requirement for this hotel is $6.7 million, $5.5 million of which
had been funded as of March 31, 2001. As of March 31, 2001, we had incurred
costs (including capitalized interest) of approximately $26.4 million on this
hotel.
We had one hotel under construction at March 31, 2001 as part of our joint
venture development agreement with Boston Capital Institutional Advisors and
Mass Mutual in Clarkstown, New York. The total estimated cost of construction
(including capitalized interest) for this hotel is $11.5 million. Our total
equity requirement per the loan agreement for this hotel is $2.3 million, $1.1
million of which had been funded as of March 31, 2001. As of March 31, 2001,
approximately $10.5 million had been incurred on this hotel. These costs include
land acquisition costs, building costs (including capitalized interest),
deposits and fees for surveys, legal services, environmental studies, and
architectural drawings.
Under the terms of the agreement with Boston Capital and Mass Mutual, if we
did not have at least 10 joint venture hotels open or under construction by
August 31, 2000, we may be required to increase our capital contribution to
existing joint venture hotels by up to 5% of the estimated total costs. As of
March 31, 2001, we had only eight hotels open or under construction and the
additional capital contribution amount was estimated at approximately $4.3
million. As of May 11, 2001, Boston Capital and Mass Mutual had not required us
to increase our capital contribution, although they may require us to do so in
the future. We are otherwise in compliance with the terms of the joint venture
agreement. We will continue to identify and evaluate potential joint venture
sites with these partners.
We currently have borrowed a total of $211.6 million from various credit
institutions (GMAC and regional/local banks) and Hilton Hotels Corporation
(Doubletree) in connection with the development of
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Candlewood hotels. The maturity dates for these loans range from May 2001 to
March 2004 with interest rates which range from 7.73% to 11.50% on
non-Doubletree loans ($196.6 million) to a fixed 15.0% on the Doubletree loan
($15.0 million). Approximately $42.4 million and $110.8 million of the total
debt matures in 2001 and 2002, respectively. We currently do not have sufficient
cash available to pay off the principal amount of these loans. Pursuant to the
terms of the agreements we have with these lenders (except for Hilton), each
loan provides for an extension period. We plan to evaluate each loan based on a
number of factors including hotel performance, interest rate, secondary market
considerations and corporate strategy to determine if we will seek an extension
or refinancing. We cannot provide any assurance that we will be able to extend
the maturity dates of our indebtedness beyond the extension periods provided for
in our debt agreements, extend or refinance any of our indebtedness on terms
acceptable to us, or at all. In regards to the Doubletree debt, the first
installment of $12.5 million matures in November 2001. We are in discussions
with Hilton to negotiate an extension on this debt. As consideration for
securing an extension, we may be required to pay down a portion of the debt at
or prior to the original maturity date. We are unable to assure that we will be
able to extend the maturity date of the Doubletree debt or that permanent
financing will be available to us on acceptable terms, or at all. In addition,
as of March 31, 2001, we have guaranteed approximately $54.5 million of the
construction debt on the Boston Capital joint venture properties. Maturity dates
for this debt range from October 2002 to December 2007. This debt is not
included in our consolidated financial statements.
Pursuant to a mandatory redemption clause in the Certificates of
Designation for the Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to the Stated Value of
the Series A ($65.0 million) and Series B ($42.0 million) Preferred Stock plus
unpaid dividends. The Series A and Series B Preferred Stock accumulate dividends
at a rate of 7.5% with dividend payments made quarterly and in preference to any
dividend on our Common Stock. These payments are approximately $2.0 million per
quarter. 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. 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.
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 Doubletree will be
sufficient to provide capital for development of projects currently under
construction, payment of preferred dividends and operations through December
2001. We will be required to invoke contractual extensions or refinance a
significant amount of debt that is scheduled to mature during 2001. In addition,
from time to time we will consider strategic acquisitions as a means of growth,
which would require additional capital. We continue to consider a number of
financing alternatives, including credit facilities, the issuance of equity,
debt or equity-linked securities 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.
Quantitative and Qualitative Disclosure of Market Risk
Our earnings are affected by changes in interest rates as the majority of
our outstanding indebtedness is at variable rates based on prime and LIBOR. If
interest rates change by .01 percent, the market value of our mortgages and
notes payable, based on the outstanding balance effected by LIBOR at March 31,
2001, would change by approximately $20,000. Additionally, we have market risk
on our short-term investments, which are considered cash equivalents, due to
changes in interest rates. If interest rates increase by .01 percent, the market
value of our short-term investments, based on the outstanding balance at March
31, 2001, would change by approximately $1,000.
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In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted in years beginning after June 15, 2000. We
adopted the new Statement effective January 1, 2001. The Statement requires us
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Because of our minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or the financial position of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document
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 guaranties 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:
We have Never Been Profitable. At March 31, 2001, we operated 74 hotels.
This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:
o the inability to maintain high occupancy rates or to attract
guests for extended-stays;
o the inability to achieve expected nightly rates;
o the inability to operate the hotels at expected expense levels;
o the ability to attract and retain quality personnel; and
o liability for accidents and other events occurring at hotel
properties.
If we are unable to efficiently and effectively operate our hotels, we may never
be profitable.
We May be Unable to Service or Repay our Debt Obligations. Our ability to
make payments on, to repay or to refinance our indebtedness and to make our
scheduled preferred stock dividends will depend upon our ability to generate
capital in the future. We cannot make any assurances that our business will
generate sufficient cash flow from operations to fund our debt obligations as
they become due. In addition, we may need to refinance all or a portion of our
indebtedness on or before the maturity date. We cannot provide any assurances
that we will be able to refinance any of our indebtedness on
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commercially reasonable terms, or at all. Our ability to make payments on, to
repay or to refinance our indebtedness and to make our scheduled preferred stock
dividends also is, to a certain extent, subject to general economic,
competitive, legislative, regulatory and other factors beyond our control. Our
inability to make payments on, to repay, or to refinance our debt obligations or
preferred stock could have a material adverse effect on our business and results
of operations. See - "Liquidity and Capital Resources."
Adverse Economic Conditions May Negatively Impact Our Occupancy Rates and
Results of Operations. Since our core customers are extended-stay business
travelers, moderate or severe economic downturns or adverse economic conditions
negatively affect our operations. These economic conditions may be widespread or
isolated to one or more geographic regions. Economic downturns generally cause a
decline in the occupancy rates of our hotels as our core customers limit their
extended-stay travel. Decreases in our occupancy rates result in a decrease in
our operating revenue. In addition, as our occupancy rates decrease, we expect
that competition will increase and that the average daily room rate of our
hotels will be negatively impacted. As a result, recessions or other general
economic conditions may have a negative impact on our results of operations and
financial condition.
Our Need for Continued Capital and Additional Financing Could Materially
Adversely Affect our Business and Results of Operations. The development of
hotels is capital intensive. We have and expect to continue to seek financing of
up to 80% of the cost of certain Candlewood-developed hotels utilizing
Doubletree's guarantee to facilitate such financing. The use of the Doubletree
guarantee reduces our profit opportunity, if any, with respect to certain
Candlewood-developed hotels. The Doubletree guarantee is currently limited to
$30 million of total funds guaranteed. Funding of the loans for each hotel will
be subject to approval of the third-party lender on an individual hotel basis,
upon satisfaction of various conditions. We cannot provide assurance that the
third-party lenders will approve any financing applications we submit, that
their approval will be timely, that we will be able to utilize the Doubletree
guarantee, or that we will be able to finance greater than 70% of the cost of
any Candlewood-developed hotel. If our applications are not approved or our
loans are not funded on a timely basis, we may be unable to construct additional
Candlewood hotels and may experience delays in our planned development of
hotels. We have no current arrangements with respect to, or sources of,
additional debt financing. Additionally, we cannot assure that additional
financing will be available when needed or upon terms acceptable to us. If we
are unable to arrange for additional capital or financing, we may not be able to
develop further hotels.
Our Growth is largely Dependant on Franchising and Developing Hotels. We
intend to grow primarily by franchising and developing additional Candlewood
hotels. Our ability to develop hotels and obtain franchisees involves
substantial risks, including:
o there are a limited number of franchising opportunities;
o we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition
than Candlewood;
o our new franchising brand, Cambridge Suites by Candlewood,
may not be accepted by or appeal to potential franchisees;
o unavailability of financing to Candlewood or to potential
franchisees on favorable terms, or at all;
o delays in completion of construction of franchised or
developed hotels;
o termination of signed franchise and development agreements;
o incurring substantial costs if we abandon a franchising or
development project prior to completion;
o our or a franchisee's failure to obtain all necessary zoning
and construction permits;
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o competition for suitable development sites from our
competitors, some of whom may have greater financial
resources than Candlewood;
o our actual costs exceeding budgeted or contracted amounts;
and
o our developed properties not achieving desired revenue or
profitability levels once opened.
If we are unable to successfully franchise and develop hotels on time or within
budget, or at all, our business and results of operations would suffer.
We Depend on a Single Type of Lodging Facility. We intend to exclusively
develop, manage and franchise Candlewood Suites and Cambridge Suites by
Candlewood hotels. We currently do not intend to develop any lodging facilities
other than hotels focused on extended-stay business travelers and do not intend
to develop lodging facilities with other franchisors. Accordingly, we will be
subject to risks inherent in concentrating investments in a single type of
lodging facility, such as a shift in demand or a reduction in business following
adverse publicity, which could have a material adverse effect on our business
and results of operations. In addition, we have a limited history upon which we
can gauge consumer acceptance of our hotels and, accordingly, we cannot provide
assurance that our hotels will be readily accepted by guests who are looking for
conventional or extended-stay hotel accommodations. Furthermore, we compete
against other facilities with substantially greater brand recognition.
We are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate investments
is significantly dependent upon our ability to maintain or increase cash
provided by operating our investments. The value of our hotels and the income
from our hotels may be materially adversely affected by:
o changes in national economic conditions;
o changes in general or local economic conditions and
neighborhood characteristics;
o competition from other lodging facilities;
o changes in the availability, cost and terms of financing;
o the ongoing need for capital improvements;
o changes in operating expenses;
o changes in real property tax rates;
o changes in governmental rules and policies;
o the impact of present or future environmental laws;
o natural disasters; and
o other factors which are beyond our control.
In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to dispose
of an investment when we find disposition advantageous or necessary, or that the
sale price of any disposition will recoup or exceed the amount of our
investment.
Our Hotels May Experience Seasonal Fluctuations. Based upon our experience
operating extended-stay hotels, we expect that occupancy and revenues may be
lower than normal during the months of November, December and January due to the
holiday season. Because many of our expenses do not fluctuate with occupancy,
declines in occupancy may cause fluctuations or decreases in our quarterly
earnings.
We Depend on Key Personnel. Our success depends to a significant extent
upon the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief
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Financial Officer. The loss of the services of either of these individuals could
have a material adverse effect upon our business and results of operations.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDLEWOOD HOTEL COMPANY, INC.
Date: May 10, 2001 By: /s/ Jack P. DeBoer
----------------------------
Jack P. DeBoer, Chairman
and Chief Executive Officer
Date: May 10, 2001 By: /s/ Warren D. Fix
----------------------------
Warren D. Fix, Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Candlewood Hotel Company,
Inc. (1)
3.2 Amended and Restated Bylaws of Candlewood Hotel Company, Inc.
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. (8)
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. (8)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Form of Warrant. (7)
4.3 Amended and Restated Stockholders Agreement dated as of July 10, 1998.
(8)
10.1 Form of Indemnification Agreement for Executive Officers and
Directors. (4)
10.2 Indemnification Agreement Schedule. (9)
10.3 1996 Equity Participation Plan and Form of Stock Option Agreements.
(4)
10.4 First Amendment to the 1996 Equity Participation Plan effective as of
May 18, 1998. (9)
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 Series A Cumulative Convertible Preferred Stock Purchase Agreement
dated as of August 27, 1997. (3)
10.9 Amended and Restated Registration Rights Agreement dated as of July
10, 1998. (8)
10.10 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. (5)
10.11 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. (9)
10.12 Agreement to Lease, dated as of November 19, 1997, by and between
Candlewood Hotel Company, Inc. and HPT. (5)
10.13 Lease Agreement, dated as of December 24, 1997, by and between HPTCW,
as landlord, and Candlewood Leasing No. 1, Inc., as tenant. (5)
10.14 Guaranty Agreement, dated as of December 24, 1997, by Candlewood
Hotel Company, Inc. for the benefit of HPTCW and HPT. (5)
10.15 Stock Pledge Agreement, dated as of December 24, 1997, by Candlewood
Hotel Company, Inc. for the benefit of HPTCW. (5)
10.16 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. (6)
10.17 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. (9)
10.18 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. (7)
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Exhibit
No. Description
- ------- -----------
10.19 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. (9)
10.20 Agreement to Lease, dated as of May 14, 1998, by and between
Candlewood Hotel Company, Inc. and HPT. (6)
10.21 Lease Agreement, dated as of May 21, 1998, by and between HPTCW, as
landlord, and Candlewood Leasing No. 2, Inc., as tenant. (6)
10.22 Guaranty Agreement, dated as of May 14, 1998, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW and HPT. (6)
10.23 Stock Pledge Agreement, dated as of May 27, 1998, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW. (6)
10.24 Securities Purchase Agreement dated as of September 30, 1998. (8)
10.25 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel
Company, Inc. and Vantage Point Properties, Inc. (9)
11.1 Statement re Computation of Per Share Earnings -- not applicable.
- ---------------
(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 September 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(9) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
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