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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-12708
CANDLEWOOD HOTEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1188025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8621 East 21st Street North, Suite 200, Wichita, Kansas 67206
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (316) 631-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 19, 2001 was $19,151,397 based on the closing sales price
of $2.89 on such date.
The number of shares outstanding of the registrant's common stock, as of
March 19, 2001 was 9,025,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2001 Annual Meeting of
Stockholders to be held on May 15, 2001 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. operates, franchises, manages and
develops Candlewood Suites hotels to serve mid-market extended-stay business
travelers. As of December 31, 2000, we had a total of 72 company-operated hotels
(which is comprised of owned, leased and joint venture hotels), two managed
hotels and 17 franchised hotels in operation. In addition, at December 31, 2000,
we had one company-owned hotel, three joint venture hotels and seven franchised
hotels under construction. See "Properties" below.
Candlewood Hotel Company, Inc. was incorporated in the State of Delaware
in August 1996 and our principal executive offices are located at 8621 East 21st
Street North, Suite 200, Wichita, Kansas 67206, telephone (316) 631-1300.
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 280 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 five nights or longer. Each Candlewood hotel is
equipped with the following amenities:
- an exercise room;
- a complimentary guest laundry facility;
- a convenient dry cleaning drop, with same-day service;
- free local calls and low-priced long distance calls;
- the self-service "Candlewood Cupboard" featuring value-priced
packaged foods and 25 cent beverages; and
- a free "First Night Kit" complete with items such as breakfast bars,
coffee and popcorn.
In addition, each Candlewood studio and one-bedroom suite offers amenities
designed to accommodate the needs of the business traveler. These amenities
include the following:
- two telephones, with two incoming direct dial lines and computer
connections;
- an oversized executive desk with a quad-outlet to accommodate office
equipment needs, an executive chair, a bulletin board, a guest chair
and personalized remote accessible telephone mail;
- a 25-inch television, video cassette player and compact disc player;
- an iron and ironing board, and
- a fully equipped kitchen, including a full-size refrigerator,
full-size microwave oven, dishwasher, two burner stovetop, coffee
maker, toaster and a complete set of utensils and cookware.
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THE LODGING INDUSTRY
We operate in the extended-stay segment of the U.S. lodging industry
which is characterized by hotels that offer a fully equipped kitchenette in each
guestroom, and which accepts reservations and does not require a lease. An
extended-stay is defined as a stay of five consecutive nights or longer. We
believe that the extended-stay market can be divided into four general sectors:
- the upscale sector;
- the mid-priced sector;
- the economy sector; and
- the budget sector.
Hotel chains associated with the upscale sector include Hawthorn Suites,
Homewood Suites, Residence Inn, Staybridge Suites, Summerfield Suites and
Woodfin Suites. We believe that these hotels operated in 2000 at average daily
rates exceeding $90.
In addition to our hotels, hotel chains that compete in the mid-priced
sector include Bradford Suites, Lexington Suites, Mainstay Suites, Select
Suites, Sierra Suites, Studio Plus and TownePlace Suites. We believe that hotels
in the mid-priced sector operated in 2000 at average daily rates exceeding $45.
Hotel chains that compete in the economy sector include Budget Suites,
Camden Suites, Crestwood Suites, Extended Stay America, Homestead Village,
Home-Towne Suites, Lodge America and Studio Six. We believe the economy sector
of the extended-stay market operated in 2000 at average daily rates exceeding
$30.
Hotel chains which compete in the budget sector include Crossland
Economy Studios, Hearthside, Intown Suites, Southern Suites, Suburban Lodge,
Suite One, Sun Suites, Villager Lodge and other independents. We believe that
these hotels operated in 2000 at average daily rates less than $30.
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. 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
Our focused approach to customer service enables each hotel to employ
generally only 10 to 12 employees, which helps minimize operating costs. Our
hotel staff generally consists of one on-site general manager, one director of
sales, one assistant manager and seven to nine front desk, housekeeping and
maintenance personnel. 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 compliance with Candlewood's
quality control standards. Personnel at our
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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 through Candlewood
University, our in house training program. In addition, our general managers and
directors of sales are required to undergo on-the-job training which is tailored
to teach such personnel 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 and directors of sales) deliver
on-site training to new employees to ensure that a guest's experience at a newly
opened Candlewood hotel is consistent with the standards set by existing
properties.
Customer service is further enhanced through the presence of an
experienced team of regional operations directors and area coaches. Our regional
directors are experienced in multi-unit management with many being former hotel
general managers. Each regional director oversees between 10 to 15 hotels and
provides direction and training to hotel personnel to ensure product consistency
and revenue management. The primary role of the area coach is to provide support
to the regional operations directors and provide mentoring support to individual
hotels.
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 and targets institutions and employers located near our
hotels. Through these direct sales efforts, we believe we can obtain and
maintain consistently high occupancy levels and generate longer stays by our
guests. To provide additional marketing and sales support, we have a team of
area sales coaches to support the marketing and sales programs within each
region and provide mentoring support to individual hotels.
We have established a toll free telephone number, 1-888-226-3539
(1-888-CANDLEWOOD), to enable our guests to make reservations at any of our
hotels. Our reservation system enables travel agents throughout the world to
book rooms and allows us to more effectively manage our hotels' inventory and
access current information on productivity and guest arrivals in real-time.
We have also established a web site, domain name "candlewoodsuites.com,"
where our guests can access information concerning our company and hotels. For
example, our guests can do the following on our web site:
- book a room;
- find a map and directions to our hotels;
- find our current stock price; and
- explore employment opportunities.
We also use wholesale web sites to sell excess inventory.
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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. During 1999, we assembled an experienced franchise sales team
to lead our franchising efforts. We currently offer two franchise brands,
Candlewood Suites and Cambridge Suites by Candlewood.
As of December 31, 2000, we had received approval to sell Candlewood
Suites franchises in 49 states and had 17 Candlewood Suites franchise hotels
open with a total of 1,907 rooms in 11 states. In addition, as of December 31,
2000, we had six Candlewood Suites franchise hotels under construction with 526
expected rooms in four states, including in one state where we did not
previously have a Candlewood Suites franchise hotel. For the year ended December
31, 2000, we entered into 20 Candlewood Suites franchise agreements. As of
December 31, 2000, we had a total of 24 Candlewood Suites franchise agreements,
which had been executed but were not yet under construction. See "Properties"
below.
We also franchise Cambridge Suites by Candlewood. As of December 31,
2000, we had received approval to sell Cambridge Suites by Candlewood franchises
in 49 states. Our franchise efforts in regards to the Cambridge Suites brand are
different than those utilized in franchising Candlewood Suites. Candlewood
Suites franchise efforts are focused on new construction whereas Cambridge
Suites by Candlewood targets conversion of existing upscale suite hotels. New
development of Cambridge Suites by Candlewood franchise properties is considered
on an individual basis. To date, we have executed four franchise agreements for
this brand, all four of which were entered into during the year ended December
31, 2000. As of December 31, 2000, we had one Cambridge Suites by Candlewood
hotel under construction with 140 expected rooms. See "Properties" below.
Our franchising program is focused on the sale of single and multi-site
franchises. We are a party to two 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. 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 a development schedule. We may rescind these exclusive rights if
the developer fails to submit franchise applications pursuant to the development
schedule. Neither of the development agreements obligate the developer to build
or open any Candlewood hotels.
Franchise agreements are executed when the prospective franchisee and
Candlewood agree on a site prior to construction. We make the services and
expertise of our franchising, real estate, construction, sales and operations
divisions available to our franchisees in order to ensure high quality
facilities and customer service. Additional fees may be charged for development,
sales and other services provided to the franchisees which are not within the
scope of the franchise agreement. 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.
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
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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.
HOTEL MANAGEMENT
As of December 31, 2000, we had contracts to manage eight Candlewood
Suites hotels, one Cambridge Suites by Candlewood hotel and one non-Candlewood
brand 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. We anticipate that some franchisees
and joint venture partners 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.
Six of the eight Candlewood Suites hotels under management at December
31, 2000 are part of our joint venture development agreement with Boston Capital
Institutional Advisors LLC ("Boston Capital") and Mass Mutual. In addition, we
manage one joint venture hotel in East Lansing, Michigan which is scheduled to
open in March 2001. These seven hotels are classified as joint venture hotels in
our property table. The remaining Candlewood Suites hotel under management
contract at December 31, 2000 is located in Rockford, Illinois. This hotel is
classified as a franchise hotel in our property table. See "Properties" below.
As of December 31, 2000, we also managed one Cambridge Suites by
Candlewood hotel and one non-Candlewood brand hotel, 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. See "Certain Transactions" in
our Proxy Statement for our 2001 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 generally for a term of two to five years with certain renewal
rights. Either party, in the event of an uncured default, may terminate the
management contract. Certain other termination provisions may also be included
in the contract.
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
local and regional banking institutions, large banking and other financial
institutions, and joint venture partners. We may also seek to raise capital
through the sale of equity and debt securities.
In order to finance the construction of new hotels, we require financing
of at least 55% to 75% of total costs. As of December 31, 2000, we had financed
an aggregate of $434 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 and mini-perm
loans of up to 80% of the cost of new Candlewood hotels.
In connection with the development of Candlewood hotels, as of December
31, 2000, we have borrowed $214.6 million from GMAC, various regional/local
banks and Doubletree Corporation, a wholly owned subsidiary of Hilton Hotel
Corporation ("Doubletree"). The maturity dates for these loans range from
February 2001 to March 2004. As of December 31, 2000, interest on the
non-Doubletree loans ranged from 9.41% to 11.07% with the Doubletree loan
bearing interest at a fixed rate of 15.0%.
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Approximately $49.4 million and $105.7 million of the total debt matures in 2001
and 2002, respectively. Pursuant to the terms of the agreements we have with
these lenders (except for Doubletree), each loan provides for an extension
period. We plan to evaluate each loan based on a number of factors including
hotel performance, interest rate, secondary market considerations and corporate
strategy to determine if we will seek an extension or refinancing. We cannot
provide any assurance that we will be able to extend or refinance any of our
indebtedness on terms acceptable to us, or at all. We currently do not have the
capital needed to repay these obligations as they mature. In regards to the
Doubletree debt, the first installment of $12.5 million matures in November
2001. We are in discussions with Doubletree to negotiate an extension on this
debt. As consideration for securing an extension, we may be required to pay down
a portion of the debt at or prior to the original maturity date. We are unable
to assure that we will be able to extend the maturity date of the Doubletree
debt or that permanent financing will be available to us on acceptable terms, or
at all.
Certain amounts we borrow under building loan agreements are partially
guaranteed by 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, 2000, the amounts loaned
to Candlewood and our franchisees that were guaranteed by Doubletree were $16.1
million and $1.2 million, respectively. Maturity dates for the Candlewood loans
guaranteed by Doubletree at December 31, 2000, range from September 2001 to
September 2003. We plan to evaluate each loan based on a number of factors
including hotel performance, interest rate, secondary market considerations and
corporate strategy to determine if we will seek an extension or refinancing.
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 defined 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 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.
In June 1999, we entered into an agreement with Boston Capital and Mass
Mutual to jointly develop new Candlewood Suites hotels. As of December 31, 2000,
we had six joint venture hotels in operation and two additional hotels under
construction pursuant to this agreement. Both joint venture hotels under
construction are scheduled to open in 2001. We have guaranteed the construction
debt on the Boston Capital joint venture properties, of which $45 million was
outstanding at December 31, 2000. Maturity dates for this debt, which is
collateralized by the assets of the joint venture, range from October 2002 to
December 2007. Since this debt is related to an entity which we do not wholly
own, it is not included in our consolidated financial statements. All of the
Boston Capital joint venture hotels are Candlewood Suites franchise hotels which
we operate under a separate management agreement with Boston Capital and Mass
Mutual. These hotels are classified as joint venture hotels in our property
table. See "Properties" below.
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 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. In the
event we liquidate, the holders of the Series A and Series B Preferred
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Stock are entitled to receive a payment equal to the stated value of their
shares, plus any accrued but unpaid dividends (the "Liquidation Amount"), prior
to any distribution or payment to the holders of our Common Stock. The aggregate
amount of the Liquidation Amount is $107 million. Alternatively, the holders of
the Series A and Series B Preferred Stock may convert any or all of their shares
into shares of Common Stock. In addition, in the event of a corporate
transaction that constitutes a change of control, we are required to offer to
redeem all of the outstanding shares of Series A and Series B Preferred Stock
for a price equal to the greater of the Liquidation Amount or 175% of the stated
value of the shares. One hundred seventy-five percent of the stated value of the
shares is currently $187.3 million. The Series A and Series B Preferred Stock
accumulate dividends at a rate of 7.5% and are in preference to any dividend on
our Common Stock.
HOTEL DEVELOPMENT
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 approximately ten 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
generally 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.
Most of our hotels are 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,
double-doubles (two double beds) and one-bedroom suites, based on market
demographics and site restrictions, among other factors. For example, we have
designed a small market prototype hotel containing approximately 60 to 80 rooms
that we are promoting 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. 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.
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, 2000, we had four Candlewood hotels with 587 expected
rooms under construction in four different states, including one state where we
did not then operate hotels. Of the four hotels under construction, one is a
company-owned hotel and three are joint venture hotels. Two of the joint venture
hotels are being developed pursuant to our joint venture agreement with Boston
Capital and Mass Mutual. See "Financing Activity." The remaining joint venture
hotel under construction is in East Lansing, Michigan and is being developed on
the campus of Michigan State University. See "Properties" below.
As of December 31, 2000, we had entered into one contract for the
purchase of a potential joint venture hotel site. 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. We will continue to perform market feasibility
due diligence on potential development sites and may enter into agreements to
purchase additional sites in the future.
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We intend to continue to actively pursue select hotel development
opportunities but can make no assurance that we will be able to develop hotels
in 2001. 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.
LEASE OF HOTELS
In order to provide 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. We completed the sale of all 34 hotels to HPT in 1999. See "Properties"
below.
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, 2011 and the
annual base rent equals approximately $12.1 million as of December 31, 2000.
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, 2000. 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.
PROPERTIES
The following tables set forth certain information as of December 31,
2000 with respect to company owned, leased, managed, joint venture and
franchised existing hotels and hotels under construction.
Existing hotels as of December 31, 2000:
Company-owned:
NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Kansas City - Overland Park, Kansas October, 1997 122
Charlotte, North Carolina - Coliseum November, 1997 81
Knoxville, Tennessee December, 1997 98
Houston, Texas - Galleria December, 1997 122
Dallas/Ft. Worth - Fossil Creek March, 1998 98
Raleigh, North Carolina - Cary April, 1998 81
Detroit - Auburn Hills, Michigan May, 1998 110
Chicago - Libertyville, Illinois June, 1998 122
Detroit - Troy, Michigan June, 1998 118
Dallas/Ft. Worth - Arlington, Texas August, 1998 125
Orange County, California - Anaheim South August, 1998 133
Orange County, California - Irvine Spectrum September, 1998 122
Nashville - Brentwood, Tennessee October, 1998 122
Dallas/Ft. Worth - Galleria October, 1998 134
Orlando - Altamonte Springs, Florida November, 1998 122
Ann Arbor, Michigan November, 1998 122
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NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Chicago - Waukegan, Illinois December, 1998 123
Greensboro, North Carolina December, 1998 122
Clearwater - St. Petersburg, Florida December, 1998 104
Dallas/Ft. Worth - North/Richardson January, 1999 122
Atlanta, Georgia - Gwinnett Place February, 1999 122
Chicago - Schaumburg, Illinois February, 1999 122
Chicago - Warrenville, Illinois February, 1999 122
St. Louis, Missouri March, 1999 122
Chicago - Hoffman Estates, Illinois April, 1999 122
Cleveland - North Olmstead, Ohio April, 1999 125
Columbus, Ohio - Airport May, 1999 123
Philadelphia - Mt. Laurel, New Jersey June, 1999 123
Oklahoma City, Oklahoma June, 1999 122
Miami, Florida - Airport West August, 1999 129
Chicago - O'Hare November, 1999 160
Las Vegas, Nevada February, 2000 276
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3,971
Leased:
NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Wichita, Kansas - Northeast May, 1996 107
Omaha, Nebraska January, 1997 130
Denver, Colorado - Tech Center February, 1997 131
Cincinnati - Blue Ash, Ohio May, 1997 78
Louisville, Kentucky - Jeffersontown May, 1997 78
Hampton, Virginia September, 1997 98
Birmingham, Alabama September, 1997 98
Orange County, California - Irvine East October, 1997 122
Philadelphia, Pennsylvania - Willow Grove October, 1997 110
Wichita, Kansas - Airport November, 1997 81
Salt Lake City, Utah - Ft. Union November, 1997 98
Houston, Texas - Clear Lake November, 1997 122
Salt Lake City, Utah - Airport November, 1997 122
Jacksonville, Florida December, 1997 111
Phoenix, Arizona December, 1997 98
Detroit - Southfield, Michigan December, 1997 121
Huntsville, Alabama December, 1997 123
Phoenix, Arizona - Tempe March, 1998 122
Houston, Texas - Town & Country April, 1998 122
Detroit - Warren, Michigan April, 1998 122
Pittsburgh, Pennsylvania - Airport April, 1998 123
Des Moines, Iowa May, 1998 98
Austin, Texas - Northwest June, 1998 125
Dallas/Ft. Worth - Las Colinas June, 1998 117
Charlotte, North Carolina - University July, 1998 122
Albuquerque, New Mexico September, 1998 123
Dallas/Ft. Worth - Plano October, 1998 122
Houston, Texas - Westchase October, 1998 123
Somerset, New Jersey October, 1998 110
Minneapolis St. Paul, Minnesota - Airport November, 1998 134
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NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Denver, Colorado - Lakewood November, 1998 122
Boston - Braintree, Massachusetts November, 1998 133
Austin, Texas - South December, 1998 122
Baltimore, Maryland - Airport December, 1998 125
-----
3,893
Managed:
NUMBER
LOCATION INCEPTION DATE OF ROOMS
-------- -------------- --------
Wichita, Kansas - Cambridge April, 1997 64
Wichita, Kansas - Hotel at Old Town March, 1999 115
-----
179
Joint Venture:
NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
San Jose, California - Silicon Valley* April, 2000 122
Morris Plains, New Jersey* June, 2000 122
Detroit - Farmington Hills, Michigan* June, 2000 125
Chicago - Wheeling, Illinois* June, 2000 143
Hartford - Meriden, Connecticut* June, 2000 124
Boston - Burlington, Massachusetts* November, 2000 149
-----
785
* Both a joint venture and franchise hotel as of December 31, 2000.
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Franchised:
NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Portland, Oregon June, 1997 126
San Francisco - Pleasanton, California August, 1997 126
Rockford, Illinois* November, 1997 67
Sacramento, California March, 1998 126
Dallas/Ft. Worth - Dallas Market Center March, 1998 150
Syracuse, New York August, 1998 92
Bellevue, Washington - Seattle September, 1998 126
Milpitas, California November, 1998 126
San Antonio, Texas December, 1998 110
Salina, Kansas February, 1999 69
Richmond, Virginia - West October, 1999 122
Louisville, Kentucky - Airport April, 2000 100
Durham, North Carolina July, 2000 122
Green Bay, Wisconsin July, 2000 86
Richmond, Virginia - South September, 2000 104
Washington DC - Dulles-Herndon October, 2000 133
Fairfax, Virginia - Washington DC November, 2000 122
-----
1,907
* Both a franchise and joint venture hotel as of December 31, 2000.
Hotels under construction as of December 31, 2000:
Company-owned:
PROJECTED NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Jersey City, New Jersey April, 2001 214
-----
214
Joint Venture:
PROJECTED NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Orange County, California - Santa Ana* February, 2001 122
East Lansing, Michigan - Michigan State* March, 2001 127
Clarkstown, New York* May, 2001 124
-----
373
* Both a joint venture and franchise hotel as of December 31, 2000.
Franchised:
PROJECTED NUMBER
LOCATION OPENING DATE OF ROOMS
-------- ------------ --------
Topeka, Kansas January, 2001 81
Raleigh, North Carolina - Crabtree April, 2001 122
Charlotte, North Carolina May, 2001 81
Hopewell, Virginia May, 2001 60
Scottsdale, Arizona - Tempe (Cambridge) June, 2001 140
Indianapolis, Indiana - Northeast July, 2001 122
Emporia, Kansas August, 2001 60
-----
666
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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., an unaffiliated
third party. The lease term is for five years with four five-year renewal
options. We do not anticipate any difficulty in securing additional office
space, as needed, on terms acceptable to us.
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, Candlewood and our franchisees are subject to laws
governing our relationships with employees, including minimum wage requirements,
overtime, working conditions and work permit requirements. We are also subject
to federal regulations and certain state laws that govern the offer and sale of
franchises. Many state franchise laws impose substantive requirements on
franchise agreements, including limitations on non-compete provisions and
termination or non-renewal of a franchise. Some states require that certain
materials be approved before franchises can be offered or sold in that state.
The failure to obtain permits or licenses or approvals to sell franchises, or an
increase in the minimum wage rate, employee benefit costs or other costs
associated with employees, could adversely affect our business and results of
operations. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.
Under the Americans with Disabilities Act ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although we have attempted to satisfy ADA
requirements in the designs of our facilities, no assurance can be given that a
material ADA claim will not be asserted against us. Such a claim could result in
a judicial order requiring compliance and the expenditure of substantial sums to
achieve compliance, an imposition of fines, or an award of damages to private
litigants. These and other initiatives could adversely affect us as well as the
lodging industry in general.
ENVIRONMENTAL MATTERS
Our operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations.
In addition, in the event any future legislation is adopted, we may, from time
to time, be required to make significant capital and operating expenditures in
response to such legislation. We attempt to minimize our exposure to potential
environmental liability through our site selection procedures. Accordingly, we
typically enter into contracts to purchase real estate subject to certain
contingencies. In addition, prior to purchasing a property, we conduct a Phase I
environmental assessment, which generally includes a physical inspection and
database search, but not soil or groundwater analyses.
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
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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.
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.
We have filed trademark and service mark applications with the United
States Patent and Trademark Office for several additional trademarks including
"Candlewood Cupboard," "CS Circle Design," "Any Suite, Any Time," "Fastest
Reservations in the World," and "Web Express." We are currently awaiting
approval from the United States Patent and Trademark Office for these trademark
applications.
Trademark and service mark applications for the proposed use of the
"Candlewood" and "Candlewood Suites" service marks in Canada have been filed and
are awaiting registration approval. In addition, we have filed trademark and
service mark applications in the European Union for use of "Cambridge Suites,"
"CS Circle Design," "Candlewood Cupboard," and the "Flame Logo." "Candlewood
Suites" is a registered service mark in the European Union. The Certificate of
Registration was issued to us on July 26, 1999.
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
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15
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 2001 Annual Meeting of Stockholders.
EMPLOYEES
As of December 31, 2000, Candlewood and its subsidiaries employed on a
full or part-time basis 1,123 persons, 1,017 of whom were employed at our hotels
and 106 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.
CERTAIN BUSINESS CONSIDERATIONS
Investors are cautioned that certain statements contained in this
document as well as some of our statements in periodic press releases and some
oral statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as "believes," "anticipates," "estimates,"
"expects" or similar expressions. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:
We have Never Been Profitable. At December 31, 2000, we operated 72
hotels. This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:
- the inability to maintain high occupancy rates or to attract guests
for extended-stays;
- the inability to achieve expected nightly rates;
- the inability to operate the hotels at expected expense levels;
- the ability to attract and retain quality personnel; and
- liability for accidents and other events occurring at hotel
properties.
If we are unable to efficiently and effectively operate our hotels, we may never
be profitable.
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16
Our Need for Continued Capital and Additional Financing Could Materially
Adversely Affect our Business and Results of Operations. The development of
hotels is capital intensive. We have and expect to continue to seek financing of
up to 80% of the cost of certain Candlewood-developed hotels utilizing
Doubletree's guarantee to facilitate such financing. The use of the Doubletree
guarantee reduces our profit opportunity, if any, with respect to certain
Candlewood-developed hotels. The Doubletree guarantee is currently limited to
$30 million of total funds guaranteed. Funding of the loans for each hotel will
be subject to approval of the third-party lender on an individual hotel basis,
upon satisfaction of various conditions. We cannot provide assurance that the
third-party lenders will approve any financing applications we submit, that
their approval will be timely, that we will be able to utilize the Doubletree
guarantee, or that we will be able to finance greater than 70% of the cost of
any Candlewood-developed hotel. If our applications are not approved or our
loans are not funded on a timely basis, we may be unable to construct additional
Candlewood hotels and may experience delays in our planned development of
hotels. We have no current arrangements with respect to, or sources of,
additional debt financing. Additionally, we cannot assure that additional
financing will be available when needed or upon terms acceptable to us. If we
are unable to arrange for additional capital or financing, we may not be able to
develop further hotels.
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. See
"Liquidity and Capital Resources" in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" below for further discussion.
Our Growth is largely Dependant on Franchising and Developing Hotels. We
intend to grow primarily by franchising and developing additional Candlewood
hotels. Our ability to develop hotels and obtain franchisees involves
substantial risks, including:
- there are a limited number of franchising opportunities;
- we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;
- our new franchising brand, Cambridge Suites by Candlewood, may not
be accepted by or appeal to potential franchisees;
- unavailability of financing to Candlewood or to potential
franchisees on favorable terms, or at all;
- delays in completion of construction of franchised or developed
hotels;
- termination of signed franchise and development agreements;
- incurring substantial costs if we abandon a franchising or
development project prior to completion;
- our or a franchisee's failure to obtain all necessary zoning and
construction permits;
- competition for suitable development sites from our competitors,
some of whom may have greater financial resources than Candlewood;
- our actual costs exceeding budgeted or contracted amounts; and
- our developed properties not achieving desired revenue or
profitability levels once opened.
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If we are unable to successfully franchise and develop hotels on time or within
budget, or at all, our business and results of operations would suffer.
We Depend on a Single Type of Lodging Facility. We intend to exclusively
develop, manage and franchise Candlewood Suites and Cambridge Suites by
Candlewood hotels. We currently do not intend to develop any lodging facilities
other than hotels focused on extended-stay business travelers and do not intend
to develop lodging facilities with other franchisors. Accordingly, we will be
subject to risks inherent in concentrating investments in a single type of
lodging facility, such as a shift in demand or a reduction in business following
adverse publicity, which could have a material adverse effect on our business
and results of operations. In addition, we have a limited history upon which we
can gauge consumer acceptance of our hotels and, accordingly, we cannot provide
assurance that our hotels will be readily accepted by guests who are looking for
conventional or extended-stay hotel accommodations. Furthermore, we compete
against other facilities with substantially greater brand recognition.
We are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate investments
is significantly dependent upon our ability to maintain or increase cash
provided by operating our investments. The value of our hotels and the income
from our hotels may be materially adversely affected by:
- changes in national economic conditions;
- changes in general or local economic conditions and neighborhood
characteristics;
- competition from other lodging facilities;
- changes in the availability, cost and terms of financing;
- the ongoing need for capital improvements;
- changes in operating expenses;
- changes in real property tax rates;
- changes in governmental rules and policies;
- the impact of present or future environmental laws;
- natural disasters; and
- other factors which are beyond our control.
In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to dispose
of an investment when we find disposition advantageous or necessary, or that the
sale price of any disposition will recoup or exceed the amount of our
investment.
Our Hotels May Experience Seasonal Fluctuations. Based upon our
experience operating extended-stay hotels, we expect that occupancy and revenues
may be lower than normal during the months of November, December and January due
to the holiday season. Because many of our expenses do not fluctuate with
occupancy, declines in occupancy may cause fluctuations or decreases in our
quarterly earnings.
We Depend on Key Personnel. Our success depends to a significant extent
upon the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief Financial
Officer. The loss of the services of either of these individuals could have a
material adverse effect upon our business and results of operations.
Certain of these factors are discussed further elsewhere in this Annual
Report on Form 10-K, including without limitation under the captions "Business
and Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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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
individually or in the aggregate 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:
2000 High Low
---- ------ ------
Fourth Quarter $ 3.50 $ 2.38
Third Quarter 4.00 2.38
Second Quarter 2.91 1.63
First Quarter 2.13 1.56
1999 High Low
---- ------ ------
Fourth Quarter $ 2.50 $ 1.38
Third Quarter 3.75 1.50
Second Quarter 4.25 2.50
First Quarter 6.13 3.38
The closing sales price of our common stock on March 19, 2001 was $2.89.
The approximate number of beneficial stockholders on March 19, 2001 was 1,101.
The approximate number of stockholders of record on March 19, 2001 was 148.
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.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Hotel operations revenues $ 127,771 $ 105,467 $ 47,278 $ 6,223 $ 686
Other income 3,458 1,459 672 221 --
Hotel operating expenses 68,005 60,218 28,266 4,713 400
Rent expense on leased hotels 25,056 24,821 12,365 79 --
Corporate operating expenses 6,437 5,390 3,906 2,372 1,637
Abandoned site costs -- 2,043 3,799 157 --
Depreciation and amortization 10,521 8,452 3,565 1,022 249
Interest income 1,150 1,034 1,166 1,216 328
Interest expense (18,577) (10,053) (214) (134) (81)
Income (loss) before preferred dividends
and cumulative effect of a change in
accounting principle 5,687 (2,791) (2,480) (817) (1,353)
Cumulative effect of a change in
accounting principle -- -- (3,857) -- --
Net loss available to common stockholders (2,338) (10,816) (12,625) (2,065) (1,353)
Net loss per share (pro forma 1996)(1) (0.26) (1.20) (1.40) (0.23) (0.23)
Weighted average shares outstanding (pro
forma 1996)(1) 9,025,000 9,025,000 9,025,000 9,025,000 5,764,071
December 31, December 31, December 31, December 31, December 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 21,834 $ 18,624 $ 23,155 $ 35,355 $ 33,792
Total assets 359,309 341,277 293,358 181,807 51,674
Accounts payable and other accrued
expenses 21,686 22,874 40,277 16,040 2,435
Redeemable preferred stock 100,689 100,689 100,737 61,461 --
Mortgages and notes payable 214,575 190,545 114,742 63,416 15,457
Stockholders' equity(2) 6,228 8,566 19,382 32,589 33,406
(1) 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.
(2) We have not declared any dividends on our Common Stock.
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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 owns, operates, franchises, manages and develops hotels
serving mid-market extended-stay business travelers.
The following table sets forth our property portfolio as of December 31,
2000 and 1999:
Number of Hotels Number of Rooms
December 31, December 31,
------------------ ------------------
2000 1999 Increase 2000 1999 Increase
------ ------ -------- ------ ------ --------
Owned 32 31 1 3,971 3,695 276
Leased 34 34 -- 3,893 3,893 --
Managed 2 2 -- 179 179 --
Joint Venture 6 -- 6 785 -- 785
Franchised 17 11 6 1,907 1,240 667
------ ------ ------ ------ ------ ------
Total 91 78 13 10,735 9,007 1,728
As of December 31, 2000, we had a total of 72 company-operated hotels
(which is comprised of owned, leased and joint venture hotels), two managed
hotels and 17 franchised hotels located in 32 states. In addition, at December
31, 2000, we had a total of one company-owned hotel, three joint venture hotels
and seven franchise hotels under construction. Of the three joint venture hotels
under construction at December 31, 2000, two of the hotels are being constructed
pursuant to the development agreement with Boston Capital and Mass Mutual. The
remaining joint venture hotel under construction is in East Lansing, Michigan
and is being developed on the campus of Michigan State University. We also had
one joint venture development site under contract to purchase at December 31,
2000 on which we were performing market feasibility due diligence. This site, if
purchased, would become a joint venture hotel pursuant to our development
agreement with Boston Capital and Mass Mutual.
Our consolidated statements of operations includes revenues and expenses
for only those hotels which are consolidated subsidiaries of Candlewood Hotel
Company, Inc. (owned and leased hotels). Revenues and expenses from franchise
hotels and unconsolidated subsidiary hotels (joint venture hotels accounted for
under the equity method of accounting) are not included in our revenues and
expenses. Franchise fees, royalty fees, management fees, equity income from
investment in joint ventures and other fees received from franchise and joint
venture hotels are included in other income in our consolidated statements of
operations.
Our results of operations are dependent upon our revenue per available
room (RevPAR) which is a factor of occupancy and room rate. Accordingly, we
intend to remain focused on occupancy levels at each of our newly opened hotels
until such time as the occupancy levels reach stabilization. Traditionally, the
overall occupancy rate for our corporate hotels (which is comprised of owned and
leased hotels) has been negatively impacted by the lower occupancy typically
experienced during the ramp-up period for newly opened facilities. This negative
impact on occupancy is expected to diminish as the ratio of new property
openings during a period to total properties in operation at the end of the
period decreases. See "Hotel Operations Revenue" below for a breakdown by year
of when our corporate hotels were opened. Once occupancy levels stabilize at a
corporate hotel, we review the daily pricing rates of that hotel. We believe
that this practice is a prevailing standard in the U.S. lodging industry.
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22
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. We sold and leased back five hotels
in 1997, 26 hotels in 1998 and three hotels in 1999. The results from operations
for 2000, 1999 and 1998 reflect the transactions. As a result of the sale
leaseback transactions, we have recorded rent expense on the hotels leased back
from HPT. Since these hotels are leased and not owned, the financial statements
do not reflect any depreciation and amortization or interest expense for these
hotels after the date of sale. The proceeds from the 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.
We believe that a significant element of our future growth and expansion
will be provided through the franchising of hotels. Additionally, we are
actively marketing management contracts to existing and prospective franchisees
to utilize our management experience and expertise to manage their hotels. We
intend to continue to pursue select hotel development opportunities, however, we
can make no assurance that we will be able to develop hotels in 2001.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Hotel Operations
Hotel Operations Revenue
The following is a summary of hotel operations revenues for corporate
hotels (which is comprised of owned and leased hotels) for the years ended
December 31, 2000 and December 31, 1999 stratified by the year in which the
hotels opened (in thousands):
Fiscal Year Number Fiscal 2000 Fiscal 1999 Increase Percentage
Opened of Hotels Revenues Revenues (Decrease) Change
----------- --------- ----------- ----------- ---------- ----------
2000 1 $ 3,404 $ -- $ 3,404 N/A
1999 12 24,140 13,312 10,828 81.3%
1998 32 64,731 58,048 6,683 11.5%
1997 20 34,255 32,669 1,586 4.9%
1996 1 1,241 1,438 (197) (13.7)%
-------- -------- -------- -------- -----
Total 66 $127,771 $105,467 $ 22,304 21.1%
Hotel operations revenue, which includes room revenue and other revenue
(e.g. guest telephone and sales of products from the Candlewood Cupboard), was
$127.8 million for the year ended December 31, 2000, compared to $105.5 million
for the year ended December 31, 1999. The increase in revenue reflected the
increased revenue generated by hotels that had completed or were near completion
of their ramp-up phase and the increase in the number of corporate hotels in
operation during the year 2000. The following table sets forth our operating
statistics for corporate hotels for the years ended December 31, 2000 and
December 31, 1999:
For the Year Ended December 31,
------------------------------------
2000 1999 Change
--------- --------- --------
Occupancy 76.0% 67.7% 8.3%
Average Daily Rate $ 56.98 $ 58.24 $ (1.26)
Revenue per available room $ 43.29 $ 39.43 $ 3.86
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Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms available
for the period, was 76.0% for corporate hotels for the year ended December 31,
2000, compared to 67.7% for the year ended December 31, 1999. The occupancy rate
for the year ended December 31, 2000 was positively influenced by the increase
in occupancy experienced by those hotels that had completed or were near
completion of their ramp-up phase. Overall, the increase in occupancy was
experienced in both short and long-term stays, but was particularly strong in
our long-term stay business, which consists of travelers staying seven or more
nights. It is our practice to continuously review individual markets to assess
the impact of competition on local supply and demand and establish room rates
that balance occupancy to produce optimal revenue.
The average daily room rate for corporate hotels for the year ended
December 31, 2000 was $56.98, compared to $58.24 for the year ended December 31,
1999. Average daily room rates are determined by dividing room revenue by the
number of guestrooms occupied on a daily basis for the applicable period. The
decrease in average daily rate was largely due to the increase in our long-term
stays, which are charged at a lower daily rate. Factors that influence average
daily room rates include:
- stays of less than one week, which are charged at a higher nightly
rate;
- higher rates for our one-bedroom suites; and
- higher rates in certain hotel locations.
Revenue per available room, calculated as the average occupancy rate
multiplied by the average daily rate, was $43.29 for the year ended December 31,
2000, compared to $39.43 for the year ended December 31, 1999, a 9.8% increase.
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:
- the number and geographic location of new hotels;
- the season in which new hotels open;
- competition;
- market acceptance of our hotels; and
- general economic conditions.
We consider a property to have generally completed its initial ramp-up
phase somewhere between nine and twelve months following a hotel's 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 66
corporate hotels open as of December 31, 2000, one of which opened in 2000. The
following table sets forth the 2000 performance of our hotels, stratified by the
year in which the hotels opened:
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Revenue per
Number of Average Daily Available
Hotels Occupancy Rate Room
--------- --------- ------------- -----------
2000 Hotels 1 73.0% $ 58.95 $ 43.02
1999 Hotels 12 71.6% 59.12 42.30
1998 Hotels 32 77.3% 57.89 44.77
1997 Hotels 20 77.3% 54.38 42.02
1996 Hotels 1 69.9% 43.29 30.27
-- ---- ------- -------
Total 66 76.0% $ 56.98 $ 43.29
As of December 31, 2000, we had 53 company-operated hotels that had been
open at least two years, representing 80% of the total corporate hotels open as
of December 31, 2000. We consider these hotels to have completed their ramp-up
phase. The following table sets forth the performance of these hotels for the
years ending December 31, 2000 and 1999, respectively:
For the Year Ended December 31,
----------------------------------
2000 1999 Change
------- ------- -------
Occupancy 77.2% 68.8% 8.4%
Average Daily Rate $ 56.42 $ 58.33 $ (1.91)
Revenue per Available Room $ 43.54 $ 40.14 $ 3.40
The average occupancy rate for the 53 hotels that had been open at least
two years as of December 31, 2000 was 77.2% in 2000, compared to 68.8% for 1999.
This increase was due to the overall increase experienced in both short and
long-term stays during the year ended December 31, 2000, but more particularly,
the strength experienced in our long-term stay business. The average daily room
rate decreased 3.3% to $56.42 in 2000, compared to 1999, primarily due to the
lower daily rates charged for long-term stays. Revenue per available increased
$3.40, or 8.5%, for the 53 hotels in 2000, compared to 1999, primarily due to
the increase in the occupancy rate.
Hotel Operating Expenses
Hotel operating expenses for the year ended December 31, 2000 totaled
$68.0 million, compared to $60.2 million for the year ended December 31, 1999.
Hotel operating expenses consist of all expenses directly applicable to the
operation of the hotels, including corporate allocations for various operating,
marketing and accounting functions. The largest portion of hotel operating
expenses consisted of salaries, wages and fringe benefits. The balance of hotel
operating expenses was comprised of normal operating items, such as utilities,
property taxes, insurance, supplies, promotional materials, maintenance items
and similar expenses. The increase in hotel operating expenses is largely due to
the full year impact of the 12 company-owned hotels opened in 1999 and the one
hotel opened in 2000, the variable nature of certain hotel operating expenses
(e.g., as occupancy increases, certain expenses such as housekeeping labor and
supplies increase), increased wages and general economic price increases.
Rent Expense on Leased Hotels
Rent expense on the 34 leased hotels for the year ended December 31,
2000 was $25.1 million, compared to $24.8 million for the year ended December
31, 1999. The increase in rent expense reflects the full year lease costs of the
three hotels sold and leased back in January 1999 and the contingent rent
expense incurred on certain properties. Contingent rent expense is a variable
expense based on a property achieving improved year over year revenue growth and
is calculated on an individual property basis.
Hotel Opening Costs
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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. Opening costs for the year ended December 31, 2000 totaled
$279,000, compared to $1.1 million for the year ended December 31, 1999. The
decrease in opening costs was primarily the result of having opened fewer
company-owned hotels in 2000.
Hotel Depreciation and Amortization
Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the year ended December
31, 2000 totaled $9.8 million, compared to $7.8 million for the year ended
December 31, 1999. The increase in depreciation and amortization expense in
2000, compared to 1999, was a result of the full year impact of the 12
company-owned hotels opened in 1999 and the one hotel opened in 2000. In
addition, many of the newly opened company-owned hotels are in higher priced,
primary markets where building costs are higher. For both 2000 and 1999,
depreciation and amortization expense does not reflect any expense for
properties sold in the sale-leaseback transactions. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to forty years.
Corporate Operations
Other Income
Other income for the year ended December 31, 2000 totaled $3.5 million,
compared to $1.5 million for 1999. Other income consists primarily of royalty
fees (revenue-based fees received over the life of the franchise agreement) and
franchise fees (a one-time fee received upon execution of a signed franchise
agreement) from franchised hotels, management fees received from managed hotels
and equity income from joint venture hotels. Equity income represents our share
of the profits of unconsolidated joint venture hotels. Franchise fee income
(including application and royalty fees) for the year ended December 31, 2000
totaled $2.6 million, compared to $1.4 million for the year ended December 31,
1999. Franchise application fee income in 2000 increased as a result of
executing 24 new franchise agreements during the year ended December 31, 2000,
compared to 15 franchise agreements for the year ended December 31, 1999. The
growth in royalty fee income is due to the increase in the number of franchise
hotels in operation, and the increased revenue generated by those franchise
hotels that had completed or were near completion of their ramp-up phase. We had
17 franchised hotels (excluding the Boston Capital joint venture hotels) open as
of December 31, 2000, compared to 11 at December 31, 1999. The six Boston
Capital joint venture hotels (classified as joint venture hotels in our property
table) are also Candlewood franchise hotels that we manage. As a result, we
receive royalty fees, management fees, and equity income from these hotels. All
six of these hotels opened during the year 2000. Management fee income for the
year ended December 31, 2000 totaled $674,000, compared to $136,000 for the year
ended December 31, 1999. The increase in management fee income was primarily due
to the management fees received from the six Boston Capital joint venture
hotels. Equity income from joint venture hotels for the year ended December 31,
2000 totaled $176,000, compared to an equity loss of $91,000 for the year ended
December 31, 1999. The increase in equity income is 2000 was due to the
profitability of the Boston Capital joint venture hotels.
We did not sell any hotels during the year ended December 31, 2000;
however, for the year ended December 31, 2000, we recognized $2.2 million of the
deferred gain on hotels that were previously sold. For the year ended December
31, 1999, we sold three hotels and recognized $1.3 million of the deferred gain
on hotels sold.
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Corporate Operating Expenses
Corporate operating expenses for the year ended December 31, 2000
totaled $6.4 million, compared to $5.4 million for 1999, 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 2000 was primarily due to the expansion of our franchise sales and
service team. This expansion began in the second quarter of 1999 and was
completed in the third quarter of 1999. Franchise sales personnel are paid sales
commissions on new franchise agreements. During the year 2000, we executed 24
new franchise agreements, compared to 15 agreements in 1999.
Abandoned Site Costs
There were no abandoned site costs recorded for the year ended December
31, 2000. We recorded $2.0 million of abandoned site costs for the year ended
December 31, 1999. Abandoned site costs represent costs, such as acquisition,
architectural and zoning costs, related to certain development sites that we
have decided not to develop.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
year ended December 31, 2000, totaled $706,000, compared to $666,000 for the
year ended December 31, 1999. Depreciation and amortization reflects
depreciation of leasehold improvements and furnishings and our financial system
hardware, software 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 a period of twenty years. The slight increase in depreciation and
amortization expense reflects the full year depreciation of leasehold
improvements and furnishings purchased in 1999 for the new corporate office and
depreciation of the financial system hardware, software and peripheral equipment
purchased in 1999.
Interest Income and Expense
We earned $1.2 million of interest income for the year ended December
31, 2000, compared to $1.0 million for the year ended December 31, 1999.
Interest income for the year ended December 31, 2000 resulted primarily from the
temporary investment of cash provided by operations. Interest income for the
year ended December 31, 1999 related to the short-term investment of proceeds
received from the Series B Preferred Stock placement, the sale-leaseback
transaction and the temporary investment of cash provided by operations.
We had interest expense, net of capitalized interest, of $18.6 million
for the year ended December 31, 2000, compared to $10.1 million for the year
ended December 31, 1999. The increase for the year ended December 31, 2000 was
due to the increased level of debt, higher interest rates, and fewer projects
under construction, which reduced the amount of interest capitalized.
Sales of Hotels
We have sold to and leased back from HPT 34 hotels. A deferred gain was
recorded on the sales, a portion of which has been recorded in income in the
years ended December 31, 2000 and December 31, 1999. The following table sets
forth the sale-leaseback activity for the years ended December 31, 2000 and
December 31, 1999 (in thousands, except number of hotels):
For the year ended December 31,
-------------------------------
2000 1999
------- -------
Number of hotels sold -- 3
Proceeds from sales of hotels, net of
deferred gain $ -- $24,281
Rent expense on leased hotels $25,056 $24,821
Gain recognized into earnings $ 2,183 $ 1,329
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Hotel Operations
Hotel Operations Revenues
The following is a summary of hotel operations revenues for corporate
hotels for the years ended December 31, 1999 and December 31, 1998 stratified by
the year in which the hotels opened (in thousands):
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 and sales of products from the Candlewood Cupboard), was
$105.5 million for the year ended December 31, 1999, compared to $47.3 million
for the year ended December 31, 1998. The increase in revenue reflected the
increase in the number of corporate 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 corporate hotels for the years ended December 31, 1999 and
December 31, 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 was 67.7% for corporate hotels for the year
ended December 31, 1999, compared to 65.7% for the year ended December 31, 1998.
The occupancy rate during 1999 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, 1999. 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.
The average daily rate for corporate hotels for the year ended December
31, 1999 was $58.24, compared to $53.14 for the year ended December 31, 1998.
The increase in average daily rate was due to increases in room rates charged at
previously opened hotels and higher introductory rates for new hotel openings.
Revenue per available room was $39.43 for the year ended December 31, 1999,
compared to $34.93 for the year ended December 31, 1998.
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The following table sets forth the 1999 performance of our hotels,
stratified by the year in which the hotels opened:
Revenue per
Number of Average Daily Available
Hotels Occupancy Rate 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 65 67.7% $ 58.24 $ 39.43
As of December 31, 1999, we had 21 hotels that had been open at least
two years. 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 that had been open at least
two years as of December 31, 1999 decreased 1.2 occupancy points in 1999. This
decrease 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 for the year ended December 31, 1999 totaled
$60.2 million, compared to $28.3 million for the year ended December 31, 1998.
The increase in 1999 was 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.
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Rent Expense on Leased Hotels
For the year ended December 31, 1999, we incurred rent expense of $24.8
million for leased hotels, compared to $12.4 million for the year ended December
31, 1998. The increase in rent expense in 1999 was due to 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 1999.
Hotel Opening Costs
Opening costs for the year ended December 31, 1999 totaled $1.1 million.
There were no opening costs expensed for the year ended December 31, 1998.
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 the year ended December 31, 1998 totaled $1.3 million and is
included in depreciation and amortization on the statement of operations. 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.
Hotel Depreciation and Amortization
Depreciation and amortization expense attributable to hotel operations
for the year ended December 31, 1999 totaled $7.8 million, compared to $3.4
million for the year ended December 31, 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.
Corporate Operations
Other Income
Other income for the year ended December 31, 1999 totaled $1.5 million,
compared to $672,000 for the year ended December 31, 1998. The increase in other
income for the year ended December 31, 1999, compared to the year ended December
31, 1998, was due to 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. Franchise fee income (including application and royalty
fees) for the year ended December 31, 1999 totaled $1.4 million, compared to
$701,000 for the year ended December 31, 1998. Franchise application fee income
in 1999 increased as a result of executing 15 new franchise agreements during
the year ended December 31, 1999, compared to four franchise agreements for the
year ended December 31, 1998. The growth in royalty fee income was due to the
increase in the number of franchise hotels in operation during 1999 and the
increased revenue generated by the six franchise hotels that opened in 1998. We
had 11 franchised hotels open as of December 31, 1999, compared to nine hotels
at December 31, 1998. Management fee income for the year ended December 31, 1999
totaled $136,000, compared to $74,000 for the year ended December 31, 1998. The
increase in management fee income was primarily due to the management fees
received during the year from the Hotel at Old Town, which opened in March 1999.
Equity loss from investment in the Rockford, Illinois joint venture hotel for
the year ended December 31, 1999 totaled $91,000, compared to an equity loss of
$104,000 for the year ended December 31, 1998.
We sold three hotels during the year ended December 31, 1999 as part of
the sale-leaseback transaction for which a $2.3 million deferred gain was
recorded. For the year ended December 31, 1999, we recognized $1.3 million of
the deferred gain on all hotels previously sold, compared to $569,000 for the
year ended December 31, 1998.
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Corporate Operating Expenses
Corporate operating expenses for the year ended December 31, 1999
totaled $5.4 million, compared to $3.9 million for the year ended December 31,
1998. The increase in 1999 was primarily due to the expansion of our franchise
sales and service team and increases in general personnel and field information
system support costs.
Abandoned Site Costs
Abandoned site costs totaled $2.0 million for the year ended December
31, 1999, compared to $3.8 million for the year ended December 31, 1998.
Corporate Depreciation and Amortization
Depreciation and amortization applicable to corporate operations for the
year ended December 31, 1999 totaled $666,000 compared to $162,000 for the year
ended December 31, 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.
Interest Income and Expense
We earned $1.0 million of interest income for the year ended December
31, 1999, compared to $1.2 million for the year ended December 31, 1998.
Interest income for the year ended December 31, 1999 resulted primarily from the
temporary investment of proceeds received from the Series B Preferred Stock
placement, the sale-leaseback transaction and cash provided by operations.
Interest income for the year ended December 31, 1998 resulted from the temporary
investment of proceeds received from the Series A and B Preferred Stock
placements, the sale-leaseback transaction and cash provided by operations.
We had interest expense, net of capitalized interest of $10.1 million
for the year ended December 31, 1999, compared to $214,000 for the year ended
December 31, 1998. The increase in interest expense in 1999 was the result of
having fewer projects under construction in 1999, thereby reducing the amount of
interest capitalized.
Sales of Hotels
We have sold to and leased back from HPT 34 hotels. A deferred gain was
recorded on the sales, a portion of which was recorded in income in the years
ended December 31, 1999 and December 31, 1998. The following table sets forth
the sale-leaseback activity for the years ended December 31, 1999 and December
31, 1998 (in thousands, except number of hotels):
For the year ended December 31,
-------------------------------
1999 1998
-------- ---------
Number of hotels sold 3 26
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
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LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $21.8 million at December 31, 2000,
compared to $18.6 million at December 31, 1999. Net cash provided by operating
activities totaled $10.6 million for the year ended December 31, 2000, compared
to $20.4 million for the year ended December 31, 1999. For the year ended
December 31, 2000, net income from operations was $5.7 million and we recorded
$10.5 million of non-cash depreciation and amortization expense and $2.2 million
of non-cash deferred gain income on hotels previously sold. Uses of cash for the
year ended December 31, 2000 consisted primarily of a $2.6 million increase in
other assets. For the year ended December 31, 1999, net loss from operations was
$2.8 million (which included a $2.0 million write-off of costs related to
abandoned sites) and we recorded $8.5 million of non-cash depreciation and
amortization expense and $1.3 million of non-cash deferred gain income on hotels
sold. The primary source of cash for the year ended December 31, 1999 was a
reduction of $20.8 million in the amount of hotels held for sale. Uses of cash
for the year ended December 31, 1999 included a $3.7 million increase in other
assets, an increase of $2.5 million in deposits, and an increase of $1.9 million
in accounts and other receivables. The additional deposit required for the
sale-leaseback of the three hotels sold in the first quarter of 1999 accounts
for the increase in deposits.
Net cash used in investing activities for the year ended December 31,
2000 totaled $26.4 million, compared to $92.4 million for the year ended
December 31, 1999. Our expenditures for property and equipment in connection
with the completed hotels, the construction of new hotels, investment in joint
venture hotels, and acquisition costs for potential development sites accounted
for the majority of the cash used.
For the year ended December 31, 2000, net cash provided by financing
activities was $19.0 million, compared to $67.5 million for the year ended
December 31, 1999. Net cash provided by financing activities for the year ended
December 31, 2000 included $29.5 million in proceeds from mortgages and notes
payable, partially offset by $2.4 million of principal payments on notes payable
and $8.0 million of preferred stock dividend payments. For the year ended
December 31, 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 in the first quarter of 1999.
At December 31, 2000, we had one company-owned hotel under construction
(Jersey City, New Jersey) with a total estimated cost (including capitalized
interest) of approximately $25.5 million. We have an $18.0 million construction
loan to develop this hotel which matures in September 2003 and bears interest at
LIBOR plus 4.25% (11.07% as of December 31, 2000). Under terms of the financing,
our total equity requirement for this hotel is $5.8 million, $5.5 million of
which had been funded as of December 31, 2000. As of December 31, 2000, we had
incurred costs (including capitalized interest) of approximately $20.5 million
on this hotel.
Additionally, we had one hotel under construction in Orange County,
California, which we intend to contribute to the joint venture with Boston
Capital as described below. As of December 31, 2000, the total estimated cost of
construction for this hotel was $11.1 million, $7.0 million of which had been
incurred.
We had two hotels under construction at December 31, 2000 as part of our
joint venture development agreement with Boston Capital Institutional Advisors
and Mass Mutual in Orange County, California and Clarkstown, New York. The total
estimated cost of construction for these hotels is $22.1 million. Our total
equity requirement per the loan agreements for these two hotels is $3.0 million,
$2.2 million of which had been funded as of December 31, 2000. As of December
31, 2000, approximately $11.3 million had been incurred on these projects. These
costs include land acquisition costs, building
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32
costs (including capitalized interest), deposits and fees for surveys, legal
services, environmental studies, and architectural drawings.
Under the terms of the agreement with Boston Capital and Mass Mutual, if
we did not have at least 10 joint venture hotels open or under construction by
August 31, 2000, we may be required to increase our capital contribution to
existing joint venture hotels by up to 5% of the estimated total costs. As of
December 31, 2000, we had only eight hotels open or under construction and the
additional capital contribution amount was estimated at approximately $3.4
million. As of March 19, 2001, Boston Capital and Mass Mutual had not required
us to increase our capital contribution, although they may require us to do so
in the future. We are otherwise in compliance with the terms of the joint
venture agreement. We will continue to identify and evaluate potential joint
venture sites with these partners.
In addition to the above, at December 31, 2000, we had one joint venture
hotel under construction in East Lansing, Michigan. The total estimated cost of
construction for this hotel is $8.3 million. Under terms of the joint venture
agreement, our total equity requirement for this hotel is $575,000, all of which
had been funded as of December 31, 2000. As of December 31, 2000, the joint
venture had incurred costs on this hotel of approximately $5.2 million.
We currently have borrowed a total of $214.6 million from various credit
institutions (GMAC and regional/local banks) and Hilton Hotels Corporation
(Doubletree) in connection with the development of Candlewood hotels. The
maturity dates for these loans range from February 2001 to March 2004 with
interest rates which range from 9.41% to 11.07% on non-Doubletree loans ($199.6
million) to a fixed 15.0% on the Doubletree loan ($15.0 million). Approximately
$49.4 million and $105.7 million of the total debt matures in 2001 and 2002,
respectively. We currently do not have sufficient cash available to pay off the
principal amount of these loans. Pursuant to the terms of the agreements we have
with these lenders (except for Hilton), each loan provides for an extension
period. We plan to evaluate each loan based on a number of factors including
hotel performance, interest rate, secondary market considerations and corporate
strategy to determine if we will seek an extension or refinancing. For those
loans which matured in February and March 2001, we have paid down a portion of
the principal and extended the loans for up to one year. We cannot provide any
assurance that we will be able to extend or refinance any of our indebtedness on
terms acceptable to us, or at all. In regards to the Doubletree debt, the first
installment of $12.5 million matures in November 2001. We are in discussions
with Hilton to negotiate an extension on this debt. As consideration for
securing an extension, we may be required to pay down a portion of the debt at
or prior to the original maturity date. We are unable to assure that we will be
able to extend the maturity date of the Doubletree debt or that permanent
financing will be available to us on acceptable terms, or at all. In addition,
as of December 31, 2000, we have guaranteed approximately $45.0 million of the
construction debt on the Boston Capital joint venture properties. Maturity dates
for this debt range from October 2002 to December 2007. This debt is not
included in our consolidated financial statements.
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.
We believe that a combination of our cash and cash equivalents, cash
from operations, borrowed funds from third-party lenders (if approved on an
individual basis) and construction loan guarantees from Doubletree will be
sufficient to provide capital for development of projects currently under
construction, payment of preferred dividends and operations through December
2001. We will be required to invoke contractual extensions or refinance much of
the $49.4 million of debt that will mature during 2001. In addition, from time
to time we will consider strategic acquisitions as a means of growth, which
would require additional capital. We continue to consider a number of financing
alternatives, including credit
32
33
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.
As of December 31, 2000, we have available $24.4 million of net
operating loss carryforwards which are available to be utilized in future years
to offset taxable income. These net operating loss carryforwards expire
beginning in 2011 through 2015.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Our earnings are affected by changes in interest rates as the majority
of our outstanding indebtedness is at variable rates based on prime and LIBOR.
If interest rates change by .01 percent, the market value of our mortgages and
notes payable, based on the outstanding balance effected by LIBOR at December
31, 2000, would change by approximately $20,000. Additionally, we have market
risk on our short-term investments, which are considered cash equivalents, due
to changes in interest rates. If interest rates increase by .01 percent, the
market value of our short-term investments, based on the outstanding balance at
December 31, 2000, would change by approximately $1,400.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, which is required to be adopted in years beginning after June 15, 2000.
We are required to adopt the new Statement effective January 1, 2001. The
Statement will require us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Because of our minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
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.
33
34
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 2001 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 13, 2001.
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 2001 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 13, 2001.
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 2001 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 13, 2001.
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 2001 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 13, 2001.
34
35
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.
35
36
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 23, 2001 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 March 23, 2001
- -------------------------------------- and Director (Principal
Jack P. DeBoer Executive Officer)
/s/ Warren D. Fix Executive Vice President, March 23, 2001
- -------------------------------------- Chief Financial Officer,
Warren D. Fix Secretary and Director
(Principal Financial and
Accounting Officer)
/s/ James E. Roos President and Chief March 23, 2001
- -------------------------------------- Operating Officer
James E. Roos
/s/ Gary E. Costley Director March 23, 2001
- --------------------------------------
Gary E. Costley
/s/ Robert J. Cresci Director March 23, 2001
- --------------------------------------
Robert J. Cresci
/s/ Mariel C. Albrecht Director March 23, 2001
- --------------------------------------
Mariel C. Albrecht
/s/ Robert S. Morris Director March 23, 2001
- --------------------------------------
Robert S. Morris
/s/ William L. Perocchi Director March 23, 2001
- --------------------------------------
William L. Perocchi
/s/ Frank J. Pados, Jr. Director March 23, 2001
- --------------------------------------
Frank J. Pados, Jr.
/s/ Tony M. Salazar Director March 23, 2001
- --------------------------------------
Tony M. Salazar
/s/ Thomas H. Nielsen Director March 23, 2001
- --------------------------------------
Thomas H. Nielsen
/s/ Thomas L. Keltner Director March 23, 2001
- --------------------------------------
Thomas L. Keltner
/s/ Thomas W. Storey Director March 23, 2001
- --------------------------------------
Thomas W. Storey
36
37
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, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 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
38
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. We have also
audited the related financial statement schedule listed in the accompanying
index for the year ended December 31, 2000. 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, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, 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 10, 2001
F-2
39
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, stated value, and share data)
- -----------------------------------------------------------------------------------------------------
December 31, 2000 1999
--------- ---------
ASSETS
Investment in hotels completed and under construction:
Hotels completed $ 264,896 $ 238,320
Hotels under construction 32,282 37,755
Other costs 192 3,654
--------- ---------
297,370 279,729
Accumulated depreciation and amortization (16,977) (8,582)
--------- ---------
Net investment in hotels 280,393 271,147
Cash and cash equivalents (including $945 and $407 of
restricted cash, respectively) 21,834 18,624
Deposits 26,334 26,334
Accounts and other receivables 4,912 4,735
Investments in joint ventures 11,467 6,421
Other assets 14,369 14,016
--------- ---------
Total assets $ 359,309 $ 341,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 214,575 $ 190,545
Accounts payable and other accrued expenses 21,686 22,874
Deferred gain on sale of hotels 15,239 17,431
Other liabilities 892 1,172
--------- ---------
Total liabilities 252,392 232,022
Redeemable, convertible, cumulative preferred stock ("Series A"), $1,000
stated value, 65,000 shares authorized and outstanding, net of
offering costs 61,339 61,339
Redeemable, convertible, cumulative preferred stock ("Series B"), $1,000
stated value, 42,000 shares authorized and outstanding, net of
offering costs 39,350 39,350
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized, 9,025,000 issued and outstanding 90 90
Additional paid-in capital 35,270 35,270
Accumulated deficit (29,132) (26,794)
--------- ---------
Total stockholders' equity 6,228 8,566
--------- ---------
Total liabilities and stockholders' equity $ 359,309 $ 341,277
========= =========
See accompanying notes to consolidated financial statements.
F-3
40
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUES:
Hotel operations $ 127,771 $ 105,467 $ 47,278
Other income 3,458 1,459 672
----------- ----------- -----------
Total hotel operating revenues 131,229 106,926 47,950
Proceeds from sales of hotels, net of deferred gain of $0,
$2,319 and $10,533, respectively -- 24,281 184,841
Deferred gain recognition on sales of hotels 2,183 1,329 569
----------- ----------- -----------
Total Revenues 133,412 132,536 233,360
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 68,005 60,218 28,266
Corporate operating expenses 6,437 5,390 3,906
Rent expense on leased hotels 25,056 24,821 12,365
Hotel opening costs 279 1,103 --
Abandoned Site Costs -- 2,043 3,799
Depreciation and amortization 10,521 8,452 3,565
----------- ----------- -----------
Total operating costs and expenses 110,298 102,027 51,901
Cost of hotels sold -- 24,281 184,841
----------- ----------- -----------
23,114 6,228 (3,382)
Interest income 1,150 1,034 1,166
Interest expense (18,577) (10,053) (214)
----------- ----------- -----------
Income (Loss) before preferred dividends and cumulative
effect of a change in accounting principle 5,687 (2,791) (2,430)
Preferred stock dividends (8,025) (8,025) (6,338)
----------- ----------- -----------
Loss available to common stockholders before cumulative
effect of a change in accounting principle (2,338) (10,816) (8,768)
Cumulative effect of a change in accounting principle, less
applicable income taxes of $0 -- -- (3,857)
----------- ----------- -----------
Net loss available to common stockholders $ (2,338) $ (10,816) $ (12,625)
=========== =========== ===========
Per share amounts - basic and diluted
Loss before cumulative effect of a change in
accounting principle $ (.26) $ (1.20) $ (.97)
Cumulative effect of change in accounting principle -- -- (.43)
----------- ----------- -----------
Net loss $ (.26) $ (1.20) $ (1.40)
=========== =========== ===========
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
41
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
- ----------------------------------------------------------------------------------------------------------
Total
Common Additional Accumulated Stockholders'
Stock Paid-in Capital Deficit Equity
-------- --------------- ----------- -------------
Balance at December 31, 1997 $ 90 $ 35,270 $ (2,771) $ 32,589
Preferred stock dividends paid -- -- (6,920) (6,920)
Net loss before preferred stock dividends -- -- (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 before preferred stock dividends -- -- (2,791) (2,791)
-------- -------- -------- --------
Balance at December 31, 1999 90 35,270 (26,794) 8,566
Preferred stock dividends paid -- -- (8,025) (8,025)
Net income before preferred stock dividends -- -- 5,687 5,687
-------- -------- -------- --------
Balance at December 31, 2000 $ 90 $ 35,270 $(29,132) $ 6,228
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
42
CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
- ---------------------------------------------------------------------------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (Loss) before preferred dividends and cumulative
effect of change in accounting principle $ 5,687 $ (2,791) $ (2,430)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,521 8,452 3,565
(Income) Loss from joint ventures (176) 91 104
Deferred gain recognition on sales of hotels (2,183) (1,329) (569)
Abandoned site costs -- 2,043 3,799
Change in:
Hotels completed and under construction - held for sale -- 20,776 23,877
Deposits -- (2,487) (15,253)
Accounts receivable (177) (1,937) (1,309)
Opening costs -- 718 (2,543)
Other assets (2,575) (3,738) (3,061)
Accounts payable and other accrued expenses (341) (1,360) 12,457
Deferred gain on sale of hotels (9) 1,989 10,533
Other liabilities (132) (1) 227
--------- --------- ---------
Net cash provided by operating activities 10,615 20,426 29,397
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed/under Construction and
change in site acquisition costs (27,207) (92,076) (125,055)
Distributions from joint ventures 800 -- --
Purchase of intangible assets (17) (335) 48
--------- --------- ---------
Net cash used in investing activities (26,424) (92,411) (125,007)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of preferred stock -- -- 39,276
Proceeds from mortgage and notes payable 29,549 79,287 147,101
Payments on mortgages and notes payable (2,357) (3,484) (95,775)
Preferred stock dividends (8,025) (8,025) (6,920)
Other liabilities (148) (276) (272)
Expenditures for private placement -- (48) --
--------- --------- ---------
Net cash provided by financing activities 19,019 67,454 83,410
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,210 (4,531) (12,200)
Cash and cash equivalents at beginning of year 18,624 23,155 35,355
--------- --------- ---------
Cash and cash equivalents at end of year $ 21,834 $ 18,624 $ 23,155
========= ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 21,289 $ 14,142 $ 7,509
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
43
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.
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 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
F-7
44
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.
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.
F-8
45
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.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as
amended. We are required to adopt the new Statement effective January 1,
2001. The Statement will require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. Because of our minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial
position of the Company.
F-9
46
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 assets are being amortized using the
straight-line method over a period of twenty years and are included in other
assets on the accompanying consolidated balance sheets.
g. DEFERRED FINANCING COSTS
Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on the level yield basis.
h. REVENUE RECOGNITION
Room revenue and other revenues are recognized when earned. Recognition of
franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue when recognized is included in other
income on the accompanying consolidated statements of operations.
The Company's sales of hotels are accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized
when the title passes to the buyer, generally upon the receipt of proceeds.
Related profit is deferred due to required support obligations under the
operating lease agreements until operations meet stipulated levels. At such
time, the deferred gain is recognized in earnings over the remaining lease
term.
i. INCOME TAXES
The Company is taxed as a corporation as defined in subchapter "C" under the
Internal Revenue Code for federal and state income tax purposes and accounts
for any temporary differences under the asset and liability method.
j. 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. Upon adoption, the remaining unamortized opening and
organization costs of $3.9 million were expensed in the accompanying 1998
consolidated statements 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.
F-10
47
k. INVESTMENTS IN JOINT VENTURES
The Company has certain investments in joint ventures in which it owns 50%
or less of the voting equity that it accounts for under the equity method of
accounting. As of December 31, 2000, the Company had $11.5 million invested
in joint ventures, of which $5.0 million (in non-cash transactions, net of
$3.2 million of debt) was contributed during the year ended December 31,
2000. The difference between the amount at which the investment is carried
in the Company's accounting records and the amount of the underlying equity
in the net assets of the investee is amortized into income from joint
ventures over the contractual life of the respective joint venture entity.
As of December 31, 2000, this amount was approximately $2.7 million and is
included in investments in joint ventures on the accompanying consolidated
balance sheets. For the years ended December 31, 2000, 1999 and 1998, equity
income (loss) in joint ventures was recorded of $176,000, ($91,000) and
($104,000), respectively. These amounts are included in other income on the
accompanying consolidated statements of operations. Additionally, during the
year ended December 31, 2000, the Company received distributions from its
joint ventures of $800,000.
The Company has one significant joint venture that was formed in 1999 with
Boston Capital Institutional Advisors and Mass Mutual in which it has a 50%
ownership. Hotel operations for the joint venture commenced in 2000, and as
of December 31, 2000, the Company operated six hotels and had two additional
hotels under construction pursuant to this agreement. Under the terms of the
agreement, if the Company did not have at least 10 hotels open or under
construction by August 31, 2000, it may be required to increase its capital
contributions relating to existing joint venture hotels by up to 5% of the
estimated total costs. As of December 31, 2000, this amount was estimated at
approximately $3.4 million. As of December 31, 2000, Boston Capital and Mass
Mutual had not required the Company to increase its capital contribution,
although they may require the Company to do so in the future. The Company is
otherwise in compliance with the terms of the joint venture agreement. The
Company will continue to identify and evaluate potential joint venture sites
with these partners. The following is unaudited condensed financial
information for the joint venture as of December 31, 2000 and December 31,
1999:
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
(In thousands)
Hotels completed and under construction $66,443 $16,024
Other assets 3,951 1,711
------- -------
Total assets $70,394 $17,735
======= =======
Total development liabilities $62,596 $12,665
Total equity 7,798 5,070
------- -------
Total liabilities and equity $70,394 $17,735
======= =======
----------------------------------------------------------------------------
Year ended December 31, 2000
----------------------------------------------------------------------------
(In thousands)
Total revenue $8,569
Hotel operating expenses 3,886
Hotel opening costs 624
Depreciation and amortization 1,342
Interest expense 1,660
------
Net pre-tax income $1,057
======
In addition, as of December 31, 2000, the Company has guaranteed
construction debt on the joint venture properties of approximately $45
million. This debt is collateralized by the Hotels completed
F-11
48
and under construction in the joint venture. Maturity dates on this debt
range from October 2002 to December 2007. This debt is not included in the
Company's consolidated financial statements. The Company does not receive
any fees related to this guarantee.
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, 2000, 1999 and 1998, respectively, is as
follows:
Year ended December 31, 2000
----------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ -------- --------
Revenues from external customers $131,229 $ -- $131,229
Interest expense 18,577 -- 18,577
Depreciation expense 9,815 -- 9,815
Segment profit 28,353 2,183 30,536
Hotels assets:
Hotels completed and under 297,178 -- 297,178
construction
Accounts receivable 2,382 2,110 4,492
Deferred gain on sale of hotels -- 15,239 15,239
Year ended December 31, 1999
----------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ -------- --------
Revenues from external customers $106,926 $ 24,281 $131,207
Interest expense 10,053 -- 10,053
Depreciation expense 7,787 -- 7,787
Segment profit 14,100 1,329 15,429
Hotels assets:
Hotels completed and under 276,075 -- 276,075
construction
Accounts receivable 2,246 2,014 4,260
Deferred gain on sale of hotels -- 17,431 17,431
F-12
49
Year ended December 31, 1998
-----------------------------------------------------------------------------------
(In thousands) Operation of Sale of
Hotels Hotels Total
------------ -------- --------
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.
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:
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
-------- --------
Hotels completed:
Land $ 45,495 $ 39,863
Buildings and improvements 179,510 164,799
Furniture, fixtures and equipment 39,891 33,658
-------- --------
264,896 238,320
Hotels under construction 32,282 37,755
Other costs 192 3,654
-------- --------
297,370 279,729
Less accumulated depreciation (16,977) (8,582)
-------- --------
$280,393 $271,147
======== ========
Hotels completed and Hotels under construction also include capitalized interest
costs. The Company incurred interest costs of approximately $21.6 million and
$15.3 million of which $3.0 million and $5.2 million in 2000 and 1999,
respectively, were capitalized. Depreciation expense for the years ended
December 31, 2000, 1999 and 1998, was approximately $8.4 million, $6.8 million
and $3.1 million, respectively.
Other costs included approximately $192,000 and $3.7 million of acquisition
costs at December 31, 2000 and 1999, respectively. Acquisition costs related to
abandoned site costs of approximately $2.0 million and $3.8 million were charged
to operations in 1999 and 1998, respectively. There were no acquisition costs
recorded for the year ended December 31, 2000.
F-13
50
4. MORTGAGES AND NOTES PAYABLE
A summary of mortgages and notes payable is as follows:
- --------------------------------------------------------------------------------
(In thousands) December 31,
------------------------
2000 1999
-------- --------
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 1.00% to 3.00%, principal payments
commencing twelve to eighteen months
following Hotel opening, with maturity dates
ranging from February 2001 to March 2004 $ 27,619 $ 19,013
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 171,956 156,532
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
-------- --------
$214,575 $190,545
======== ========
LIBOR rates, depending on the maturity dates of the individual notes, ranged
from 6.66% to 6.80% at December 31, 2000, and 6.17% to 6.48% at December 31,
1999. The prime rate at December 31, 2000 and December 31, 1999 was 9.50% and
8.50%, respectively.
Certain of the Company's debt is partially guaranteed by Doubletree. As of
December 31, 2000 and 1999, approximately $16.0 million of the Company's debt
was guaranteed by Doubletree. In exchange for the guarantee, Doubletree receives
a 5% interest in the defined cash flows of the hotels and a 0.25-0.50% fee on
the total loan amount outstanding. For the years ended December 31, 2000, 1999
and 1998, interest incurred related to this guarantee was approximately
$675,000, $324,000 and $163,000, respectively.
The Company intends to extend the maturity dates of all notes coming due in
2001, under current terms of the notes, or refinance such notes in the ordinary
course of business. Scheduled principal payments required on mortgage and other
notes payable subsequent to December 31, 2000, are as follows:
F-14
51
- --------------------------------------------------------------------------------
(In thousands)
Year Ending December 31,
- ------------------------
2001 $ 50,998
2002 105,651
2003 40,465
2004 17,461
--------
Total $214,575
========
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, 2000 and 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 proceeds to the Company were
approximately $39.4 million, after deducting commissions and expenses of $2.6
million.
F-15
52
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, 2000 and
1999 were 9,025,000.
7. STOCK OPTIONS
The Company has one stock option plan, the 1996 Equity Participation Plan, as
amended, (the "Plan"), in which options may be granted to key personnel to
purchase shares of the Company's common stock at a price not less than the
current market price at the date of the grant. The options vest annually and
ratably over the four-year period from the date of grant and expire ten years
after the grant date. 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, 2000, 1999 and 1998, is as follows:
F-16
53
- --------------------------------------------------------------------------------
Weighted
Average
Shares Exercise Price
--------- --------------
Options outstanding, December 31, 1997 605,800 $9.39
Granted 397,800 7.36
Exercised -- --
Forfeited (103,700) 8.11
--------- -----
Options outstanding, December 31, 1998 899,900 8.73
Granted 565,300 4.24
Exercised -- --
Forfeited (277,377) 7.62
--------- -----
Options outstanding, December 31, 1999 1,187,823 6.82
Granted 132,600 2.37
Exercised -- --
Forfeited (96,923) 4.61
--------- -----
Options outstanding, December 31, 2000 1,223,500 $6.52
========= =====
At December 31, 2000, 1,223,500 options were outstanding at prices ranging from
$1.78 to $11.38. There were 600,957, 338,674 and 222,700 shares exercisable as
of December 31, 2000, 1999 and 1998, 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:
- --------------------------------------------------------------------------------
2000 1999 1998
------ ------- -------
Net income (loss), as reported in
thousands) $5,687 $(2,791) $(6,287)
Net income (loss), pro forma (in
thousands) 5,003 (3,349) (6,619)
Net loss per share, as reported (0.26) (1.20) (1.40)
Net loss per share, pro forma (0.33) (1.26) (1.44)
F-17
54
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:
- --------------------------------------------------------------------------------
2000 1999 1998
------ ------ ------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 55.50% 66.87% 44.50%
Risk-free interest rate 6.30% 5.14% 5.21%
Expected life of options 5 years 5 years 5 years
The weighted-average fair value of the options granted during 2000, 1999, and
1998 is $1.28, $2.22 and $3.06 per share, respectively. The weighted-average
exercise price and weighted-average contractual life, by exercise price range
for options outstanding is as follows:
- --------------------------------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining
Number of Exercise Contractual
Exercise Price Options Price Life
----------------- --------- --------- -----------
$1.78 to $2.44 120,550 $ 2.17 9.0 years
$2.75 to $4.00 154,300 3.44 8.8 years
$4.25 to $4.81 357,150 4.77 8.1 years
$7.25 to $10.50 551,500 9.11 6.6 years
$11.25 to $11.38 40,000 11.28 6.6 years
The weighted-average exercise price of the options exercisable as of December
31, 2000, 1999 and 1998 were $8.14, $9.11 and $9.71, 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, 2000, 1999
and 1998 respectively, the Company matched contributions in the amount of
approximately $411,000, $201,000 and $94,000.
9. RELATED PARTY TRANSACTIONS
As of December 31, 2000, 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, 2000, 1999 and 1998 respectively, the Company
received management fees from these properties in the amount of approximately
$223,000, $150,000 and $52,000.
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-18
55
- -------------------------------------------------------------------------------------
(In thousands)
Year Ended December 31, 2000 1999 1998
----- ------- -------
Total insurance premiums for third-party insurance $ 990 $ 1,213 $ 1,134
Office and equipment rent 6 20 118
Corporate air travel 160 199 396
Amounts payable at December 31: 89 41 17
- -------------------------------------------------------------------------------------
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:
- ---------------------------------------------------------------------------------
(In thousands)
2000 1999 1998
------- ------- -------
DEFERRED TAX ASSETS:
Taxable gain on sale/lease-back transaction
in excess of book income $ 6,096 $ 6,972 $ 6,708
Deferred franchise fee revenue 56 94 132
Tax benefit of net operating loss carry-forwards 1,467 3,831 2,847
------- ------- -------
Total gross deferred tax assets 7,619 10,898 9,687
Valuation allowance 982 7,827 8,423
------- ------- -------
Total deferred tax assets 6,637 3,071 1,264
------- ------- -------
DEFERRED TAX LIABILITIES:
Excess tax depreciation over book 6,578 3,008 1,197
Financial basis in excess of tax basis of
Intangible assets 59 63 67
------- ------- -------
Total deferred tax liabilities 6,637 3,071 1,264
------- ------- -------
Net deferred tax asset $ -- $ -- $ --
======= ======= =======
The Company had $19,000 in prepaid taxes that it expects to have refunded in
2001. The deferred tax liabilities reflected in the above schedule resulted from
items that are currently taxable for federal and state income tax purposes but
were not included in book net income. Timing differences that resulted in a
deferred tax asset but did not result in current taxes payable were offset by a
valuation allowance due to the uncertainty of the ultimate realization of the
asset.
The Company had a cumulative net operating loss carry-forward available to
offset future taxable income of $24.4 million and $20.8 million as of December
31, 2000 and 1999, respectively. Net operating losses, available to offset
future taxable income, generated in the years ended December 31, 2000, 1999 and
1998, were approximately $3.6 million, $12.6 million and $7.7 million, which
expire in 2015, 2014, and 2013, respectively.
F-19
56
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 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 may
be renewed in certain circumstances and at the election of the Company for up to
three 15-year periods. The leases call for monthly lease payments and require
the Company to place a security deposit with HPT for each property equal to one
year's lease payments. The security deposit will be released to the Company at
the end of the lease term.
The agreements also provide for the Company to guarantee the payment of rent
until defined operating cash flows exceed the annual lease payments by 150% for
12 consecutive months. In connection with this obligation, the Company was
required to place a 5% deposit with HPT, upon the initial closing of each
transaction, the deposit will be refunded to the Company when cash flows from
operations exceed required lease payments by 140% of defined cash flows from
operations. The deposit is charged to cost of sales as the hotels are sold. Upon
attainment of the required coverage ratios, the portion of the deposit refunded
to the Company will be recognized in income beginning in the period such funds,
if any, are received.
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 $2.2 million, $1.3
million and $569,000 of deferred gain into income in 2000, 1999 and 1998,
respectively. As of December 31, 2000, the Company has recognized a total of
$4.1 million of deferred gain into income. Sale proceeds, net of the deferred
gain and related cost of the Hotels sold are presented on the consolidated
statements of operations.
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 April 2006. The total monthly payment on these leases is
approximately $125,000.
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-20
57
Payments for all operating leases for the years ended December 31, 2000, 1999,
and 1998, were approximately $27,795,000, $27,261,000, and $13,900,000,
respectively. Future minimum lease payments under noncancelable operating leases
having remaining terms in excess of one year at December 31, 2000 are as
follows:
- --------------------------------------------------------------------------------
(In thousands)
Year Ending December 31,
2001 $ 27,783
2002 27,726
2003 27,567
2004 26,954
2005 26,499
Thereafter 158,495
--------
Total future minimum lease payments $295,024
========
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 individually and in
aggregate are not expected to have a material adverse impact on the Company.
F-21
58
14. EPS-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
- ------------------------------------------------------------------------------------------------------
(In thousands, except for share and per share data): 2000 1999 1998
----------- ----------- -----------
Income (Loss) available to common stockholders before
preferred dividends and cumulative effect of a change
in accounting principle $ 5,687 $ (2,791) $ (2,430)
Convertible preferred stock dividends (8,025) (8,025) (6,338)
----------- ----------- -----------
Loss available to common stockholders before
cumulative effect of a change in accounting principle (2,338) (10,816) (8,768)
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) (2,338) (10,816) (12,625)
Dilutive securities - Preferred stock dividends -- -- --
----------- ----------- -----------
Loss available to common stockholders after
assumed conversion of Preferred Stock -
(Numerator for diluted earnings per share) $ (2,338) $ (10,816) $ (12,625)
=========== =========== ===========
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
Loss before a cumulative effect of a change in
accounting principle $ (0.26) $ (1.20) $ (0.97)
Cumulative effect of a change in accounting principle -- -- (.43)
=========== =========== ===========
Net loss $ (0.26) $ (1.20) $ (1.40)
=========== =========== ===========
For additional disclosures regarding the convertible preferred stock and the
employee stock options, see Notes (5) and (7).
Options to purchase 1,223,500 shares of common stock at a weighted-average
exercise price of $6.52 per share were outstanding as of December 31, 2000.
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-22
59
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 2000, 1999 and 1998 (amounts in
thousands, except for per share amounts.)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2000 ENDED 3/31 ENDED 6/30 ENDED 9/30 ENDED 12/31
---- -------- -------- -------- --------
Hotel Operating Revenue $ 30,240 $ 33,840 $ 33,624 $ 30,067
Total revenues 31,213 35,141 35,359 31,832
Income (loss) before preferred stock dividends 256 3,014 3,082 (665)
Net income (loss) available to common
shareholders (1,739) 1,018 1,065 (2,682)
Weighted average shares outstanding -
basic and diluted 9,025 9,025 9,025 9,025
Net income (loss) per share of common stock
basic and diluted $ (0.19) $ 0.11 $ 0.12 $ (0.30)
1999
----
Hotel Operating Revenue $ 21,267 $ 26,906 $ 29,585 $ 27,709
Total revenues 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 income (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-23
60
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(IN THOUSANDS)
Costs Capitalized
Initial Cost to Company Subsequent to Acquisition
----------------------- -------------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
----------------- -------- ------------ ---- ----------- ---- -----------
Wichita Wichita KS $ -- $ -- $ -- $ -- $ 164
Omaha Omaha NE -- -- -- -- 146
Denver - Tech Center Denver CO -- -- -- -- 45
Louisville Louisville KY -- -- -- -- 83
Cincinnati-Blue Ash Blue Ash OH -- -- -- -- 57
Birmingham Birmingham AL -- -- -- -- 20
Kansas City Overland Park KS 3,867 542 5,373 -- 40
Norfolk - Hampton Hampton VA -- -- -- -- 31
Wichita - Airport Wichita KS -- -- -- -- 43
Charlotte - Coliseum Charlotte NC 3,118 403 3,802 -- 10
Detroit - Southfield Southfield MI -- -- -- -- 25
Raleigh-Cary Raleigh NC 3,385 578 5,233 -- 29
Philadelphia - Willow Grove Willow Grove PA -- -- -- -- 52
Houston - Clear Lake Clear Lake TX -- -- -- -- 27
Knoxville Knoxville TN 3,689 566 4,380 -- 24
Phoenix Phoenix AZ -- -- -- -- 77
Salt Lake City - Airport Salt Lake City UT -- -- -- -- 62
Salt Lake City - Ft. Union Ft. Union UT -- -- -- -- 37
Houston - Loop Central Houston TX 6,183 1,842 5,568 -- 33
Houston - Town & Country Houston TX -- -- -- -- 73
Irvine East - Lake Forest Irvine East CA -- -- -- -- 49
Phoenix-Tempe Tempe AZ -- -- -- -- 45
Detroit - Auburn Hills Auburn Hills MI 6,004 1,205 6,221 -- 21
Jacksonville Jacksonville FL -- -- -- -- 62
Huntsville Huntsville AL -- -- -- -- 26
Dallas - Fort Worth Fossil Creek TX 3,513 592 4,650 -- 51
Detroit - Troy Troy MI 5,306 1,003 6,266 -- 27
Miami - Airport Miami FL 5,700 2,013 7,158 -- 24
Detroit - Warren Warren MI -- -- -- -- 42
Pittsburgh-Airport Pittsburgh PA -- -- -- -- 22
Des Moines Des Moines IA -- -- -- -- 19
Irving - Las Colinas Las Colinas TX -- -- -- -- 26
Chicago - Libertyville Libertyville IL 5,629 1,086 6,754 -- 28
Austin - Northwest Austin TX -- -- -- -- 56
Somerset Somerset NJ -- -- -- -- 23
Charlotte-University Charlotte NC -- -- -- -- 39
Dallas - Arlington Arlington TX 5,261 861 6,373 -- 28
Irvine - Spectrum Irvine CA 6,190 2,116 6,444 -- 39
Albuquerque Albuquerque NM -- -- -- -- 51
Nashville - Brentwood Brentwood TN -- -- -- -- 30
Houston - Westchase Westchase TX -- -- -- -- 34
Dallas - Galleria Dallas TX 6,113 2,005 6,291 -- 25
Dallas - Plano Plano TX 5,436 1,518 6,063 -- 26
Denver - Lakewood Denver CO -- -- -- -- 17
Boston - Braintree Boston MA -- -- -- -- 37
Detroit - Ann Arbor Ann Arbor MI 5,377 962 6,434 -- 30
Orlando - Altamonte Springs Orlando FL 5,363 1,572 5,615 -- 20
Greensboro Greensboro NC 4,765 1,004 5,531 -- 24
Dallas - North / Richardson Dallas TX 4,843 1,579 6,098 -- 21
Anaheim - South Anaheim CA 6,163 1,666 6,922 -- 18
Clearwater - St. Petersburg St. Petersburg FL 4,199 908 4,726 -- 17
Baltimore - Airport Baltimore MD -- -- -- -- 22
Chicago - Schaumburg Schaumburg IL 6,109 1,211 7,224 -- 25
Chicago - Naperville Naperville IL 6,200 1,772 7,298 -- 30
Chicago - Waukegan Waukegan IL 5,806 866 6,837 -- 27
St. Louis - Earth City St. Louis MO 5,683 938 5,922 -- 38
Philadelphia - Mt. Laurel Mt. Laurel NJ 4,891 802 6,618 -- 15
Minneapolis Minneapolis MN -- -- -- -- 21
Austin - South Austin TX -- -- -- -- 30
Gross Amount Carried
at Close of Period 12/31/00(5)
---------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Land Property Total Depreciation Construction Acquisition
----------------- ---- ----------- ----- ------------ ------------ -----------
Wichita $ -- $ 164 $ 164 $ 9 May-96 Apr-95
Omaha -- 146 146 5 Apr-97 May-96
Denver - Tech Center -- 45 45 4 Apr-97 Jun-96
Louisville -- 83 83 11 Jun-97 Sep-96
Cincinnati-Blue Ash -- 57 57 7 Jun-97 Sep-96
Birmingham -- 20 20 2 Oct-97 Dec-96
Kansas City 542 5,413 5,955 652 Oct-97 Dec-96
Norfolk - Hampton -- 31 31 5 Oct-97 Dec-96
Wichita - Airport -- 43 43 6 Nov-97 Feb-97
Charlotte - Coliseum 403 3,812 4,215 454 Dec-97 Feb-97
Detroit - Southfield -- 25 25 3 Feb-98 Feb-97
Raleigh-Cary 578 5,262 5,840 490 Apr-98 Feb-97
Philadelphia - Willow Grove -- 52 52 7 Nov-97 Mar-97
Houston - Clear Lake -- 27 27 4 Dec-97 Mar-97
Knoxville 566 4,404 4,970 504 Jan-98 Mar-97
Phoenix -- 77 77 10 Jan-98 Mar-97
Salt Lake City - Airport -- 62 62 9 Jan-98 Mar-97
Salt Lake City - Ft. Union -- 37 37 4 Jan-98 Mar-97
Houston - Loop Central 1,842 5,601 7,443 605 Mar-98 Mar-97
Houston - Town & Country -- 73 73 9 Apr-98 Mar-97
Irvine East - Lake Forest -- 49 49 7 Nov-97 Apr-97
Phoenix-Tempe -- 45 45 5 Mar-98 May-97
Detroit - Auburn Hills 1,205 6,242 7,447 551 May-98 May-97
Jacksonville -- 62 62 6 Feb-98 Jun-97
Huntsville -- 26 26 3 Feb-98 Jun-97
Dallas - Fort Worth 592 4,701 5,293 500 Mar-98 Jun-97
Detroit - Troy 1,003 6,293 7,296 562 Jun-98 Jun-97
Miami - Airport 2,013 7,182 9,195 356 Aug-99 Aug-97
Detroit - Warren -- 42 42 5 Apr-98 Sep-97
Pittsburgh-Airport -- 22 22 3 Apr-98 Sep-97
Des Moines -- 19 19 2 May-98 Sep-97
Irving - Las Colinas -- 26 26 3 Jun-98 Sep-97
Chicago - Libertyville 1,086 6,782 7,868 605 Jun-98 Sep-97
Austin - Northwest -- 56 56 6 Jul-98 Sep-97
Somerset -- 23 23 3 Oct-98 Sep-97
Charlotte-University -- 39 39 6 Jul-98 Oct-97
Dallas - Arlington 861 6,401 7,262 558 Aug-98 Oct-97
Irvine - Spectrum 2,116 6,483 8,599 540 Sep-98 Dec-97
Albuquerque -- 51 51 4 Sep-98 Dec-97
Nashville - Brentwood -- 30 30 2 Oct-98 Dec-97
Houston - Westchase -- 34 34 5 Oct-98 Dec-97
Dallas - Galleria 2,005 6,316 8,321 532 Oct-98 Dec-97
Dallas - Plano 1,518 6,089 7,607 498 Oct-98 Jan-98
Denver - Lakewood -- 17 17 3 Nov-98 Jan-98
Boston - Braintree -- 37 37 5 Nov-98 Jan-98
Detroit - Ann Arbor 962 6,464 7,426 503 Nov-98 Feb-98
Orlando - Altamonte Springs 1,572 5,635 7,207 465 Nov-98 Feb-98
Greensboro 1,004 5,555 6,559 432 Dec-98 Feb-98
Dallas - North / Richardson 1,579 6,119 7,698 444 Jan-99 Feb-98
Anaheim - South 1,666 6,940 8,606 586 Sep-98 Mar-98
Clearwater - St. Petersburg 908 4,743 5,651 379 Dec-98 Mar-98
Baltimore - Airport -- 22 22 2 Dec-98 Mar-98
Chicago - Schaumburg 1,211 7,249 8,460 484 Feb-99 Mar-98
Chicago - Naperville 1,772 7,328 9,100 484 Feb-99 Mar-98
Chicago - Waukegan 866 6,864 7,730 513 Dec-98 Apr-98
St. Louis - Earth City 938 5,960 6,898 386 Mar-99 Apr-98
Philadelphia - Mt. Laurel 802 6,633 7,435 366 Jun-99 Apr-98
Minneapolis -- 21 21 2 Nov-98 May-98
Austin - South -- 30 30 4 Dec-98 May-98
S-1
61
SCHEDULE III
CANDLEWOOD HOTEL COMPANY, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(IN THOUSANDS)
Costs Capitalized
Initial Cost to Company Subsequent to Acquisition
----------------------- -------------------------
(1) Depreciable Depreciable
Candlewood Hotels Location Encumbrances Land Property Land Property
----------------- -------- ------------ ---- ----------- ---- -----------
Atlanta - Gwinnett Place Atlanta GA 5,646 2,153 5,780 -- 25
Columbus - East Columbus OH 5,029 620 6,154 -- 21
Santa Ana Santa Ana CA 3,861 3,254 6,017 -- --
Chicago - Hoffman Estates Hoffman Estates IL 6,367 1,413 7,278 -- 7
Cleveland - North Olmsted Cleveland OH 7,151 1,455 6,828 -- 20
Oklahoma City Oklahoma City OK 4,589 779 6,236 -- 26
Chicago - O'Hare Airport Schiller Park IL 10,829 3,766 11,430 -- 32
Jersey City Jersey City NJ 12,310 3,361 19,656 -- --
Las Vegas Las Vegas NV 15,000 5,675 16,912 -- 7
Corporate(4) 15,000 -- 1,530 -- 5,069
Acquisition costs for potential sites 83 109 -- --
-------- ------- -------- ------- --------
$214,575 $52,169 $237,731 $ -- $ 7,470
======== ======= ======== ======= ========
Gross Amount Carried
at Close of Period 12/31/00(5)
---------------------------------
(2) (3)
(1) Depreciable Accumulated Date of Date of
Candlewood Hotels Land Property Total Depreciation Construction Acquisition
----------------- ---- ----------- ----- ------------ ------------ -----------
Atlanta - Gwinnett Place 2,153 5,805 7,958 410 Feb-99 May-98
Columbus - East 620 6,175 6,795 385 May-99 May-98
Santa Ana 3,254 6,017 9,271 -- N/A Jun-98
Chicago - Hoffman Estates 1,413 7,285 8,698 447 Apr-99 Jul-98
Cleveland - North Olmsted 1,455 6,848 8,303 420 Apr-99 Jul-98
Oklahoma City 779 6,262 7,041 347 Jun-99 Jul-98
Chicago - O'Hare Airport 3,766 11,462 15,228 412 Nov-99 Jul-98
Jersey City 3,361 19,656 23,017 -- N/A Sep-98
Las Vegas 5,675 16,919 22,594 394 Apr-00 Jan-99
Corporate(4) -- 6,599 6,599 1,542
Acquisition costs for
potential sites 83 109 192 --
-------- -------- -------- --------
$ 52,169 $245,201 $297,370 $ 16,977
======== ======== ======== ========
NOTES:
- ------
NA - Not applicable
(1) This schedule includes all hotels operated at December 31, 2000,
including company-owned hotels and improvements to leased hotels. In
addition, the schedule includes all properties under construction at
December 31, 2000.
(2) For depreciable property, the Company uses a 40-year estimated life for
buildings and components, ten years for furniture and fixtures, and
three to five years on computer equipment and software.
(3) Dates of construction represents the date the hotel became fully
operational. This date is based on the completed project construction
date.
(4) The loan is not collateralized by specific properties and is a general
company obligation.
(5) There are no significant differences in the aggregate costs for federal
income tax purposes.
The changes in total real estate and depreciable property for the years ended
December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- --------- ---------
Balance, beginning of year $279,729 $ 234,439 $ 129,882
Acquisitions 17,641 67,042 285,172
Cost of hotels sold -- (21,752) (180,615)
-------- --------- ---------
Balance, end of year $297,370 $ 279,729 $ 234,439
======== ========= =========
The changes in accumulated depreciation for the years ended December 31, 2000,
1999 and 1998 were as follows:
2000 1999 1998
-------- ------- -------
Balance, beginning of year $ 8,582 $ 1,907 $ 1,109
Depreciation expense 8,418 6,752 3,081
Dispositions and other (23) (77) (2,283)
-------- ------- -------
Balance, end of year $ 16,977 $ 8,582 $ 1,907
======== ======= =======
S-2
62
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)
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)
E-1
63
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.
(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