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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 48-1188025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8621 East 21st Street North, Suite 200, Wichita, Kansas 67206
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(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code:
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(316) 631-1300
Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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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
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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 the voting stock held by non-affiliates
of the registrant as of March 20, 2000 was $13,260,462 based on the closing
sales price of such stock on such date.
The number of shares outstanding of the registrant's common stock, as
of March 20, 2000 was 9,025,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders to be held on May 16, 2000 are incorporated by this reference into
Part III as set forth herein.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Candlewood Hotel Company, Inc. is in the business of operating,
franchising, managing, and developing Candlewood hotels which are designed to
serve mid-market extended-stay business travelers. As of December 31, 1999, we
operated 65 Candlewood hotels and were constructing eight additional hotels.
Additionally, as of December 31, 1999, franchisees had opened 11 franchised
hotels and had an additional five hotels under construction. Including hotels
open and under construction, we had hotels in 32 states as of December 31, 1999.
Candlewood hotels and their amenities are designed to appeal to business
travelers seeking extended-stay accommodations by combining the convenience of a
hotel with many of the comforts of an apartment. Candlewood provides well
appointed, high quality lodging at affordable prices. We are franchising and
developing Candlewood hotels to develop a leading national brand within the
mid-priced segment of the market, which we believe is characterized by average
daily rates of approximately $55 to $125. We believe that the experience of our
senior management team is and will continue to be instrumental in executing our
growth strategy. Jack P. DeBoer, our founder, Chairman and Chief Executive
Officer, is credited by the lodging industry with creating the extended-stay
concept as the founder of Residence Inns.
Our principal executive offices are located at 8621 East 21st Street
North, Suite 200, Wichita, Kansas 67206, telephone (316) 631-1300.
CANDLEWOOD HOTELS
The Candlewood brand is built on the foundation of providing
exceptional value to all guests. Candlewood hotels offer upscale, spacious
accommodations at competitive rates that we believe are attractive to both
transient guests and extended-stay guests. Candlewood hotels contain
approximately 75 to 160 rooms, 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 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.
Candlewood hotels offer the accommodations and amenities that are
desired by guests staying six nights or longer. Each Candlewood hotel is
equipped with the following amenities:
o an exercise room;
o a complimentary guest laundry facility;
o a convenient dry cleaning drop, with same-day service;
o free local calls and 25 cent-per-minute long distance calls;
o the self-service "Candlewood Cupboard" featuring value-priced
packaged foods and 25 cent beverages; and
o a free "First Night Kit" complete with items such as breakfast
bars, coffee and popcorn.
In addition, each Candlewood studio and one-bedroom suite offers amenities
designed to accommodate the needs of the business traveler. These amenities
include the following:
o two telephones, with two incoming direct dial lines and
computer connections;
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o 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;
o a 25-inch television, video cassette player, and compact disc
player;
o an iron and ironing board, and
o 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.
We believe the majority of industry defined extended-stay hotels are
either in the upscale sector or economy sector of the market. Upscale hotel
chains include Residence Inn, Homewood Suites, Hawthorn Suites and Summerfield
Suites. We believe that average daily rates for these chains exceed $90. The
economy sector includes Suburban Lodge, Extended Stay America, Homestead Village
and Villager Lodge. Most of these chains operate with weekly rates that we
believe represent effective average daily rates of less than $40. Based upon
industry sources, including public disclosure and equity research reports, we
believe that our nearest competitors in the mid-priced segment, which include
Studio Plus, MainStay Suites, TownePlace, and Sierra Suites, had a total of
approximately 200 hotels open at the end of 1999. Candlewood hotels are designed
to accommodate what we believe to be an under-served segment of the
extended-stay market. In addition, we believe that the high quality of
Candlewood hotels, relative to their moderate daily rate, attracts certain
guests who otherwise would stay at traditional hotels. In most areas of the
country, the average daily rate at Candlewood hotels is approximately $55 to $95
per studio suite and $75 to $125 per one bedroom suite. These 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
We focus on delivering those services and amenities that are most
valued by our target clientele. For example, in addition to providing clean,
comfortable and attractive accommodations, each room contains many amenities
that are essential for business travelers and others who stay for six nights or
longer.
Our focused approach to customer service enables each hotel to employ
only 10 to 12 employees thereby minimizing operating costs. Each Candlewood
hotel employs a general manager who is responsible for the operations of the
hotel. The general manager shares duties with and oversees a staff of
approximately nine to 11 persons, typically consisting of an assistant manager,
a director of sales, desk clerks, a maintenance person, and housekeeper/laundry
staff (many of whom are part-time employees). The office at each of our
facilities is generally open daily from 7:00 a.m. to 8:00 p.m., although a staff
member is normally on site at all facilities 24 hours a day to respond to our
guests' needs. We believe that employing only 10 to 12 employees at each hotel
minimizes operating costs. Each Candlewood hotel has a system in place that
allows our guests to check in and check out without the assistance of hotel
employees.
The on-site general manager at each Candlewood hotel is responsible for
Candlewood's quality control standards and procedures which govern management,
operations, maintenance, regulatory compliance, reporting and marketing. Each
Candlewood 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 and profits. Our quality assurance division conducts periodic
inspections of each Candlewood hotel to ensure
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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 is
required to complete classroom courses which we administer and on-the-job
training to learn the marketing and operational systems specific to operating a
Candlewood 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) deliver on-site training to new employees to
ensure that a guest's experience in 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 regional operations directors. Our regional directors are
experienced in multi-unit management with many being former hotel general
managers. Each regional director oversees anywhere between 10 to 15 hotels and
provides direction and training to hotel personnel to ensure product consistency
and revenue management.
We make our hotel management services available to franchisees and our
joint venture partners. Currently, we provide management services to the
Cambridge Suites by Candlewood which is owned by Jack DeBoer, our Chairman and
Chief Executive Officer, and located in Wichita, Kansas, pursuant to a five-year
renewable contract. We also provide our hotel management services to the Hotel
at Old Town located in Wichita, Kansas, a hotel in which Jack DeBoer has a
controlling interest. In addition, we anticipate that some franchisees may want
to utilize our experience and expertise to manage their hotels and believe that
our management of such hotels helps to maximize the consistency of the
Candlewood hotel system. If a franchisee's hotel shares a common trade area with
Candlewood hotels, we may require that we manage those hotels in order to
coordinate direct sales efforts in the region. We have structured our management
agreements so that we will receive approximately 5% of hotel revenue in exchange
for our management services. We currently do not manage any hotels owned by a
franchisee.
In 2000, we intend to focus our efforts on continuing to improve the
efficiency and effectiveness of our hotel operations. Specific areas of focus
include:
o increasing revenue yield through the continued use of our
targeted local and national sales teams and innovative
incentives;
o continuing to expand our Internet-based wholesale and retail
sales strategy including the implementation of a business to
business model; and
o building upon our already successful "Best Methods" program
for performance and quality through the addition of the
following three new quality initiatives:
1) the Maintenance Mentor program. A program that
outlines training for maintenance engineers and
general managers and provides for quarterly, monthly,
weekly and daily action plans to keep the hotels
looking and feeling brand new;
2) the "On the Spot" awards program. A program that
provides for immediate individual and team
recognition for excellence in quality; and
3) the Perpetual Green Plan. A plan that integrates our
quality initiatives to help ensure exceptional guest
experiences.
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MARKETING AND SALES
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. Through these direct sales efforts, we believe we can obtain
and maintain consistently high occupancy levels and generate longer stays by our
guests. Our sales and marketing division targets institutions and employers
located near our 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. The number uses an automated response system that directs the caller to
the specific hotel desired, and reservations are then booked directly with that
hotel's personnel. We are aligned with Lexington Services, a subsidiary of The
Travel Company, the largest provider of global hotel reservations in the nation
and the second largest in the world. Our alliance with Lexington enables travel
agents throughout the world to book rooms and access detailed information about
all our hotels using their existing computer networks. In addition, we are
utilizing Lexington's LexLink OnLine service. This service enables real-time
access to our reservation systems and allows us to more effectively manage our
hotels' inventory and access current information on productivity and guest
arrivals.
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:
o book a room;
o find a map and directions to our hotels;
o find our current stock price; and
o explore employment opportunities.
We also use wholesale web sites to sell excess inventory. We intend to continue
to explore other Internet related opportunities in the future.
We believe that our marketing and sales efforts have been successful in
promoting brand awareness. For example, as of January 2000, Candlewood hotels
have been used by business travelers from more than 350 of the Fortune 500
companies. In addition, according to data supplied by Smith Travel Research for
1999, Candlewood corporate hotels yield index increased from 69.8% in January
1999 to 84.1% in December 1999. This yield index measures the relationship of
revenue per available room (RevPAR) as compared to a competitive set of national
hotel chains.
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, generate incremental revenues at an attractive margin, and
create opportunities to obtain management contracts with respect to franchised
properties. During 1999, we assembled an experienced franchise sales team to
lead our efforts in this area. Our franchising program currently consists of two
brands, Candlewood Suites and Cambridge Suites by Candlewood which we introduced
in November 1999.
As of December 31, 1999, we had received approval to sell both
Candlewood Suites and Cambridge Suites by Candlewood franchises in 49 states.
Our efforts to franchise the Cambridge Suites by Candlewood brand are in their
formative stage. As a result, all franchise activity as of December 31, 1999
represents the franchising of the Candlewood Suites brand. As of December 31,
1999, we had 11 Candlewood Suites franchise hotels open with a total of 1,240
rooms:
NUMBER
LOCATION OPENING DATE OF ROOMS
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Hillsboro, Oregon June, 1997 126
Pleasanton, California August, 1997 126
Rockford, Illinois November, 1997 67
Sacramento, California March, 1998 126
Dallas, Texas - Market Center March, 1998 150
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NUMBER
LOCATION OPENING DATE OF ROOMS
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Syracuse, New York August, 1998 92
Bellevue, Washington September, 1998 126
Milpitas, California November, 1998 126
San Antonio, Texas December, 1998 110
Salina, Kansas February, 1999 69
Richmond, Virginia - Glen Allen October, 1999 122
In addition, as of December 31, 1999, we had five Candlewood Suites
franchise hotels under construction with a total of 563 rooms:
NUMBER
LOCATION STATUS OF ROOMS
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Louisville, Kentucky - Airport Under Construction 100
Durham, North Carolina - Research Triangle Under Construction 122
Herndon, Virginia Under Construction 133
Fairfax, Virginia Under Construction 122
Green Bay, Wisconsin Under Construction 86
For the year ended December 31, 1999, we received 19 Candlewood Suites
franchise applications and entered into 15 franchise agreements. Excluding those
properties under construction, as of December 31, 1999, we had entered into
franchise agreements for the establishment of Candlewood hotels in the following
13 areas:
Richmond, Virginia Hopewell; Virginia
Charlotte, North Carolina - Huntersville Homestead, Pennsylvania
Raleigh, North Carolina - Crabtree Mall Miami Lakes, Florida
Bakersfield, California Emporia, Kansas
Indianapolis, Indiana Boynton Beach, Florida
Bethlehem, Pennsylvania Topeka, Kansas
Lansing, Michigan
Until the introduction of Cambridge Suites by Candlewood, all of our
franchising activity revolved around our Candlewood Suites brand. The Cambridge
Suites by Candlewood concept was created in April 1997 when Jack DeBoer
converted the original Residence Inn located in downtown Wichita, Kansas to a
Cambridge Suites by Candlewood hotel. Mr. DeBoer believed the value-oriented
philosophy of the Candlewood Suites brand extended to an upscale hotel would
offer a higher level of customer satisfaction, while at the same time providing
greater operating efficiencies.
Cambridge Suites by Candlewood builds upon the features, comfort and
amenities familiar to Candlewood Suites guests, including:
o free laundry facilities;
o free local telephone calls;
o low-cost long distance telephone calls and two telephone
lines;
o free video and compact disk library; and
o use of the honor-system-based Candlewood Cupboard food and
sundries pantry.
In addition, Cambridge Suites by Candlewood will offer a wider variety of room
suite choices, with fully equipped kitchens in many rooms. Guests will also
enjoy complimentary continental breakfast, recreational facilities (such as a
pool, ball court, or beach), and a hospitality area.
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Our franchise efforts in regards to the Cambridge Suites by Candlewood
brand will be different than those utilized in franchising Candlewood Suites.
Candlewood Suites franchise efforts are focused on new construction whereas
Cambridge Suites by Candlewood will target conversion of existing upscale, suite
hotels. New development of Cambridge Suites by Candlewood franchise properties
will be considered on an individual basis.
Franchise agreements are executed when the franchisee and Candlewood
agree on a site prior to construction. We make the services and expertise of our
real estate, construction, sales, and operations divisions available to our
franchisees in order to ensure high quality facilities and customer service. Our
construction division advises on the construction and development of franchised
hotels. A representative of our construction 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. While we may
grant franchises in geographic locations where we own and operate hotels, if
franchisees' hotels share a common trade area with Candlewood hotels, we may
require that we manage those hotels in order to coordinate direct sales efforts
in the region.
Our franchising program is focused on the sale of single and multi-site
franchises and the establishment of development agreements under which we grant,
in exchange for nominal consideration, the right to obtain franchises to
construct and operate Candlewood hotels in an exclusive geographic territory.
Pursuant to our development agreements, we may rescind these exclusive rights if
the developer fails to submit franchise applications pursuant to a development
schedule. We are a party to only two development agreements, which, in each
case, do not obligate the developer to build or open any Candlewood hotels. By
granting exclusive rights in a territory, we must rely on the developer to
franchise hotels at such locations as the developer chooses and at such times as
specified in the development schedule.
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 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
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 for new hotels generally have a 20-year term. We
may terminate a franchise agreement if the franchisee fails to cure a breach of
the franchise agreement in a timely manner.
There can be no assurance that the franchised hotels will be opened at
the time specified in the agreements, or at all. We have had potential
franchisees sign agreements and later terminate the agreement or fail to build
hotels. There can be no assurance that any additional franchise agreements will
be signed, either pursuant to development agreements or independently, or that
any Candlewood hotels will be opened pursuant to the terms and the times
specified in the development agreements, the franchise agreements, or at all.
Some franchisees will require financing for the construction of their hotels,
and there can be no assurance that financing or guarantees (by Doubletree or
otherwise) will be available on terms satisfactory to the franchisee, or at all.
Failure to franchise hotels according to the schedules set forth in the
development agreements could result in delays in construction in certain
territories and could have a material adverse effect on our business and results
of operations. See "Competition."
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MANAGEMENT CONTRACTS
As of December 31, 1999, we managed two hotels, the Cambridge Suites
and the Hotel at Old Town, both located in Wichita, Kansas. Jack DeBoer, our
Chairman and Chief Executive Officer, has an ownership interest in each hotel.
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. See "Certain Transactions" in our Proxy Statement for our
2000 Annual Meeting of Stockholders.
Under the management contracts, we manage, operate and supervise all
aspects of the hotel's operations. The owner 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 for a term of five years with certain renewal rights. The
management contract may be terminated by either party in the event of an uncured
default. Certain other termination provisions may also be included in the
contract.
HOTEL DEVELOPMENT
As of December 31, 1999, we operated 65 hotels. In addition, we were
constructing eight additional hotels. As of December 31, 1999, 34 of our 65
hotels were subject to two separate sale-leaseback arrangements. We expect to
develop fewer hotels in 2000 than we developed in 1999.
Our development status as of December 31, 1999 was as follows:
PROPERTIES ROOMS
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Owned and operated 31 3,692
Operated under leases 34 3,893
Under construction 8 1,277
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Total 73 8,862
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Our construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels developed by Candlewood.
The construction division has relationships with a group of approximately nine
contractors that are currently performing all of our hotel construction. Each of
these approved contractors has extensive experience in the construction of
lodging facilities. All of the contractors have agreed to construct the hotels
using a guaranteed maximum price contract which sets a ceiling on total
construction cost so as to limit cost overruns. The general contractors and
Candlewood share in any construction cost savings. Our construction division is
responsible for site visits and inspections during construction and upon
completion of construction must approve a hotel's quality before it can commence
operations. The average construction time on each hotel is approximately nine
months; however, construction is subject to delays due to weather and other
circumstances.
Each of our hotels is designed and constructed according to uniform
plans and specifications for the design of Candlewood facilities. We expect to
make design variations, including changes in the number of studio suites and
one-bedroom suites, based on market demographics and site restrictions, among
other factors. For example, we have designed a small market prototype hotel that
we intend to promote in secondary markets. In addition, we have constructed
hotels in Las Vegas, Nevada and Jersey City, New Jersey, which are substantially
larger than the typical Candlewood hotel. To date, we have constructed each
hotel developed by us. We believe that our coordination of the construction of
Candlewood hotels and our use of a comprehensive design manual has lowered costs
and resulted in consistent quality and appearance.
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As of December 31, 1999, eight Candlewood hotels with 1,277 expected
rooms were under construction in eight different states, including two states
where we did not then operate hotels. Six of the eight hotels under construction
are joint venture hotels. See "Financing Activity" below. The remaining two
hotels are company-owned hotels.
EXPECTED
NUMBER OF
LOCATION OWNERSHIP ROOMS
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Jersey City, New Jersey Company-owned 214
Las Vegas, Nevada Company-owned 278
Burlington, Massachusetts Joint Venture 149
Santa Clara, California Joint Venture 122
Chicago, Illinois - Northbrook Joint Venture 143
Meriden, Connecticut Joint Venture 124
Morris Plains, New Jersey Joint Venture 122
Detroit - Farmington Hills, Michigan Joint Venture 125
We typically build Candlewood hotels within 15 minutes of employment
centers, including large corporate headquarters, and within five minutes of
services such as restaurants and grocery stores. We have not excluded any area
of the country from our hotel development plans.
As of December 31, 1999, we had entered into two contracts for the
purchase of potential joint venture hotel sites in two states:
EXPECTED
NUMBER OF
LOCATION ROOMS
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Clarkstown, New York 124
Walnut Creek, California 125
Current capital market conditions are making the development of new
hotels difficult. Accordingly, we expect our development of new hotels during
2000 to be less than our development during 1999. We intend to continue to
actively pursue joint venture arrangements, sale-leaseback transactions, and
select company developments in high barrier to entry markets. We also will
continue to actively encourage development by proven franchise operators,
especially those who have strong relationships with local and regional banking
institutions, which continue to finance hotel development.
There can be no assurance that present or future development will
proceed in accordance with our expectations. Our continued development is
heavily dependent on our ability to obtain or generate equity capital and to
secure financing on acceptable terms. The number of rooms listed for those
hotels that are under construction or under contract are subject to change, and
are only estimates of the number of rooms we expect to construct. Construction
is subject to delays from a number of sources, many of which are outside of our
control. The contracts that we enter into for the purchase of potential hotel
sites provide for numerous investigations and other due diligence, including
environmental studies and title reports, prior to the closing of the sale of the
real property. We have the right to terminate each contract if we are not
satisfied with the results of the investigations and diligence. If we terminate
any contract, as a result of the unavailability of financing or otherwise, we
may have to write-off expenses incurred in connection with that property. There
can be no assurance that we will acquire properties, complete the development
and construction of hotels or that any such development or construction will be
completed on time or within budget.
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FINANCING ACTIVITY
In order to finance the continued development of Candlewood hotels, we
have and expect to continue to seek financing from various sources, including
joint venture partners, local and regional banking institutions and large
banking and other financial institutions. We may also seek to raise capital
through the sale of equity and debt securities.
To help finance the development of Candlewood hotels, in June 1999, we
signed an agreement with Boston Capital Institutional Advisors LLC and Mass
Mutual relating to the joint funding of the development of Candlewood hotels.
The joint venture will include up to $50 million of equity capital, sufficient
to begin construction on 10 to 15 new hotels, of which up to $37.5 million would
be provided by Boston Capital. Our equity contribution to the joint venture is
10% of individual project costs, subject to certain conditions. If the joint
venture has less than 10 hotels as of August 2000, we may be required to
contribute additional equity. The balance of the funding will be provided
through debt financing. This funding is contingent upon numerous events
including the negotiation and execution of definitive documentation, securing
construction financing on acceptable terms, and satisfactory due-diligence for
potential hotels. As of December 31, 1999, we had six joint venture hotels under
construction pursuant to this agreement, of which four had been contributed to
the joint venture. All are scheduled to open in 2000. Under the terms of the
agreement, if we do not have at least 10 hotels under construction by August 31,
2000, we may be required to increase our capital contributions for existing and
future joint venture hotels. We can give no assurance that the entire
transaction will be completed or that any future hotel will be built with this
financing. While the terms of any joint venture may vary from agreement to
agreement, we believe that this financing vehicle may provide us with a source
of capital that will enable the continued development of Candlewood hotels.
Accordingly, we intend to continue to explore additional joint-venture
relationships.
In addition to seeking joint-venture partners, we expect to seek
financing from national, regional and local banking institutions. We believe
that construction debt is available from local and regional banks on an
individual hotel basis as contrasted to one large bank or a syndication of banks
providing a large line of credit. We intend to leverage our contacts and
knowledge of local markets. In order to finance the construction of new hotels,
we require financing of at least 55% to 75% of total costs. We have worked with
various lenders to secure this debt financing.
As of December 31, 1999, we had financed an aggregate of $433 million
of the construction costs of Candlewood-operated hotels with GMAC. Many of these
hotels were subsequently sold as part of the sale-leaseback transaction with
Hospitality Properties Trust. As part of its financial relationship with us,
GMAC has provided construction loans of up to 80% of the cost of new Candlewood
hotels. Following stabilization, we expect to be able to convert these
construction loans into long-term financing through GMAC or other sources.
Certain amounts we borrow under building loan agreements are partially
guaranteed by Doubletree Corporation, a wholly-owned subsidiary of Hilton Hotel
Corporation ("Doubletree"). Doubletree has agreed to guarantee portions of
certain loans made to Candlewood and our franchisees. The guarantee applies to
loans that exceed 56.25% of the hotel cost but not in excess of 80% of such
costs of hotels that we manage and 75% of the costs of hotels we do not manage.
The total guaranty cannot exceed $30 million. As of December 31, 1999, the
amounts loaned to Candlewood and our franchisees that were guaranteed by
Doubletree were $7.4 million and $3.6 million, respectively. Upon an event of
default under any guaranteed loan, Doubletree will have the option to meet any
shortfalls or pay down the loan principal. In exchange for the guarantee,
Doubletree will receive a 5% interest in the cash flows of the hotels and a
0.25-0.50% fee on the total loan amount outstanding. In the event the loan is
refinanced, Doubletree will receive a fee equal to 5% of the increase in
proceeds attributable to the refinancing. In the event the loan is extinguished
through the sale of the underlying property, Doubletree
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will receive as a fee 5% of the gain on sale resulting from the transaction.
Most franchisees will require debt financing for a portion of the cost of the
construction of their hotels, and there can be no assurance that financing or
guarantees (by Doubletree or otherwise) will be available on terms satisfactory
to the franchisee, or at all.
To help finance the continued development of Candlewood-owned hotels,
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
private placement of the Series A Preferred Stock was completed in two closings
on September 23, 1997 ($25.0 million) and October 3, 1997 ($40.0 million). The
private placement of the Series B Preferred Stock and accompanying warrants was
also completed in two separate closings on July 13, 1998 ($39.4 million) and
August 3, 1998 ($2.6 million). The purchasers of the Series A and Series B
Preferred Stock (the "Purchasers") consisted of a group of institutional
investors and accredited investors. The Purchasers are entitled to a
preferential dividend equal to 7.5%, payable quarterly. The Certificate of
Designation provides for the conversion of the Series A and Series B Preferred
Stock into Common Stock upon the election of the holders, at a price of $9.50
per share of Common Stock, subject to certain anti-dilution adjustments.
Funding of loans for each newly constructed hotel will be subject to
the approval of the lender on an individual hotel basis, upon satisfaction of
various conditions. There can be no assurance that any financing applications
submitted by us will be approved on a timely basis, or at all, that we will be
able to utilize the Doubletree guarantee, or that we will be able to finance
greater than 70% of the cost of any Candlewood hotel. If the applications are
not approved or if loans are not funded on a timely basis, we may be unable to
construct additional Candlewood hotels, may experience delays in our planned
development of hotels, and expect that we will be required to seek additional
financing. In addition, our ability to meet our debt service obligations will
depend upon the future performance of our operations, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. We have no current arrangements with respect to, or sources
of, additional debt financing, including regional and local banking
institutions. Additionally, no assurance can be given that financing will be
available to us when needed or upon terms acceptable to us. In addition, we
cannot make any assurances that we will be able to find joint-venture partners
on terms acceptable to us, or that finding such partners will positively impact
the company and our results of operations. If such capital or financing is
unavailable, we may not be able to develop further hotels.
LEASE OF HOTELS
In order to provide further funds for our development activities, we
entered into two separate sale-leaseback arrangements with Hospitality
Properties Trust, a Maryland real estate investment trust ("HPT") on November
19, 1997 and May 27, 1998, respectively. Pursuant to the November 1997
sale-leaseback arrangement, we sold 17 hotels to HPT for an aggregate purchase
price of $118.5 million. Pursuant to the May 1998 sale-leaseback arrangement, we
agreed to sell 17 additional Candlewood hotels to HPT for an aggregate purchase
price of $142.4 million. As of December 31, 1999, we had completed the sale of
all 34 hotels to HPT, three of which were sold in 1999. The cumulative sales
price for the three hotels sold in 1999 is approximately $26.6 million.
For each of the hotels sold to HPT, the hotel is leased back to one of
our wholly owned subsidiaries pursuant to the terms of two operating leases.
Pursuant to the lease for the hotels subject to the November 1997 sale-leaseback
arrangement, the initial term of the lease expires on December 31,
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2011 and the annual base rent equals approximately $12.1 million as of December
31, 1999. Pursuant to the lease for the hotels subject to the May 1998
sale-leaseback arrangement, the initial term of the lease expires on December
31, 2011 and the annual base rent equals approximately $14.2 million as of
December 31, 1999. In addition, under each lease, percentage rent is equal to
10% of the increases in gross hotel sales over the amount generated in each
hotel's second year of operation. We will continue to explore sale-leaseback
arrangements in respect of groups or individual hotels with real estate
investment trusts, such as HPT, or other regional or local institutions.
HISTORY OF CANDLEWOOD
Our current business of operating, franchising, managing and developing
hotels originated in November 1995 with the formation of Candlewood Hotel
Company, L.L.C., a Delaware limited liability company ("Candlewood LLC"). Our
company was founded by Doubletree together with Jack DeBoer, our Chairman and
Chief Executive Officer, and Warren Fix, a director and the Executive Vice
President and Chief Financial Officer of Candlewood. Candlewood was incorporated
in the State of Delaware in August 1996 to succeed to the business of Candlewood
LLC. In November 1996, we completed an initial public offering of our common
stock. In October 1997 and August 1998, we completed private placements of our
Series A Preferred Stock and Series B Preferred Stock, respectively.
THE LODGING INDUSTRY
The U.S. lodging industry's revenues and profits have improved in each
year since 1991, according to industry sources that we believe to be reliable.
The industry is estimated to have generated increased profits in 1999 of
approximately $22.6 billion, up 8.2% from profits of approximately $20.9 billion
in 1998. It is also estimated that the industry achieved an increase in revenue
per available room in 1999 compared to 1998. We operate in the extended-stay
segment of the U.S. lodging industry.
The Extended-Stay Segment
We believe that the extended-stay market is a growing segment of the
U.S. lodging industry. According to Smith Travel and Research, the number of
extended-stay rooms in the U.S. lodging industry has steadily increased over the
past six years, from approximately 38,000 rooms in 1994 to approximately 157,000
rooms in 1999. No assurance can be given, however, that the number of
extended-stay rooms will continue to increase or that the supply of
extended-stay rooms does not, or will not, exceed demand.
We believe that the extended-stay market can be divided into three
general sectors:
o the upscale sector;
o the mid-priced sector; and
o the economy sector.
The upscale sector is characterized by hotels that offer the following amenities
to their guests:
o daily housekeeping;
o complimentary hot breakfast;
o meeting space;
o swimming pool/sport court;
o exercise facility;
o larger rooms including two bedroom suites;
o in room desk/work space; and
o two phone lines per hotel room.
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Hotel chains associated with the upscale sector include Residence Inn, Hawthorn
Suites, Homewood Suites, Staybridge Suites, Summerfield Suites and Woodfin
Suites. We believe that these hotels operated in 1999 at average daily rates
exceeding $90 and estimated occupancy rates of 76%.
In addition to our hotels, hotel chains that compete in the mid-priced sector
include Homestead Village, Mainstay, Sierra Suites, Studio Plus and TownePlace.
We believe that hotels in the mid-priced sector operated in 1999 at average
daily rates exceeding $45 and occupancy rates of approximately 71%. The
mid-priced sector of the U.S. lodging industry is characterized by hotels that
offer their guests the following amenities:
o weekly housekeeping;
o limited breakfast service;
o small pool facility (in some hotels);
o exercise facility (in some hotels);
o in room desk / work space; and
o two phone lines per hotel room.
We believe the economy sector of the extended-stay market operated in 1999 at
average daily rates less than $45 and occupancy rates of approximately 70%.
Hotel chains that compete in the economy sector include Extended Stay America,
Crossland Economy Studios, Suburban Lodge, Villager Suites, Hearthside Lodge and
Budget Suites. Hotels in the economy sector offer their guests the following
amenities:
o weekly housekeeping;
o vending machines for food service;
o no fitness facility or swimming pool;
o smaller rooms; and
o limited public space.
The foregoing data concerning each sector is derived from information provided
to us by Smith Travel and Research.
We operate largely in the mid-priced sector of the lodging industry.
All of our owned, franchised and joint venture hotels were designed for the
mid-priced sector and focus on meeting the needs of the business traveler. With
the introduction of Cambridge Suites by Candlewood, our second franchising
brand, we intend to enter the upscale sector of the extended-stay segment of the
U.S. lodging industry.
The U.S. lodging industry and the extended-stay segment in which we
operate may be adversely affected by changes in national or local economic
conditions and other local market conditions, including the following:
o an oversupply of hotel rooms or a reduction in demand for
hotel space in a geographic area;
o changes in travel patterns;
o extreme weather conditions;
o changes in governmental regulations which influence or
determine wages, prices or construction costs;
o changes in interest rates;
o the availability of financing for operating or capital needs;
or
o changes in real estate tax rates and other operating expenses.
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In addition, due in part to the strong correlation between the lodging
industry's performance and economic conditions, the lodging industry is subject
to cyclical changes in revenues and profits. Other factors that could have a
material adverse impact on our business and results of operations include:
o downturns or prolonged adverse conditions in the real estate
or capital markets or in national or local economies;
o the inability of our franchisees and us to secure financing
for the development of Candlewood hotels; or
o an oversupply of hotel rooms coupled with a reduction in
demand
COMPETITION
The lodging industry is highly competitive. Competitive factors within
the industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. We intend to build most of our
properties in geographic locations where other extended-stay hotels may be
located. We expect to compete for guests and development sites with both
traditional lodging facilities and other extended-stay facilities, including
those owned and operated by competing chains and individual extended-stay
facilities. Many of these competitors have greater financial resources and may
have better relationships with prospective franchisees, representatives of the
construction industry and others in the lodging industry. The number of
competitive lodging facilities in a particular area could have a material
adverse effect on occupancy, average daily rate and revenues at our hotels.
Competition for franchisees in the lodging industry is intense. We
expect to compete with national and regional brand franchisors, most of which
have greater name recognition and financial resources and a more established
market presence than Candlewood. We believe that competition for franchisees is
based principally upon:
o the perceived value and validity of the brand;
o the nature and quality of services provided to franchisees;
o the franchisees' view of the relationship of building cost and
operating expenses to the potential for revenues and
profitability during operation and upon sale; and
o the franchisees' ability to finance construction and operation
of the hotel.
No assurance can be given that we will be successful in establishing
brand awareness or the other factors on which franchisors compete, including
retention of existing franchisees and competition for new franchisees. Our
failure to maintain and attract franchisees could have a material adverse effect
on our business and results of operations.
A number of other lodging chains and developers have developed or are
attempting to develop extended-stay lodging facilities that may compete with our
facilities. In particular, some of these entities target the mid-priced segment
of the extended-stay market in which we compete. We may compete for guests and
for development sites with certain of these established entities that have
greater financial resources than we do and better relationships with lenders and
real estate sellers. Furthermore, there can be no assurance that new or existing
competitors will not significantly reduce their rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in markets in which we compete, thereby materially adversely affecting our
business and results of operations.
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
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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).
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
"Candlewood" is a registered service mark on the principal register of
the United States Patent and Trademark Office. The Certificate of Registration
was issued to us on December 24, 1996. Candlewood is also a registered service
mark with the State of Kansas. This registration was made on May 2, 1996 under
the registrant name Candlewood Hotel Company, L.L.C. A trademark application for
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the proposed use of the Candlewood service mark in Canada was filed in November
1996. We received a notice of allowance for use of the service mark from the
Canadian Intellectual Property Office on November 6, 1997. We have filed and
been granted extensions by the Canadian Intellectual Property Office until June
25, 2000 to file a declaration of use on this mark.
The Candle Flame/Twin Circle logo is a registered service mark on the
principal register of the United States Patent and Trademark Office. The
Certificate of Registration for the logo was issued on April 7, 1998. In
addition, "Delivering Exceptional Value" is a registered service mark on the
principal register of the United States Patent and Trademark Office. That
registration was issued on June 16, 1998.
We have also obtained registrations on the principal register of the
United States Patent and Trademark Office for the service marks "Cambridge
Suites" and "Cambridge Suites by Candlewood". These registrations were issued to
us on January 12, 1999 and January 26, 1999, respectively. On October 5, 1999,
we received a registration on the principal register for "Candlewood Suites" and
on December 7, 1999 an additional registration was issued to us for "Where Value
Stays".
"Your Studio Hotel" is a registered service mark on the supplemental
register of the United States Patent and Trademark Office. The Certificate of
Registration was issued to us on November 11, 1997. Registration on the
supplemental register does not provide the protection afforded by registration
on the principal register but lays a basis for establishing a claim to such
rights in the future.
On May 14, 1998, we filed a service mark application with the United
States Patent and Trademark Office for the service mark "Candlewood Cupboard".
We have been refused registration of this mark. We are currently considering
various options in regard to responding to the rejection of this application.
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 or any state agency to further
protect these rights.
INSURANCE
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 2000 Annual Meeting of
Stockholders.
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EMPLOYEES
As of December 31, 1999, Candlewood and its subsidiaries employed on a
full or part-time basis 915 persons, 820 of whom were employed at our hotels,
and 95 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.
PROPERTIES
As of December 31, 1999, we operated the following 65 hotels in 26
different states with a total of 7,585 rooms:
NUMBER
LOCATION OPENING DATE OF ROOMS
- -------- --------------- --------
Wichita, Kansas May, 1996 107
Omaha, Nebraska January, 1997 130
Denver - Tech Center, Colorado February, 1997 131
Cincinnati - Blue Ash, Ohio May, 1997 78
Louisville, Kentucky May, 1997 78
Norfolk - Hampton, Virginia September, 1997 98
Birmingham, Alabama October, 1997 98
Kansas City - Overland Park, Kansas October, 1997 122
Charlotte, North Carolina - Coliseum November, 1997 81
Irvine East, California - Lake Forest November, 1997 122
Jacksonville, Florida November, 1997 111
Philadelphia - Willow Grove, Pennsylvania November, 1997 110
Phoenix, Arizona November, 1997 98
Salt Lake - Airport, Utah November, 1997 122
Salt Lake - Ft. Union, Utah November, 1997 98
Wichita - Airport, Kansas November, 1997 81
Detroit - Southfield, Michigan December, 1997 121
Houston - Clear Lake, Texas December, 1997 122
Houston - Loop Central, Texas December, 1997 122
Huntsville, Alabama December, 1997 123
Knoxville, Tennessee December, 1997 98
Phoenix - Tempe, Arizona March, 1998 122
Dallas - Ft. Worth - Fossil Creek, Texas March, 1998 98
Raleigh - Cary, North Carolina April, 1998 81
Houston - Town & Country, Texas April, 1998 122
Detroit - Warren, Michigan April, 1998 122
Pittsburgh - Airport, Pennsylvania April, 1998 123
Des Moines, Iowa May, 1998 98
Detroit - Auburn Hills, Michigan May, 1998 110
Chicago - Libertyville, Illinois June, 1998 122
Irving - Las Colinas, Texas June, 1998 117
Detroit - Troy, Michigan June, 1998 118
Austin - Northwest, Texas June, 1998 125
Charlotte, North Carolina - University July, 1998 122
Dallas - Arlington, Texas August, 1998 125
Anaheim - South, California August, 1998 133
Irvine - Spectrum, California September, 1998 122
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NUMBER
LOCATION OPENING DATE OF ROOMS
- -------- --------------- --------
Albuquerque, New Mexico September, 1998 123
Dallas - Plano, Texas October, 1998 122
Houston - Westchase, Texas October, 1998 123
Nashville - Brentwood, Tennessee October, 1998 122
Somerset, New Jersey October, 1998 110
Dallas - Galleria, Texas October, 1998 134
Orlando, Florida - Altamonte Springs November, 1998 122
Minneapolis, Minnesota November, 1998 134
Denver - Lakewood, Colorado November, 1998 122
Boston - Braintree, Massachusetts November, 1998 133
Detroit - Ann Arbor, Michigan November, 1998 122
Chicago - Waukegan, Illinois December, 1998 122
Austin - South, Texas December, 1998 122
Baltimore - Airport, Maryland December, 1998 125
Greensboro, North Carolina December, 1998 122
Clearwater - St. Petersburg, Florida December, 1998 104
Dallas, Texas - North / Richardson January, 1999 122
Chicago - Schaumburg, Illinois February, 1999 122
Chicago, Illinois - Naperville February, 1999 122
Atlanta, Georgia - Gwinnett Place February, 1999 122
St. Louis, Missouri - Earth City March, 1999 122
Chicago - Hoffman Estates, Illinois April, 1999 122
Cleveland, Ohio - North Olmstead April, 1999 125
Columbus, Ohio - East May, 1999 122
Philadelphia - Mt. Laurel, New Jersey June, 1999 123
Oklahoma City, Oklahoma June, 1999 122
Miami, Florida - Airport August, 1999 128
Chicago, Illinois - O'Hare Airport November, 1999 160
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 moved our corporate headquarters to this location in March 1999, and
lease this office space from Vantage Point Properties, Inc. The lease term is
five years with four five-year renewal options. The current monthly lease
payment is approximately $44,000. We do not anticipate any difficulty in
securing additional office space, as needed, on terms acceptable to us.
CERTAIN BUSINESS CONSIDERATIONS
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and elsewhere in this Annual Report on Form 10-K.
We have a Limited Operating History. We opened our first hotel in May
1996 and, as a result, we have a limited operating history upon which to
evaluate our performance and our claims about the proposed construction,
operation, features, rates and demand for Candlewood hotels, among other things.
At December 31, 1999, we operated 65 hotels. 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:
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o the inability to operate the hotels at expected expense
levels;
o the inability to maintain high occupancy rates or to attract
guests for extended-stays;
o liability for accidents and other events occurring at hotel
properties; and
o the inability to achieve expected nightly rates.
If we are unable to efficiently and effectively operate our hotels, our business
and results of operations would suffer.
Our Need for Continued Capital and Additional Financing Could
Materially Adversely Affect our Business and Results of Operations. The
development of hotels is capital intensive. We have and expect to continue to
seek financing of up to 80% of the cost of certain Candlewood-developed hotels
utilizing Doubletree's guarantee to facilitate such financing. The use of the
Doubletree guarantee reduces our profit opportunity, if any, with respect to
certain Candlewood-developed hotels. The Doubletree guarantee is currently
limited to $30 million of total funds guaranteed. Funding of the loans for each
hotel will be subject to approval of the third party lender on an individual
hotel basis, upon satisfaction of various conditions. We cannot provide
assurance that the third-party lenders will approve on a timely basis, or at
all, any financing applications we submit, that we will be able to utilize the
Doubletree guarantee, or that we will be able to finance greater than 70% of the
cost of any Candlewood-developed hotel. If our applications are not approved or
our loans are not funded on a timely basis, we may be unable to construct
additional Candlewood hotels and may experience delays in our planned
development of hotels. We have no current arrangements with respect to, or
sources of, additional debt financing. Additionally, we cannot assure that
additional financing will be available when needed or upon terms acceptable to
us. If we are unable to arrange for additional capital or financing, we may not
be able to develop further hotels.
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 as they become
due. In addition, we may need to refinance all or a portion of our indebtedness
on or before the maturity date. We cannot provide any assurances that we will be
able to refinance any of our indebtedness on commercially reasonable terms, or
at all. Our ability to make payments on, to repay or to refinance our
indebtedness and to make our scheduled preferred stock dividends also is, to a
certain extent, subject to general economic, competitive, legislative,
regulatory and other factors beyond our control. Our inability to make payments
on, to repay, or to refinance our debt obligations or preferred stock could have
a material adverse effect on our business and results of operations.
Our Growth is largely Dependent on Franchising and Developing Hotels.
We intend to grow primarily by franchising and developing additional Candlewood
hotels. Our ability to develop hotels and obtain franchisees involves
substantial risks, including:
o financing not being available to us or potential franchisees
on favorable terms, or at all;
o our actual costs exceeding budgeted or contracted amounts;
o delays in completion of construction of franchised or
developed hotels;
o incurring substantial costs if we abandon a franchising or
development project prior to completion;
o our or a franchisee's failure to obtain all necessary zoning
and construction permits;
o our developed properties not achieving desired revenue or
profitability levels once opened;
o competition for suitable development sites from our
competitors, some of whom have greater financial resources
than us;
o there are a limited number of franchising opportunities;
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o we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;
o our new franchising brand, Cambridge Suites by Candlewood, may
not be accepted by or appeal to potential franchisees;
o changes in governmental rules, regulations and
interpretations; and
o changes in general economic and business conditions.
If we are unable to successfully franchise and develop hotels on time or within
budget, or at all, our business and results of operations would suffer.
We Need to Manage our Growth. Our growth plans will require us to
implement specialized operational and financial systems and require additional
management, operational and financial resources. For example, we will be
required to recruit and train property managers and other personnel for each new
hotel as well as additional personnel at our headquarters. We cannot assure that
we will be able to achieve our planned rate of expansion or manage our expanding
operations efficiently or effectively. If we are unable to manage our growth
efficiently and effectively, our business and results of operations could be
materially and adversely affected.
We depend on a Single Type of Lodging Facility. We intend to
exclusively develop, manage and franchise Candlewood Suites and Cambridge Suites
by Candlewood hotels. We currently do not intend to develop any lodging
facilities other than hotels focused on extended-stay business travelers and do
not intend to develop lodging facilities with other franchisors. Accordingly, we
will be subject to risks inherent in concentrating investments in a single type
of lodging facility, such as a shift in demand or a reduction in business
following adverse publicity, which could have a material adverse effect on our
business and results of operations. In addition, we have a limited history upon
which we can gauge consumer acceptance of our hotels and, accordingly, we cannot
provide assurance that our hotels will be readily accepted by guests who are
looking for conventional or extended-stay hotel accommodations. Furthermore, we
compete against other facilities with substantially greater brand recognition.
We are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate investments
is significantly dependent upon our ability to maintain or increase cash
provided by operating our investments. The value of our hotels and the income
from our hotels may be materially adversely affected by:
o changes in national economic conditions;
o changes in general or local economic conditions and
neighborhood characteristics;
o competition from other lodging facilities;
o changes in real property tax rates;
o changes in the availability, cost and terms of financing;
o the impact of present or future environmental laws;
o the ongoing need for capital improvements;
o changes in operating expenses;
o changes in governmental rules and policies;
o natural disasters; and
o other factors which are beyond our control.
In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to dispose
of an investment when we find disposition advantageous or necessary, or that the
sale price of any disposition will recoup or exceed the amount of our
investment.
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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.
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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 and
intend to defend ourselves vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 National Market under
the symbol "CNDL". The following table sets forth the high and low sales prices
per share, as reported by the Nasdaq National market during the periods
indicated:
1999 High Low
---- ---- ---
Fourth Quarter $2 1/2 $1 3/8
Third Quarter 3 3/4 1 1/2
Second Quarter 4 1/4 2 1/2
First Quarter 6 1/8 3 3/8
1998 High Low
---- ---- ---
Fourth Quarter $6 1/4 $3 3/4
Third Quarter 8 1/4 4 1/4
Second Quarter 8 1/4 7 1/8
First Quarter 9 7 7/8
The closing sales price of our common stock on March 20, 2000 was $2.
The approximate number of beneficial stockholders on March 20, 2000 was 1,207.
The approximate number of stockholders of record on March 20, 2000 was 151.
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 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. After payment of dividends on the Series
A and Series B Preferred Stock, we intend to retain any future earnings for
reinvestment in the development and expansion of our business.
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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.
Period from
October 1,
1995
Year Ended Year Ended Year Ended Year Ended (Inception) to
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995(1)
----------- ----------- ----------- ----------- --------------
STATEMENT OF OPERATIONS DATA:
Hotel operations revenues .............. $ 105,467 $ 47,278 $ 6,223 $ 686 $ --
Other income ........................... 1,459 672 221 -- --
Hotel operating expenses ............... 60,218 28,266 4,713 400 --
Rent expense on leased hotels .......... 24,821 12,365 79 -- --
Corporate operating expenses ........... 5,390 3,906 2,372 1,637 204
Abandoned site costs ................... 2,043 3,799 157 -- --
Depreciation and amortization .......... 8,452 3,565 1,022 249 5
Interest income ........................ 1,034 1,166 1,216 328 --
Interest expense ....................... (10,053) (214) (134) (81) --
Net loss ............................... (2,791) (6,287) (817) (1,353) (209)
Net loss per share (pro forma 1996 and
1995)(2) .............................. (1.20) (1.40) (0.23) (0.23) (0.04)
Weighted average shares outstanding (pro
forma 1996 and 1995)(2) ............... 9,025,000 9,025,000 9,025,000 5,764,071 5,175,000
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents ........ $ 18,624 $ 23,155 $ 35,355 $33,792 $ 123
Total assets ..................... 341,277 293,358 181,807 51,674 1,283
Accounts payable and other accrued
expenses ....................... 22,874 40,277 16,040 2,435 92
Mortgages and notes payable ...... 190,545 114,742 63,416 15,457 --
Minority interest ................ -- -- -- -- 8
Members' equity .................. -- -- -- -- 1,183
Stockholders' equity ............. 8,566 19,382 32,589 33,406 --
- ----------
(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, our statements of operations have
been presented as if our operations began on October 1, 1995.
(2) Pro forma net loss per share is based on (i) the 5,175,000 shares of our
Common Stock issued in conjunction with the conversion from a limited
liability company to a corporation in November 1996, (ii) the 3,850,000
shares of our Common Stock issued in conjunction with our initial public
offering and (iii) the amount of pro forma net loss we would have recorded
had we operated as a C Corporation for all periods presented.
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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 operates, franchises, manages, and develops Candlewood
hotels serving mid-market transient and extended-stay business travelers.
The following table sets forth our property portfolio as of December
31, 1999 and 1998:
Number of Hotels Number of Rooms
December 31 December 31
---------------- -------------------
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ---- ---- --------
Owned ....... 31 22 9 3,692 2,549 1,143
Leased ...... 34 31 3 3,893 3,522 371
Managed ..... 2 1 1 179 64 115
Joint Venture -- -- -- -- -- --
Franchised .. 11 9 2 1,240 1,050 190
-- -- -- ----- ----- -----
Total .... 78 63 15 9,004 7,185 1,819
== == == ===== ===== =====
Our results of operations are dependent upon our revenue per available
room (RevPAR) which is a factor of occupancy and room rate. Accordingly, we
intend to remain focused on occupancy levels at each of our hotels until such
time as the occupancy levels reach stabilization. Due to our rapid expansion,
the overall occupancy rate has been negatively impacted by the lower occupancy
typically experienced during the pre-stabilization period for newly opened
facilities. This negative impact on occupancy is expected to diminish as the
ratio of new property openings during a period to total properties in operation
at the end of the period decreases. Once our hotels' occupancy levels have
stabilized, we intend to review the daily pricing rates of our hotels. We
believe that this practice is a prevailing standard in the U.S. lodging
industry.
Our overall results of operations and financial position are
significantly influenced by our development activity. The following table sets
forth our hotel development for the past three years:
Number of Hotels
December 31,
------------------
1999 1998 1997
---- ---- ----
Open Hotels
-----------
Owned 31 22 16
Leased 34 31 5
Managed(1) 2 1 1
Joint Venture -- -- --
Franchised 11 9 3
---- ---- ----
Total 78 63 25
==== ==== ====
Under Construction
------------------
Owned 2 12 22
Leased -- -- --
Managed(1) -- -- --
Joint Venture 6 -- --
Franchised 5 2 6
---- ---- ----
Total 13 14 28
==== ==== ====
Potential Development
---------------------
Owned 1 14 34
Leased -- -- --
Managed(1) -- -- --
Joint Venture 2 -- --
Franchised 13 5 1
---- ---- ----
Total 16 19 35
==== ==== ====
- --------------
(1) Managed hotels for the years 1999, 1998 and 1997 represent hotels the
Company managed but which are not part of the Candlewood system.
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The following is a summary of hotel development by quarter for 1999:
Number of Hotels
--------------------------------------------------------------------
1999
------------------------------------------
First Second Third Fourth
As of Quarter Quarter Quarter Quarter As of
12/31/98 3/31 6/30 9/30 12/31 12/31/99
-------- ------- ------- ------- ------- --------
Owned 22 2 5 1 1 31
Leased 31 3 -- -- -- 34
Managed 1 1 -- -- -- 2
Joint Venture -- -- -- -- -- --
Franchised 9 1 -- -- 1 11
---- ---- ---- ---- ---- ----
Total 63 7 5 1 2 78
==== ==== ==== ==== ==== ====
At the end of 1999, we had a total of 65 company-operated hotels
(hotels owned and leased) and 11 franchised hotels located in 29 different
states. In addition, at December 31, 1999, we had a total of two company-owned
hotels, six joint venture hotels and five franchise hotels under construction.
Our portfolio also included one parcel of undeveloped property. We are
attempting to secure financing for the development of this property. If we are
unable to secure financing for development of this property, we may sell the
property in which case we may incur a loss on the sale. As of December 31, 1999,
we had two new joint venture development sites under contract on which we were
performing market-feasibility due diligence. The contracts into which we enter
for the purchase of potential hotel sites provide for numerous investigations
and other due diligence, including environmental studies and title reports,
prior to the closing of the sale. We have the right to terminate each contract
if we are not satisfied with the results of the investigations and due
diligence. We intend to continue developing additional hotels through either new
construction or acquisition of existing properties and are evaluating various
financing arrangements. We expect to develop fewer hotels in 2000 than we did in
1999. We are unable to assure such development opportunities or the related
financing will be available and, if available, under terms acceptable to us. In
addition, if we abandon a contract, we may write-off certain costs that would
have otherwise been capitalized. For the years ended December 31, 1999 and 1998,
we wrote off $2.0 million and $3.8 million, respectively, of costs on
development projects we abandoned.
We believe that a significant element of our future growth and
expansion will be provided through the franchising of hotels. During 1999, we
assembled an experienced franchise sales team to lead our efforts in this area.
As of December 31, 1999, all franchise activity reported represents the
franchising of the Candlewood Suites brand. The following table summarizes the
franchise development activity for the years ended December 31, 1999 and 1998:
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For the Year Ended
December 31,
---------------------
1999 1998
-------- --------
Applications Received 19 5
Applications Approved 16 5
Franchise Agreements Signed 15 4
We received 19 franchise applications during 1999 and signed 15 new franchise
agreements. Based on the projected construction dates, the majority of these
hotels are scheduled to open in 2001. We are unable to assure that we will enter
into any additional franchise agreements or that franchisees will complete the
development and construction of hotels.
Traditionally, our franchise development program has consisted of one
brand, Candlewood Suites. To serve a perceived market demand, we added a second
brand, Cambridge Suites by Candlewood, to our franchise program in November
1999. We believe the addition of the Cambridge Suites brand diversifies our
franchise program and provides additional growth opportunities.
In two separate sale-leaseback transactions, we have sold and leased
back certain of our hotels with HPT, a real estate investment trust. The
provisions of the transactions allow us to operate, as lessee, over a defined
lease term, hotels that we developed. The transactions were closed in stages,
beginning in 1997 and ending in early 1999. Five hotels were sold and leased
back in 1997 and 26 hotels sold and leased back during 1998. The remaining three
hotels were sold and leased back in January 1999. The results from operations
for 1999, 1998 and 1997 reflect the transactions. As a result of the
sale-leaseback transactions, we have recorded rent expense on the hotels leased
back from HPT. As the hotels are leased and not owned, the financial statements
do not reflect any depreciation and amortization or interest expense for these
hotels after the date of sale. The proceeds from the sale of the hotels is
recorded net of the deferred gain on sale. The gain is deferred and not
recognized into earnings until certain operating performance levels are
achieved. See Note 11 to Consolidated Financial Statements.
In June 1999, we entered into an agreement with Boston Capital
Institutional Advisors LLC and Mass Mutual to jointly develop 10 to 15 new
Candlewood hotels. As of December 31, 1999 we had six joint venture hotels under
construction pursuant to this agreement, all of which are scheduled to open in
2000. In addition, at December 31, 1999, we had identified two additional
potential joint venture development sites.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Hotel Operations
----------------
Hotel Operations Revenue
The following is a summary of 1999 and 1998 hotel operations revenues,
stratified by the year in which the hotels opened (in thousands):
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Fiscal Year Number Fiscal 1999 Fiscal 1998 Increase Percentage
Opened of Hotels Revenues Revenues (Decrease) Change
----------- --------- ----------- ----------- ---------- ----------
1999 12 $ 13,312 $ -- $13,312 N/A
1998 32 58,048 15,043 43,005 285.9%
1997 20 32,669 30,564 2,105 6.9
1996 1 1,438 1,671 (233) (13.9)
-- -------- ------- ------- -----
Total 65 $105,467 $47,278 $58,189 123.1
== ======== ======= ======= =====
Hotel operations revenue, which includes room revenue and other revenue
(e.g. guest telephone, sales of products from the Candlewood cupboard), was
$105.5 million for 1999, compared to $47.3 million for 1998. The increase in
revenue reflects the increase in the number of hotels in operation during 1999
and the full year impact of the hotels opened in 1998. Fifteen of the 32 hotels
opened in 1998 opened in the fourth quarter. The following table sets forth our
operating statistics for 1999 and 1998:
For the Year Ended December 31,
----------------------------------
1999 1998 Change
------ ------ ------
Occupancy 67.7% 65.7% 2.0%
Average Daily Rate $58.24 $53.14 $5.10
Revenue per available room $39.43 $34.93 $4.50
Average occupancy rate, which is determined by dividing the number of
guest rooms occupied by the total number of guest rooms available for the
period, was 67.7% for 1999, compared to 65.7% for 1998. The occupancy rate
during 1999 was positively influenced by the increase in occupancy experienced
by those hotels that had completed or were near completion of their ramp-up
phase. The overall increase in the occupancy rate was partially offset by a
decrease in occupancy which occurred as a result of the increase in room rates
at some of our more established hotels. It is our practice to continuously
review individual markets to assess the impact of competition on local supply
and demand and to attempt to establish room rates that balance occupancy to
produce optimal revenue.
The average daily room rate in 1999 was $58.24, compared to $53.14 for
1998. Average daily room rates are determined by dividing room revenue by the
number of rooms occupied for the applicable period. The increase in average
daily rate was largely due to increases in room rates charged at previously
opened hotels and higher introductory rates for new hotel openings. Other
factors that influenced average daily room rates included:
o stays of less than one week, which are charged at a higher
nightly rate;
o higher rates for our one-bedroom suites; and
o higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $39.43 for 1999, compared to $34.93
for 1998, a 12.9% increase. The increase was due to increases in the average
daily occupancy rate and the average daily room rate.
We cannot predict whether current occupancy and room rates can be
maintained. Future occupancy and room rates may be impacted by a number of
factors including:
o the number and geographic location of new hotels;
o the season in which new hotels open;
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o competition;
o market acceptance of our hotels; and
o general economic conditions.
We consider a property to have completed its initial ramp-up phase
somewhere between six and twelve months following hotel opening. The ramp-up
phase is dependent on the supply demand characteristics of individual markets as
well as the effectiveness of our local sales efforts. We had 65 company-operated
hotels open as of December 31, 1999, 12 of which opened in 1999. The following
table sets forth the 1999 performance of our hotels, stratified by the year in
which the hotels opened:
Number of Average Daily Revenue per
Hotels Occupancy Rate Available Room
--------- --------- ------------- --------------
1999 Hotels 12 61.0% $57.65 $35.14
1998 Hotels 32 68.7 58.50 40.18
1997 Hotels 20 69.2 58.31 40.33
1996 Hotels 1 66.8 52.51 35.09
-- ----- ------ ------
Total Hotels 65 67.7 $58.24 $39.43
== ===== ====== ======
We had 21 company-operated hotels open at December 31, 1997. The
following table sets forth the performance of these hotels for the years ending
December 31, 1999 and 1998, respectively:
For the Year Ended December 31,
-------------------------------------
1999 1998 Change
---- ---- ------
Occupancy 69.1% 70.3% (1.2)%
Average Daily Rate $58.04 $53.54 $4.50
Revenue per Available Room $40.08 $37.62 $2.46
The average occupancy rate for the 21 hotels open as of December 31,
1997 declined 1.2 occupancy points in 1999 to 69.1%, compared to 70.3% for 1998.
This decline was due in large part to our efforts in 1999 to increase room rates
and geographic market performance. Many of the 21 hotels are located in the
Midwest. These markets are secondary markets and typically have lower barriers
to entry. The average daily room rate in 1999 increased 8.4% over 1998. Despite
the decline in occupancy rates, revenue per available room increased 6.5% for
the 21 hotels in 1999, compared to 1998.
Hotel Operating Expenses
Hotel operating expenses in 1999 totaled $60.2 million, compared to
$28.3 million for 1998. Hotel operating expenses consist of all expenses
directly applicable to the operation of the hotels. The largest portion of hotel
operating expenses consisted of salaries, wages and fringe benefits. The balance
of hotel operating expenses was comprised of normal operating items, such as
utilities, property taxes, insurance, supplies, promotional materials,
maintenance items and similar expenses. The increase in hotel operating expenses
is largely due to the full year impact of the 32 hotels opened in 1998 and the
increase in the number of hotels in operation during 1999.
Rent Expense on Leased Hotels
We incurred rent expense in 1999 of $24.8 million for the 34 hotels
leased as of December 31, 1999. We recorded $12.4 million of rent expense in
1998 for the 31 hotels leased as of December 31,
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1998. The increase in rent expense reflects the full year lease costs of the 26
hotels sold and leased back in 1998 and the three additional hotels sold and
leased back in January 1999.
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. During the fourth quarter of 1998, we
elected early adoption of Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5). SOP 98-5 requires opening costs to be expensed
as incurred. Prior to adoption of SOP 98-5, we capitalized and amortized opening
costs using the straight-line method over a period of twelve months.
Amortization expense on opening costs for 1998 is included in depreciation and
amortization on the statement of operations. Opening costs for 1999 totaled $1.1
million. There were no opening cost expensed in 1998; however, we did record
$1.3 million of amortization expense in 1998 for opening costs that had been
capitalized. The remaining unamortized hotel opening costs were expensed in full
in December 1998, as a result of our adoption of SOP 98-5, and reflected as a
change in accounting principle on the statement of operations. The total amount
expensed in 1998 due to the change in accounting principle was $3.9 million.
Hotel Depreciation and Amortization
Hotel depreciation and amortization expense (e.g. building, furniture,
fixtures, equipment) for 1999, totaled $7.8 million compared to $3.4 million for
1998. The increase was primarily due to the increase in the number of
company-owned hotels open and operating during 1999 and the full year impact of
the hotels opened in 1998. Many of our hotels opened in the second to fourth
quarters of 1998 and as a result, only a partial year's depreciation was
recorded in 1998. For both 1999 and 1998, depreciation and amortization expense
does not reflect any expense for the properties sold in the sale-leaseback
transactions. In accordance with generally accepted accounting principles, we do
not depreciate assets held for sale. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years.
Corporate Operations
--------------------
Other Income
Other income for 1999 totaled $1.5 million, compared to $672,000 for
1998. Other income consists primarily of franchise fees and royalty fees from
franchise hotels, management fees received from two managed hotels (Cambridge
Suites and the Hotel at Old Town, both located in Wichita, Kansas) and equity
income from a joint venture hotel in Rockford, Illinois. At December 31, 1999,
we had 11 franchised hotels in operation, compared to nine hotels at December
31, 1998. The increase in other income in 1999, compared to 1998 reflects an
increase in royalty, franchise fee and management fee income, partially offset
by our equity in the net loss of the Rockford, Illinois joint venture hotel.
Royalty income in 1999 increased primarily due to the full year impact of the
six franchise hotels that opened in 1998. Franchise fee income in 1999 increased
as a direct result of our increased franchise sales efforts.
In addition, we sold three additional hotels as part of the
sale-leaseback transaction during 1999. The total sales price for these hotels
was $26.6 million. A deferred gain of $2.3 million was recorded on the sales. In
1999, we recognized $1.3 million of the gain on hotels sold in 1997, 1998 and
1999, compared to $569,000 in 1998.
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31
Corporate Operating Expenses
Corporate operating expenses for 1999 totaled $5.4 million, compared to
$3.9 million for 1998, and included all expenses not directly related to the
development or operations of specific hotels. The largest portion of corporate
operating expenses consisted of salaries, wages and fringe benefits. The balance
of other corporate operating expenses was comprised of normal operating costs,
such as office space lease, travel, utilities, advertising, professional fees
and similar expenses. The increase in 1999 reflects the expansion of our
franchise sales and services team and increases in general personnel and field
information system support costs. These increases were needed to launch our
franchise sales program and to provide support and services to the increased
number of hotels in operation.
Abandoned Site Costs
We recorded $2.0 million of abandoned site costs in 1999, compared to
$3.8 million in 1998. Abandoned site costs represent costs related to certain
development sites that we have decided not to develop.
Corporate Depreciation and Amortization
Corporate depreciation and amortization applicable to corporate
operations for 1999 totaled $666,000, compared to $162,000 for 1998. The
increase in corporate depreciation and amortization reflects the leasehold
improvements and furnishings purchased in 1999 for new corporate offices and the
depreciation of new systems hardware and peripheral equipment. Depreciation
expense is calculated using the straight-line method over the estimated useful
lives of the respective assets, ranging from three to twenty years. Amortization
expense for intangible assets (e.g. operating rights, trademarks) is computed
using the straight-line method over the life of the corresponding asset.
Interest Income and Expense
We earned $1.0 million of interest income in 1999, compared to $1.2
million in 1998. For 1999, interest income resulted primarily from the
short-term investment of the net proceeds received from the Series B Preferred
Stock placement and the sale-leaseback transaction. Interest income in 1998
resulted from the short-term investment of the net proceeds received from the
Series A and B Preferred Stock placements and the sale-leaseback transaction.
We had interest expense, net of capitalized interest, of $10.1 million
for 1999, compared to $214,000 for 1998. The increase in interest expense was
the result of the slowdown in our development activity during 1999. We had fewer
projects under construction in 1999 thereby reducing the amount of interest
capitalized.
Sales of Hotels
As of December 31, 1999, we had sold to and leased back from HPT 34
hotels. A deferred gain was recorded on the sales, a portion of which has been
recorded as income in 1999 and 1998. The following table sets forth the
sale-leaseback activity for 1999 and 1998 (in thousands, except number of
hotels):
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For the year ended
December 31,
-------------------------
1999 1998
------- --------
Number of hotels sold - year 3 26
Number of hotels sold - total 34 31
Proceeds from sales of hotels,
net of deferred gain $24,281 $184,841
Rent expense on leased hotels $24,821 $ 12,365
Gain recognized into earnings $ 1,329 $ 569
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Hotel Operations
----------------
Hotel Operations Revenues
The following is a summary of 1998 and 1997 hotel operations revenues
(in thousands):
Fiscal Year Number Fiscal 1998 Fiscal 1997 Percentage
Opened of Hotels Revenues Revenues Increase Change
----------- --------- ----------- ----------- -------- ----------
1998 32 $15,043 $ -- $15,043 N/A
1997 20 30,564 4,651 25,913 557.2%
1996 1 1,671 1,572 99 6.3
-- ------- ------ ------- -----
Total 53 47,278 $6,223 $41,055 659.8
== ======= ====== ======= =====
Hotel operations revenue, which includes room revenue and other revenue
(e.g., guest telephone, sales of products from the Candlewood cupboard), was
$47.3 million, compared to $6.2 million for 1997. The increase in revenue
reflected the increase in the number of hotels in operation during 1998 and the
full year impact of the hotels opened in 1997. Fifteen of the 20 hotels opened
in 1997 opened in the fourth quarter. The following table sets forth our
operating statistics for 1998 and 1997:
For the Year Ended
December 31,
--------------------------
1998 1997 Change
----- ----- ------
Occupancy 65.7% 52.1% 13.6%
Average Daily Rate $53.14 $51.31 $1.83
Revenue per available room $34.93 $26.74 $8.19
Average occupancy rate was 65.7% for 1998, compared to 52.1% for 1997.
Occupancy during 1998 was positively impacted by the increase in occupancy
experienced by those hotels that had completed or were near completion of their
ramp-up phase as of December 31, 1998. The overall increase in the occupancy
rate was partially offset by the lower occupancy typically experienced for newly
opened properties. We had 53 company-operated hotels open as of December 31,
1998, 32 of which opened in 1998.
The average daily rate in 1998 was $53.14, compared to $51.31 for
1997. The increase in average daily rate was largely due to our entry into
higher priced markets. Revenue per available room was $34.93 for 1998, compared
to $26.74 for 1997 and reflects the increase in the occupancy rate and the
average daily rate achieved in 1998.
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33
The following table sets forth the 1998 performance of our hotels,
stratified by the year in which the hotels opened:
Revenue per
Number of Average Daily Available
Hotels Occupancy Rate Room
---------- --------- ------------- -----------
1998 Hotels 32 57.9% $52.31 $30.29
1997 Hotels 20 70.0 53.53 37.48
1996 Hotels 1 75.4 53.65 40.48
-- ---- ------ ------
Total Hotels 53 65.7% 53.14 34.93
== ==== ====== ======
The following table compares the 1998 and 1997 performance of the 21
hotels open at December 31, 1997:
For the Year Ended
December 31,
--------------------------
1998 1997 Change
----- ----- ------
Occupancy 70.3% 52.1% 18.2%
Average Daily Rate $53.54 $51.31 $ 2.23
Revenue per Available Room $37.62 $26.74 $10.88
The average occupancy rate for the 21 hotels open at December 31, 1997,
increased 18.2 occupancy points in 1998. This increase reflects the positive
effect on occupancy that occurred in 1998 as the hotels opened in 1997 completed
or neared completion of their ramp-up phase. The average daily room rate
increased by 4.4% in 1998. The increase in occupancy and average daily rates
resulted in a 40.7% increase in revenue per available room for the 21 hotels in
1998, compared to 1997.
Hotel Operating Expenses
Hotel operating expenses for 1998 totaled $28.3 million, compared to
$4.7 million for 1997. The increase in 1998 was largely due to the increased
number of hotels in operation at December 31, 1998.
Rent Expense on Leased Hotels
We incurred rent expense of $12.4 million in 1998, compared to $79,000
in 1997. The increase in rent expense reflected the sale and leaseback of 26
additional hotels in 1998, as well as the full year lease costs of the hotels
sold in 1997.
Hotel Opening Costs
During the fourth quarter of 1998, we elected early adoption of SOP
98-5. Prior to adoption of SOP 98-5, we capitalized and amortized opening costs
using the straight-line method over a period of twelve months. Amortization
expense on opening costs for 1998 and 1997 is included in depreciation and
amortization on the statement of operations. There were no opening costs
expensed in 1998 and 1997; however, we did record $1.3 million and $290,000 of
amortization expense in 1998 and 1997, respectively, for opening costs that had
been capitalized. The remaining unamortized hotel opening costs were expensed in
full in December 1998, as a result of our adoption of SOP 98-5, and was
reflected as a change in accounting principle on the statement of operations.
The total amount expensed in 1998 due to the change in accounting principle was
$3.9 million.
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34
Hotel Depreciation and Amortization
Depreciation and amortization expense attributable to hotel operations
for 1998 totaled $3.4 million, compared to $879,000 for 1997. The increase was
primarily due to the increase in the number of company-owned hotels open and
operating during 1998 and the full year impact of the hotels opened in 1997.
Corporate Operations
--------------------
Other Income
Other income for 1998 totaled $672,000, compared to $221,000 for 1997.
At December 31, 1998, we had nine franchised hotels in operation, compared to
three hotels at December 31, 1997. The increase in other income in 1998,
compared to 1997, reflected an increase in royalty, franchise fee and management
fee income, partially offset by our equity in the net loss of the Rockford,
Illinois joint venture hotel.
In addition, during 1998, we sold 26 additional hotels as part of the
sale-leaseback transaction during 1997. The total sales price for these hotels
was $198.4 million. A deferred gain of $13.5 million was recorded on the sale.
In 1998, we recognized $569,000 of the gain on hotels sold in 1997 and 1998.
There was no gain recognized during 1997.
Corporate Operating Expenses
Corporate operating expenses for 1998 totaled $3.9 million, compared to
$2.4 million for 1997. The increase was primarily due to the salaries, wages,
fringe benefits and travel for additional employees required to support the
increase in hotels in operation, under construction and properties on which we
performed due diligence in 1998.
Abandoned Site Costs
Abandoned site costs totaled $3.8 million for 1998, compared to
$157,000 for 1997.
Corporate Depreciation and Amortization
Corporate depreciation and amortization applicable to corporate
operations totaled $162,000 for 1998, compared to $143,000 for 1997. The
increase in depreciation and amortization reflected the increase in furniture,
fixtures and equipment as the corporate office support staff expanded to meet
our growth needs.
Interest Income and Expense
Interest income totaled $1.2 million in 1998. This income resulted
primarily from the short-term investment of the net proceeds received in the
Series A and B Preferred Stock placements and the sale-leaseback transaction.
For 1997, we earned $1.2 million of interest income related to the temporary
investment of the net proceeds from our initial public offering of Common Stock
and the Series A Preferred Stock placement.
Interest expense, net of capitalized interest, was $214,000 in 1998,
compared to $134,000 in 1997. The increase in interest expense in 1998 reflected
the slowdown in our development activity in the fourth quarter of 1998.
33
35
Sales of Hotels
As of December 31, 1998, we had sold to and leased back from HPT 31
hotels. A deferred gain was recorded on the sales, a portion of which had been
recorded as income in 1998. There was no gain recognized into income in 1997.
The following table sets forth the sale-leaseback activity for 1998 and 1997 (in
thousands, except number of hotels):
For the year ended
December 31,
----------------------
1998 1997
-------- -------
Number of hotels sold - year 26 5
Number of hotels sold - total 31 5
Proceeds from sales of hotels, net of
deferred gain $184,841 $29,134
Rent expense on leased hotels $ 12,365 $ 79
Gain recognized into earnings $ 569 $ --
Liquidity and Capital Resources
- -------------------------------
We had cash and cash equivalents of $18.6 million at December 31, 1999,
compared to $23.2 million at December 31, 1998. Net cash provided by operating
activities totaled $14.1 million in 1999, compared to $29.4 million in 1998. For
1999, we recorded a net loss of $2.8 million, which includes a $2.0 million
write-off of costs related to abandoned sites. The primary sources of cash for
1999 were a reduction of $20.8 million in the amount of hotels held for sale,
$8.5 million of non-cash depreciation and amortization expense, and an increase
of $2.0 million in deferred gain on sale of hotels. The primary uses of cash in
1999 consisted primarily of a $10.0 million increase in other assets, an
increase of $2.5 million in deposits, and an increase of $2.0 million in
accounts and other receivables. The increase in other assets reflects the
investment in joint ventures made during 1999 with our joint venture partner.
The additional deposit required for the sale-leaseback of the three hotels sold
in January 1999 accounts for the increase in deposits. For 1998, we recorded a
net loss of $6.3 million, which included a $3.9 million write-off of opening
costs as a result of a change in accounting principle and $3.8 million of
abandoned site costs. Sources of cash in 1998 included a reduction of $23.9
million in the amount of hotels held for sale, a $12.5 million increase in
accounts payable and accrued expenses, an increase of $10.5 million in deferred
gain on sale of hotels, and $3.6 million of non-cash depreciation and
amortization expense. The primary use of cash in 1998 was an increase of $15.3
million in deposits related to the sale-leaseback of the 26 hotels sold during
the year.
Net cash used in investing activities for 1999 totaled $86.1 million,
compared to $125.0 million in 1998. Our expenditures for property and equipment
in connection with the completed hotels, the construction of new hotels,
acquisition costs for potential development sites, and the costs of hotels sold
accounted for the majority of the cash used. In 1999, we expended approximately
$95.9 million on construction, compared to $111.3 million in 1998.
In 1999, net cash provided by financing activities was $67.5 million,
compared to $83.4 million in 1998. For 1999, net cash provided by financing
activities consisted of $79.3 million in proceeds from mortgages and notes
payable, partially offset by $3.5 million of principal payments on notes payable
and $8.0 million of preferred stock dividend payments. The principal payments on
notes payable made in 1999 related primarily to the three hotels sold as part of
the sale-leaseback transaction in January 1999. Net cash provided by financing
activities in 1998 totaled $83.4 million and reflected $147.1 million in
proceeds from mortgages and notes payable and $39.3 million in proceeds from the
Series B Preferred Stock placement, partially offset by $6.9 million of
preferred stock dividend payments and $95.8 million
34
36
of principal payments on notes payable. The principal payments on notes payable
made in 1998 related primarily to the 26 hotels sold in 1998.
At December 31, 1999, we had two company-owned hotels under
construction with a total estimated cost of approximately $47.7 million. We have
secured financing on both hotels. As of December 31, 1999, we had incurred costs
of approximately $22.5 million on these projects. Under terms of the financing,
our total equity requirement for these properties is $12.8 million, $11.8
million of which had been funded as of December 31, 1999. The remaining $1.0
million of equity will be funded upon completion of the hotel. In addition to
the company-owned hotels under construction, at December 31, 1999, we owned one
property on which construction had not begun. We are attempting to secure
financing for this project.
We had six hotels under construction at December 31, 1999 as part of
our joint venture development agreement with Boston Capital Institutional
Advisors and Mass Mutual. The total estimated cost of construction for these six
hotels is $64.7 million. As of December 31, 1999, the joint venture had incurred
costs of approximately $17.7 million on these projects. These costs include land
acquisition costs, deposits and fees for surveys, legal services, environmental
studies, and architectural drawings. Our total equity requirement per the loan
agreements for these six hotels is $7.3 million, all of which had been funded as
of December 31, 1999. In addition, we have two joint venture properties under
contract at December 31, 1999 with an estimated total project cost of $23.9
million. Under the terms of our joint venture development agreement, if we do
not have at least 10 hotels under construction by August 31, 2000, we may be
required to increase our capital contributions relating to existing and future
joint venture hotels. We have not secured financing for this contingency. We
will continue to identify and evaluate potential joint venture sites.
We believe that a combination of our cash and cash equivalents, cash
from operations, borrowed funds from third-party lenders (if approved on an
individual basis) and construction loan guarantees from Doubletree will be
sufficient to provide capital for development of projects currently under
construction, payment of preferred dividends and operations through December
2000. In addition, from time to time we will consider strategic acquisitions as
a means of growth, which would similarly require additional capital. We are
actively considering and/or pursuing a number of financing alternatives,
including credit facilities, the issuance of 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.
Failure to obtain such financing could result in the delay or abandonment of
some or all of our development and expansion plans, losses of deposits or other
committed capital, and could have a material adverse effect on our business and
results of operations.
We have not paid dividends on our Common Stock. We currently do not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Dividend payments on the Series A and Series B Preferred Stock are paid
quarterly and in preference to the Common Stock. These payments are
approximately $2.0 million per quarter. After payment of dividends on the Series
A and Series B Preferred Stock, we intend to retain any future earnings for
reinvestment in the development and expansion of our business.
Impact of the Year 2000 Issue
- -----------------------------
In prior years, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of our systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe our systems
successfully responded to the Year 2000 date change. We expended approximately
$100,000 during 1999 in connection with
35
37
remediating our systems. We are not aware of any material problems resulting
from Year 2000 issues, either with our products, our internal systems, or the
products and services of third parties. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Our earnings are affected by changes in interest rates as the majority
of our outstanding indebtedness is at variable rates based on prime and LIBOR.
If interest rates change by .01 percent, the market value of our mortgages and
notes payable, based on the outstanding balance at December 31, 1999, would
change by approximately $17,600. 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,
1999, would change by approximately $1,200.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document as well as some of our statements in periodic press releases and some
oral statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as "believes," "anticipates," "estimates,"
"expects" or similar expressions. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:
o the market acceptance of the Candlewood brand;
o the ability to attract and retain franchisees;
o the risk that signed franchise agreements may not result in
the construction or opening of hotels;
o the ability to maximize revenue per available room through the
management of occupancy and rate;
o the ability to attract and retain quality personnel;
o operating performance of our hotels;
o adverse changes in national or local economic conditions;
o competition from other lodging properties;
o changes in real property tax rates;
o changes in the availability, cost and terms of financing;
o the impact of present or future environmental legislation;
o the ongoing need for capital improvements;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning laws;
o civil unrest;
36
38
o acts of God, including earthquakes and other natural disasters
(which may result in uninsured losses); and
o acts of war.
Certain of these factors are discussed in more detail elsewhere in this Annual
Report on Form 10-K, including without limitation under the captions "Certain
Business Considerations," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business and Properties."
37
39
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.
38
40
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 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 2000.
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 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 2000.
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 2000 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 2000.
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 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 2000.
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.
39
41
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 24, 2000 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 and in the capacities and on the dates indicated.
Signature Title Date Signed
--------- ----- -----------
/s/ Jack P. DeBoer Chief Executive Officer and March 24, 2000
- ----------------------------------------------- Director (Principal Executive
Jack P. DeBoer Officer)
/s/ Warren D. Fix Executive Vice President, Chief March 24, 2000
- ----------------------------------------------- Financial Officer, Secretary and
Warren D. Fix Director (Principal Financial
and Accounting Officer)
/s/ James E. Roos President and Chief Operating March 24, 2000
- ----------------------------------------------- Officer
James E. Roos
/s/ Gary E. Costley Director March 24, 2000
- -----------------------------------------------
Gary E. Costley
/s/ Robert J. Cresci Director March 24, 2000
- -----------------------------------------------
Robert J. Cresci
/s/ Mariel C. Albrecht Director March 24, 2000
- -----------------------------------------------
Mariel C. Albrecht
/s/ Robert S. Morris Director March 24, 2000
- -----------------------------------------------
Robert S. Morris
/s/ William L. Perocchi Director March 24, 2000
- -----------------------------------------------
William L. Perocchi
/s/ Frank J. Pados Director March 24, 2000
- -----------------------------------------------
Frank J. Pados
/s/ Tony M. Salazar Director March 24, 2000
- -----------------------------------------------
Tony M. Salazar
/s/ Thomas H. Nielsen Director March 24, 2000
- -----------------------------------------------
Thomas H. Nielsen
/s/ Thomas L. Keltner Director March 24, 2000
- -----------------------------------------------
Thomas L. Keltner
/s/ Thomas W. Story Director March 24, 2000
- -----------------------------------------------
Thomas W. Story
40
42
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 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
43
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. We have also
audited the related financial statement schedule listed in the accompanying
index for the year ended December 31, 1999. 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, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, 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 5, 2000
F-2
44
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, stated value, and share data)
December 31,
------------------------
1999 1998
--------- ---------
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 238,320 $ 150,401
Hotels under construction 37,755 67,447
Other costs 3,654 16,591
--------- ---------
279,729 234,439
Accumulated depreciation and amortization (8,582) (1,907)
--------- ---------
Net investment in hotels 271,147 232,532
Cash and cash equivalents (including $407 and $521 of
restricted cash, respectively) 18,624 23,155
Deposits 26,334 23,847
Accounts and other receivables 4,735 3,566
Other assets 20,437 10,258
--------- ---------
Total assets $ 341,277 $ 293,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 190,545 $ 114,742
Accounts payable and other accrued expenses 22,874 40,277
Deferred gain on sale of hotels 17,431 16,771
Other liabilities 1,172 1,449
--------- ---------
Total liabilities 232,022 173,239
Redeemable, convertible, cumulative preferred stock ("Series A"),
$1,000 stated value, 65,000 shares authorized and outstanding, net of
offering costs 61,339 61,339
Redeemable, convertible, cumulative preferred stock ("Series B"),
$1,000 stated value, 42,000 shares authorized and outstanding, net of
offering costs 39,350 39,398
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized, 9,025,000 issued and outstanding 90 90
Additional paid-in capital 35,270 35,270
Accumulated deficit (26,794) (15,978)
--------- ---------
Total stockholders' equity 8,566 19,382
--------- ---------
Total liabilities and stockholders' equity $ 341,277 $ 293,358
========= =========
See accompanying notes to consolidated financial statements.
F-3
45
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share and per share data)
1999 1998 1997
--------- --------- ---------
REVENUES:
Hotel operations $ 105,467 $ 47,278 $ 6,223
Other income 1,459 672 221
--------- --------- ---------
Total hotel operating revenues 106,926 47,950 6,444
Proceeds from sales of hotels, net of deferred gain of
$2,319, $10,533 and $6,807, respectively 24,281 184,841 29,134
Deferred gain recognition on sales of hotels 1,329 569 --
--------- --------- ---------
Total Revenues 132,536 233,360 35,578
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 60,218 28,266 4,713
Corporate operating expenses 5,390 3,906 2,372
Rent expense on leased hotels 24,821 12,365 79
Hotel opening costs 1,103 -- --
Abandoned Site Costs 2,043 3,799 157
Depreciation and amortization 8,452 3,565 1,022
--------- --------- ---------
Total operating costs and expenses 102,027 51,901 8,343
Cost of hotels sold 24,281 184,841 29,134
--------- --------- ---------
6,228 (3,382) (1,899)
Interest income 1,034 1,166 1,216
Interest expense (10,053) (214) (134)
--------- --------- ---------
Loss before preferred dividends and cumulative effect
of a change in accounting principle (2,791) (2,430) (817)
Preferred stock dividends (8,025) (6,338) (1,248)
--------- --------- ---------
Loss available to common stockholders before
cumulative effect of a change in accounting
principle (10,816) (8,768) (2,065)
Cumulative effect of a change in accounting principle,
less applicable income taxes of $0 -- (3,857) --
--------- --------- ---------
Net loss available to common stockholders $ (10,816) $ (12,625) $ (2,065)
========= ========= =========
Per share amounts - basic and diluted
Loss before cumulative effect of a change
in accounting principle $ (1.20) $ (.97) $ (0.23)
Cumulative effect of change in accounting principle -- (.43) --
--------- --------- ---------
Net loss (1.20) $ (1.40) $ (0.23)
========= ========= =========
Weighted average shares outstanding - basic and diluted 9,025,000 9,025,000 9,025,000
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
46
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
Total
Additional Accumulated Stockholders'
Common Stock Paid-in Capital Deficit Equity
------------ --------------- ----------- -------------
Balance at December 31, 1996 $90 $35,270 $ (1,954) $ 33,406
Net Loss -- -- (817) (817)
--- ------- -------- --------
Balance at December 31, 1997 90 35,270 (2,771) 32,589
Preferred stock dividends paid -- -- (6,920) (6,920)
Net Loss -- -- (6,287) (6,287)
--- ------- -------- --------
Balance at December 31, 1998 90 35,270 (15,978) 19,382
Preferred stock dividends paid -- -- (8,025) (8,025)
Net Loss -- -- (2,791) (2,791)
--- ------- -------- --------
Balance at December 31, 1999 $90 $35,270 $(26,794) $ 8,566
=== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-5
47
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before preferred dividends and cumulative effect of
change in accounting principle $ (2,791) $ (2,430) $ (817)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,452 3,565 1,022
Deferred gain recognition on sales of hotels (1,329) (569) --
Abandoned site costs 2,043 3,799 157
Change in:
Hotels completed and under construction - held
for sale 20,776 23,877 (44,653)
Deposits (2,487) (15,253) (8,594)
Accounts receivable (1,937) (1,309) (1,346)
Opening costs 718 (2,543) (1,797)
Other assets (9,964) (2,956) (1,140)
Accounts payable and other accrued expenses (1,360) 12,457 224
Deferred gain on sale of hotels 1,989 10,533 6,807
Other liabilities (1) 227 422
-------- --------- ---------
Net cash provided by (used in) operating activities 14,109 29,398 (49,715)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under construction (95,936) (111,324) (54,127)
Change in site acquisition costs 10,176 (13,731) (4,701)
Purchase of intangible assets (334) 47 (10)
-------- --------- ---------
Net cash used in investing activities (86,094) (125,008) (58,838)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of preferred stock -- 39,276 61,461
Proceeds from mortgage and notes payable 79,287 147,101 63,286
Payments on mortgages and notes payable (3,484) (95,775) (15,327)
Preferred stock dividends (8,025) (6,920) --
Other liabilities (276) (272) 696
Expenditures for private placement (48) -- --
-------- --------- ---------
Net cash provided by financing activities 67,454 83,410 110,116
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents (4,531) (12,200) 1,563
Cash and cash equivalents at beginning of year 23,155 35,355 33,792
-------- --------- ---------
Cash and cash equivalents at end of year $ 18,624 $ 23,155 $ 35,355
======== ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 14,886 $ 7,147 $ 3,335
======== ========= =========
See accompanying notes to consolidated financial statements.
F-6
48
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,
manages, constructs and develops a nationwide hotel chain under the name
Candlewood Suites. The hotels are designed to serve extended-stay, value
oriented guests with high quality, fully equipped studio units. The first
hotel commenced operations on May 5, 1996, and as of December 31, 1999, the
Company had a portfolio of 76 properties ("Hotels"). Of these properties,
the Company operated 65 Hotels and 11 were franchised and operated by third
parties. Of the Company operated Hotels, 31 were wholly-owned and 34 were
leased from a third party. The Company also had two Company-owned, six
joint venture and five franchised Hotels under construction at year-end.
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. Candlewood LLC began construction of its first
Candlewood hotel in Wichita, Kansas in the fourth quarter of 1995, and
construction was completed and the hotel opened for operations in May 1996.
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
F-7
49
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 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 August 31, 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 significant intercompany
balances and transactions have been eliminated in consolidation.
F-8
50
B. INVESTMENT IN HOTELS COMPLETED AND UNDER CONSTRUCTION
HOTELS COMPLETED
Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the Hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.
HOTELS UNDER CONSTRUCTION
Hotels under construction represents costs incurred in the acquisition and
development of Hotels. Such costs include land acquisition costs,
construction costs, capitalized interest and construction overhead. Upon
completion, the costs of construction, including any capitalized costs, are
transferred to Hotels completed and except for hotels held for sale,
depreciated over the asset's useful life.
OTHER COSTS
Other costs consist of acquisition costs. Acquisition costs are costs
related to the acquisition of property sites. These costs are added to the
costs of the Hotels under construction when the site is acquired and
construction at the Hotel begins. Costs associated with a particular site
are expensed to operations when the Company determines it will no longer
pursue the site.
C. CASH EQUIVALENTS
The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
D. RESTRICTED CASH
Restricted cash represents cash that, under the terms of certain letters of
credit, has been set aside for pending land acquisitions and financing.
These funds are generally applied as payments upon the closing of escrow of
related acquisitions or released to the Company shortly thereafter.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of the
Company's financial instruments, which include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, approximate
fair values due to the short maturities of such instruments. The fair value
of the Company's long-term debt, which approximates carrying value, is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities.
F. INTANGIBLE ASSETS
Pursuant to the terms of the Limited Liability Company Agreement of
Candlewood LLC, JPD Corporation contributed the ownership rights, title and
interest in the Candlewood Hotel name and logo and certain other
intangibles to the Company in 1996 at the agreed-upon value of $200,000.
Such amount is included in intangible assets and is being amortized using
the straight-line method over a period of twenty years. Intangible assets
also include costs for patents and trademarks. These
F-9
51
assets are being amortized using the straight-line method over a period of
twenty years and are included in other assets on the accompanying balance
sheet.
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
balance sheets. These costs are amortized over the life of the related loan
on the level yield basis.
H. REVENUE RECOGNITION
Room revenue and other revenues are recognized when earned. Recognition of
franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue when recognized is included in other
income on the accompanying statements of operations.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized
when the title passes to the buyer, generally upon the receipt of proceeds.
Related profit is deferred due to required support obligations under the
operating lease agreements until operations meet stipulated levels. At such
time, the deferred gain is recognized in earnings over the remaining lease
term.
I. INCOME TAXES
The Company is taxed as a corporation as defined in subchapter "C" under
the Internal Revenue Code for federal and state income tax purposes and
accounts for any temporary differences under the asset and liability
method.
J. CHANGE IN ACCOUNTING METHOD FOR 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.
During the fourth quarter of 1998, the Company elected early adoption of
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
(SOP 98-5). SOP 98-5 requires opening and organization costs to be expensed
as incurred. The remaining unamortized opening and organization costs of
$3.9 million were expensed in the accompanying 1998 Statement of Operations
and reported as a cumulative effect of a change in accounting principle.
The cumulative effect of the change was a one-time charge in 1998.
K. INVESTMENTS IN JOINT VENTURES
The Company owns 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. As of December 31, 1999, the Company had contributed $7.0
million of investment in joint ventures. This amount is included in other
assets on the accompanying balance sheets. For the years ended December 31,
1999, 1998 and 1997, an equity loss in joint ventures was recorded of
$91,000, $100,000 and $4,000, respectively, which is a reduction in other
income on the accompanying statements of operations.
The Company has one significant joint venture that was formed in 1999.
Operations for this joint venture had not yet commenced as of December 31,
1999. The following is unaudited financial information for the joint
venture as of December 31, 1999:
F-10
52
1999
-------
(In thousands)
Hotels under development $16,043
Other assets 1,692
-------
Total assets $17,735
=======
Total development liabilities $12,666
Total equity 5,069
-------
Total liabilities and equity $17,735
=======
L. SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") which was effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 superseded Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of
a Business Enterprise". SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
beginning in the second year of implementation. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect the results of operations or financial position of the Company.
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, 1999 and 1998, respectively, is as
follows:
Year ended December 31, 1999
------------------------------------------------
Operation of Sale of
Hotels Hotels Total
------------ ------- --------
(In thousands)
Revenues from external customers $106,926 $24,281 $131,207
Interest expense 10,053 -- 10,053
Depreciation expense 7,787 -- 7,787
Segment profit 14,100 1,329 15,429
Hotels assets:
Hotels completed and under construction 276,075 -- 276,075
Accounts receivable 2,246 2,014 4,260
Deferred gain on sale of hotels -- 17,431 17,431
F-11
53
Year ended December 31, 1998
------------------------------------
Operation of Sale of
Hotels Hotels Total
------------ -------- --------
(In thousands)
Revenues from external customers $ 47,950 $184,841 $232,791
Interest expense 214 -- 214
Depreciation expense 3,403 -- 3,403
Segment profit 3,916 569 4,485
Hotels assets:
Hotels completed and under construction 197,072 20,776 217,848
Accounts receivable 1,195 2,213 3,408
Deferred gain on sale of hotels -- 16,771 16,771
The difference between segment profit and net income is corporate expenses
not specific to the Company's reportable segments.
For the year ended December 31, 1997, net revenues from the sale of hotels
were $29.1 million, and hotel assets held for sale were $44.7 million. The
remainder of the Company's revenues, expenses and assets were from the
operation of hotels and corporate overhead activities.
M. 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.
N. RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform
to the current period presentation. Such reclassifications have no effect
on the operations or equity as originally presented.
3. INVESTMENT IN HOTELS COMPLETED AND UNDER CONSTRUCTION
Investment in Hotels consists of the following:
1999 1998
--------- ---------
(In thousands)
Hotels completed:
Land $ 39,863 $ 26,407
Buildings and improvements 164,799 104,595
Furniture, fixtures and equipment 33,658 19,399
--------- ---------
238,320 150,401
Hotels under construction 37,755 67,447
Other costs 3,654 16,591
--------- ---------
279,729 234,439
Less accumulated depreciation (8,582) (1,907)
--------- ---------
$ 271,147 $ 232,532
========= =========
F-12
54
Approximately $20.8 million of the balance in Hotels completed and Hotels under
construction at December 31, 1998 was held for sale as part of the transactions
described in Note 11. There were no assets held for sale at December 31, 1999.
Hotels completed and Hotels under construction also include capitalized interest
costs. The Company incurred interest costs of approximately $15.3 million and
$8.0 million of which $5.2 million and $7.8 million in 1999 and 1998,
respectively, were capitalized. Depreciation expense for completed Hotels for
the years ended December 31, 1999, 1998 and 1997, was approximately $7.8
million, $3.4 million and $991,000, respectively.
Other costs included approximately $3.7 million and $15.9 million of acquisition
costs at December 31, 1999 and 1998, respectively. Acquisition costs related to
abandoned site costs of approximately $2.0 million, $3.8 million and $157,000
were charged to operations in 1999, 1998 and 1997, respectively.
4. MORTGAGES AND NOTES PAYABLE
A summary of mortgages and notes payable is as follows:
December 31,
--------------------
1999 1998
-------- --------
(In thousands)
Mortgage notes:
Mortgage notes payable to a bank, secured by individual Hotels, interest
payable monthly at rates ranging from LIBOR plus 2.75% to prime plus 1.25%,
principal payments commencing twelve to eighteen months following Hotel
opening, with maturity dates ranging from February 2000 to December 2007 $19,013 $3,948
Mortgage notes payable to a financial institution secured by individual
Hotels, interest payable monthly at rates ranging from LIBOR plus 3.40% to
4.25%, principal payments commencing twelve to eighteen months from related
loan closing, with maturity dates ranging from March 2001 to September 2003 156,532 95,794
Notes payable:
Subordinate credit facility due to stockholder, interest payable quarterly
at a rate of 15.0%, with principal of $12.5 million and $2.5 million
payable at maturity in November 2001, and July 2002, respectively 15,000 15,000
-------- --------
$190,545 $114,742
======== ========
LIBOR rates, depending on the maturity dates of the individual notes, ranged
from 6.17% to 6.48% at December 31, 1999, to 5.08% to 5.55% at December 31,
1998. The prime rate at December 31, 1999 was 8.50%.
Certain of the Company's debt is partially guaranteed by Doubletree. As of
December 31, 1999 and 1998, approximately $7.4 million and $8.4 million,
respectively, of the Company's debt was guaranteed by Doubletree.
Scheduled principal payments required on mortgage and other notes payable
subsequent to December 31, 1999, are as follows:
F-13
55
Year Ending December 31, (In thousands)
- ------------------------ --------------
2000 $ 5,173
2001 47,599
2002 102,781
2003 25,162
2004 6,810
Thereafter 3,020
--------
Total $190,545
========
5. 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, 1999, 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.
Series A Preferred Stock Offering
- ---------------------------------
In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of "Series A" Redeemable, Convertible, Cumulative Preferred Stock
at an offering price of $1,000 per share ("Stated Value"). The net proceeds to
the Company were approximately $61.3 million, after deducting commissions and
expenses of $3.7 million.
The Preferred Stock accumulates dividends at a rate of 7.5% of the Stated Value,
per annum, payable in cash initially on August 31, 1998 and thereafter,
quarterly, including up to the date of conversion, when and if declared by the
board of directors.
Series A Preferred Stockholders have the right to convert, at any time at their
option into shares of Common Stock at the conversion price of $9.50 per share.
Subsequent to August 31, 1999, the Preferred Stock is redeemable in cash, in
whole or part, at the option of the Company at 200% of the Stated Value. At
August 31, 2004, the Preferred Stock will be redeemed under a mandatory
redemption clause, at the Stated Value plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
Series B Preferred Stock Offering
- ---------------------------------
On August 3, 1998, the Company completed the private placement of $42.0 million
of its "Series B" Redeemable, Convertible, Cumulative Preferred Stock and
warrants to purchase its common stock. In total, 42,000 shares of Series B
Preferred Stock were issued at an offering price of $1,000 per share ("Stated
Value"). Preferred stockholders were also issued, at no additional cost,
warrants to purchase 336,000 shares of common stock at $12.00 per share. These
warrants expire on July 13, 2005. The net
F-14
56
proceeds to the Company were approximately $39.4 million, after deducting
commissions and expenses of $2.6 million.
The Series B Preferred Stock accumulates dividends at a rate of 7.5% of the
Stated Value, per annum, payable in cash initially on August 31, 1998 and
thereafter, quarterly, including up to the date of conversion, when and if
declared by the board of directors.
Series B Preferred Stockholders have the right to convert, at any time at their
option into shares of Common Stock at the conversion price of $9.50 per share.
Subsequent to September 30, 1999, the Series B Preferred Stock is redeemable in
cash, in whole or part, at the option of the Company at 200% of the Stated
Value. At September 30, 2004, the Series B Preferred Stock will be redeemed
under a mandatory redemption clause, at the Stated Value plus unpaid dividends.
Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.
6. 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, 1999 and
1998 were 9,025,000.
7. STOCK OPTIONS
The Company has one stock option plan, the 1996 Equity Participation Plan (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. The
Plan allows for 1,676,710 options to be granted. 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, 1999, 1998 and 1997, is as follows:
F-15
57
Weighted Average
Shares Exercise Price
--------- ----------------
Options outstanding, December 31, 1996 354,200 $10.00
Granted 296,250 8.74
Exercised -- --
Canceled (44,650) 9.96
--------- ------
Options outstanding, December 31, 1997 605,800 9.39
Granted 397,800 7.36
Exercised -- --
Canceled (103,700) 8.11
--------- ------
Options outstanding, December 31, 1998 899,900 8.73
Granted 565,300 4.24
Exercised -- --
Canceled (277,377) 7.62
--------- ------
Options outstanding, December 31, 1999 1,187,823 $ 6.82
========= ======
At December 31, 1999, 1,187,823 options were outstanding at prices ranging from
$2.44 to $11.38. There were 338,674, 222,700 and 200,608 shares exercisable by
employees as of December 31, 1999, 1998 and 1997, 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:
1999 1998 1997
-------- ------- -------
Net loss, as reported (in thousands) $(2,791) $(6,287) $ (817)
Net loss, pro forma (in thousands) (3,349) (6,619) (1,119)
Net loss per share, as reported (1.20) (1.40) (0.23)
Net loss per share, pro forma (1.26) (1.44) (0.26)
F-16
58
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 66.87% 44.50% 44.5%
Risk-free interest rate 5.14% 5.21% 6.09%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during 1999, 1998, and
1997 is $2.22, $3.06 and $4.06 per share, respectively. The weighted-average
exercise price and weighted-average contractual life, by exercise price range
for options outstanding is as follows:
Weighted-Average
Remaining
Number of Weighted-Average Contractual
Exercise Price Options Exercise Price Life
-------------- --------- ---------------- ----------------
$2.44 to $2.88 100,850 $ 2.57 9.8 years
$3.81 to $4.81 467,137 4.59 9.1 years
$7.25 to $10.50 579,836 9.06 7.5 years
$11.25 to $11.38 40,000 11.28 7.6 years
The weighted-average exercise price of the options exercisable as of December
31, 1999, 1998 and 1997 were $9.11, $9.71 and $10.00, respectively.
8. 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, 1999, 1998
and 1997 respectively, the Company matched contributions in the amount of
approximately $201,000, $94,000 and $22,000.
9. RELATED PARTY TRANSACTIONS
As of December 31, 1999, 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, 1999, 1998 and 1997 respectively, the Company
received management fees from these properties in the amount of approximately
$150,000, $52,000 and $47,000.
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 equipment under a five-year lease from
a corporation in which the Company's chairman owned a minority interest. In
addition, certain corporate travel is purchased from a corporation owned by the
Company's chairman. A summary of the dollar amounts of these transactions and
the related payable at year-end is as follows:
F-17
59
Year Ended December 31,
--------------------------
1999 1998 1997
------ ------ ----
(In thousands)
Total insurance premiums for third party insurance $1,213 $1,134 $167
Office and equipment rent 20 118 117
Corporate air travel 199 396 41
Amounts payable at December 31: 41 17 37
10. 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 are as follows:
1999 1998 1997
------ ------ ----
(In thousands)
DEFERRED TAX ASSETS:
Taxable gain on sale/lease-back transaction
in excess of book income $ 467 $1,207 $475
Deferred franchise fee revenue 94 132 153
Excess book expenses over tax 1,483 1,234 128
Tax benefit of net operating loss carryforwards 5,301 1,929 189
------ ------ ----
Total gross deferred tax assets 7,345 4,502 945
Valuation allowance 4,274 3,238 575
------ ------ ----
Total deferred tax assets 3,071 1,264 370
------ ------ ----
DEFERRED TAX LIABILITIES:
Excess tax depreciation over book 3,008 1,197 106
Financial basis in excess of tax basis of
intangible assets 63 67 75
------ ------ ----
Total deferred tax liabilities 3,071 1,264 181
------ ------ ----
Net deferred tax asset $ -- $ -- $189
====== ====== ====
The Company had $60,000 in prepaid taxes that it expects to have refunded in
2000. The taxes payable 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 carryforward available to offset
future taxable income of $13.2 million and $4.8 million as of December 31, 1999
and 1998, respectively. Net operating losses, available to offset future taxable
income, generated in the years ended December 31, 1999, 1998 and 1997, were
approximately $8.4 million, $4.3 million and $421,000, which expire in 2014,
2013, and 2012, respectively.
11. SALE/LEASEBACK
In November, 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell 15 hotels for a total purchase price of $100.0
million, and to lease the hotels back from the buyer
F-18
60
under a non-cancelable operating lease. The Company completed the sale and
leaseback of five hotels in December 1997, nine hotels in the first quarter of
1998, and one hotel in the second quarter of 1998. In December 1998, the Company
agreed to sell two additional hotels to HPT under the terms of the 1997
transaction. These hotels were sold in January 1999.
In May 1998, the Company announced a second agreement with HPT to sell and
leaseback 17 hotels for a total purchase price of $142.4 million, as amended.
The Company completed the sale and leaseback of four hotels in the second
quarter of 1998, six hotels in the third quarter of 1998, six hotels in the
fourth quarter of 1998, and one hotel in the first quarter of 1999. As of
December 31, 1999, all of the hotels had been sold.
Terms of the sales are all cash at the close of escrow for hotels sold. The
lease term for the non-cancelable operating leases is approximately 14 years for
the 17 hotels in the first transaction and 13 years for the 17 hotels in the
second transaction with all leases expiring on December 31, 2011. The leases
call for monthly lease payments and require the Company to place a security
deposit with HPT for each property equal to one year's lease payments. The
security deposit will be released to the Company at the end of the lease term.
The agreements also provide for the Company to guarantee the payment of rent
until defined operating cash flows exceed the annual lease payments by 150% for
12 consecutive months. In connection with this obligation, the Company was
required to place a 5% deposit with HPT, upon the initial closing of each
transaction, the deposit will be refunded to the Company when cash flows from
operations exceed required lease payments by 140% of defined cash flows from
operations. The deposit is charged to cost of sales as the hotels are sold. Upon
attainment of the required coverage ratios, the portion of the deposit refunded
to the Company will be recognized in income beginning in the period such funds,
if any, are received.
As of December 31, 1999, the Company had completed the sale of all 34 hotels,
three of which were sold in 1999. The cumulative sales price for the three
hotels sold during 1999 was $26.6 million with a total deferred gain on the sale
of the hotels of $2.3 million. In total, the Company has sold $260.9 million of
hotels with a total deferred gain of $19.6 million at the date the sales were
completed. Such gain has been deferred and is being recognized in income as
noted in the Company's accounting policies (Note 2). The Company recognized
approximately $1.3 million of deferred gain into income in 1999. As of December
31, 1999, the Company has recognized a total of $1.9 million of deferred gain
into income. Sale proceeds, net of the deferred gain and related cost of the
Hotels sold are presented on the statement of operations.
12. 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 March 2004. The total monthly payment on these leases is
approximately $95,000.
The Company leases 34 Hotels under non-cancelable operating leases expiring in
December 2011. The leases call for monthly lease payments of approximately $2.2
million plus additional rent of 10% of defined excess revenues over stipulated
base year amounts, if any.
F-19
61
Payments for all operating leases for the years ended December 31, 1999, 1998,
and 1997, were approximately $27,261,000, $13,900,000, and $283,000,
respectively. Future minimum lease payments under noncancelable operating leases
having remaining terms in excess of one year at December 31, 1999 are as
follows:
(In thousands)
--------------
Year Ending December 31,
2000 $ 27,441
2001 27,428
2002 27,405
2003 27,265
2004 26,634
Thereafter 184,742
--------
Total future minimum lease payments $320,915
========
The Company leases phone systems at certain hotels under non-cancelable capital
leases that expire in June 2000. The total monthly payment on these leases is
approximately $25,000. As of December 31, 1999, $151,000 of lease obligations
remained. For the years ended December 31, 1999, 1998 and 1997, the Company made
payments on capital leases in the amounts of $304,000, $304,000, and $152,000,
respectively.
13. 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 taken together are not
expected to have a material adverse impact on the Company.
F-20
62
14. EPS-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
----------- ----------- -----------
(In thousands, except for share and per share data):
Loss available to common stockholders before preferred
dividends and cumulative effect of a change in
accounting principle $ (2,791) $ (2,430) $ (817)
Convertible preferred stock dividends (8,025) (6,338) (1,248)
----------- ----------- -----------
Loss available to common stockholders before cumulative effect
of a change in accounting principle (10,816) (8,768) (2,065)
Cumulative effect of a change in accounting principle,
net of tax -- (3,857) --
----------- ----------- -----------
Net loss available to common stockholders (Numerator for basic
earnings per share) (10,816) (12,625) (2,065)
Dilutive securities - Preferred stock dividends -- -- --
----------- ----------- -----------
Income available to common stockholders after assumed
conversion of Preferred Stock -
(Numerator for diluted earnings per share) $ (10,816) $ (12,625) $ (2,065)
=========== =========== ===========
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 - basic and diluted
Income before a cumulative effect of a change in accounting
principle $ (1.20) $ (0.97) $ (0.23)
Cumulative effect of a change in accounting principle -- (.43) --
=========== =========== ===========
Net loss $ (1.20) $ (1.40) $ (0.23)
=========== =========== ===========
For additional disclosures regarding the convertible preferred stock and the
employee stock options, see Notes (5) and (7).
Options to purchase 1,187,823 shares of common stock at a weighted average
exercise price of $6.82 per share were outstanding as of December 31, 1999.
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 antidilutive.
As of December 31, 1999, the Company has $65.0 million and $42.0 million,
respectively, of Series A and Series B Preferred Stock outstanding (See Note 5).
The assumed conversion of these shares into approximately 11.3 million shares of
common stock would be antidilutive and, therefore, was not included in the
reported diluted earnings per share calculation.
F-21
63
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 1999 and 1998 (amounts in
thousands, except for per share amounts.)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1999 ENDED 3/31 ENDED 6/30 ENDED 9/30 ENDED 12/31
- ------------------------------- ---------- ---------- ---------- -----------
Hotel Operating Revenue $ 21,267 $ 26,906 $ 29,585 $ 27,709
Total revenues 44,851 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 loss per share of common stock --
basic and diluted $ (0.45) $ (0.20) $ 0.01 $ (0.56)
1998
- -------------------------------
Hotel Operating Revenue $ 6,917 $ 10,330 $ 14,120 $ 15,911
Total revenues 56,053 66,190 44,546 66,571
Cumulative effect of change in accounting
principle -- -- -- (3,857)
Income (loss) before preferred stock dividends 469 829 954 (8,539)
Net loss available to common shareholders (733) (386) (944) (10,562)
Weighted average shares outstanding --
basic and diluted 9,025 9,025 9,025 9,025
Net loss per share of common stock --
basic and diluted $ (0.08) $ (0.04) $ (0.10) $ (1.18)
F-22
64
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
Costs Capitalized
Subsequent to
Initial Cost to Company Acquisition
----------------------- --------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
----------------- ---------------- ------------ ------ ----------- ---- -----------
Wichita Wichita KS $ -- $ -- $ -- $ -- $90
Omaha Omaha NE -- -- -- -- 30
Denver - Tech Center Denver CO -- -- -- -- 25
Louisville Louisville KY -- -- -- -- 51
Cincinnati-Blue Ash Blue Ash OH -- -- -- -- 36
Birmingham Birmingham AL -- -- -- -- 12
Kansas City Overland Park KS 3,901 548 5,376 -- 21
Norfolk - Hampton Hampton VA -- -- -- -- 26
Wichita - Airport Wichita KS -- -- -- -- 37
Charlotte - Coliseum Charlotte NC 3,150 403 3,803 -- 4
Detroit - Southfield Southfield MI -- -- -- -- 16
Raleigh-Cary Raleigh NC 3,419 578 5,235 -- 31
Philadelphia - Willow Grove Willow Grove PA -- -- -- -- 35
Houston - Clear Lake Clear Lake TX -- -- -- -- 23
Knoxville Knoxville TN 3,727 566 4,380 -- 12
Phoenix Phoenix AZ -- -- -- -- 64
Salt Lake City - Airport Salt Lake City UT -- -- -- -- 42
Salt Lake City - Ft. Union Ft. Union UT -- -- -- -- 29
Houston - Loop Central Houston TX 6,239 1,842 5,573 -- 25
Houston - Town & Country Houston TX -- -- -- -- 56
Irvine East - Lake Forest Irvine East CA -- -- -- -- 39
Phoenix-Tempe Tempe AZ -- -- -- -- 30
Detroit - Auburn Hills Auburn Hills MI 6,058 1,205 6,218 -- 13
Jacksonville Jacksonville FL -- -- -- -- 54
Huntsville Huntsville AL -- -- -- -- 15
Dallas - Fort Worth Fossil Creek TX 4,555 592 4,651 -- 37
Detroit - Troy Troy MI 5,358 1,003 6,266 -- 13
Miami - Airport Miami FL 5,740 2,004 7,484 -- 10
Detroit - Warren Warren MI -- -- -- -- 26
Pittsburgh-Airport Pittsburgh PA -- -- -- -- 15
Des Moines Des Moines IA -- -- -- -- 2
Irving - Las Colinas Las Colinas TX -- -- -- -- 20
Chicago - Libertyville Libertyville IL 5,718 1,120 6,754 -- 18
Austin - Northwest Austin TX -- -- -- -- 33
Somerset Somerset NJ -- -- -- -- 15
Charlotte-University Charlotte NC -- -- -- -- 25
Dallas - Arlington Arlington TX 5,312 861 6,373 -- 21
Irvine - Spectrum Irvine CA 6,249 2,116 6,438 -- 33
Albuquerque Albuquerque NM -- -- -- -- 26
Nashville - Brentwood Brentwood TN -- -- -- -- 12
Houston - Westchase Westchase TX -- -- -- -- 38
Dallas - Galleria Dallas TX 6,171 2,005 6,291 -- 17
Dallas - Plano Plano TX 5,490 1,518 6,065 -- 19
Denver - Lakewood Denver CO -- -- -- -- 16
Boston - Braintree Boston MA -- -- -- -- 24
Detroit - Ann Arbor Ann Arbor MI 5,423 962 6,434 -- 18
Orlando - Altamonte Springs Orlando FL 5,413 1,572 5,615 -- 15
Greensboro Greensboro NC 4,806 1,004 5,531 -- 18
Dallas - North / Richardson Dallas TX 4,875 1,579 6,100 -- 11
Gross Amount Carried
at Close of Period 12/31/99(5)
---------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Land Property Total Depreciation Construction Acquisition
----------------- ------ ----------- ------ ------------ ------------ -----------
Wichita $ -- $ 90 $ 90 $ 3 May-96 Apr-95
Omaha -- 30 30 2 Apr-97 May-96
Denver - Tech Center -- 25 25 2 Apr-97 Jun-96
Louisville -- 51 51 5 Jun-97 Sep-96
Cincinnati-Blue Ash -- 36 36 3 Jun-97 Sep-96
Birmingham -- 12 12 1 Oct-97 Dec-96
Kansas City 548 5,397 5,945 446 Oct-97 Dec-96
Norfolk - Hampton -- 26 26 2 Oct-97 Dec-96
Wichita - Airport -- 37 37 4 Nov-97 Feb-97
Charlotte - Coliseum 403 3,807 4,210 303 Dec-97 Feb-97
Detroit - Southfield -- 16 16 2 Feb-98 Feb-97
Raleigh-Cary 578 5,266 5,844 301 Apr-98 Feb-97
Philadelphia - Willow Grove -- 35 35 3 Nov-97 Mar-97
Houston - Clear Lake -- 23 23 3 Dec-97 Mar-97
Knoxville 566 4,392 4,958 332 Jan-98 Mar-97
Phoenix -- 64 64 5 Jan-98 Mar-97
Salt Lake City - Airport S -- 42 42 4 Jan-98 Mar-97
Salt Lake City - Ft. Union -- 29 29 2 Jan-98 Mar-97
Houston - Loop Central 1,842 5,598 7,440 392 Mar-98 Mar-97
Houston - Town & Country -- 56 56 5 Apr-98 Mar-97
Irvine East - Lake Forest -- 39 39 3 Nov-97 Apr-97
Phoenix-Tempe -- 30 30 3 Mar-98 May-97
Detroit - Auburn Hills 1,205 6,231 7,436 328 May-98 May-97
Jacksonville -- 54 54 3 Feb-98 Jun-97
Huntsville -- 15 15 1 Feb-98 Jun-97
Dallas - Fort Worth 592 4,688 5,280 318 Mar-98 Jun-97
Detroit - Troy 1,003 6,279 7,282 336 Jun-98 Jun-97
Miami - Airport 2,004 7,494 9,498 90 Aug-99 Aug-97
Detroit - Warren -- 26 26 2 Apr-98 Sep-97
Pittsburgh-Airport -- 15 15 2 Apr-98 Sep-97
Des Moines -- 2 2 -- May-98 Sep-97
Irving - Las Colinas -- 20 20 1 Jun-98 Sep-97
Chicago - Libertyville 1,120 6,772 7,892 361 Jun-98 Sep-97
Austin - Northwest -- 33 33 3 Jul-98 Sep-97
Somerset -- 15 15 1 Oct-98 Sep-97
Charlotte-University -- 25 25 2 Jul-98 Oct-97
Dallas - Arlington 861 6,394 7,255 321 Aug-98 Oct-97
Irvine - Spectrum 2,116 6,471 8,587 300 Sep-98 Dec-97
Albuquerque -- 26 26 2 Sep-98 Dec-97
Nashville - Brentwood -- 12 12 1 Oct-98 Dec-97
Houston - Westchase -- 38 38 3 Oct-98 Dec-97
Dallas - Galleria 2,005 6,308 8,313 289 Oct-98 Dec-97
Dallas - Plano 1,518 6,084 7,602 272 Oct-98 Jan-98
Denver - Lakewood -- 16 16 1 Nov-98 Jan-98
Boston - Braintree -- 24 24 2 Nov-98 Jan-98
Detroit - Ann Arbor 962 6,452 7,414 265 Nov-98 Feb-98
Orlando - Altamonte Springs 1,572 5,630 7,202 252 Nov-98 Feb-98
Greensboro 1,004 5,549 6,553 214 Dec-98 Feb-98
Dallas - North / Richardson 1,579 6,111 7,690 211 Jan-99 Feb-98
S-1
65
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
Costs Capitalized
Initial Cost to Subsequent to
Company Acquisition
--------------------- --------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
- ------------------------ ----------------- ------------ ------ ----------- ------ -----------
Anaheim - South Anaheim CA $ 6,225 $1,666 $6,925 $ -- $ 17
Clearwater - St. Petersburg St. Petersburg FL 4,238 908 4,726 -- 13
Baltimore - Airport Baltimore MD -- -- -- -- 17
Chicago - Schaumburg Schaumburg IL 5,752 1,211 7,227 -- 16
Chicago - Naperville Naperville IL 5,976 1,772 7,289 -- 16
Chicago - Waukegan Waukegan IL 5,557 863 6,854 -- 21
St. Louis - Earth City St. Louis MO 5,465 938 5,922 -- 31
Philadelphia - Mt. Laurel Mt. Laurel NJ 4,473 802 6,602 -- --
Minneapolis Minneapolis MN -- -- -- -- 14
Austin - South Austin TX -- -- -- -- 21
Atlanta - Gwinnett Place Atlanta GA 5,683 2,153 5,774 -- 10
Columbus - East Columbus OH 4,379 620 6,105 -- 6
Chicago - Hoffman Estates Hoffman Estates IL 5,619 1,413 7,265 -- 5
Cleveland - North Olmsted Cleveland OH 6,802 1,455 6,820 -- 7
Oklahoma City Oklahoma City OK 4,068 779 6,204 -- 9
Chicago - O'Hare Airport Schiller Park IL 8,964 3,765 11,043 -- 1
Jersey City Jersey City NJ 100 3,171 5,709 -- --
San Jose - Santa Clara Santa Clara CA 3,162 2,961 4,620 -- --
Las Vegas Las Vegas NV 7,478 5,646 11,720 -- --
Detroit - Farmington Hills Detroit MI -- 1,920 1,974 -- --
Corporate(4) 15,000 40 1,589 -- 2,057
Acquisition costs for
potential sites 3,654 -- -- --
-------- ------- -------- ---- ------
$190,545 $57,215 $218,955 $ -- $3,559
======== ======= ======== ==== ======
Gross Amount Carried
at Close of Period 12/31/99(5)
---------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Land Property Total Depreciation Construction Acquisition
- ------------------------ ------- ----------- ------ ------------ ------------ -----------
Anaheim - South $ 1,666 $ 6,942 $8,608 $ 328 Sep-98 Mar-98
Clearwater - St. Petersburg 908 4,739 5,647 188 Dec-98 Mar-98
Baltimore - Airport -- 17 17 1 Dec-98 Mar-98
Chicago - Schaumburg 1,211 7,243 8,454 218 Feb-99 Mar-98
Chicago - Naperville 1,772 7,305 9,077 217 Feb-99 Mar-98
Chicago - Waukegan 863 6,875 7,738 248 Dec-98 Apr-98
St. Louis - Earth City 938 5,953 6,891 164 Mar-99 Apr-98
Philadelphia - Mt. Laurel 802 6,602 7,404 118 Jun-99 Apr-98
Minneapolis -- 14 14 1 Nov-98 May-98
Austin - South -- 21 21 2 Dec-98 May-98
Atlanta - Gwinnett Place 2,153 5,784 7,937 185 Feb-99 May-98
Columbus - East 620 6,111 6,731 144 May-99 May-98
Chicago - Hoffman Estates 1,413 7,270 8,683 173 Apr-99 Jul-98
Cleveland - North Olmsted 1,455 6,827 8,282 166 Apr-99 Jul-98
Oklahoma City 779 6,213 6,992 112 Jun-99 Jul-98
Chicago - O'Hare Airport 3,765 11,044 14,809 26 Nov-99 Jul-98
Jersey City 3,171 5,709 8,880 -- N/A Sep-98
San Jose - Santa Clara 2,961 4,620 7,581 -- N/A Sep-98
Las Vegas 5,646 11,720 17,366 -- N/A Jan-99
Detroit - Farmington Hills 1,920 1,974 3,894 -- N/A Sep-99
Corporate(4) 40 3,646 3,686 884
Acquisition costs for
potential sites 3,654 -- 3,654 --
------- -------- -------- ------
$57,215 $222,514 $279,729 $8,582
======= ======== ======== ======
NOTES:
- ------
NA - Not applicable
(1) This schedule includes all hotels operated at December 31, 1999, including
company-owned and leased hotels. In addition, the schedule includes all
properties under construction at December 31, 1999.
(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.
S-2
66
The changes in total real estate and depreciable property for the years ended
December 31, 1999, 1998, and 1997 were as follows:
1999 1998 1997
--------- --------- ---------
Balance, beginning of year $ 234,439 $ 129,882 $ 16,937
Acquisitions 67,042 285,172 141,273
Cost of hotels sold (21,752) (180,615) (28,328)
--------- --------- ---------
Balance, end of year $ 279,729 $ 234,439 $ 129,882
========= ========= =========
The changes in accumulated depreciation for the years ended December 31, 1999,
1998, and 1997 were as follows:
1999 1998 1997
--------- --------- ---------
Balance, beginning of year $ 1,907 $ 1,109 $ 222
Depreciation expense 6,752 3,081 887
Dispositions and other (77) (2,283) --
--------- --------- ---------
Balance, end of year $ 8,582 $ 1,907 $ 1,109
========= ========= =========
S-3
67
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.(11)
3.3 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof of Series A
Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc.(3)
3.4 Certificate of Amendment of Certificate of Designations of Series A
Preferred Stock.(10)
3.5 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof of Series B
Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc.(10)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Warrant.(9)
4.3 Amended and Restated Stockholders Agreement dated as of July 10,
1998.(10)
10.1 Form of Indemnification Agreement for Executive Officers and
Directors.(5)
10.2 Indemnification Agreement Schedule.(11)
10.3 1996 Equity Participation Plan and Form of Stock Option Agreements.(5)
10.4 First Amendment to the 1996 Equity Participation Plan effective as of
May 18, 1998.(11)
10.5 Employment Agreement between Candlewood Hotel Company, Inc. and Jack
P. DeBoer dated as of September 1, 1996.(1)
10.6 Credit Facility Agreement between Candlewood Hotel Company, Inc. and
Doubletree Corporation dated as of November 11, 1996.(2)
10.7 Subordinated Promissory Note from Candlewood Hotel Company, Inc. to
Doubletree Corporation dated as of November 11, 1996.(2)
10.8 Employment Agreement between Candlewood Hotel Company, Inc. and James
Roos dated as of June 2, 1997.(4)
10.9 Series A Cumulative Convertible Preferred Stock Purchase Agreement
dated as of August 27, 1997.(3)
10.10 Amended and Restated Registration Rights Agreement dated as of July
10, 1998.(10)
10.11 Purchase and Sale Agreement, dated as of November 19, 1997, by and
among Candlewood Hotel Company, Inc. and certain of its affiliates, as
sellers, and HPT, as purchaser.(6)
10.12 First Amendment to Purchase and Sale Agreement and Agreement to Lease
and Fourth Amendment to Lease Agreement and Incidental Documents,
dated as of January 7, 1999, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 1, Inc., HPT and HPT CW, and seventeen
entities which are parties thereto.(11)
10.13 Agreement to Lease, dated as of November 19, 1997, by and between
Candlewood Hotel Company, Inc. and HPT.(6)
10.14 Lease Agreement, dated as of December 24, 1997, by and between HPTCW,
as landlord, and Candlewood Leasing No. 1, Inc., as tenant.(6)
10.15 Guaranty Agreement, dated as of December 24, 1997, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW and HPT.(6)
10.16 Stock Pledge Agreement, dated as of December 24, 1997, by Candlewood
Hotel Company, Inc. for the benefit of HPTCW.(6)
10.17 Purchase and Sale Agreement, dated as of May 14, 1998, by and among
Candlewood Hotel Company, Inc. and certain of its affiliates, as
sellers, and HPT, as purchaser.(7)
E-1
68
10.18 First Amendment to Purchase and Sale Agreement, Agreement to Lease,
Lease Agreement and Incidental Documents, dated as of June 18, 1998,
by and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 2,
Inc., HPT and HPT CW II.(11)
10.19 Second Amendment to Purchase and Sale Agreement, Agreement to Lease,
Lease Agreement and Incidental Documents, dated as of July 31, 1998,
by and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 2,
Inc., HPT and HPT CW II.(9)
10.20 Third Amendment to Purchase and Sale Agreement and Agreement to Lease
and Sixth Amendment to Lease Agreement and Incidental Documents, dated
as of December 23, 1998, by and among Candlewood Hotel Company, Inc.,
Candlewood Leasing No. 2, Inc., HPT, HPT CW II and seventeen entities
which are parties thereto.(11)
10.21 Agreement to Lease, dated as of May 14, 1998, by and between
Candlewood Hotel Company, Inc. and HPT.(7)
10.22 Lease Agreement, dated as of May 21, 1998, by and between HPTCW, as
landlord, and Candlewood Leasing No. 2, Inc., as tenant.(7)
10.23 Guaranty Agreement, dated as of May 14, 1998, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW and HPT.(7)
10.24 Stock Pledge Agreement, dated as of May 27, 1998, by Candlewood Hotel
Company, Inc. for the benefit of HPTCW.(7)
10.25 Securities Purchase Agreement dated as of September 30, 1998.(10)
10.26 Lease Agreement dated April 30, 1998 by and between Candlewood Hotel
Company, Inc. and Vantage Point Properties, Inc.(11)
11.1 Statement re Computation of Per Share Earnings--not applicable.
12.1 Statement re Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
- -------------
(1) Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-12021).
(2) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed on October 8, 1997.
(4) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference from Candlewood Hotel Company, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1997.
(6) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed January 7, 1998.
(7) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K filed June 9, 1998.
(8) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997 filed
July 30, 1998.
(9) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 6, 1998.
(10) Incorporated by reference from Candlewood Hotel Company, Inc.'s Current
Report on Form 8-K/A filed August 10, 1998.
(11) Incorporated by reference from Candlewood Hotel Company, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
E-2