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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-12708
CANDLEWOOD HOTEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8621 East 21st Street North, Suite 200, Wichita, Kansas 67206
(Address of principal executive offices and Zip Code)
Registrant's telephone number,
including area code: (316) 631-1300
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $.01 par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of
the registrant, as of March 15, 2002, was $11,159,536 based on the closing sales
price of $1.68 on such date.
The number of shares outstanding of the registrant's common stock, as
of March 15, 2002, was 9,025,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2002 Annual Meeting of
Stockholders to be held on May 14, 2002 are incorporated by this reference into
Part III as set forth herein.
1
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Candlewood Hotel Company, Inc. owns, operates, franchises and manages
high-quality, value-oriented, business-travel hotels. Our hotel properties offer
accommodations for all guests, while catering to mid-market and upscale business
and personal travelers seeking multiple night stays. At December 31, 2001, we
had 76 company-operated hotels (which is comprised of owned, leased and joint
venture hotels), two managed hotels and 27 franchised hotels. In addition, at
December 31, 2001, we had three franchised hotels under construction. See
"Properties" below.
Candlewood Hotel Company, Inc. was incorporated in the State of
Delaware in August 1996 and our principal executive offices are located at 8621
East 21st Street North, Suite 200, Wichita, Kansas 67206, telephone (316)
631-1300.
OUR BRANDS
We operate two brands in the lodging market - Candlewood Suites and
Cambridge Suites. Each brand is built on the foundation of providing exceptional
value to all guests and designed to appeal to different price points in the
lodging market.
CANDLEWOOD SUITES
Candlewood Suites hotels offer upscale, spacious accommodations at
competitive rates that we believe are attractive to mid-market business and
personal travelers. Each Candlewood Suites hotel is comprised of studios and
one-bedroom suites, both of which contain business and other amenities
consistent with amenities found in upscale, full-service hotels. We believe that
the 350 square foot studio suites are larger than most full-service hotel rooms.
Up to 25% of the rooms in a standard Candlewood Suites hotel are one-bedroom
suites, which are approximately 525 square feet, and are designed to accommodate
guests who desire a bedroom separated from the kitchen and office area.
We believe that Candlewood Suites hotels offer the accommodations and
amenities that are desired by guests staying an extended period of time. Each
Candlewood Suites hotel is equipped with the following amenities and values,
which we refer to as "Candlewood values":
- an exercise room;
- a complimentary guest laundry facility;
- a convenient dry cleaning drop, with same-day service;
- free local calls and low-priced long distance calls;
- the self-service "Candlewood Cupboard" featuring value-priced
packaged foods and 25 cent beverages; and
- a free "First Night Kit" complete with items such as breakfast
bars, coffee and popcorn.
In addition, each Candlewood Suites studio and one-bedroom suite offers
amenities designed to accommodate the needs of the business traveler. These
amenities include the following:
- two telephones, with two incoming direct dial lines and
computer connections;
- an oversized executive desk with a quad-outlet to accommodate
office equipment needs, an executive chair, a bulletin board,
a guest chair and personalized remote accessible telephone
mail;
- a 25-inch television, video cassette player and compact disc
player;
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- an iron and ironing board; and
- a fully equipped kitchen, including a full-size refrigerator,
full-size microwave oven, dishwasher, two burner stovetop,
coffee maker, toaster and a complete set of utensils and
cookware.
CAMBRIDGE SUITES
Building on our value positioning, Cambridge Suites offers the
upscale business traveler exceptional amenities and comfort at competitive
rates. Each Cambridge Suites hotel offers the following amenities:
- Candlewood values;
- a recreational facility (such as a swimming pool or fitness
center) or access to one;
- a full kitchen in every suite;
- a complimentary "cooked to order" breakfast; and
- a hospitality area for breakfast and socializing.
THE LODGING INDUSTRY
We operate in the extended-stay segment of the U.S. lodging industry.
Extended-stay hotels are generally characterized as hotels, which accept
reservations, do not require a lease and provide a fully equipped kitchenette in
each guestroom. An extended-stay is defined as a stay of seven consecutive
nights or longer. We believe that the extended-stay market can be divided into
four general sectors:
- the upscale sector;
- the mid-priced sector;
- the economy sector; and
- the budget sector.
We operate largely in the mid-priced and upscale sectors of the
lodging industry. We believe that hotels in the mid-priced sector, including our
Candlewood Suites hotel brand, operated in 2001 at average daily rates exceeding
$45, but less than $90. Our Cambridge Suites brand operates in the upscale
sector, which we believe to have operated in 2001 with average daily rates
exceeding $90. All of our owned, franchised and joint venture hotels were
designed for the extended-stay business and personal traveler. We believe that
the high quality of Candlewood hotels, relative to their daily rate, attract
certain guests who otherwise would stay at traditional hotels. Our rates are
significantly lower than full-service hotels with comparable room features and
amenities and generally competitive with traditional limited-service hotels that
do not offer the high quality appointments and amenities of our rooms.
Accordingly, we believe that Candlewood hotels are particularly attractive to
business travelers, including professionals on temporary work assignment,
consultants, travelers conducting or participating in training seminars, and
government employees.
HOTEL OPERATIONS
Our focused approach to customer service enables each Candlewood
hotel to employ generally only 10 to 12 employees, which helps minimize
operating costs. Our hotel staff generally consists of one on-site general
manager, one director of sales, one operations manager and seven to nine front
desk, housekeeping and maintenance personnel. The on-site general manager at
each hotel is responsible for adhering to Candlewood's quality control standards
and procedures, which govern management, operations, maintenance, regulatory
compliance, reporting and marketing. Each hotel is measured against guest
service standards and a detailed revenue and expense budget, as well as against
the performance of our other hotels. Key on-site personnel participate in an
incentive program based on hotel revenues, market share performance and expense
management. Our quality assurance division conducts periodic
3
inspections of each hotel to ensure compliance with Candlewood's quality control
standards. Personnel at our corporate headquarters provide each hotel with
certain management services, such as accounting and payroll services, which
allow our on-site hotel general managers to focus on providing guest services
and result in economies of scale.
Each Candlewood hotel on-site general manager and director of sales
are required to complete classroom courses, which we administer through
Candlewood University, our in house training program. In addition, our general
managers and directors of sales are required to undergo on-the-job training
which is tailored to teach them the marketing and operational systems specific
to operating a Candlewood Suites and Cambridge Suites hotel, how to maximize
operating efficiencies and how to attract extended-stay guests. In addition,
dedicated pre-opening teams (consisting of our experienced general managers and
directors of sales) deliver on-site training to new employees to ensure that a
guest's experience at a newly opened Candlewood hotel is consistent with the
standards set by existing properties. Customer service is further enhanced
through the presence of an experienced team of operations area coaches. The
primary role of the area coach is to provide direction, training and mentoring
support to individual hotels.
The number of housekeeping staff at a Candlewood Suites hotel is
generally lower than that of a Cambridge Suites hotel of comparable size. Weekly
housekeeping is provided to guests of our Candlewood Suites hotels, offering
less intrusion and greater privacy, while lowering hotel expenses. Guests of our
Cambridge Suites hotels receive daily housekeeping on stays of six nights or
less and weekly housekeeping on stays of seven nights or longer.
SALES AND MARKETING
Each Candlewood hotel has an on-site director of sales dedicated to
marketing and direct sales efforts. The sales and marketing division uses direct
mail solicitations and targets institutions and employers located near our
hotels. Through these direct sales efforts, we believe we can obtain and
maintain consistently high occupancy levels and generate longer stays by our
guests. To provide additional marketing and sales support, we have a team of
area sales coaches to support the marketing and sales programs within each
region and provide mentoring support to individual hotels.
We have established a toll free telephone number, 1-888-226-3539
(1-888-CANDLEWOOD), to enable our guests to make reservations at any of our
hotels. Our reservation system enables travel agents throughout the world to
book rooms and allows us to more effectively manage our hotels' inventory and
access current information on productivity and guest arrivals in real-time.
We have also established a web site, domain name
"candlewoodsuites.com," where our guests can access information concerning our
company and hotels. For example, our guests can do the following on our web
site:
- book a room;
- find a map and directions to our hotels;
- find our current stock price; and
- explore employment opportunities.
We also use wholesale web sites to sell excess inventory.
HOTEL FRANCHISING
We have established a national franchising program, which we believe,
will accelerate the establishment of our market presence and brand awareness on
a national level. Our franchise efforts in regards to the Cambridge Suites brand
are different than those utilized in franchising Candlewood Suites. Candlewood
Suites franchise efforts are focused on new construction whereas Cambridge
Suites by Candlewood targets conversion of existing upscale suite hotels. New
development of Cambridge Suites
4
by Candlewood franchise properties is considered on an individual basis. At
December 31, 2001, we had 25 Candlewood Suites franchise hotels open, three
hotels under construction and 22 executed franchise agreements for hotels not
yet under construction. The Cambridge Suites brand was introduced by Candlewood
in 2000 and as of December 31, 2001, we had two franchise hotels open with an
additional four executed franchise agreements for hotels not yet under
construction. See "Properties" below.
Each franchise agreement provides for the payment of an application
fee and two types of ongoing fees - a royalty fee and a marketing fee. The
franchise application fee is paid upon execution of the franchise agreement and
varies based upon the brand and size of the hotel. The royalty and marketing
fees are based upon a percentage of the franchisee's gross room revenues. The
royalty fee is four to five percent of gross room revenues, depending upon hotel
age, and is intended to cover our operating expenses, such as costs incurred in
providing quality assurance, administrative support and other franchise
services, and to provide us with operating profits. The marketing fee is used to
pay for the costs of developing and preparing advertising and direct sales
materials, national advertising and certain promotional programs.
Franchise agreements are executed when the prospective franchisee and
Candlewood agree on a site prior to construction. We make the services and
expertise of our franchising, facilities management, marketing and sales and
operations divisions available to our franchisees in order to ensure high
quality facilities and customer service. Additional fees may be charged for
facilities management, marketing and other services provided to the franchisees,
which are not within the scope of the franchise agreement. Our facilities
management division advises on the construction and development of franchised
hotels. A representative of our facilities management division visits franchised
hotel sites during the construction phase and inspects and approves each
franchised Candlewood hotel before or shortly after commencement of operations.
In addition, after commencing operations, all franchised Candlewood hotels are
subject to periodic inspection to ensure that they are in compliance with our
quality control program and maintenance and updating standards. Franchise
agreements for newly developed Candlewood Suites and Cambridge Suites hotels
have a 20-year term. For converted Cambridge Suites hotels, the franchise
agreement term is 10 years. We may terminate a franchise agreement if the
franchisee fails to cure a breach of the franchise agreement in a timely manner.
Our franchise agreements provide for a variety of conditions to the franchisees'
obligations to build the hotels and, accordingly, these hotels may never be
constructed or opened.
HOTEL JOINT VENTURES
As of December 31, 2001, we had nine joint venture hotels that we had
developed with third parties. Eight joint venture hotels were developed under an
agreement with Boston Capital and Mass Mutual. The remaining joint venture hotel
is located on the campus of Michigan State University in East Lansing, Michigan.
All of the joint venture hotels are Candlewood Suites franchise hotels, which we
operate under separate management agreements. As a result, we receive royalty
fees, management fees, and equity income from these hotels. These hotels are
classified as joint venture hotels in our property table. See "Properties"
below.
HOTEL MANAGEMENT
In addition to our company-operated hotels, we manage hotels owned by
third parties. As of December 31, 2001, we managed two such properties; one
Cambridge Suites hotel and one non-Candlewood brand hotel, the Hotel at Old
Town, both located in Wichita, Kansas. See "Properties" below. Jack DeBoer, our
Chairman and Chief Executive Officer, has an ownership interest in each of these
hotels. See "Certain Transactions" in our Proxy Statement for our 2002 Annual
Meeting of Stockholders.
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. Under the management contracts, we
manage, operate and supervise all aspects of the hotel's operations. The owner
5
of the hotel property is generally responsible for all costs, expenses and
liabilities incurred in connection with operating the hotel, including the
expenses and salaries of all hotel employees. Each contract is generally for a
term of up to five years with certain renewal rights. Either party, in the event
of an uncured default, may terminate the management contract. Certain other
termination provisions may also be included in the contract.
HOTEL DEVELOPMENT
Our facilities management division is responsible for the oversight
and coordination of the construction and ongoing maintenance of hotels developed
by Candlewood. Most of our hotels are designed and constructed according to
uniform plans and specifications. We have made design variations, including
changes in the number of studio suites, double-doubles (two double beds) and
one-bedroom suites, based on market demographics and site restrictions, among
other factors. As of December 31, 2001, existing Candlewood Suites hotels ranged
in size from 60 to 280 rooms. We believe that our coordination of the
construction of our hotels and our use of a comprehensive design manual has
lowered costs and resulted in consistent quality and appearance.
As of December 31, 2001, we did not have any company-operated hotels
under construction nor had we entered into any contracts for the purchase of any
hotel sites. We do not currently expect to develop hotels for ourselves in 2002.
LEASE OF HOTELS
In order to provide funds for our development activities, we have
completed three separate sale-leaseback transactions with Hospitality Properties
Trust, a Maryland real estate investment trust ("HPT"). These transactions were
completed in stages commencing in December 1997 with the most recent transaction
completed in August 2001.
As of December 31, 2001, we had sold 36 hotels to HPT for an
aggregate purchase price of $289.8 million. See "Properties" below. Each of the
hotels sold is leased back to Candlewood pursuant to an operating lease, which
expires in December 2016. The lease provides for two types of rent; base rent,
which is a fixed amount, and contingent rent, which is equal to 10% of the
increase in gross hotel sales over the amount generated in each hotel's second
year of operation. As of December 31, 2001, the annual base rent for the 36
leased hotels was approximately $29.5 million.
PROPERTIES
We classify our hotels 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. The following tables
set forth information by brand as of December 31, 2001 with respect to these
properties:
Existing hotels as of December 31, 2001:
Company-owned:
NUMBER
LOCATION BRAND DATE OPENED OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Kansas City - Overland Park, Kansas Candlewood Suites October, 1997 122
Charlotte, North Carolina - Coliseum Candlewood Suites November, 1997 81
Knoxville, Tennessee Candlewood Suites December, 1997 98
Houston, Texas - Galleria Candlewood Suites December, 1997 122
6
NUMBER
LOCATION BRAND DATE OPENED OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Dallas / Ft. Worth - Fossil Creek Candlewood Suites March, 1998 98
Raleigh, North Carolina - Cary Candlewood Suites April, 1998 81
Detroit - Auburn Hills, Michigan Candlewood Suites May, 1998 110
Chicago - Libertyville, Illinois Candlewood Suites June, 1998 122
Detroit - Troy, Michigan Candlewood Suites June, 1998 118
Dallas / Ft. Worth - Arlington, Texas Candlewood Suites August, 1998 125
Orange County, California Anaheim South Candlewood Suites August, 1998 133
Orange County, California - Irvine Spectrum Candlewood Suites September, 1998 122
Dallas / Ft. Worth - Plano Candlewood Suites October, 1998 122
Dallas / Ft. Worth - Galleria Candlewood Suites October, 1998 134
Orlando - Altamonte Springs, Florida Candlewood Suites November, 1998 122
Ann Arbor, Michigan Candlewood Suites November, 1998 122
Chicago - Waukegan, Illinois Candlewood Suites December, 1998 122
Greensboro, North Carolina Candlewood Suites December, 1998 122
Clearwater - St. Petersburg, Florida Candlewood Suites December, 1998 104
Dallas / Ft. Worth - North / Richardson Candlewood Suites January, 1999 122
Atlanta, Georgia - Gwinnett Place Candlewood Suites February, 1999 122
Chicago - Schaumburg, Illinois Candlewood Suites February, 1999 122
Chicago - Warrenville, Illinois Candlewood Suites February, 1999 122
St. Louis, Missouri Candlewood Suites March, 1999 122
Chicago - Hoffman Estates, Illinois Candlewood Suites April, 1999 122
Cleveland - North Olmstead, Ohio Candlewood Suites April, 1999 125
Columbus, Ohio - Airport Candlewood Suites May, 1999 122
Oklahoma City, Oklahoma Candlewood Suites June, 1999 122
Miami, Florida - Airport West Candlewood Suites August, 1999 128
Chicago - O'Hare Candlewood Suites November, 1999 160
Jersey City, New Jersey Candlewood Suites April, 2001 214
-------
3,783
Leased:
NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Wichita, Kansas - Northeast Candlewood Suites May, 1996 108
Omaha, Nebraska Candlewood Suites January, 1997 131
Denver, Colorado - Tech Center Candlewood Suites February, 1997 131
Cincinnati - Blue Ash, Ohio Candlewood Suites May, 1997 78
Louisville, Kentucky - Jeffersontown Candlewood Suites May, 1997 78
Hampton, Virginia Candlewood Suites September, 1997 98
Birmingham, Alabama Candlewood Suites September, 1997 98
Orange County, California - Irvine East Candlewood Suites October, 1997 122
Philadelphia, Pennsylvania - Willow Grove Candlewood Suites October, 1997 110
Wichita, Kansas - Airport Candlewood Suites November, 1997 81
Salt Lake City, Utah - Ft. Union Candlewood Suites November, 1997 98
Houston, Texas - Clear Lake Candlewood Suites November, 1997 122
Salt Lake City, Utah - Airport Candlewood Suites November, 1997 122
Jacksonville, Florida Candlewood Suites December, 1997 111
Phoenix, Arizona Candlewood Suites December, 1997 98
Detroit - Southfield, Michigan Candlewood Suites December, 1997 121
Huntsville, Alabama Candlewood Suites December, 1997 123
Phoenix, Arizona - Tempe Candlewood Suites March, 1998 122
Houston, Texas - Town & Country Candlewood Suites April, 1998 122
Detroit - Warren, Michigan Candlewood Suites April, 1998 122
Pittsburgh, Pennsylvania - Airport Candlewood Suites April, 1998 123
Des Moines, Iowa Candlewood Suites May, 1998 98
Austin, Texas - Northwest Candlewood Suites June, 1998 125
Dallas / Ft. Worth - Las Colinas Candlewood Suites June, 1998 117
Charlotte, North Carolina - University Candlewood Suites July, 1998 122
Albuquerque, New Mexico Candlewood Suites September, 1998 123
Nashville - Brentwood, Tennessee Candlewood Suites October, 1998 122
Houston, Texas - Westchase Candlewood Suites October, 1998 123
Somerset, New Jersey Candlewood Suites October, 1998 110
Minneapolis St. Paul, Minnesota - Airport Candlewood Suites November, 1998 134
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NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Denver, Colorado - Lakewood Candlewood Suites November, 1998 122
Boston - Braintree, Massachusetts Candlewood Suites November, 1998 133
Austin, Texas - South Candlewood Suites December, 1998 122
Baltimore, Maryland - Airport Candlewood Suites December, 1998 125
Philadelphia - Mt. Laurel, New Jersey Candlewood Suites June, 1999 123
Las Vegas, Nevada Candlewood Suites February, 2000 276
-------
4,294
Managed:
NUMBER
LOCATION BRAND INCEPTION DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Wichita, Kansas - Cambridge Cambridge Suites April, 1997 76
Wichita, Kansas - Hotel at Old Town Non-Candlewood brand March, 1999 115
-----
191
Joint Venture:
NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
San Jose, California - Silicon Valley Candlewood Suites April, 2000 122
Morris Plains, New Jersey Candlewood Suites June, 2000 122
Detroit - Farmington Hills, Michigan Candlewood Suites June, 2000 125
Chicago - Wheeling, Illinois Candlewood Suites June, 2000 143
Hartford - Meriden, Connecticut Candlewood Suites June, 2000 124
Boston - Burlington, Massachusetts Candlewood Suites November, 2000 149
Orange County, California - Santa Ana Candlewood Suites February, 2001 122
East Lansing, Michigan - Michigan State Candlewood Suites March, 2001 128
Clarkstown - Nanuet, New York Candlewood Suites May, 2001 124
-------
1,159
Franchised:
NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Portland, Oregon Candlewood Suites June, 1997 126
San Francisco - Pleasanton, California Candlewood Suites August, 1997 126
Rockford, Illinois * Candlewood Suites November, 1997 67
Sacramento, California Candlewood Suites March, 1998 126
Dallas / Ft. Worth - Dallas Market Center Candlewood Suites March, 1998 150
Syracuse, New York Candlewood Suites August, 1998 92
Bellevue, Washington - Seattle Candlewood Suites September, 1998 126
Milpitas, California Candlewood Suites November, 1998 126
San Antonio, Texas Candlewood Suites December, 1998 110
Salina, Kansas Candlewood Suites February, 1999 69
Richmond, Virginia - West Candlewood Suites October, 1999 122
Louisville, Kentucky - Airport Candlewood Suites April, 2000 100
Durham, North Carolina Candlewood Suites July, 2000 122
Green Bay, Wisconsin Candlewood Suites July, 2000 86
Richmond, Virginia - South Candlewood Suites September, 2000 104
Washington DC - Dulles-Herndon Candlewood Suites October, 2000 133
Fairfax, Virginia - Washington DC Candlewood Suites November, 2000 122
Topeka, Kansas Candlewood Suites January, 2001 78
Raleigh, North Carolina - Crabtree Candlewood Suites February, 2001 122
Charlotte, North Carolina - Huntersville Candlewood Suites May, 2001 81
Emporia, Kansas Candlewood Suites May, 2001 60
Wichita, Kansas Cambridge Suites July, 2001 82
Indianapolis, Indiana Candlewood Suites August, 2001 125
Hopewell / Petersburg, Virginia Candlewood Suites September, 2001 60
Brunswick, Georgia Cambridge Suites September, 2001 44
Rogers, Arkansas Candlewood Suites September, 2001 78
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NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Colorado Springs, Colorado - North Candlewood Suites November, 2001 122
-------
2,759
* Both a franchise and joint venture hotel as of December 31, 2001.
Hotels under construction as of December 31, 2001:
Franchised:
PROJECTED NUMBER
LOCATION BRAND OPENING DATE OF ROOMS
- --------------------------------------------- ------------------ --------------- --------
Round Rock, Texas Candlewood Suites January, 2002 100
Columbia, Missouri Candlewood Suites April, 2002 81
Plymouth, Minnesota Candlewood Suites August, 2002 89
------
270
In addition to the properties described above, we also maintain our
corporate headquarters in Wichita, Kansas, at 8621 East 21st Street North, Suite
200. We lease this office space under a five-year term with four five-year
renewal options. We anticipate that our office space will be adequate for the
foreseeable future.
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, Candlewood and our franchisees are subject to laws
governing our relationships with employees, including minimum wage requirements,
overtime, working conditions and work permit requirements. We are also subject
to federal regulations and certain state laws that govern the offer and sale of
franchises. Many state franchise laws impose substantive requirements on
franchise agreements, including limitations on non-compete provisions and
termination or non-renewal of a franchise. Some states require that certain
materials be approved before franchises can be offered or sold in that state.
The failure to obtain permits or licenses or approvals to sell franchises, or an
increase in the minimum wage rate, employee benefit costs or other costs
associated with employees, could adversely affect our business and results of
operations. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.
Under the Americans with Disabilities Act ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although we have attempted to satisfy ADA
requirements in the designs of our facilities, no assurance can be given that a
material ADA claim will not be asserted against us. Such a claim could result in
a judicial order requiring compliance and the expenditure of substantial sums to
achieve compliance, an imposition of fines, or an award of damages to private
litigants. These and other initiatives could adversely affect us as well as the
lodging industry in general.
ENVIRONMENTAL MATTERS
Our operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations.
In addition, in the event any future legislation is adopted, we may, from time
to time, be required to make significant capital and operating expenditures in
response to such legislation. We attempt to minimize our exposure to potential
environmental liability through our site selection procedures. Accordingly, we
typically enter into contracts to purchase real estate subject to certain
contingencies. In addition, prior to purchasing a property, we conduct a Phase I
environmental assessment, which generally includes a physical inspection and
database search, but not soil or groundwater analyses.
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Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership or operation of
hotels, we may be potentially liable for any such costs. Although we are
currently not aware of any material environmental claims pending or threatened
against us or any of our managed or franchised hotels, no assurance can be given
that a material environmental claim will not be asserted against us or against
us and our managed or franchised hotels. The cost of defending against claims of
liability or of remediating a contaminated property could have a material
adverse effect on our results of operations.
PROPRIETARY RIGHTS
We have filed applications for or obtained registrations for our
service marks on the principal registries of the United States Patent and
Trademark Office, the state of Kansas, Canada and the European Community. The
following table sets forth information regarding the status of our service marks
and proprietary rights as of December 31, 2001:
SERVICE MARK COUNTRY / STATE STATUS REGISTRATION DATE
- --------------------------------------------- ------------------ ---------- -----------------
Candlewood United States Registered December, 1996
Flame in Two Circle Design United States Registered April, 1998
Delivering Exceptional Value United States Registered June, 1998
Cambridge Suites United States Registered January, 1999
Cambridge Suites by Candlewood United States Registered January, 1999
Candlewood Suites United States Registered October, 1999
Where Value Stays United States Registered December, 1999
CS Circle Design United States Registered June, 2001
Candlewood Cupboard United States Registered June, 2001
Our Place. Your Space United States Registered November, 2001
Any Suite, Any Time United States Registered November, 2001
Fastest Reservations In The World United States Pending
WebExpress United States Pending
Eguarantee A Suite Anytime:
www.candlewoodsuites.com United States Pending
Candlewood Kansas Registered May, 1996
Candlewood Canada Registered January, 2001
Candlewood Suites Canada Pending
Candlewood Suites European Community Registered July, 1999
Flame In Two Circles Design European Community Registered March, 2000
Cambridge Suites European Community Registered April, 2000
CS Circle Design European Community Registered April, 2000
Candlewood Cupboard European Community Pending
We also claim common law rights to various other trademarks, service
marks, trade names, and trade dress for the various products and services we
offer. To date, we have not filed trademark or service mark applications with
the United States Patent and Trademark Office, any state agency or foreign
office to further protect these rights.
INSURANCE
10
We currently have the types and amounts of insurance coverage that we
consider appropriate for a company of our size in our business. While we believe
that our insurance coverage is adequate, if we were held liable for amounts
exceeding the limits of our insurance coverage or for claims outside of the
scope of our insurance coverage, our business, results of operations, and
financial condition could be materially and adversely affected. Specifically,
there are certain types of hotel-related losses, generally of a catastrophic
nature, such as earthquakes and floods that may be uninsurable or not
economically insurable. We use our discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to obtaining
appropriate insurance on Candlewood hotels at a reasonable cost and on suitable
terms. This may result in insurance coverage that in the event of a loss would
be insufficient to pay the full current market value or current replacement cost
of our lost investment. Inflation, changes in building codes and ordinances,
environmental considerations and other factors also might make it unfeasible to
use insurance proceeds to replace a hotel after it has been damaged or
destroyed. Under these circumstances, the insurance proceeds received by us
might not be adequate to restore our economic position with respect to such
hotel. In addition, property and casualty insurance rates may increase depending
on claims experience, insurance market conditions and the replacement value of
our hotels. Mr. DeBoer is affiliated with an insurance provider we utilize. See
"Certain Transactions" in our Proxy Statement for our 2002 Annual Meeting of
Stockholders and Note 10 to the Consolidated Financial Statements.
EMPLOYEES
As of December 31, 2001, Candlewood and its subsidiaries employed on
a full or part-time basis 1,203 persons, 1,125 of whom were employed at our
hotels and 78 of whom were employed at our corporate headquarters. Our employees
are not subject to any collective bargaining agreements, and our management
believes that its relationship with our employees is good.
ITEM 3. LEGAL PROCEEDINGS
We are and from time to time have been party to commercial litigation
relating to our business. We believe that none of these matters is material
individually or in the aggregate and intend to defend ourselves vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Candlewood's initial public offering of common stock was made on
November 5, 1996. The common stock is listed on the Nasdaq SmallCap Market under
the symbol "CNDL". The following table sets forth the high and low sales prices
per share, as reported by Nasdaq, during the periods indicated:
2001 High Low
- ---- ---- ---
Fourth Quarter $ 2.00 $ 1.10
Third Quarter 2.30 1.21
Second Quarter 2.99 2.00
First Quarter 3.50 2.50
2000 High Low
- ---- ---- ---
Fourth Quarter $ 3.50 $ 2.38
Third Quarter 4.00 2.38
Second Quarter 2.91 1.63
First Quarter 2.13 1.56
The closing sales price of our common stock on March 15, 2002 was
$1.68. The approximate number of beneficial stockholders on March 15, 2002 was
1,300. The approximate number of stockholders of record on March 15, 2002 was
156.
We have not paid dividends on our Common Stock. The Series A and
Series B Preferred Stock accumulate dividends at a rate of 7.5% of the stated
value of the shares ($1,000 per share), and are in preference to any dividend on
our Common Stock. We did not make our November 2001 and February 2002 preferred
stock dividend payments.
We currently do not anticipate paying any cash dividends on our
Common Stock in the foreseeable future. Any future payment of dividends on the
Common Stock will be at the discretion of the Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors. We
anticipate that future financing, including any lines of credit, may restrict or
prohibit our ability to pay dividends.
12
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected consolidated financial data set forth below has been
derived from our audited consolidated financial statements and the notes
thereto. The selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Hotel operations revenues $ 127,092 $ 127,771 $ 105,467 $ 47,278 $ 6,223
Other income 3,031 3,458 1,459 672 221
Hotel operating expenses 74,451 67,993 60,217 28,266 4,713
Rent expense on leased hotels 26,523 25,056 24,821 12,365 79
Corporate operating expenses 7,162 6,392 5,431 3,906 2,372
Abandoned site costs - - 2,043 3,799 157
Depreciation and amortization 11,641 10,578 8,412 3,565 1,022
Interest income 761 1,150 1,034 1,166 1,216
Interest expense (17,081) (18,577) (10,053) (214) (134)
Income (loss) before preferred dividends
and cumulative effect of a change in
accounting principle (5,138) 5,687 (2,791) (2,480) (817)
Cumulative effect of a change in
accounting principle - - - (3,857) -
Net loss available to common stockholders (13,163) (2,338) (10,816) (12,625) (2,065)
Net loss per share (1.46) (0.26) (1.20) (1.40) (0.23)
Weighted average shares outstanding 9,025,000 9,025,000 9,025,000 9,025,000 9,025,000
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents (including
restricted cash) $ 17,966 $ 21,834 $ 18,624 $ 23,155 $ 35,355
Total assets 321,338 359,309 341,277 293,358 181,807
Accounts payable and other accrued
expenses 16,364 21,686 22,874 40,277 16,040
Mortgages and notes payable 191,456 214,575 190,545 114,742 63,416
Redeemable preferred stock 103,538 100,689 100,689 100,737 61,461
Stockholders' equity (7,783) 6,228 8,566 19,382 32,589
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
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 and manages Candlewood Suites
and Cambridge Suites hotels to serve mid-market and upscale extended-stay
business and personal travelers. At December 31, 2001, we had a total of 76
company-operated hotels (which is comprised of owned, leased and joint venture
hotels), two managed hotels and 27 franchise hotels located in 34 states. In
addition, at December 31, 2001, we had three franchise hotels under
construction.
We classify our hotels 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, but do not lease or own. 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. The following tables set forth our property portfolio and hotel
development, respectively, at December 31, 2001 and December 31, 2000:
Number of Hotels Number of Rooms
December 31, December 31,
---------------- Increase / ---------------- Increase /
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ------ ------ -----------
Owned 31 32 (1) 3,783 3,971 (188)
Leased 36 34 2 4,294 3,893 401
Managed 2 2 - 191 179 12
Joint Venture 9 6 3 1,159 785 374
Franchised 27 17 10 2,759 1,907 852
--- --- --- ------ ------ -----
Total 105 91 14 12,186 10,735 1,451
December 31,
--------------- Increase /
2001 2000 (Decrease)
---- ---- ----------
Under Construction
Owned - 1 (1)
Leased - - -
Managed - - -
Joint Venture - 3 (3)
Franchised 3 7 (4)
--- ----- -----
Total 3 11 (8)
We believe that a significant element of our future growth and
expansion will be provided through the franchising of hotels. At December 31,
2001, we had 26 signed franchise agreements for hotels not yet under
construction. These agreements provide for a variety of conditions to the
franchisees' obligations to build the hotels and, accordingly, these hotels may
never be constructed or opened. Additionally, we are actively marketing
management contracts to existing and prospective franchisees to utilize our
management experience and expertise to manage their hotels.
Our consolidated statements of operations includes revenues and
expenses for only those hotels which are consolidated subsidiaries of Candlewood
Hotel Company, Inc. (which is comprised of 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
14
equity method of accounting) are not included in our revenues and expenses.
Franchise fees, royalty fees, management fees, equity income from investment in
joint ventures and other fees received from franchise, managed and joint venture
hotels are included in other income in our consolidated statements of
operations.
We measure our results of operations by 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 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.
We have completed three separate sale-leaseback transactions with
Hospitality Properties Trust, a Maryland real estate investment trust ("HPT").
These transactions were completed in stages commencing in December 1997 with the
most recent transaction completed in August 2001. As of December 31, 2001, we
had sold 36 hotels to HPT. The provisions of the transactions allow us to
operate, as lessee, over a defined lease term, hotels that we developed. Our
results from operations reflect these transactions. As a result of the
sale-leaseback transactions, we have recorded rent expense on the hotels leased
back from HPT. Since these 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 sales of the
hotels is recorded net of the deferred gain on sale. The gain is deferred and
not recognized into earnings until certain operating performance levels are
achieved. See Note 12 to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures. The Company believes that the following critical accounting
policies, among others, affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements.
Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets, including
its investments in real estate for impairment indicators. The judgments
regarding the existence of impairment indicators are based on factors such as
operational performance, market conditions and legal factors. Future events
could occur which would cause us to conclude that impairment indicators exist
and an impairment loss is warranted.
Depreciation of Investment in Hotels
The Company depreciates its investment in hotels over a 40-year
useful life, which is a judgmental determination.
Fair Value of Financial Instruments
The valuation of financial instruments under SFAS No. 107 requires
the Company to make estimates and judgments that affect the fair value of the
instruments. The Company, where possible, bases the fair values of its financial
instruments on listed market prices and third party quotes. Where these are not
available, the Company bases its estimates on other factors relevant to the
financial instrument.
RESULTS OF OPERATIONS
15
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Hotel Operations
Hotel Operations Revenue
Hotel operations revenue, which includes room revenue and other
revenue (e.g. guest telephone and sales of products from the Candlewood
Cupboard), was $127.1 million for the year ended December 31, 2001, compared to
$127.8 million for the year ended December 31, 2000. Occupancy rates were lower
in 2001 as a result of the slowdown in the economy and a reduction in business
travel, however, the decrease in revenue was partially offset by the impact of
the opening of the Jersey City, New Jersey hotel in April 2001. The following
table sets forth the operating statistics for all our corporate hotels for the
years ended December 31, 2001 and December 31, 2000:
For the Year Ended December 31,
-------------------------------------
2001 2000 Change
-------- -------- --------
Occupancy 73.5% 76.0% (2.5)%
Average Daily Rate $ 57.32 $ 56.98 $ 0.34
Revenue per available room $ 42.14 $ 43.29 $ (1.15)
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 73.5% for corporate hotels for the year ended December 31,
2001, compared to 76.0% for the year ended December 31, 2000. We believe that
the decline in occupancy experienced in 2001 is consistent with the overall
lodging industry and is the result of a slower U.S. economy and to a lesser
extent the impact of the World Trade Center attacks on business travel. Overall,
the decrease in occupancy was experienced in both short and long-term stays, but
was particularly prevalent in our short-term stays, which we consider to be six
nights or less.
The average daily room rate for corporate hotels for the year ended
December 31, 2001 was $57.32, compared to $56.98 for the year ended December 31,
2000, an increase of 0.6%. 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 the
opening of the Jersey City, New Jersey hotel, which has a significantly higher
room rate than other corporate hotels. This was partially offset by a reduction
in the number of short-term stays, which are charged at a higher daily rate.
Other factors that influence average daily rates include lower rates for
long-term stays (seven or more nights), higher rates for one-bedroom suites and
higher rates in certain hotel locations. 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.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $42.14 for the year ended December 31,
2001, compared to $43.29 for the year ended December 31, 2000, a 2.7% decrease.
We cannot predict whether current occupancy levels and room rates can
be maintained or improved in 2002. Future occupancy and room rates may be
impacted by a number of factors including:
- the number and geographic location of new hotels;
- the season in which new hotels open;
- competition;
- market acceptance of our hotels;
- general economic conditions;
- unexpected events, such as the World Trade Center attacks; and
- the profitability of the businesses' of our core customers.
16
Hotel Operating Expenses
Hotel operating expenses for the year ended December 31, 2001 totaled
$74.5 million, compared to $68.0 million for the year ended December 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
increased wages, promotional costs associated with sales promotions and
operating costs for the newly opened Jersey City, New Jersey hotel. Other items
contributing to the increase in hotel operating expenses included higher
maintenance and utility costs and costs related to the restructuring of our
operations field administration team.
Rent Expense on Leased Hotels
Rent expense on the 36 leased hotels for the year ended December 31,
2001 was $26.5 million, compared to $25.1 million for the year ended December
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. The increase in rent expense is due to the sale
and leaseback of two additional hotels in 2001.
Hotel Opening Costs
Opening costs are costs incurred prior to the opening of a hotel and
include costs related to the hiring and training of hotel personnel, such as
travel, compensation and relocation costs. Opening costs for the year ended
December 31, 2001 totaled $230,000 compared to $279,000 for the year ended
December 31, 2000.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the year ended December
31, 2001 totaled $10.9 million, compared to $9.8 million for the year ended
December 31, 2000. The increase in depreciation and amortization expense in
2001, compared to 2000, was a result of the opening of the Jersey City, New
Jersey hotel in April 2001. This hotel is in a higher priced, primary market
where building costs are higher. In addition, leasehold improvement depreciation
expense was higher due to increased capital expenditures at our leased hotels,
and software amortization expense increased as a result of the full year
depreciation of the field property management system purchased in 2000. For both
2001 and 2000, depreciation and amortization expense does not reflect any
expense for properties sold in the sale-leaseback transactions.
Corporate Operations
Other Income
Other income for the year ended December 31, 2001 totaled $3.0
million, compared to $3.5 million for the year ended December 31, 2000. Other
income consists primarily of royalty fees (revenue-based fees received over the
life of a franchise agreement), franchise application fees (a one-time fee
received upon execution of a franchise agreement), management fees and joint
venture equity income. Equity income represents our share of the profits of
unconsolidated joint venture hotels.
17
Franchise fee income (including application and royalty fees) for the
year ended December 31, 2001 totaled $2.9 million, compared to $2.6 million for
the year ended December 31, 2000. Royalty fee income in 2001 increased 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. Franchise application fee income decreased in
2001 as a result of executing fewer new franchise agreements. For the year ended
December 31, 2001, we executed a combined total for both brands of 11 new
franchise agreements compared to 24 franchise agreements for the year ended
December 31, 2000. Management fee income for the year ended December 31, 2001
totaled $1.3 million, compared to $674,000 for the year ended December 31, 2000.
The increase in management fee income was due to increased management fees
received from the eight Boston Capital joint venture hotels and the East
Lansing, Michigan joint venture hotel. For the year ended December 31, 2001, we
recorded a loss of $1.1 million on our joint venture hotels, compared to
$176,000 of income for the year ended December 31, 2000. This loss is due to the
amortization of the difference between the amount at which the Boston Capital
joint venture investment is carried on our accounting records and the amount of
the underlying book equity in the net assets of the joint venture. This
difference is primarily made up of carrying costs incurred from the time we
purchased the land until the hotel was contributed to the joint venture.
We sold two hotels during the year ended December 31, 2001 and
recognized $1.3 million of the total deferred gain on hotels sold. We did not
sell any hotels during the year ended December 31, 2000, and recognized $2.2
million of the deferred gain on hotels sold.
Corporate Operating Expenses
Corporate operating expenses for the year ended December 31, 2001
totaled $7.2 million, compared to $6.4 million for the year ended December 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
travel, office space lease, professional fees and similar expenses. The increase
in 2001 was primarily due to increased salaries and wages, a change in the
capitalization of internal hotel development costs, and the accounting treatment
afforded certain internal personnel costs related to the development and
installation of the new field property management system in 2000. Beginning in
June 2001, in response to the limited amount of hotel development activity we
were experiencing, we ceased capitalization of internal real estate development
costs. As for the field property management system, pursuant to accounting
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use," certain specific internal personnel costs were
capitalized as part of the system. This project was completed in the third
quarter of 2000 and the costs of these personnel have since been recorded as an
expense. The increase in corporate operating expense in 2001 was partially
offset by a reduction in the amount of corporate incentive bonus costs and
franchise sales commissions. Franchise sales personnel are paid sales
commissions on new franchise agreements. As previously noted, during the year
2001, we executed 11 new franchise agreements, compared to 24 agreements in
2000.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for
the year ended December 31, 2001 totaled $749,000, compared to $751,000 for the
year ended December 31, 2000. Depreciation and amortization reflects
depreciation of leasehold improvements and furnishings in our corporate office,
and depreciation of financial system hardware, software and peripheral
equipment.
Interest Income and Expense
Interest income for the year ended December 31, 2001 was $761,000,
compared to $1.2 million for the year ended December 31, 2000. Interest income
for the year ended December 31, 2001 resulted primarily from the temporary
investment of cash provided by operations and proceeds from the third
18
quarter 2001 sale-leaseback transaction. For the year ended December 31, 2000,
interest income resulted primarily from the temporary investment of cash
provided by operations. The decrease for the year ended December 31, 2001 is
largely due to lower cash levels and lower investment rate yields.
Interest expense, net of capitalized interest, for the year ended
December 31, 2001 was $17.1 million, compared to $18.6 million for the year
ended December 31, 2000. The decrease in interest expense is due to lower LIBOR
interest rates and lower debt levels, partially offset by a reduction in the
amount of interest capitalized to development projects. We had fewer projects
under construction during 2001, thereby reducing the amount of interest
capitalized.
Sales of Hotels
We have sold to and leased back from HPT 36 hotels, two of which were
sold during 2001. One of these hotels was sold at a loss of $214,000. The
$64,000 gain from the sale of the other hotel has been deferred and will be
recognized over the remaining lease term. The following table sets forth the
sales proceeds, rent expense and earnings related to our leased hotels for the
years ended December 31, 2001 and 2000 (in thousands):
For the year ended
December 31,
----------------------
2001 2000
-------- --------
Proceeds from sale of hotels, net
of deferred gain of $64 and 0, respectively $ 28,850 $ -
Cost of hotels sold 29,064 -
Rent expense on leased hotels 26,523 25,056
Gain recognized 1,280 2,183
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Hotel Operations
Hotel Operations Revenues
For the year ended December 31, 2000, hotel operations revenue
totaled $127.8 million, compared to $105.5 million for the year ended December
31, 1999. The increase in revenue reflected the increased revenue generated by
hotels that had completed or were near completion of their ramp-up phase and the
opening of the Las Vegas, Nevada hotel in February 2000. The following table
sets forth the operating statistics for all our corporate hotels for the years
ended December 31, 2000 and December 31, 1999:
For the Year Ended December 31,
------------------------------------
2000 1999 Change
-------- -------- ---------
Occupancy 76.0% 67.7% 8.3%
Average Daily Rate $ 56.98 $ 58.24 $ (1.26)
Revenue per available room $ 43.29 $ 39.43 $ 3.86
The average occupancy rate for corporate hotels for the year ended
December 31, 2000 was 76.0%, compared to 67.7% for the year ended December 31,
1999. The occupancy rate for the year ended December 31, 2000 was positively
influenced by the increase in occupancy experienced by those hotels that had
completed or were near completion of their ramp-up phase. Overall, the increase
in occupancy was experienced in both short and long-term stays, but was
particularly strong in our long-term stay business, which consists of travelers
staying seven or more nights.
19
The average daily room rate for corporate hotels for the year ended
December 31, 2000 was $56.98, compared to $58.24 for the year ended December 31,
1999. The decrease in average daily rate was primarily due to the increase in
our long-term stays, which are charged at a lower daily rate. Revenue per
available room was $43.29 for the year ended December 31, 2000, compared to
$39.43 for the year ended December 31, 1999, a 9.8% increase. This increase in
revenue per available room was due to the increase in the average occupancy
rate.
Hotel Operating Expenses
Hotel operating expenses for the year ended December 31, 2000 totaled
$68.0 million, compared to $60.2 million for the year ended December 31, 1999.
The increase in hotel operating expenses experienced in 2000 is largely due to
the full year impact of the 12 corporate hotels opened in 1999 and the opening
of the Las Vegas, Nevada hotel in February 2000. Other factors contributing to
the increase in hotel operating expenses include the variable nature of certain
hotel operating expenses (e.g. as occupancy increases, certain expenses such as
housekeeping labor and supplies increase), increased wages and general economic
price increases.
Rent Expense on Leased Hotels
Rent expenses on the 34 leased hotels for the year ended December 31,
2000 was $25.1 million, compared to $24.8 million for the year ended December
31, 1999. The increase in rent expense reflects the contingent rent expense
incurred on certain properties in 2000 and the full year base rent costs of the
three hotels sold in January 1999.
Hotel Opening Costs
Opening costs for the year ended December 31, 2000 totaled $279,000
compared to $1.1 million for the year ended December 31, 1999. The decrease in
opening costs was primarily the result of having opened fewer corporate hotels
in 2000.
Hotel Depreciation and Amortization
Depreciation and amortization expense attributable to hotel
operations for the year ended December 31, 2000 totaled $9.8 million, compared
to $7.8 million for the year ended December 31, 1999. The increase in
depreciation and amortization expense in 2000, compared to 1999, was a result of
the full year impact of the 12 company-owned hotels opened in 1999 and the one
hotel opened in 2000. In addition, many of the newly opened hotels are in higher
priced, primary markets where building costs are higher.
Corporate Operations
Other Income
Other income for the year ended December 31, 2000 totaled $3.5
million, compared to $1.5 million for the year ended December 31, 1999. The
increase in other income for the year ended December 31, 2000, compared to the
year ended December 31, 1999, was due to an increase in royalty, franchise fee,
management fee and equity income. Franchise fee income (including application
and royalty fees) for the year ended December 31, 2000 totaled $2.6 million,
compared to $1.4 million for the year ended December 31, 1999. Franchise
application fee income in 2000 increased as a result of executing 24 new
franchise agreements during the year ended December 31, 2000, compared to 15
franchise agreements for the year ended December 31, 1999. The growth in royalty
fee income was due to the increase in the number of franchise hotels in
operation during 2000 and the increased revenue generated by those franchise
hotels that had completed or were near completion of their ramp-up phase. We had
17 franchised hotels (excluding the six Boston Capital joint venture hotels)
open as of December
20
31, 2000, compared to 11 hotels at December 31, 1999. The Boston Capital joint
venture hotels are also Candlewood Suites franchise hotels that we manage.
Management fee income for the year ended December 31, 2000 totaled $674,000,
compared to $136,000 for the year ended December 31, 1999. The increase in
management fee income was primarily due to the management fees received from the
six Boston Capital joint venture hotels. Equity income from joint venture hotels
for the year ended December 31, 2000 totaled $176,000, compared to an equity
loss of $91,000 for the year ended December 31, 1999. The increase in equity
income in 2000 was due to the profitability of the Boston Capital joint venture
hotels.
We did not sell any hotels during the year ended December 31, 2000;
however, for the year ended December 31, 2000 we recognized $2.2 million of the
deferred gain on hotels sold. For the year ended December 31, 1999, we sold
three hotels and recognized $1.3 million of the deferred gain on hotels sold.
Corporate Operating Expenses
Corporate operating expenses for the year ended December 31, 2000
totaled $6.4 million, compared to $5.4 million for the year ended December 31,
1999. The increase in 2000 was primarily due to the expansion of our franchise
sales and service team. This expansion began in the second quarter of 1999 and
was completed in the third quarter of 1999. Franchise sales personnel are paid
commissions on new franchise agreements. During the year 2000, we executed 24
new franchise agreements, compared to 15 agreements in 1999.
Abandoned Site Costs
There were no abandoned site costs recorded for the year ended
December 31, 2000. We recorded $2.0 million of abandoned site costs for the year
ended December 31, 1999. Abandoned site costs represent costs, such as
acquisition, architectural and zoning 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 year ended December 31, 2000, totaled $751,000 compared to $625,000 for the
year ended December 31, 1999. The increase in depreciation and amortization
expense reflects the full year depreciation of 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.
Interest Income and Expense
Interest income for the year ended December 31, 2000 totaled $1.2
million, compared to $1.0 million for the year ended December 31, 1999. Interest
income for the year ended December 31, 2000 resulted primarily from the
temporary investment of cash provided by operations. Interest income for the
year ended December 31, 1999 related to the short-term investment of proceeds
received from the Series B Preferred Stock placement, the sale-leaseback
transaction and the temporary investment of cash provided by operations.
Interest expense, net of capitalized interest, for the year ended
December 31, 2000 was $18.6 million, compared to $10.1 million for the year
ended December 31, 1999. The increase in interest expense for the year ended
December 31, 2000 was due to higher debt levels, higher interest rates, and a
reduction in the amount of interest capitalized to development projects. We had
fewer projects under construction in 2000, thereby reducing the amount of
interest capitalized.
Sales of Hotels
21
We have sold to and leased back from HPT 34 hotels. A deferred gain
was recorded on the sales, a portion of which was recorded in income in the
years ended December 31, 2000 and December 31, 1999. The following table sets
forth the sales proceeds, rent expense and earnings related to our leased hotels
for the years ended December 31, 2000 and 1999 (in thousands):
For the year ended
December 31,
----------------------
2000 1999
-------- --------
Proceeds from sale of hotels, net
of deferred gain $ - $ 24,281
Rent expense on leased hotels 25,056 24,821
Gain recognized 2,183 1,329
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $18.0 million at December 31,
2001, compared to $21.8 million at December 31, 2000. Net cash provided by
operating activities totaled $275,000 for the year ended December 31, 2001,
compared to $10.7 million of cash provided by operating activities for the year
ended December 31, 2000. For the year ended December 31, 2001, we recorded a net
loss from operations of $5.1 million, including $11.6 million of non-cash
depreciation and amortization expense and $1.3 million of non-cash deferred gain
income on hotels sold. Sources of cash for the year ended December 31, 2001
consisted primarily of a $3.0 million return of a guarantee deposit, which was
recorded as an increase in the deferred gain on sale of hotels. Uses of cash for
the year ended December 31, 2001 consisted of a $4.6 million increase in other
assets and an increase in sale-leaseback deposits of $3.8 million. The increase
in other assets is largely due to funding of the furniture, fixtures and
equipment ("FF&E") cash reserve accounts. These accounts are stipulated in the
lending agreements and the cash reserved is for replacement and refurbishment of
hotel furniture and fixtures. The increase in sale-leaseback deposits reflects
the sale of the two hotels in 2001. For the year ended December 31, 2000, we
recorded net income from operations of $5.7 million, including $10.6 million of
non-cash depreciation and amortization expense and $2.2 million of non-cash
deferred gain income on hotels sold. Uses of cash for the year ended December
31, 2000 consisted primarily of a $2.6 million increase in other assets. This
increase in other assets was due to funding of the FF&E cash reserve accounts.
Net cash provided by investing activities for the year ended December
31, 2001 totaled $25.0 million, compared to $26.5 million of net cash used in
investing activities for the year ended December 31, 2000. Sources of cash for
the year ended December 31, 2001 consisted of proceeds from the sale of hotels
and cash distributions from the joint ventures. Cash used in investing
activities for the year ended December 31, 2001 consisted of expenditures for
property and equipment and investment in joint venture hotels. For the year
ended December 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 year ended December 31, 2001, net cash used in financing
activities was $29.1 million, compared to $19.0 million of net cash provided by
financing activities for the year ended December 31, 2000. Net cash used in
financing activities during the year ended December 31, 2001 included $28.6
million of principal payments on notes payable and $6.0 million of preferred
stock dividend payments, partially offset by $5.4 million of proceeds from
mortgages and notes payable. The principal payments on notes payable related
primarily to the payoff of loans associated with the sale of the two hotels in
2001 and payments made to extend or refinance notes that matured during the year
ended December 31, 2001. For the year ended December 31, 2000, net cash provided
by financing activities consisted of $29.5 million in proceeds from mortgages
and notes payable, partially offset by $2.4 million of principal payments on
notes payable and $8.0 million of preferred stock dividend payments.
22
Under the terms of the agreement with Boston Capital and Mass Mutual,
since 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 the existing joint venture hotels. This additional capital
contribution amount could be as much as 5% of the estimated total costs of all
existing joint venture hotels. As of December 31, 2001, we had eight hotels open
with none under construction and the additional capital contribution amount was
estimated at approximately $4.3 million, which we would pay with available
funds, if necessary. As of March 15, 2002, 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.
As of December 31, 2001, we have guaranteed approximately $57.2
million of the construction debt on the Boston Capital joint venture properties.
Maturity dates for this debt range from October 2002 to December 2007 with
certain notes providing extensions for up to two years. Since this debt relates
to an entity, which we do not wholly own or control, it is not included in our
consolidated financial statements.
In connection with the development of Candlewood hotels, as of
December 31, 2001, we had borrowed $191.5 million from GMAC and one other
financial institution and Doubletree Corporation, a wholly owned subsidiary of
Hilton Hotel Corporation.
As of December 31, 2001, we had borrowed $178.0 million from GMAC and
one other financial institution. This debt had scheduled maturity dates ranging
from February 2002 to June 2011 with interest rates, which ranged from 5.52% to
9.25%. Approximately $128.2 million and $45.9 million of this debt was scheduled
to mature in 2002 and 2003, respectively. We have the ability to extend the
maturities on or refinance the debt scheduled to mature in 2002, under the terms
of the existing loan agreements.
In addition, we had $13.5 million in unsecured indebtedness
outstanding as of December 31, 2001, with Doubletree, as evidenced by two
promissory notes. In November 2001, under the terms of the original note, the
first installment of $12.5 million matured. We did not pay that principal
amount. In December 2001, we reached an agreement with Doubletree to extend the
original maturity date on the debt to June 2002. As consideration to Doubletree
for securing this extension, we were required to pay $1.5 million and make
monthly principal payments of $1.0 million up to the maturity date. These notes
are scheduled to mature in June and July 2002 with interest payable quarterly at
15%.
In March 2002, we purchased a hotel, which was previously franchised
to an unaffiliated third party for the outstanding debt balance of $4.7 million.
Additionally, we are currently in discussions with an unaffiliated third party
regarding the potential sale and leaseback of additional hotels. The proceeds
from the sale of these hotels would be used to repay hotel and corporate
indebtedness, with the balance to be used for general working capital, as
necessary. We are also in discussions with our lenders regarding the refinancing
of all, or a portion, of the debt, which would remain subsequent to the sale and
leaseback of the hotels.
To help finance our development, we completed two private placements
of preferred stock. In 1997, we issued 65,000 shares of our Series A Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock"), at a price of
$1,000 per share, raising net proceeds $61.3 million. In 1998, we issued 42,000
shares of our Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") at a price of $1,000 per share, raising net proceeds of $39.4
million. We also issued the holders of our Series B Preferred Stock, at no
additional cost, warrants to purchase an aggregate of 336,000 shares of Common
Stock at $12.00 per share.
The Series A and Series B Preferred Stock accumulate dividends at a
rate of 7.5% with dividend payments made quarterly, upon approval of the board
of directors, and in preference to any dividend on our Common Stock. These
payments are approximately $2.0 million per quarter. We did not make the
23
November 2001 and February 2002 preferred stock dividend payments. We intend to
assess our cash position on a quarterly basis and may elect to forego additional
scheduled dividend payments on our preferred stock. As of March 15, 2002, we had
approximately $4.0 million of accumulated unpaid dividends. 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. As of March
15, 2002, the mandatory redemption amount was approximately $111.0 million.
Series A and B Preferred Stockholders also have the right to convert, at any
time at their option into shares of Common Stock, subject to certain
anti-dilution adjustments. Our failure to pay the November 2001 and February
2002 preferred stock dividends has resulted in an automatic adjustment to the
conversion price of the Preferred Stock from $9.13 to $8.63 and may result in a
future adjustment to the dividend rate. In the event we liquidate, the holders
of the Series A and Series B Preferred Stock are entitled to receive a payment
equal to the stated value of their shares, plus any accrued but unpaid dividends
(the "Liquidation Amount"), prior to any distribution or payment to the holders
of our Common Stock. As of March 15, 2002, the Liquidation Amount was $111.0
million, including $4.0 million of unpaid dividends. Alternatively, the holders
of the Series A and Series B Preferred Stock may convert any or all of their
shares into shares of Common Stock. In the event of a corporate transaction that
constitutes a change of control, we are required to offer to redeem all of the
outstanding shares of Series A and Series B Preferred Stock for a price equal to
the greater of the Liquidation Amount or 175% of the stated value of the shares.
One hundred seventy five percent of the stated value of the shares was $187.3
million. Preferred stock dividends are in preference to any dividend on our
Common Stock. 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.
We believe that a combination of our cash and cash equivalents, cash
from operations and borrowed funds from third-party lenders (if approved on an
individual basis) will be sufficient to provide capital for operations through
December 2002.
From time to time we will consider strategic acquisitions as a means
of growth, which may 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.
As of December 31, 2001, we have available $30.9 million of net
operating loss carry-forwards, which are available to be utilized in future
years to offset taxable income. These net operating loss carry-forwards will
expire beginning in 2011 through 2016.
CERTAIN BUSINESS CONSIDERATIONS
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, and
we disclaim any obligation, to update these statements.
24
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:
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. Although we currently do not expect
to develop any company-owned Candlewood hotels in 2002, if we elect to develop
any hotels, we cannot assure you that we will be able to obtain the financing
necessary to develop such hotels on terms acceptable to us, or at all. Because
we currently do not have adequate cash balances to pay for the development costs
of new hotels, if our applications with lending institutions are not approved or
our loans are not funded on a timely basis, we may be unable to construct
additional Candlewood hotels. We have no current arrangements with respect to,
or sources of, additional debt financing. If we are unable to arrange for
additional capital or financing, we may not be able to develop further hotels.
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. For example, the tragedy at the World Trade Center caused
significant short-term declines in our occupancy rates and room rates. 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.
We have Never Been Profitable. At December 31, 2001, we operated 76
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:
- the inability to maintain high occupancy rates or to attract
guests for extended-stays;
- the inability to achieve expected nightly rates;
- the inability to operate the hotels at expected expense
levels;
- the ability to attract and retain quality personnel; and
- 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 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 or make our
scheduled preferred stock dividend payments as they become due. In November
2001, we did not make the scheduled principal payment on the indebtedness with
Doubletree. In December 2001, we reached an agreement with Doubletree to extend
the original maturity date on the debt to June 2002. In addition, we may need to
refinance all or a portion of our indebtedness on or before the maturity date.
We do not currently have sufficient capital to pay all of our debts if they were
due today and cannot provide any assurances that we will be able to refinance
any of our indebtedness on commercially reasonable terms, or at all. Our
Preferred Stock accumulates dividends at a rate of 7.5% with dividend payments
made quarterly, upon approval of the board of directors, and in preference to
any dividend on our Common Stock. These payments are approximately $2.0 million
per quarter. We did not make the November 2001
25
and February 2002 preferred stock dividend payments. 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 result in litigation and have a material
adverse effect on our business and results of operations. See "Liquidity and
Capital Resources" in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" for further discussion.
Our Growth is largely Dependant on Franchising Hotels. We intend to
grow primarily by franchising Candlewood Suites and Cambridge Suites hotels. Our
ability to franchise hotels and obtain franchisees involves substantial risks,
including:
- there are a limited number of franchising opportunities;
- we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;
- unavailability of financing to potential franchisees on
favorable terms, or at all;
- delays in completion of construction of franchised hotels;
- termination of signed franchise agreements;
- incurring substantial costs if we abandon a franchising
project prior to completion;
- a franchisee's failure to obtain all necessary zoning and
construction permits;
- competition for suitable franchise sites from our competitors,
some of whom may have greater financial resources than
Candlewood franchisees;
- our franchisees actual costs exceeding budgeted or contracted
amounts; and
- our franchised properties not achieving desired revenue or
profitability levels once opened.
If we are unable to successfully franchise 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
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:
- changes in national economic conditions;
- changes in general or local economic conditions and
neighborhood characteristics;
- competition from other lodging facilities;
- changes in the availability, cost and terms of financing;
- the ongoing need for capital improvements;
- changes in operating expenses;
- changes in real property tax rates;
- changes in governmental rules and policies;
26
- the impact of present or future environmental laws;
- natural disasters; and
- 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
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 further elsewhere in this
Annual Report on Form 10-K, including without limitation under the captions
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
IMPACT OF NEW ACCOUNTING STANDARDS
On June 29, 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, "Business Combinations."
Statement 141 eliminates the pooling-of-interest method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. The requirements of Statement 141 are effective
for any business combination accounted for by the purchase method that is
completed after June 20, 2001. Additionally, Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangibles," was issued. Under Statement
142, goodwill and other indefinite lived intangibles are no longer amortized,
but are periodically reviewed for impairment. Intangibles with definite lives
are amortized over their useful lives. Statement 142 is effective for years
beginning after December 15, 2001. Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was
also issued for years beginning after December 15, 2001. Statement 144 revises
the measurement and recognition of impairment, specifically on assets held for
disposal.
We do not believe the issuance of either of these statements will
have a material impact on our results of operations or financial position.
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 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 rates at
December 31, 2001, would change by approximately $17,800. 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 December 31, 2001, would change by approximately $1,800.
27
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and its amendments, Statements 137 and 138 in June of 1999 and June
of 2000, respectively. We adopted Statement No. 133, as amended, 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. As
of December 31, 2001, we did not have any derivative financial instruments and
the adoption of the new Statement did not have a significant effect on our
earnings or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this report
on Form 10-K (see page F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information
appearing under the caption "Proposal 1 Election of Directors" and under the
caption "Executive Officers of the Company" in our definitive Proxy Statement
for our 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 12, 2002.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information
appearing under the caption "Executive Compensation" in our definitive Proxy
Statement for our 2002 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 12, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information
appearing under the caption "Voting Securities and Principal Holders Thereof" in
our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 12, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information
appearing under the caption "Certain Transactions" in our definitive Proxy
Statement for our 2002 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 12, 2002.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements contained in the accompanying
Index to Consolidated Financial Statements covered by the
Independent Auditors' Report are filed as part of this Report (see
page F-1).
2. Financial Statement Schedule. See page F-1.
3. Exhibits.
The list of exhibits contained in the Index to Exhibits is filed as
part of this Report (see page E-1).
(b) Reports on Form 8-K
None.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 25, 2002 CANDLEWOOD HOTEL COMPANY, INC.
By: /s/ Jack P. DeBoer
--------------------------------
Jack P. DeBoer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on March 25, 2002.
Signature Title
/s/ Jack P. DeBoer Director, Chairman of the Board and Chief
- ----------------------------- Executive Officer
Jack P. DeBoer (Principal Executive Officer)
/s/ Warren D. Fix Director, Executive Vice President, Chief
- ----------------------------- Financial Officer and Secretary (Principal
Warren D. Fix Financial Officer)
/s/ James E. Roos
- ----------------------------- Director, President and Chief Operating Officer
James E. Roos
/s/ Robert J. Cresci
- ----------------------------- Director
Robert J. Cresci
/s/ J. Michael Issa
- ----------------------------- Director
J. Michael Issa
/s/ Robert S. Morris
- ----------------------------- Director
Robert S. Morris
/s/ Thomas H. Nielsen
- ----------------------------- Director
Thomas H. Nielsen
/s/ Frank J. Pados, Jr.
- ----------------------------- Director
Frank J. Pados, Jr.
/s/ Tony M. Salazar
- ----------------------------- Director
Tony M. Salazar
/s/ Seth E. Schofield
- ----------------------------- Director
Seth E. Schofield
31
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE*
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule III - Real Estate and Accumulated Depreciation S-1
* Certain schedules have been omitted as they are not applicable to the
Company or the information is contained in the consolidated financial
statements or notes thereto.
F-1
Report of Independent Auditors
To the Board of Directors of Candlewood Hotel Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Candlewood Hotel
Company, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. We have also
audited the related financial statement schedule listed in the accompanying
index for the year ended December 31, 2001. These financial statements and
schedule are the responsibility of the management of Candlewood Hotel Company,
Inc. and Subsidiaries. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Candlewood Hotel Company, Inc. and Subsidiaries as of December 31, 2001 and
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
February 8, 2002, except for Note 16
as to which the date is March 8, 2002
F-2
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, stated value, and share data)
December 31, 2001 2000
-------- --------
ASSETS
Investment in hotels completed and under construction:
Hotels completed $263,160 $264,896
Hotels under construction -- 32,282
Other costs -- 192
-------- --------
263,160 297,370
Accumulated depreciation and amortization (24,878) (16,977)
-------- --------
Net investment in hotels 238,282 280,393
Cash and cash equivalents (including $968 and $945 of
restricted cash, respectively) 17,966 21,834
Deposits 30,086 26,334
Accounts and other receivables 4,663 4,912
Investments in joint ventures 12,994 11,467
Other assets 17,347 14,369
-------- --------
Total assets $321,338 $359,309
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Mortgages and notes payable $191,456 $214,575
Accounts payable and other accrued expenses 16,364 21,686
Deferred gain on sale of hotels 16,995 15,239
Other liabilities 768 892
-------- --------
Total liabilities 225,583 252,392
Redeemable, convertible, cumulative preferred stock
("Series A"), $1,000 stated value, 65,000
shares authorized and outstanding, net of
offering costs 63,047 61,339
Redeemable, convertible, cumulative preferred stock
("Series B"), $1,000 stated value, 42,000
shares authorized and outstanding, net of
offering costs 40,491 39,350
Stockholders' (deficit) equity:
Common stock, $.01 par value, 100,000,000 shares
Authorized, 9,025,000 issued and outstanding 90 90
Additional paid-in capital 32,421 35,270
Accumulated deficit (40,294) (29,132)
-------- --------
Total stockholders' (deficit) equity (7,783) 6,228
-------- --------
Total liabilities and stockholders' (deficit) equity $321,338 $359,309
======== ========
See accompanying notes.
F-3
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
(In thousands, except share and per share data)
2001 2000 1999
----------- ----------- -----------
REVENUES:
Hotel operations $ 127,092 $ 127,771 $ 105,467
Other income 3,031 3,458 1,459
----------- ----------- -----------
Total hotel operating revenues 130,123 131,229 106,926
Proceeds from sales of hotels, net of deferred gain of $64,
$0 and $2,319, respectively 28,850 -- 24,281
Deferred gain recognition on sales of hotels 1,280 2,183 1,329
----------- ----------- -----------
Total revenues 160,253 133,412 132,536
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 74,451 67,993 60,217
Corporate operating expenses 7,162 6,392 5,431
Rent expense on leased hotels 26,523 25,056 24,821
Hotel opening costs 230 279 1,103
Abandoned site costs -- -- 2,043
Depreciation and amortization 11,641 10,578 8,412
----------- ----------- -----------
Total operating costs and expenses 120,007 110,298 102,027
Cost of hotels sold 29,064 -- 24,281
----------- ----------- -----------
11,182 23,114 6,228
Interest income 761 1,150 1,034
Interest expense (17,081) (18,577) (10,053)
----------- ----------- -----------
(Loss) income before preferred stock dividends (5,138) 5,687 (2,791)
Preferred stock dividends (8,025) (8,025) (8,025)
----------- ----------- -----------
Net loss available to common stockholders $ (13,163) $ (2,338) $ (10,816)
=========== =========== ===========
Per share data:
Net loss per share of common stock - basic and diluted $ (1.46) $ (.26) $ (1.20)
Average weighted shares of common stock outstanding 9,025,000 9,025,000 9,025,000
See accompanying notes.
F-4
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
(In thousands)
Total
Common Additional Accumulated Stockholders'
Stock Paid-in Capital Deficit Equity
------------ --------------- ----------- ------------
Balance at December 31, 1998 $ 90 $ 35,270 $ (15,978) $ 19,382
Preferred stock dividends paid -- -- (8,025) (8,025)
Net loss before preferred stock dividends -- -- (2,791) (2,791)
------------ --------------- ----------- ------------
Balance at December 31, 1999 90 35,270 (26,794) 8,566
Preferred stock dividends paid -- -- (8,025) (8,025)
Net income before preferred stock dividends -- -- 5,687 5,687
------------ --------------- ----------- ------------
Balance at December 31, 2000 90 35,270 (29,132) 6,228
Preferred stock dividends paid -- -- (6,024) (6,024)
Preferred stock dividends unpaid (2,001) (2,001)
Accretion of preferred stock to stated value (848) (848)
Net loss before preferred stock dividends -- -- (5,138) (5,138)
------------ --------------- ----------- ------------
Balance at December 31, 2001 $ 90 $ 32,421 $ (40,294) $ (7,783)
============ =============== =========== ============
See accompanying notes.
F-5
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income before preferred stock dividends $ (5,138) $ 5,687 $ (2,791)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,641 10,578 8,412
Loss (income) from joint ventures 1,095 (176) 91
Deferred gain recognition on sales of hotels (1,280) (2,183) (1,329)
Abandoned site costs -- -- 2,043
Change in:
Hotels completed and under construction --
held for sale -- -- 20,776
Deposits (3,752) -- (2,487)
Accounts receivable 249 (177) (1,937)
Opening costs -- -- 718
Other assets (4,639) (2,575) (3,738)
Accounts payable and other accrued expenses (813) (341) (1,360)
Deferred gain on sale of hotels 3,036 (9) 1,989
Other liabilities (124) (132) (1)
------------ ------------ ------------
Net cash provided by operating activities 275 10,672 20,386
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of hotels 28,914 -- 26,600
Change in hotels completed and under construction (5,237) (27,264) (118,636)
Distributions from joint ventures 1,750 800 --
Purchase of intangible assets (427) (17) (335)
------------ ------------ ------------
Net cash provided by (used in) investing activities 25,000 (26,481) (92,371)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and notes payable 5,431 29,549 79,287
Payments on mortgages and notes payable (28,550) (2,357) (3,484)
Preferred stock dividends (6,024) (8,025) (8,025)
Other liabilities -- (148) (276)
Expenditures for private placement -- -- (48)
------------ ------------ ------------
Net cash (used in) provided by financing activities (29,143) 19,019 67,454
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,868) 3,210 (4,531)
Cash and cash equivalents at beginning of year 21,834 18,624 23,155
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,966 $ 21,834 $ 18,624
============ ============ ============
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 18,995 $ 21,289 $ 14,142
============ ============ ============
See accompanying notes.
F-6
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
a. DESCRIPTION OF BUSINESS
Candlewood Hotel Company, Inc. (the "Company") owns, operates, franchises
and manages high quality, value-oriented, business travel hotels. The
hotels offer accommodations for all guests, while catering to mid-market
and upscale business and personal travelers seeking multiple night stays.
b. ORGANIZATION
Candlewood Hotel Company, Inc. was incorporated in August 1996 to succeed
to the business of Candlewood Hotel Company, LLC, a Delaware limited
liability company ("Candlewood LLC"), in anticipation of an initial public
offering of 3,850,000 shares of the Company's Common Stock, $.01 par value
per share. Candlewood LLC was formed in November 1995 to develop, own,
operate and franchise Candlewood extended-stay hotels designed
particularly for the business traveler.
On November 8, 1996, the Company completed an initial public offering of
3,850,000 shares of Common Stock at an initial public offering price of
$10.00 per share (the "Offering"). The net proceeds to the Company from
the Offering, after deducting the underwriting discounts and commissions
and expenses of the Offering, were approximately $35.0 million. These
proceeds were used to fund the national expansion of the Company through
the development of Company-owned and operated Candlewood hotels.
Prior to the Offering, the membership interests in Candlewood LLC were
owned 50% by Doubletree Corporation, a wholly-owned subsidiary of Hilton
Hotel Corporation, ("Doubletree"), 42.5% by JPD Corporation and certain
trusts (the "DeBoer Trusts") and 7.5% by the Warren D. Fix Family
Partnership, L.P. (the "Fix Partnership"). JPD Corporation is a Kansas
corporation owned by Mr. Jack P. DeBoer, the Company's Chairman and Chief
Executive Officer. Warren D. Fix, the Company's Executive Vice President
and Chief Financial Officer, is the general partner and majority owner of
the Fix Partnership.
Immediately prior to the Offering, Doubletree and the Fix Partnership
contributed to the Company all of their outstanding membership interests
in Candlewood LLC and certain minority interests which they held in the
subsidiary LLCs, which owned the initially contributed properties
("Subsidiary LLCs"). At the same time, Mr. DeBoer and the DeBoer Trusts
contributed to the Company 100% of the stock of JPD Corporation, the
assets of which were substantially comprised of its membership interest in
Candlewood LLC and the Subsidiary LLCs. In consideration of such transfer,
Doubletree and the Fix Partnership were each issued shares of the
Company's Common Stock in proportion to their ownership interests in
Candlewood LLC immediately prior to such transfer. In addition, Mr. DeBoer
and the DeBoer Trusts, collectively, were issued shares of the Company's
common stock in proportion to JPD Corporation's ownership interest in
Candlewood LLC immediately prior to such transfer. As a result, the
ownership of the Common Stock of the Company by Doubletree, the Fix
Partnership and the shareholders of JPD Corporation, totaling 5,175,000
shares, was in the same proportion as their ownership of membership
interests in Candlewood LLC immediately prior to the reorganization of the
Company.
In addition, prior to the Offering, approximately $12.4 million previously
contributed to Candlewood LLC by Doubletree, including a preferred return
amounting to approximately $392,000 on its capital contributions was
distributed by Candlewood LLC to Doubletree. Doubletree concurrently
extended to the Company a $15.0 million subordinated credit facility, of
which the amount of the distribution to Doubletree was funded in
connection with the reorganization of the Company. The terms of the
F-7
distribution to Doubletree as well as the terms of the subsequent loan by
Doubletree to the Company were determined by the members of Candlewood LLC
in the course of arms-length negotiations.
In October 1997, the Company completed a $65.0 million private placement
of 65,000 shares of 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.
The Preferred Stock accumulates dividends at a rate of 7.5% of the Stated
Value, per annum. 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 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 A Preferred Stock will be redeemed under a mandatory redemption
clause, at the Stated Value plus unpaid dividends.
In August 1998, the Company completed the private placement of $42.0
million of its 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").
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. The
Preferred Stock accumulates dividends at a rate of 7.5% of the Stated
Value, per annum. 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 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION
The accompanying consolidated financial 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 above-discussed 1996 organization, and various
wholly-owned LLCs which own certain hotels.
All majority-owned subsidiaries have been consolidated into the
consolidated financial statements. In addition, all intercompany
transactions have been eliminated.
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.
F-8
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.
The Company evaluates hotels for impairment when conditions indicate that
it is probable that the sum of the expected future cash flows is less than
the carrying value of the hotels. Upon determination that a hotel has been
impaired, the carrying value of the hotel is reduced to fair value less
costs to sell. As of December 31, 2001, no permanent impairment conditions
exist at any of the Company's hotels. In August 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The application of the provisions of this statement is
not expected to affect the earnings and financial position of the Company.
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 as a condition of loan financing. These
funds, which are held by the lenders, will be released to the Company upon
achievement of certain operating criteria, as defined in the loan
agreements.
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,"
and its amendments, Statements 137 and 138 in June of 1999 and June of
2000, respectively. The Company adopted Statement No. 133, as amended,
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. As of
December 31, 2001, the Company did not have any derivative financial
instruments and the adoption of the new Statement did not have a
significant effect on earnings or the financial position of the Company.
f. INTANGIBLE ASSETS
F-9
Intangible assets include ownership rights, title and interest in the
Candlewood Hotel name, costs for patents and trademarks and costs to
obtain franchise agreements. These assets are being amortized using the
straight-line method over a period of ten to twenty years and are included
in other assets on the accompanying consolidated balance sheets. In 2001,
the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," upon
its effective date. The adoption did not have an effect on the earnings or
the financial position of the Company.
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 a method, which approximates 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 agreements. 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. ADVERTISING
Advertising costs are expensed as incurred.
j. 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.
k. OPENING AND ORGANIZATION 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. Organization costs relate to the
formation of the Company and Subsidiaries. Such costs are expensed as
incurred.
l. INVESTMENTS IN JOINT VENTURES
The Company has certain investments in joint ventures in which it owns 50%
or less of the voting equity that it accounts for under the equity method
of accounting.
m. 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 years ended December 31, 2001, 2000 and 1999, respectively, is as
follows:
F-10
Year ended December 31, 2001
- --------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ --------- ---------
Revenues from external customers $ 130,123 $ 28,850 $ 158,973
Interest expense 17,081 - 17,081
Depreciation expense 10,897 - 10,897
Segment profit 1,171 1,280 2,451
Hotels assets:
Hotels completed and under construction 263,160 - 263,160
Accounts receivable 1,294 1,863 3,157
Deferred gain on sale of hotels - 16,995 16,995
Year ended December 31, 2000
- --------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ --------- ---------
Revenues from external customers $ 131,229 $ - $ 131,229
Interest expense 18,577 - 18,577
Depreciation expense 9,828 - 9,828
Segment profit 9,775 2,183 11,958
Hotels assets:
Hotels completed and under construction 297,370 - 297,370
Accounts receivable 1,647 2,110 3,757
Deferred gain on sale of hotels - 15,239 15,239
Year ended December 31, 1999
- --------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ --------- ---------
Revenues from external customers $ 106,926 $ 24,281 $131,207
Interest expense 10,053 - 10,053
Depreciation expense 7,788 - 7,788
Segment profit 4,047 1,329 5,376
Hotels assets:
Hotels completed and under construction 279,729 - 279,729
Accounts receivable 2,050 2,014 4,064
Deferred gain on sale of hotels - 17,431 17,431
F-11
The difference between segment profit and net income is corporate expenses
not specific to the Company's reportable segments.
n. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
o. 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.
3. INVESTMENT IN HOTELS COMPLETED AND UNDER CONSTRUCTION
For the years ended December 31, 2001, 2000 and 1999, respectively,
investment in hotels consists of the following:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Hotels completed:
Land $ 42,332 $ 45,495 $ 39,863
Buildings and improvements 180,714 179,510 164,799
Furniture, fixtures and equipment 40,114 39,891 33,658
--------- --------- --------
263,160 264,896 238,320
Hotels under construction - 32,282 37,755
Other costs - 192 3,654
--------- --------- --------
263,160 297,370 279,729
Less accumulated depreciation (24,878) (16,977) (8,582)
--------- --------- --------
$ 238,282 $ 280,393 $271,147
========= ========= ========
Hotels completed and hotels under construction also include capitalized
interest costs. For the years ended December 31, 2001, 2000 and 1999, the
Company incurred interest costs of approximately $17.8 million, $21.6
million and $15.3 million, respectively, of which $733,000, $3.0 million
and $5.2 million was capitalized. Depreciation expense for the years ended
December 31, 2001, 2000 and 1999, was approximately $9.2 million, $8.4
million and $6.7 million, respectively. As of December 31, 2001, the
Company did not have any hotels held for sale.
Other costs at December 31, 2000 and December 31, 1999 included $192,000
and $3.7 million of acquisition costs, respectively. Acquisition costs are
costs related to the acquisition of property sites. For the year ended
December 31, 1999, $2.0 million of acquisition costs related to abandoned
sites were charged to operations. There were no abandoned site costs
charged to operations for the years ended December 31, 2001 and December
31, 2000.
4. MORTGAGES AND NOTES PAYABLE
A summary of mortgages and notes payable at December 31, 2001 and 2000,
respectively, is as follows:
F-12
December 31, 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Mortgage debt - GMAC:
30 day LIBOR + 3.40% to 4.25%
Secured by individual hotels
Maturity dates from February 2002 to
September 2003
Monthly principal and interest payments
(amortized over 25 years) commence
12 to 18 months following loan closing $173,977 $171,956
Mortgage debt - other financial institutions
and banks:
8.30% fixed rate
Secured by individual hotel
Maturity date June 2011
Monthly principal and interest payments
(amortized over 22.5 years) commence
at loan closing 3,979 27,619
Subordinated notes payable - unsecured
(payable to Doubletree)
15.0% fixed rate, paid quarterly
Maturity dates June - July 2002
Monthly principal payments of $1.0 million 13,500 15,000
-------- --------
$191,456 $214,575
======== ========
The 30-day LIBOR rate was 1.88% and 6.56% at December 31, 2001 and
December 31, 2000, respectively. Approximately $52.6 million of the
Company's debt at December 31, 2001 is subject to a LIBOR interest rate
floor of 5.0%. As of December 31, 2001, interest rates based on LIBOR
ranged from 5.52% to 9.25%.
As of December 31, 2001, all mortgage loans are in their principal
amortization period. Maturity dates for loans financed through GMAC
currently range from February 2002 to September 2003, as amended. As of
December 31, 2001, all of the Company's mortgage debt with GMAC scheduled
to mature in 2002 can be extended, under the terms of the existing loan
agreements, for one year with certain loans providing for extensions of up
to two years.
During the year ended December 31, 2001, the Company renegotiated its
subordinated notes payable to Doubletree to extend the maturity on one of
its two subordinated notes. As a result, the Company paid $1.5 million at
the date of the renegotiation and is making monthly principal payments of
$1.0 million up to maturity at which time a lump sum of $6.0 million will
be due. The remaining note of $2.5 million will mature in July 2002.
Approximately $16.0 million of the Company's debt at December 31, 2001 and
2000 was partially guaranteed by Doubletree. In exchange for the
guarantee, Doubletree receives a 5% interest in the defined cash flows of
certain hotels and a 0.25-0.50% fee on the total loan amount outstanding.
For the years ended December 31, 2001, 2000 and 1999, interest incurred
related to this guarantee was approximately $272,000, $218,000 and
$206,000, respectively.
Scheduled principal payments required on mortgage and other notes payable
subsequent to December 31, 2001, are as follows:
F-13
Year ended December 31, 2001
- --------------------------------------------------------------------------------
(In thousands)
2002 $ 141,677
2003 45,903
2004 59
2005 64
2006 69
Thereafter 3,684
---------
Total $ 191,456
=========
5. INVESTMENTS IN JOINT VENTURES
As of December 31, 2001, the Company had $13.0 million invested in joint
ventures, of which $4.4 million (in non-cash transactions, net of $3.9
million of debt) was contributed during the year ended December 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 December 31, 2001, this amount was approximately $4.8 million and is
included in investments in joint ventures on the accompanying consolidated
balance sheets. For the years ended December 31, 2001, 2000 and 1999,
equity income (loss) in joint ventures of $123,000, $442,000 and
($91,000), respectively, was recorded before recognition of the carrying
value difference of $1.2 million, $266,000 and $0, respectively. These
amounts are included in other income on the accompanying consolidated
statements of operations. Additionally, during the year ended December 31,
2001 and 2000, the Company received distributions from its joint ventures
of $1.8 million and $800,000, respectively.
The Company has one significant 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 2000,
and as of December 31, 2001, the Company operated eight hotels 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
December 31, 2001, this amount was estimated at approximately $4.3
million. As of December 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 following
is unaudited condensed financial information for the joint venture as of
December 31, 2001, 2000 and 1999:
2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Hotels completed and under construction $ 76,417 $ 66,443 $ 16,024
Other assets 5,594 3,951 1,711
-------- -------- --------
Total assets $ 82,011 $ 70,394 $ 17,735
======== ======== ========
Total development liabilities $ 75,965 $ 62,596 $ 12,665
Total equity 6,046 7,798 5,070
-------- -------- --------
Total liabilities and equity $ 82,011 $ 70,394 $ 17,735
======== ======== ========
F-14
Year ended December 31, 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Total revenue $ 20,152 $ 8,569
Hotel operating expenses 10,423 3,886
Hotel opening costs 150 624
Depreciation and amortization 2,825 1,342
Interest expense 6,095 1,660
-------- --------
Net pre-tax income $ 659 $ 1,057
======== ========
In addition, as of December 31, 2001, the Company has guaranteed
construction debt on the joint venture properties of approximately $57.2
million. This debt is collateralized by the hotels completed and under
construction in the joint venture. Maturity dates on this debt range from
October 2002 to December 2007 with certain notes providing extensions for
up to two years under specific criteria including loan to value ratios.
This debt is not included in the Company's consolidated financial
statements (See Note 4) and the Company does not receive any fees related
to this guarantee.
The scheduled maturity dates for the guaranteed debt as of December 31,
2001, are as follows:
Year ended December 31, 2001
- --------------------------------------------------------------------------------
(In thousands)
2002 $ 6,616
2003 24,950
2004 13,498
2005 4,416
2006 166
Thereafter 7,552
--------
Total $ 57,198
========
6. REDEEMABLE, CONVERTIBLE 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 December 31, 2001 and 2000, 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.
Preferred Stock Offerings
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.
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.
F-15
The Series A and Series B Preferred Stock accumulate 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 and 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 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 will be redeemed under a mandatory redemption clause, at the Stated
Value plus unpaid dividends. Pursuant to the anti-dilution protection
provisions of the certificate of designation for the Series A Preferred
Stock, the conversion price (i.e. the price at which the Preferred Stock
may convert into Common Stock) was reduced in 2001 from $9.50 per share to
$9.13 per share to reflect the grant of new employee stock options.
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.
The carrying amount of the redeemable preferred stock is being increased
by periodic accretions using the interest method, so that the carrying
amount will equal the mandatory redemption amount at the mandatory
redemption date. For the year ended December 31, 2001, approximately
$848,000 was recorded as an increase to the carrying value of the
preferred stock.
The Company did not make the Series A and Series B preferred stock
dividend payment in November 2001. As a result, the Company has accrued
the $2.0 million cumulative dividend, which has been recorded as an
increase to the carrying amount of the Series A and Series B preferred
stock.
7. STOCKHOLDERS' EQUITY
On November 8, 1996, the Company completed its initial public offering of
3,850,000 shares of common stock. The stock was offered to the public at
an initial offering price of $10.00 per share. The proceeds to the Company
were approximately $35.0 million, net of offering costs of $2.7 million.
Immediately prior to the offering, Doubletree, JPD Corporation and the Fix
Partnership received 5,175,000 shares in exchange for their outstanding
membership interests in Candlewood LLC and certain minority interests in
subsidiary LLC's (Note 1). Total shares outstanding at December 31, 2001
and 2000 were 9,025,000.
8. STOCK OPTIONS
The Company has one stock option plan, the 1996 Equity Participation Plan,
as amended, (the "Plan"), in which options may be granted to key personnel
to purchase shares of the Company's common stock at a price not less than
the current market price at the date of the grant. The options vest
annually and ratably over the four-year period from the date of grant and
expire ten years after the grant date. In 2001, the stockholders approved
an amendment to the Plan, which increased the number of options available
for grant to 2,676,710 from 1,676,710. The Plan also provides for the
issuance of stock appreciation rights, restrictive stock or other awards,
none of which have been granted.
A summary of the Company's stock option activity and related exercise
price information for the years ended December 31, 2001, 2000 and 1999, is
as follows:
F-16
Weighted-Average
Shares Exercise Price
Options outstanding, December 31, 1998 899,900 $ 8.73
Granted 565,300 4.24
Exercised - -
Forfeited (277,377) 7.62
--------- ------
Options outstanding, December 31, 1999 1,187,823 6.82
Granted 132,600 2.37
Exercised - -
Forfeited (96,923) 4.61
--------- ------
Options outstanding, December 31, 2000 1,223,500 6.52
Granted 563,075 2.97
Exercised - -
Forfeited (316,989) 5.35
--------- ------
Options outstanding, December 31, 2001 1,469,586 $ 5.35
========= ======
At December 31, 2001, 1,469,586 options were outstanding at prices ranging from
$1.55 to $11.38. There were 705,461, 600,957, and 338,674 shares exercisable as
of December 31, 2001, 2000 and 1999, respectively.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The effects of
applying FAS 123 for providing pro forma disclosures are not likely to be
representative of net income (loss) in future years. If the Company had elected
to recognize compensation cost based on the fair value of the options granted at
the grant date as prescribed by FAS No. 123, net loss and net loss per share
would have been increased to the unaudited pro forma amounts indicated in the
table below:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands except per share data):
Net (loss) income before preferred stock
dividends, as reported $(5,138) $ 5,687 $(2,791)
Net (loss) income before preferred stock
dividends, pro forma (5,793) 5,003 (3,349)
Net (loss) income per share, as reported (1.46) (0.26) (1.20)
Net (loss) income per share, pro forma (1.53) (0.33) (1.26)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. For the years ended December 31, 2001, 2000
and 1999, the following assumptions were used:
F-17
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 60.14% 55.50% 66.87%
Risk-free interest rate 4.89% 6.30% 5.14%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during 2001, 2000,
and 1999 was $1.58, $1.28 and $2.22 per share, respectively. The
weighted-average exercise price and weighted-average contractual life, by
exercise price range for options outstanding as of December 31, 2001, was
as follows:
Weighted-Average
Number of Weighted-Average Remaining
Exercise Price Options Exercise Price Contractual Life
$1.55 to $2.30 80,824 $ 1.94 8.7 years
$2.44 to $3.25 545,800 3.00 8.9 years
$3.81 to $4.81 368,925 4.58 6.8 years
$7.25 to $10.50 434,037 9.04 5.0 years
$11.25 to $11.38 40,000 11.28 5.6 years
The weighted-average exercise price of the options exercisable as of
December 31, 2001, 2000 and 1999 were $7.37, $8.14 and $9.11,
respectively.
9. EMPLOYEE BENEFITS PLAN
Effective June 1, 1996, the Company established the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "Plan") for its employees.
Generally, all full-time employees over the age of 21 who have completed
ninety days of service, as amended, are eligible to participate in the
Plan. Employees are permitted to contribute up to 15% of their individual
compensation, subject to certain limitations established by the Internal
Revenue Service for plans of this type. The Company may, but is not
obligated to, make contributions on behalf of each participant. Effective
October 1, 1999, the Company match rate was increased from 25% to 50% of
all participants' contributions, not to exceed 6% of the employee's
compensation. For the years ended December 31, 2001, 2000 and 1999
respectively, the Company matched contributions in the amount of
approximately $456,000, $411,000 and $201,000.
10. RELATED PARTY TRANSACTIONS
As of December 31, 2001, the Company had two managed hotel properties in
which the Company's chairman had a controlling interest. These properties
are the Cambridge Suites and the Hotel at Old Town, both located in
Wichita, Kansas. For the years ended December 31, 2001, 2000 and 1999,
respectively, the Company received management fees from these properties
in the amount of approximately $270,000, $223,000 and $150,000.
The Company purchases property and casualty insurance, workers'
compensation coverage, and builders risk insurance through an insurance
agency ("Agency") in which the Company's chairman owns a minority
interest. Prior to March 15, 1999, the Company also rented office space
and
F-18
equipment under a five-year lease from a corporation in which the
Company's chairman owns a minority interest. In addition, certain
corporate travel is purchased from a corporation owned by the Company's
chairman. A summary of these transactions and the related payable at
year-end for the years ended December 31, 2001, 2000 and 1999 is as
follows:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands):
Total insurance premiums paid $ 1,628 $ 990 $ 1,213
Office and equipment rent 1 6 20
Corporate air travel 275 160 199
Amounts payable at December 31, 5 89 41
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes.
Significant components of the Company's approximated deferred income tax
assets and liabilities as of December 31, 2001, 2000 and 1999 are as
follows:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands):
DEFERRED TAX ASSETS:
Taxable gain on sale-leaseback transaction
in excess of book income $ 476 $ 278 $ 1,127
Deferred franchise fee revenue 39 56 94
Tax benefit of net operating loss
carry-forwards 8,912 8,418 4,477
------- -------- --------
Total gross deferred tax assets 9,427 8,752 5,698
Valuation allowance 1,571 2,115 2,627
------- -------- --------
Total deferred tax assets 7,856 6,637 3,071
------- -------- --------
DEFERRED TAX LIABILITIES:
Excess tax depreciation over book 7,801 6,578 3,008
Financial basis in excess of tax basis of
intangible assets 55 59 63
------- -------- --------
Total deferred tax liabilities 7,856 6,637 3,071
------- -------- --------
Net deferred tax asset $ - $ - $ -
======= ======== ========
The deferred tax liabilities reflected in the above schedule resulted from
items that are currently taxable for federal and state income tax purposes
but were not included in book net income. Timing differences that resulted
in a deferred tax asset but did not result in current taxes payable were
offset by a valuation allowance due to the uncertainty of the ultimate
realization of the asset.
The Company had a cumulative net operating loss carry-forward available to
offset future taxable income of $30.9 million and $24.7 million as of
December 31, 2001 and 2000, respectively, which expire in 2011 through
2016. Net operating losses, available to offset future taxable income,
generated in the years ended December 31, 2001, 2000 and 1999, were
approximately $6.2 million, $3.9 million and $12.6 million, which expire
in 2016, 2015, and 2014, respectively.
12. SALE / LEASEBACK
F-19
As of December 31, 2001, the Company had completed three separate
sale-leaseback transactions with Hospitality Properties Trust ("HPT").
These transactions were completed in stages commencing in December 1997
with the most recent transaction completed in August 2001. As of December
31, 2001, the Company has sold 36 hotels to HPT for an aggregate purchase
price of $289.8 million.
Terms of the sales were all cash at the close of escrow for each hotel
sold. Each of the hotels sold has been leased back to a wholly owned
subsidiary of Candlewood pursuant to the terms of an operating lease. This
lease expires in December 2016 and may be renewed in certain circumstances
and at the election of the Company for up to three 15-year periods. 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 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, and recognized into income over the remaining lease term. As
part of the agreement to sell two additional hotels to HPT in August 2001,
the Company received in return approximately $3.1 million of the guaranty
deposit.
In total, the Company has sold $289.8 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 2). For the years ended December 31,
2001, 2000 and 1999, respectively, the Company recognized approximately
$1.3 million, $2.2 million and $1.3 million of deferred gain into income.
As of December 31, 2001, the Company has recognized a total of $5.4
million of deferred gain into income. Sale proceeds, net of the deferred
gain and related cost of the hotels sold are presented on the consolidated
statements of operations.
13. COMMITMENTS
The Company leases corporate office space and certain equipment at its
hotels and corporate offices under non-cancelable operating leases that
expire at various dates through August 2006. The total monthly payment on
these leases is approximately $164,000.
In addition, the Company leases 36 hotels under a non-cancelable operating
lease with HPT. In August 2001, concurrently with the sale of two
additional hotels to HPT, the Company re-negotiated its operating leases
to combine the separate leases entered into through the sale-leaseback
transactions. As a result, the lease term was extended with a remaining
lease term of 15 years expiring on December 2016. The lease calls for
monthly lease payments of approximately $2.5 million, with annual base
rent of approximately $29.5 million. In addition, the lease provides for
contingent rent equal to 10% of the increase in gross hotel sales, as
defined in the lease, over the amount generated in each hotel's second
year of operation. The monthly lease payments for hotels sold prior to
August 2001 were not affected by the new lease terms.
Payments for all operating leases for the years ended December 31, 2001,
2000 and 1999, were approximately $28.2 million, $27.8 million and $27.3
million, respectively. Future minimum lease payments under non-cancelable
operating leases having remaining terms in excess of one year at December
31, 2001 are as follows:
F-20
Year ended December 31, 2001
- --------------------------------------------------------------------------------
(In thousands)
2002 $ 29,886
2003 29,628
2004 29,001
2005 28,581
2006 28,403
Thereafter 283,890
---------
Total future minimum lease payments $ 429,389
=========
14. LITIGATION AND LEGAL MATTERS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. All such proceedings
individually and in aggregate are not expected to have a material adverse
impact on the Company.
15. EPS-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2001, 2000 and 1999:
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data):
(Loss) income available to common
stockholders before preferred stock dividends $ (5,138) $ 5,687 $ (2,791)
Preferred stock dividends (8,025) (8,025) (8,025)
---------- ---------- ----------
Net loss available to common stockholders
(Numerator of basic earnings per share) $ (13,163) $ (2,338) $ (10,816)
Dilutive securities - preferred stock dividends - - -
---------- ---------- ----------
Loss available to common stockholders
after assumed conversion of preferred stock
(Numerator for diluted earnings per share) $ (13,163) $ (2,338) $ (10,816)
========== ========== ==========
Weighted-average common shares
(Denominator for basic earnings per share) 9,025,000 9,025,000 9,025,000
Dilutive securities - employee stock options - - -
Dilutive securities - preferred stock - - -
---------- ---------- ----------
Adjusted weighted-average common shares
and assumed conversion of preferred stock
(Denominator for diluted earnings per share) 9,025,000 9,025,000 9,025,000
========== ========== ==========
Per share amounts:
Net loss per share - basic $ (1.46) $ (0.26) $ (1.20)
Net loss per share - diluted $ (1.46) $ (0.26) $ (1.20)
F-21
For additional disclosures regarding the convertible preferred stock and
the employee stock options, see Notes 6 and 8.
As of December 31, 2001, options to purchase 1,469,586 shares of common
stock at a weighted-average exercise price of $5.35 per share were
outstanding. These options were not included in the computation of diluted
earnings per share as the Company had a net loss available to common
stockholders and the inclusion of such options would be anti-dilutive.
As of December 31, 2001, the Company had $65.0 million and $42.0 million,
respectively, of Series A and Series B Preferred Stock outstanding (See
Note 6). The assumed conversion of these shares into approximately 11.7
million shares of common stock would be anti-dilutive and, therefore, was
not included in the diluted earnings per share calculation as reported.
16. SUBSEQUENT EVENTS
As discussed in Note 6, the Company did not make its November 2001
Preferred Stock Dividend payment, and in February 2002, the Company made
the decision to forego payment of its $2.0 million February 2002 Preferred
Stock Dividend. Series A and B preferred stockholders have the right to
convert, at any time at their option into shares of common stock. The
Company's failure to pay these dividends has resulted in an automatic
adjustment to the conversion price of the preferred stock from $9.13 to
$8.63 and may result in a future adjustment to the dividend rate.
Preferred stock dividends are in preference to any dividend on the
Company's common stock.
On March 8, 2002, the Company purchased a hotel, which was previously
franchised to an unaffiliated third party for the outstanding debt balance
of $4.7 million.
F-22
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly data for the years 2001,
2000 and 1999 (amounts in thousands, except for per share amounts.)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2001
- -----------------------------------------------
Hotel operating revenue $ 31,184 $ 33,369 $ 33,493 $ 29,046
Total revenues 32,207 34,783 63,797 29,466
Income (loss) before preferred stock dividends (741) 947 (525) (4,819)
Net income (loss) available to common
shareholders (2,720) (1,053) (2,548) (6,842)
Weighted average shares outstanding - basic
and diluted 9,025 9,025 9,025 9,025
Net income (loss) per share of common
stock - basic and diluted $ (0.30) $ (0.12) $ (0.28) $ (0.76)
2000
- -----------------------------------------------
Hotel operating revenue $ 30,240 $ 33,840 $ 33,624 $ 30,067
Total revenues 31,213 35,101 35,265 31,833
Income (loss) before preferred stock dividends 256 3,014 3,082 (665)
Net income (loss) available to common
shareholders (1,739) 1,018 1,065 (2,682)
Weighted average shares outstanding - basic
and diluted 9,025 9,025 9,025 9,025
Net income (loss) per share of common
stock - basic and diluted $ (0.19) $ 0.11 $ 0.12 $ (0.30)
1999
- -----------------------------------------------
Hotel operating revenue $ 21,267 $ 26,906 $ 29,585 $ 27,709
Total revenues 45,936 27,470 30,518 28,612
Income (loss) before preferred stock dividends (2,053) 135 2,115 (2,988)
Net income (loss) available to common
shareholders (4,032) (1,866) 92 (5,010)
Weighted average shares outstanding - basic
and diluted 9,025 9,025 9,025 9,025
Net income (loss) per share of common
stock - basic and diluted $ (0.45) $ (0.20) $ 0.01 $ (0.56)
F-23
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS)
Costs Capitalized
Initial Cost to Company Subsequent to Acquisition
----------------------- -------------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
- ------------------------------------- ------------------- ------------ ------- ----------- ------ -----------
Wichita Wichita KS $ - $ - $ - $ - $ 330
Omaha Omaha NE - - - - 229
Denver - Tech Center Denver CO - - - - 247
Louisville Louisville KY - - - - 132
Cincinnati-Blue Ash Blue Ash OH - - - - 107
Birmingham Birmingham AL - - - - 77
Kansas City Overland Park KS 3,979 542 5,365 - 96
Norfolk - Hampton Hampton VA - - - - 126
Wichita - Airport Wichita KS - - - - 85
Charlotte - Coliseum Charlotte NC 1,522 403 3,801 - 57
Detroit - Southfield Southfield MI - - - - 75
Raleigh-Cary Raleigh NC 3,329 578 5,232 - 78
Philadelphia - Willow Grove Willow Grove PA - - - - 107
Houston - Clear Lake Clear Lake TX - - - - 88
Knoxville Knoxville TN 3,502 566 4,369 - 83
Phoenix Phoenix AZ - - - - 124
Salt Lake City - Airport Salt Lake City UT - - - - 135
Salt Lake City - Ft. Union Ft. Union UT - - - - 100
Houston - Loop Central Houston TX 6,090 1,817 5,538 - 121
Houston - Town & Country Houston TX - - - - 125
Irvine East - Lake Forest Irvine East CA - - - - 97
Phoenix-Tempe Tempe AZ - - - - 98
Detroit - Auburn Hills Auburn Hills MI 5,686 1,205 6,217 - 67
Jacksonville Jacksonville FL - - - - 219
Huntsville Huntsville AL - - - - 74
Dallas - Fort Worth Fossil Creek TX 3,361 592 4,648 - 113
Detroit - Troy Troy MI 5,220 1,003 6,264 - 71
Miami - Airport Miami FL 5,606 2,013 7,155 - 77
Detroit - Warren Warren MI - - - - 88
Pittsburgh-Airport Pittsburgh PA - - - - 73
Des Moines Des Moines IA - - - - 80
Irving - Las Colinas Las Colinas TX - - - - 70
Chicago - Libertyville Libertyville IL 5,538 1,086 6,751 - 93
Austin - Northwest Austin TX - - - - 114
Somerset Somerset NJ - - - - 72
Charlotte-University Charlotte NC - - - - 87
Dallas - Arlington Arlington TX 5,177 861 6,371 - 89
Irvine - Spectrum Irvine CA 6,091 2,116 6,442 - 84
Albuquerque Albuquerque NM - - - - 108
Nashville - Brentwood Brentwood TN - - - - 78
Houston - Westchase Westchase TX - - - - 97
Dallas - Galleria Dallas TX 6,017 2,005 6,287 - 83
Dallas - Plano Plano TX 5,351 1,518 6,060 - 91
Denver - Lakewood Denver CO - - - - 83
Boston - Braintree Boston MA - - - - 84
Detroit - Ann Arbor Ann Arbor MI 5,293 962 6,426 - 79
Orlando - Altamonte Springs Orlando FL 5,279 1,572 5,613 - 105
Greensboro Greensboro NC 4,692 1,004 5,529 - 74
Dallas - North / Richardson Dallas TX 4,769 1,533 6,094 - 86
Anaheim - South Anaheim CA 6,066 1,666 6,920 - 66
Clearwater - St. Petersburg St. Petersburg FL 4,133 908 4,724 - 90
Baltimore - Airport Baltimore MD - - - - 80
Chicago - Schaumburg Schaumburg IL 6,013 1,211 7,217 - 78
Chicago - Naperville Naperville IL 6,370 1,772 7,297 - 87
Chicago - Waukegan Waukegan IL 5,716 866 6,827 - 79
St. Louis - Earth City St. Louis MO 5,626 939 5,916 - 81
Philadelphia - Mt. Laurel Mt. Laurel NJ - - - - 3
Minneapolis Minneapolis MN - - - - 75
Gross Amount Carried
at Close of Period 12/31/01 (5)
-------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Location Land Property Total Depreciation Construction Acquisition
- ------------------------------------- ------------------- ------- ----------- --------- ------------ ------------ -----------
Wichita Wichita KS $ - $ 330 $ 330 $ (31) May-96 Apr-95
Omaha Omaha NE - 229 229 (19) Apr-97 May-96
Denver - Tech Center Denver CO - 247 247 (18) Apr-97 Jun-96
Louisville Louisville KY - 132 132 (27) Jun-97 Sep-96
Cincinnati-Blue Ash Blue Ash OH - 107 107 (20) Jun-97 Sep-96
Birmingham Birmingham AL - 77 77 (15) Oct-97 Dec-96
Kansas City Overland Park KS 542 5,461 6,003 (859) Oct-97 Dec-96
Norfolk - Hampton Hampton VA - 126 126 (15) Oct-97 Dec-96
Wichita - Airport Wichita KS - 85 85 (18) Nov-97 Feb-97
Charlotte - Coliseum Charlotte NC 403 3,858 4,261 (608) Dec-97 Feb-97
Detroit - Southfield Southfield MI - 75 75 (13) Feb-98 Feb-97
Raleigh-Cary Raleigh NC 578 5,310 5,888 (683) Apr-98 Feb-97
Philadelphia - Willow Grove Willow Grove PA - 107 107 (20) Nov-97 Mar-97
Houston - Clear Lake Clear Lake TX - 88 88 (15) Dec-97 Mar-97
Knoxville Knoxville TN 566 4,452 5,018 (679) Jan-98 Mar-97
Phoenix Phoenix AZ - 124 124 (25) Jan-98 Mar-97
Salt Lake City - Airport Salt Lake City UT - 135 135 (24) Jan-98 Mar-97
Salt Lake City - Ft. Union Ft. Union UT - 100 100 (16) Jan-98 Mar-97
Houston - Loop Central Houston TX 1,817 5,659 7,476 (819) Mar-98 Mar-97
Houston - Town & Country Houston TX - 125 125 (21) Apr-98 Mar-97
Irvine East - Lake Forest Irvine East CA - 97 97 (19) Nov-97 Apr-97
Phoenix-Tempe Tempe AZ - 98 98 (16) Mar-98 May-97
Detroit - Auburn Hills Auburn Hills MI 1,205 6,284 7,489 (779) May-98 May-97
Jacksonville Jacksonville FL - 219 219 (22) Feb-98 Jun-97
Huntsville Huntsville AL - 74 74 (13) Feb-98 Jun-97
Dallas - Fort Worth Fossil Creek TX 592 4,761 5,353 (690) Mar-98 Jun-97
Detroit - Troy Troy MI 1,003 6,335 7,338 (795) Jun-98 Jun-97
Miami - Airport Miami FL 2,013 7,232 9,245 (624) Aug-99 Aug-97
Detroit - Warren Warren MI - 88 88 (17) Apr-98 Sep-97
Pittsburgh-Airport Pittsburgh PA - 73 73 (14) Apr-98 Sep-97
Des Moines Des Moines IA - 80 80 (12) May-98 Sep-97
Irving - Las Colinas Las Colinas TX - 70 70 (13) Jun-98 Sep-97
Chicago - Libertyville Libertyville IL 1,086 6,844 7,930 (855) Jun-98 Sep-97
Austin - Northwest Austin TX - 114 114 (18) Jul-98 Sep-97
Somerset Somerset NJ - 72 72 (13) Oct-98 Sep-97
Charlotte-University Charlotte NC - 87 87 (18) Jul-98 Oct-97
Dallas - Arlington Arlington TX 861 6,460 7,321 (804) Aug-98 Oct-97
Irvine - Spectrum Irvine CA 2,116 6,526 8,642 (786) Sep-98 Dec-97
Albuquerque Albuquerque NM - 108 108 (16) Sep-98 Dec-97
Nashville - Brentwood Brentwood TN - 78 78 (12) Oct-98 Dec-97
Houston - Westchase Westchase TX - 97 97 (16) Oct-98 Dec-97
Dallas - Galleria Dallas TX 2,005 6,370 8,375 (782) Oct-98 Dec-97
Dallas - Plano Plano TX 1,518 6,151 7,669 (733) Oct-98 Jan-98
Denver - Lakewood Denver CO - 83 83 (13) Nov-98 Jan-98
Boston - Braintree Boston MA - 84 84 (16) Nov-98 Jan-98
Detroit - Ann Arbor Ann Arbor MI 962 6,505 7,467 (749) Nov-98 Feb-98
Orlando - Altamonte Springs Orlando FL 1,572 5,718 7,290 (686) Nov-98 Feb-98
Greensboro Greensboro NC 1,004 5,603 6,607 (651) Dec-98 Feb-98
Dallas - North / Richardson Dallas TX 1,533 6,180 7,713 (680) Jan-99 Feb-98
Anaheim - South Anaheim CA 1,666 6,986 8,652 (852) Sep-98 Mar-98
Clearwater - St. Petersburg St. Petersburg FL 908 4,814 5,722 (575) Dec-98 Mar-98
Baltimore - Airport Baltimore MD - 80 80 (13) Dec-98 Mar-98
Chicago - Schaumburg Schaumburg IL 1,211 7,295 8,506 (750) Feb-99 Mar-98
Chicago - Naperville Naperville IL 1,772 7,384 9,156 (753) Feb-99 Mar-98
Chicago - Waukegan Waukegan IL 866 6,906 7,772 (774) Dec-98 Apr-98
St. Louis - Earth City St. Louis MO 939 5,997 6,936 (612) Mar-99 Apr-98
Philadelphia - Mt. Laurel Mt. Laurel NJ - 3 3 - Jun-99 Apr-98
Minneapolis Minneapolis MN - 75 75 (13) Nov-98 May-98
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS)
Costs Capitalized
Initial Cost to Company Subsequent to Acquisition
----------------------- -------------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
- ------------------------------------- ------------------- ------------ ------- ----------- ------ -----------
Austin - South Austin TX - - - - 89
Atlanta - Gwinnett Place Atlanta GA 5,560 2,153 5,778 - 74
Columbus - East Columbus OH 4,951 620 6,140 - 79
Chicago - Hoffman Estates Hoffman Estates IL 6,291 1,413 7,276 - 54
Cleveland - North Olmsted Cleveland OH 7,000 1,455 6,823 - 71
Oklahoma City Oklahoma City OK 4,536 779 6,235 - 74
Chicago - O'Hare Airport Schiller Park IL 11,333 3,769 11,410 - 104
Jersey City Jersey City NJ 17,859 3,405 23,132 - 4
Las Vegas Las Vegas NV - - - - 30
Corporate (4) 13,500 - 1,675 - 2,922
Acquisition costs for potential sites - - - -
--------- ------- ----------- ------ -----------
$ 191,456 $42,332 $ 211,532 $ - $ 9,296
========= ======= =========== ====== ===========
Gross Amount Carried
at Close of Period 12/31/01 (5)
-------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Location Land Property Total Depreciation Construction Acquisition
- ------------------------------------- ------------------- ------- ----------- --------- ------------ ------------ -----------
Austin - South Austin TX - 89 89 (15) Dec-98 May-98
Atlanta - Gwinnett Place Atlanta GA 2,153 5,852 8,005 (638) Feb-99 May-98
Columbus - East Columbus OH 620 6,219 6,839 (618) May-99 May-98
Chicago - Hoffman Estates Hoffman Estates IL 1,413 7,330 8,743 (718) Apr-99 Jul-98
Cleveland - North Olmsted Cleveland OH 1,455 6,894 8,349 (676) Apr-99 Jul-98
Oklahoma City Oklahoma City OK 779 6,309 7,088 (581) Jun-99 Jul-98
Chicago - O'Hare Airport Schiller Park IL 3,769 11,514 15,283 (811) Nov-99 Jul-98
Jersey City Jersey City NJ 3,405 23,136 26,541 (467) Apr-01 Sep-98
Las Vegas Las Vegas NV - 30 30 - Apr-00 Jan-99
Corporate (4) - 4,597 4,597 (2,205)
Acquisition costs for potential sites - - - -
------- ----------- --------- --------
$42,332 $ 220,828 $ 263,160 $(24,878)
======= =========== ========= ========
NOTES:
(1) This schedule includes all corporate hotels (comprised of hotels owned and
leased) at December 31, 2001.
(2) For depreciable property, the Company uses a 40-year estimated life for
buildings and components, ten years for furniture and fixtures, and three to
five years on computer equipment and software.
(3) Dates of construction represents the date the hotel became fully
operational. This date is based on the completed project construction date.
(4) The loan is not collateralized by specific properties and is a general
company obligation.
(5) There are no significant differences in the aggregate costs for federal
income tax purposes.
The changes in total real estate and depreciable property for the years ended
December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
--------- --------- ---------
Balance, beginning of year $ 297,370 $ 279,729 $ 234,439
Acquisitions 5,102 17,641 67,042
Cost of hotels sold and contributed (39,312) - (21,752)
--------- --------- ---------
Balance, end of year $ 263,160 $ 297,370 $ 279,729
========= ========= =========
The changes in accumulated depreciation for the years ended December 31, 2001,
2000 and 1999 were as follows:
2001 2000 1999
-------- -------- --------
Balance, beginning of year $ 16,977 $ 8,582 $ 1,907
Depreciation expense 9,189 8,418 6,752
Dispositions and other (1,288) (23) (77)
-------- -------- --------
Balance, end of year $ 24,878 $ 16,977 $ 8,582
======== ======== ========
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. (10)
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 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)
10.14 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)
10.15 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)
10.16 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)
10.17 Agreement to Lease, dated as of May 14, 1998, by and between Candlewood
Hotel Company, Inc. and HPT. (6)
10.18 Securities Purchase Agreement dated as of September 30, 1998. (8)
10.19 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel
Company, Inc. and Vantage Point Properties, Inc. (9)
E-1
Exhibit
No. Description
- ------- -----------
10.20 Amended and Restated Stock Pledge Agreement, dated as of August 10,
2001, by Candlewood Hotel Company, Inc. for the benefit of HPT CW. (11)
10.21 Amended and Restated Security Agreement by and between Candlewood
Leasing No. 1, Inc. and HPT CW. (11)
10.22 Amended and Restated Assignment and Security Agreement by and between
Candlewood Leasing No. 1, Inc. and HPT CW. (11)
10.23 Amended and Restated Lease Agreement by and between Candlewood Leasing
No. 1, Inc. and HPT CW. (11)
10.24 Third Amendment to Agreement to Lease by and between Candlewood Hotel
Company, Inc. and HPT. (11)
10.25 Amended and Restated Guaranty Agreement by Candlewood Hotel Company,
Inc. for the benefit of HPT CW and HPT. (11)
10.26 Purchase and Sale Agreement by and among Candlewood Hotel Company,
Inc., Candlewood Philadelphia-Mt. Laurel, NJ, LLC, Candlewood Las
Vegas, NV, LLC and HPT. (11)
11.1 Statement re Computation of Per Share Earnings - not applicable.
12.1 Statement re Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends.
23.1 Consent of Independent Auditors.
(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 on January 7, 1998.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s
Current Report on Form 8-K filed on 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.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s
Quarterly Report on Form 10-Q for the period ended March 31, 2001.
(11) Incorporated by reference from Candlewood Hotel Company, Inc.'s
Quarterly Report on Form 10-Q for the period ended September 30, 2001.
E-2