<PAGE>   1


                                  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, 1997

                                              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.)

         Lakepoint Office Park, 9342 East Central, 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 the voting stock held by non-affiliates of
the registrant as of March 23, 1998 was $75,858,646 based on the closing sales
price of such stock on such date.

        The number of shares outstanding of the registrant's common stock, as of
March 23, 1998 was 9,025,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders to be held on May 18, 1998 are incorporated by this reference into
Part III as set forth herein.
<PAGE>   2

                                     PART I

ITEMS 1 AND 2.  BUSINESS AND PROPERTIES

INTRODUCTION

        Candlewood Hotel Company, Inc. (the "Company") is in the business of
developing, owning, operating, managing and franchising Candlewood extended-stay
hotels. As of December 31, 1997, the Company operated twenty-one Candlewood
hotels and was constructing twenty-two additional hotels. Additionally, as of
December 31, 1997, the Company had opened three franchised hotels and had an
additional six under construction. Including hotels open and under construction,
Candlewood had hotels in twenty-two states as of December 31, 1997. Candlewood
hotels and their amenities are designed to appeal particularly to business
travelers seeking extended-stay accommodations by combining the convenience of a
hotel with many of the comforts of an apartment and providing well appointed,
high quality lodging at affordable prices. The Company is developing and
franchising Candlewood hotels in order to capitalize on what the Company
believes is an underserved demand for mid-priced, extended-stay hotels and to
develop a leading national brand within the mid-priced segment of the
extended-stay market, which the Company believes is characterized by average
daily rates of approximately $45 to $75. The Company believes that the
experience of its senior management team is and will continue to be instrumental
in executing its growth strategy. Jack P. DeBoer, the Company's founder,
Chairman and Chief Executive Officer, is credited by the lodging industry with
creating the extended-stay concept as the founder of Residence Inns.

        The principal executive offices of the Company are located at Lakepoint
Office Park, 9342 East Central, Wichita, Kansas 67206, telephone (316) 631-1300.

CANDLEWOOD HOTELS

        The Candlewood brand is built on the foundation of providing exceptional
value to guests. Candlewood hotels offer upscale, spacious accommodations at
competitive rates within the mid-priced, extended-stay market which the Company
believes are attractive to both extended-stay guests and conventional hotel
guests. Candlewood hotels contain approximately 75 - 135 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. The
Company believes 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 extended-stay guests who desire a bedroom separated from
the kitchen and office area. As of December 31, 1997, the Company operated
twenty-one hotels in eighteen different states with a total of 2,249 rooms:
<TABLE>
<CAPTION>

                                                                       NUMBER
                                                                      --------
LOCATION                                      OPENING DATE            OF ROOMS
--------                                      ------------            --------
<S>                                           <C>                     <C>
Birmingham, Alabama                           October, 1997              98
Charlotte, North Carolina                     November, 1997             81
Cincinnati-Blue Ash, Ohio                     May, 1997                  77
Denver Tech Center, Colorado                  February, 1997            131
Detroit-Southfield, Michigan                  December, 1997            121
Houston-Clear Lake, Texas                     December, 1997            122
Houston-Loop Central, Texas                   December, 1997            122
</TABLE>

                                        2
<PAGE>   3

<TABLE>
<CAPTION>

                                                                       NUMBER
                                                                      --------
LOCATION                                      OPENING DATE            OF ROOMS
--------                                      ------------            --------
<S>                                           <C>                     <C>
Huntsville, Alabama                           December, 1997            123
Irvine-East, California                       November, 1997            122
Jacksonville, Florida                         November, 1997            111
Kansas City-Overland Park, Kansas             October, 1997             122
Knoxville, Tennessee                          December, 1997             98
Louisville, Kentucky                          May, 1997                  77
Norfolk-Hampton, Virginia                     September, 1997            98
Omaha, Nebraska                               January, 1997             130
Philadelphia-Willow Grove, Pennsylvania       November, 1997            110
Phoenix, Arizona                              November, 1997             98
Salt Lake-Airport, Utah                       November, 1997            122
Salt Lake-Ft. Union, Utah                     November, 1997             98
Wichita-Airport, Kansas                       November, 1997             81
Wichita, Kansas                               May, 1996                 107
</TABLE>

        Candlewood hotels offer upscale accommodations at competitive rates
within the mid-priced, extended-stay market which the Company believes will be
attractive to guests staying six nights or longer. Each Candlewood studio and
one-bedroom suite offers amenities designed to accommodate the needs of the
business traveler, such as two phones with two incoming direct dial lines and
computer connections, an oversized wooden desk with a quad-outlet to accommodate
office equipment needs, an executive chair, a bulletin board, a guest chair and
personalized, remote accessible phone mail. Each Candlewood suite contains a
25-inch television, video cassette player, compact disk 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. Also, each Candlewood
hotel is equipped with an exercise room, a complimentary guest laundry facility
and a convenient dry cleaning drop with same-day service. Candlewood hotels also
offer free local calls, 25 cent-per-minute long distance calls and the
self-service "Candlewood Cupboard" featuring value-priced packaged foods and 25
cent beverages. Each Candlewood guest receives a free "First Night Kit" complete
with items such as breakfast bars, coffee and popcorn.

        The Company believes the majority of extended-stay hotels are either in
the upscale sector of the market, such as Residence Inn, Homewood Suites,
Hawthorn Suites and Summerfield Suites (most with average daily rates that the
Company believes exceeds $80), or in the economy sector, such as Suburban Lodge,
Extended-Stay America, Homestead Village and Villager Lodge (most with weekly
rates that the Company believes represent effective average daily rates of less
than $35). Based upon industry sources, including public disclosure and equity
research reports, the Company believes that its nearest competitors in the
mid-priced, extended-stay segment, which include Studio Plus, MainStay Suites,
Towne Place, Sierra Suites and Homegate Hospitality, had a total of only
approximately 150 hotels open at the end of 1997. The Company believes that
these brands do not meet the needs of a large number of travelers who desire
well appointed, high quality, spacious accommodations with full kitchens, but
with room rates in the mid-priced segment of the extended-stay market.
Candlewood hotels are designed to accommodate what the Company believes to be an
underserved segment of the extended-stay market. In addition, the Company
believes that the high quality of Candlewood hotels relative to their moderate
daily rate attracts certain guests who otherwise would stay at traditional
hotels. The average daily rate at Candlewood hotels is approximately $45 - $75
per suite, in most areas of the country, which is significantly lower than
full-service hotels with comparable room features and amenities and generally

                                       3


<PAGE>   4

competitive with traditional limited-service hotels that do not offer the high
quality appointments and amenities of the Company's rooms. Accordingly, the
Company believes 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 DEVELOPMENT

        As of December 31, 1997 the Company operated 21 hotels. In addition, the
Company was constructing twenty-two Candlewood hotels. Through the development
of Company-operated hotels, Candlewood expects to be able to obtain a presence
in key markets and to achieve economies of scale in management, marketing and
purchasing. As of December 31, 1997, 15 of the Company's 21 hotels were subject
to a sale-leaseback arrangement (of which five had already been transferred and
leased back to the Company).

        The Company's development status as of December 31, 1997 was as follows:
<TABLE>
<CAPTION>

                                       PROPERTIES       ROOMS
                                       ----------       -----
<S>                                    <C>              <C>
Owned and operated                          16          1,691
Operated under long term leases              5            558
Under Construction                          22          2,600
Sites Under Contract                        34          4,416
                                       ==========       =====
  TOTAL                                     77          9,265
</TABLE>

        The Company's construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels developed by the Company.
The construction division has relationships with a group of approximately 8
contractors which are performing approximately 80% of the construction of the
Company's hotels in various regions of the United States. Each of these approved
contractors have extensive experience in the construction of lodging facilities.
Each of the contractors has agreed to a guaranteed maximum price contract which
sets a ceiling on total construction cost that is expected to limit cost
overruns. Any savings in the construction costs are shared by the Company and
the general contractors. The Company's 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 eight months;
however, construction is subject to delays due to weather and other
circumstances.

        Each of the Company's hotels is designed and constructed according to
uniform plans and specifications for the design of Candlewood facilities. The
Company expects to make design variations, including changes in the number of
studio suites and one bedroom suites, based on market demographics and site
restrictions, among other factors. To date, each Company developed hotel has
been constructed by the Company and the Company has no immediate plans to
convert other brands to Candlewood hotels. The Company believes that its
coordination of the construction of Candlewood hotels and use of its
comprehensive design manual will lower cost and result in consistent quality and
appearance.

        As of December 31, 1997, the following 22 Company-owned hotels with
2,600 expected rooms were under construction in 12 different states, 4 of which
are located in states where the Company did not then operate hotels:
<TABLE>
<CAPTION>
                                                              EXPECTED NUMBER
LOCATION                                     STATUS               OF ROOMS
--------                                     ------               --------
<S>                                   <C>                     <C>
Albuquerque, New Mexico               Under Construction             122
</TABLE>

                                       4


<PAGE>   5

<TABLE>
<CAPTION>
                                                              EXPECTED NUMBER
LOCATION                                     STATUS               OF ROOMS
--------                                     ------               --------
<S>                                   <C>                     <C>
Arlington, Texas                      Under Construction             125
Auburn Hills, Michigan                Under Construction             110
Austin, Texas                         Under Construction             125
Brentwood, Tennessee                  Under Construction             123
Charlotte, North Carolina             Under Construction             122
Dallas (Noel Road), Texas             Under Construction             134
Ft. Worth, Texas                      Under Construction              98
Garden Grove, California              Under Construction             133
Houston (Town & Country), Texas       Under Construction             122
Houston (Westchase), Texas            Under Construction             122
Irvine, California                    Under Construction             122
Irving, Texas                         Under Construction             117
Libertyville, Illinois                Under Construction             122
Miami, Florida                        Under Construction             129
Pittsburgh, Pennsylvania              Under Construction             123
Raleigh, North Carolina               Under Construction              81
Somerset, New Jersey                  Under Construction             110
Tempe, Arizona                        Under Construction             122
Troy, Michigan                        Under Construction             118
W. Des Moines, Iowa                   Under Construction              98
Warren, Michigan                      Under Construction             122
</TABLE>

        The Company's real estate division is continuously evaluating a variety
of sites for purchase and construction of Candlewood hotels. The Company has
entered into agreements with several commercial brokers, including CB Commercial
and certain independent brokers, that identify potential sites for Candlewood
hotels. The Company typically builds Candlewood hotels within 15 minutes of
employment centers, including large corporate headquarters, and within five
minutes of services such as restaurants and grocery stores. The Company is
developing hotels throughout the United States, and no area of the country has
been excluded from the Company's expansion plans.

        As of December 31, 1997, the Company had entered into 34 contracts for
the purchase of the following potential hotel sites in 19 states, 6 of which are
located in states where the Company did not then operate hotels or have hotels
under construction:

<TABLE>
<CAPTION>
                                                                EXPECTED NUMBER
LOCATION                                        STATUS              OF ROOMS
--------                                        ------              --------
<S>                                         <C>                 <C>
Albany, New York                            Under Contract             122
Alpharetta, Georgia                         Under Contract             122
Altamonte Springs, Florida                  Under Contract             123
Ann Arbor, Michigan                         Under Contract             123
Atlanta (Gwinnett County #2), Georgia       Under Contract             122
Austin, Texas                               Under Contract             122
Baltimore (Linthicum), Maryland             Under Contract             125
Bethlehem, Pennsylvania                     Under Contract             122
Braintree, Massachusetts                    Under Contract             134
Burlington, Massachusetts                   Under Contract             149
Chandler, Arizona                           Under Contract             122
</TABLE>


                                       5
<PAGE>   6

<TABLE>
<CAPTION>
                                                                EXPECTED NUMBER
LOCATION                                        STATUS              OF ROOMS
--------                                        ------              --------
<S>                                         <C>                 <C>
Clearwater, Florida                         Under Contract             105
Columbus, Ohio                              Under Contract             122
Dallas, Texas                               Under Contract             122
Dania, Florida                              Under Contract             122
Denver (Lakewood), Colorado                 Under Contract             122
Fairfax, Virginia                           Under Contract             122
Greensboro, North Carolina                  Under Contract             122
Herndon, Virginia                           Under Contract             122
Hoffman Estates, Illinois                   Under Contract             123
Jersey City, New Jersey                     Under Contract             215
Las Vegas, Nevada                           Under Contract             264
Louisville, Colorado                        Under Contract             122
Miami Lakes, Florida                        Under Contract             122
Mt. Laurel, New Jersey                      Under Contract             123
North Olmsted, Ohio                         Under Contract             122
Plano, Texas                                Under Contract             122
Santa Ana, California                       Under Contract             122
Santa Clara, California                     Under Contract             122
Schaumburg, Illinois                        Under Contract             122
St. Louis, Missouri                         Under Contract             122
Tigard, Oregon                              Under Contract             125
Toledo, Ohio                                Under Contract             122
Waukegan, Illinois                          Under Contract             123
</TABLE>

        There can be no assurance that present or future development will
proceed in accordance with the Company's expectations. The number of rooms
listed for those hotels that are under construction or under contract are
subject to change, and are only estimates of the number of rooms the Company
expects to construct. Construction is subject to delays from a number of
sources, many of which are outside the Company's control. The contracts which
the Company enters into for the purchase of potential hotel sites provide for
numerous investigations and other diligence, including environmental studies and
title reports, prior to the closing of the sale of the real property. The
Company reserves the right to terminate each contract if it is not satisfied
with the results of the investigations and diligence. There can be no assurance
that the Company will acquire properties, complete the development and
construction of hotels or that any such development or construction will be
completed on time or within budget.

HOTEL OPERATIONS

        Candlewood hotels focus on delivering those services and amenities which
the Company believes are valued most by its target clientele. This focused
approach enables each hotel to employ only ten to twelve employees, thereby
minimizing operating costs.

        Each Candlewood hotel employs a general manager who is responsible for
the operations of the hotel. The general manager shares duties with and oversees
a staff of approximately nine to eleven persons, typically consisting of an
assistant manager, a sales director, desk clerks, a maintenance person, and
housekeeper/laundry staff (many of whom are part-time employees). The office at
each of the Company's facilities is generally open daily from 7:00 a.m. to 8:00
p.m., although a staff member is

                                       6


<PAGE>   7

normally on site at all facilities 24 hours a day to respond to guests' needs.
By employing only ten to twelve employees at each hotel, the Company believes it
minimizes operating costs. Each Candlewood hotel has a system in place that
allows guests to check in and check out without the assistance of hotel
employees.

        Each Candlewood hotel's on-site general manager is responsible for the
Company'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 Candlewood's
other properties. Key on-site personnel participate in an incentive program
based on hotel revenues and profits. The Company's operations division conducts
periodic inspections of each Candlewood hotel to ensure compliance with the
Company's quality control standards. The Company believes that its corporate
services, such as accounting and payroll services, permit on-site hotel general
managers to effectively focus on providing guest services and results in
economies of scale.

        Each Candlewood general manager and director of sales is required to
complete Company administered classroom courses and on-the-job training to learn
the marketing and operational systems specific to the operation of an
extended-stay hotel, how to maximize operating efficiencies and how to attract
extended-stay guests. In addition, dedicated pre-opening teams (consisting of
experienced Candlewood managers) deliver on-site training to new employees to
ensure that the guest experience in all newly-opened Candlewood properties is
consistent with the standards set by comparable properties.

        The Company makes its hotel management services available to franchisees
and investors in joint ventures with the Company. The Company anticipates that
some franchisees may want to utilize the Company's experience and expertise to
manage their hotels and believes that the Company's management of such hotels
helps to maximize the consistency of the Candlewood hotel system. If in excess
of 75% of the cost of a franchised hotel is financed by GMAC Commercial Mortgage
Corporation ("GMAC"), Doubletree Corporation ("Doubletree") requires that the
Company manage the franchisee's hotel as a condition to guaranteeing a portion
of the loan. The Company has structured its management agreements so that it
will receive approximately 5% of hotel revenue in exchange for management
services. Currently, the Company provides management services to the Cambridge
Suites by Candlewood, owned by Jack DeBoer and located in Wichita, Kansas,
pursuant to a one-year renewable contract. The Company is not currently pursuing
other management arrangements for hotels other than Candlewood hotels.

MARKETING AND SALES

        Candlewood hotels provide high quality, comfortable and attractive
accommodations together with the amenities desired by the extended-stay business
traveler. The Company believes that the high quality of its rooms attracts
business travelers in the mid-priced segment of the extended-stay market, which
the Company believes is underserved by the current supply of rooms. The Company
also believes that its design and pricing results in longer stays, higher
occupancy rates and a more stable revenue stream.

        Each Candlewood hotel has an on-site director of sales dedicated to
marketing and direct sales efforts. The sales and marketing division uses direct
mail solicitations. Through these direct sales efforts, the Company believes it
can obtain and maintain consistently high occupancy levels and generate longer
stays by its guests. The Company's sales and marketing division targets
institutions and employers located in proximity to its properties.

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<PAGE>   8


        The Company has established a toll free telephone number,
1-800-946-6200, to enable guests to make reservations at any of the Company's
hotels. The number uses an automated response system that directs the caller to
the specific hotel desired, and reservations are then booked directly with that
hotel's personnel.

HOTEL FRANCHISING

        The Company has established a national franchising program which it
believes will accelerate the establishment of its market presence and brand
awareness on a national level, generate incremental revenues at an attractive
margin, and create opportunities to obtain management contracts with respect to
franchised properties. The Company has received approval to sell franchises in
47 states. As of December 31, 1997, the Company had entered into franchise
agreements for the establishment of Candlewood hotels in the following 10 areas:

Bellevue, Washington                     Pleasanton, California
Dallas, Texas                            Rockford, Illinois
Hillsboro, Oregon                        Sacramento, California
Salina, Kansas                           San Antonio, Texas
Milpitas, California                     Syracuse, New York

        As of December 31, 1997, three of the franchised hotels were open and
six were under construction. Franchise agreements are executed when the Company
and the franchisee agree on a site prior to construction. The Company makes the
services and expertise of its real estate, construction, sales and operations
divisions available to its franchisees in order to ensure high quality
facilities and customer service. The Company's construction division advises on
the construction and development of franchised hotels. A representative of the
Company's 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 and verification that they are in compliance with the Company's
quality control program and maintenance and updating standards. While the
Company may grant franchises in geographic locations where the Company owns and
operates hotels, if franchisees' hotels share a common trade area with the
Company's hotels, the Company may require that it manage the hotels owned by its
franchisees in order to coordinate direct sales efforts in the region.

        The Company's franchising program is focused on the sale of single and
multi-site franchises and the establishment of development agreements under
which the Company grants, in exchange for nominal consideration, the right to
obtain franchises to construct and operate Candlewood hotels in an exclusive
geographic territory. Pursuant to the Company's development agreements,
exclusive rights may be rescinded by the Company if the developer fails to
submit franchise applications pursuant to a development schedule. By granting
exclusive rights in a territory, the Company must rely on the developer, to the
exclusion of the Company or other franchisees, to franchise hotels at such
locations as the developer chooses and at such times as specified in the
development schedule. The Company is a party to only two development agreements,
and development agreements do not obligate the developer to build or open any
Candlewood hotels.

        There can be no assurance that the franchised hotels will be opened at
the time specified in the agreements, or at all. There can be no assurance that
any additional franchise agreements will be signed, either pursuant to
development agreements or independently, or that any Candlewood hotels will be
opened pursuant to the terms and the times specified in the development
agreements, the franchise

                                       8

<PAGE>   9

agreements, or at all. Some franchisees will require financing for the
construction of their hotels, and there can be no assurance that financing or
guarantees (by Doubletree or otherwise) will be available on terms satisfactory
to the franchisee, or at all. Failure to franchise hotels according to the
schedules set forth in the development agreements could result in delays in
construction in certain territories and have a material adverse effect on the
Company's business and results of operations.

FINANCING ACTIVITY

        The Company has arranged with GMAC for financing of up to $300 million
for the development of Company-owned and franchised hotels. As part of its
financial relationship with the Company, GMAC provides construction loans of up
to 70% of the cost of new Candlewood hotels, upon satisfaction of various
conditions. Following stabilization, the Company and franchisees are able to
convert these construction loans into long-term financing through GMAC.
Doubletree has agreed to guarantee certain portions of the loans up to 80% of
cost made to the Company or its franchisees and up to a total guaranteed loan
amount pursuant to this arrangement. As of December 31, 1997, the amounts loaned
to the Company and its franchisees which are guaranteed by Doubletree were $37.1
million and $2.1 million, respectively. 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 order to help finance the continued nationwide development of
Company-owned hotels, the Company completed a private placement (the "Private
Placement") whereby the Company issued 65,000 shares of its Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock"), at a price of $1,000 per
share, raising net proceeds $61.5 million. The Private Placement was completed
in two closings on September 23, 1997 ($25.0 million), and October 3, 1997
($40.0 million). The purchasers of the Preferred Stock (the "Purchasers")
consisted of a group of institutional investors and accredited investors. The
Purchasers are entitled to a preferential quarterly dividend equal to 7.5%,
payable quarterly beginning on August 31, 1998. The Certificate of Designation
provides for conversion of the Preferred Stock into Common Stock of the Company,
upon the election of the holders, at a price of $9.50 per share of Common Stock,
subject to certain anti-dilution adjustments.

        In order to further finance the Company's development activity, on
November 19, 1997 the Company entered into a sale-leaseback arrangement with
Hospitality Properties Trust, a Maryland real estate investment trust ("HPT").
Pursuant to the arrangement, the Company agreed to sell a total of 15 Candlewood
hotels to HPT for an aggregate purchase price of $100 million. The hotels will
be transferred in multiple closings, as individual hotels are completed. On
December 24, 1997, the Company completed the sale of five Candlewood hotels. The
transfer of all 15 hotels are expected to be completed in the first half of
1998. At the time each Hotel is transferred to HPT, the hotel is leased back to
a wholly-owned subsidiary of the Company pursuant to the terms of a long term
lease. The initial term of the lease is 14 years with three renewal options of
15 years each. The annual base rent equals $10 million. 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. As of December 31, 1997, the Company had
closed sale-leaseback transactions relating to five of the fifteen hotels with a
total sale price of approximately $36.9 million. The Company believes that this
and future sale-leaseback transactions will enable to Company to leverage its
financial resources and accelerate the roll-out of hotels.


                                       9
<PAGE>   10

HISTORY OF CANDLEWOOD

        The Company's current business of developing, owning, operating,
franchising and managing business hotels focusing on the extended-stay traveler
originated in November 1995 with the formation of Candlewood Hotel Company,
L.L.C., a Delaware limited liability company ("Candlewood LLC"). The membership
interests in Candlewood LLC were owned by Doubletree, JPD Corporation, a Kansas
corporation owned by Mr. DeBoer and certain trusts, the beneficiaries of which
are certain members of his family, and the Warren D. Fix Family Partnership, a
Kansas limited partnership, the general partner and majority owner of which is
Mr. Warren Fix, a director and the Executive Vice President and Chief Financial
Officer of the Company. The Company was incorporated in the State of Delaware in
August 1996 to succeed to the business of Candlewood LLC. In November 1996 the
Company completed an initial public offering of its common stock.

THE LODGING INDUSTRY

        The lodging industry revenue and profits have improved in each year
since 1991, according to industry sources that the Company believes to be
reliable. The industry is estimated to have generated its fourth consecutive
year of pre-tax profits in 1997 at a record of approximately $14.3 billion, up
14.4% from pre-tax profits of approximately $12.5 billion in 1996. The industry
has achieved increases in revenue per available room ("RevPAR") every year since
1991. According to Smith Travel Research, RevPAR for the industry as a whole
grew 3.2%, 5.6%, 6.5%, 6.0%, 7.7% and 5.3% in 1992, 1993, 1994, 1995, 1996 and
1997 respectively, over each of the previous periods.

The Extended-Stay Segment

        The Company believes that the extended stay market is one of the most
rapidly growing and underserved segments of the U.S. lodging industry, with
demand for extended stay lodging significantly exceeding the current supply of
dedicated extended stay rooms. For 1996, industry statistics indicate that there
were approximately 164.2 million room nights for paid accommodations of five
nights or longer related to non-convention business travel. This indicates
potential demand for over 450,000 extended stay lodging rooms on an annual
basis. Of the 3.4 million rooms available in the lodging industry in 1996,
extended stay hotel chains had only approximately 57,000 rooms. For 1997, there
were approximately 3.6 million rooms available in the lodging industry, of which
approximately 86,000 rooms were at extended stay hotels chains. Of the 29,000
rooms added at extended stay hotel chains in 1997, approximately 2,142 were
constructed by the company.

        The Company believes that the continuing significant demand/supply
imbalance and the longer length of stay have allowed occupancy rates for
extended stay hotels to significantly exceed occupancy rates in the overall U.S.
lodging industry. As shown below, average occupancy rates for extended stay
hotel chains have exceeded such rates in the overall U.S.
lodging industry for each of the previous five years.
<TABLE>
<CAPTION>

                      1993           1994           1995           1996           1997

<S>                   <C>            <C>            <C>            <C>            <C>
Extended Stay Hotel   79.2%          80.9%          80.3%          78.7%          75.7%
Chains (1)
</TABLE>



                                       10

<PAGE>   11
<TABLE>
<CAPTION>

<S>                   <C>            <C>            <C>            <C>            <C>
All U.S. Lodging      63.5           64.8           65.1           65.1           64.5
Industry (2)
</TABLE>


        (1) Occupancy rates were provided by Smith Travel Research. Includes
            Homestead Village(R), Villager Lodge(R), StudioPLUS, Lexington Hotel
            Suites(R), EXTENDED STAYAMERICA Efficiency Studios, Suburban Lodge,
            Candlewood, and Sierra Suites.

        (2) Occupancy rates were proved by Smith Travel Research.

        The Company believes the decline in occupancy rates for extended stay
hotel chains since 1995 is in part the result of an increase in the proportion
of newly-opened hotels, which generally experience lower occupancies during
their pre-stabilization period. Available room nights for extended stay hotels
increased by 2.8 million in 1996 and 7.2 million in 1997, or 19.1% and 41.6%
respectively, to a total of 24.4 million. Occupied room nights for extended stay
hotels increased by 1.9 million in 1996 and 4.9 million in 1997, or 16.7% and
36.2% respectively, to a total of 18.5 million, indicating that a significant
amount of the new construction has been absorbed.

        As of December 31, 1997, 418 extended stay hotels containing 48,348
rooms, were in the start stage of development according to F.W. Dodge and Cooper
& Lybrand LLP. Starts include projects that are within 60 days of ground
breaking. The breakdown of room starts by price segment is as follows: upper
price of 10,517, mid-price of 13,793, and economy price of 24,038. The overall
extended stay room starts and mid-price extended stay room starts represent
21.4% and 6.1%, respectively of the total hotel room starts of 226,308. The
Company's hotel room starts are reported to represent 3,713 of the 13,793
mid-price extended stay room starts.

        The lodging industry, and the extended-stay segment in which the Company
operates, may be adversely affected by changes in national or local economic
conditions and other local market conditions, such as an oversupply of hotel
rooms or a reduction in demand for hotel space in a geographic area, changes in
travel patterns, extreme weather conditions, changes in governmental regulations
which influence or determine wages, prices or construction costs, changes in
interest rates, the availability of financing for operating or capital needs or
changes in real estate tax rates and other operating expenses. In addition, due
in part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. Downturns or prolonged adverse conditions in the real
estate or capital markets or in national or local economies, the inability of
the Company or its franchisees to secure financing for the development of
Candlewood hotels or an oversupply of hotel rooms coupled with a reduction in
demand could have a material adverse impact on the Company's business and
results of operations.

COMPETITION

        The lodging industry is highly competitive. Competitive factors within
the industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its properties in geographic locations where other extended-stay hotels
may be located. The Company expects to compete for guests and development sites
with both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual

                                       11
<PAGE>   12

extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction industry and others in the lodging industry.
The number of competitive lodging facilities in a particular area could have a
material adverse effect on occupancy, average daily rate and revenues of the
Candlewood hotels.

        Competition for franchise agreements in the lodging industry is intense.
The Company expects to compete with national and regional brand franchisors,
most of which have greater name recognition and financial resources and a more
established market presence than the Company. The Company believes that
competition for franchise agreements is based principally upon: the perceived
value and validity of the brand; the nature and quality of services provided to
franchisees; the franchisees' view of the relationship of building cost and
operating expenses to the potential for revenues and profitability during
operation and upon sale; and the franchisees' ability to finance construction
and operation of the hotel. No assurance can be given that the Company will be
successful in establishing brand awareness or the other factors on which
franchisors compete, retaining its current franchisee or competing for or
obtaining additional franchisees. Failure to maintain and attract franchisees
could have a material adverse effect on the Company's business and results of
operations.

        The Company anticipates that competition within the extended-stay
lodging market will increase substantially in the foreseeable future. A number
of other lodging chains and developers have developed or are attempting to
develop extended-stay lodging facilities that may compete with the Company's
facilities. In particular, some of these entities target the mid-priced segment
of the extended-stay market in which the Company competes. The Company may
compete for guests and for development sites with certain of these established
entities that have greater financial resources than the Company and better
relationships with lenders and real estate sellers. Further, there can be no
assurance that new or existing competitors will not significantly reduce their
rates or offer greater convenience, services or amenities or significantly
expand or improve facilities in markets in which the Company competes, thereby
materially adversely affecting the Company's business and results of operations.

GOVERNMENT REGULATION

        The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, the Company and its franchisees are subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
Company is 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
noncompetition provisions and termination or nonrenewal 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
the Company's 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, all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA requirements
in the designs for its facilities, no assurance can be given that a material ADA
claim will not be asserted against the Company, which could result in a judicial
order requiring compliance, and the expenditure of substantial sums to achieve
compliance, an imposition of

                                       12


<PAGE>   13

fines, or an award of damages to private litigants. These and other initiatives
could adversely affect the Company as well as the lodging industry in general.

ENVIRONMENTAL MATTERS

        The Company's 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, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. The Company attempts to
minimize its exposure to potential environmental liability through its site
selection procedures. The Company typically enters into contracts to purchase
real estate subject to certain contingencies. Prior to exercising its option and
purchasing the property, the Company conducts a Phase I environmental assessment
(which generally includes a physical inspection and database search, but not
soil or groundwater analyses).

        Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership or operation of
hotels, the Company may be potentially liable for any such costs. Although the
Company is currently not aware of any material environmental claims pending or
threatened against it or any of its managed or franchised hotels, no assurance
can be given that a material environmental claim will not be asserted against
the Company or against the Company and its 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 the results of operations of
the Company.

PROPRIETARY RIGHTS

        "Candlewood" is a registered service mark of the Company on the
principal register of the United States Patent and Trademark Office. The
Certificate of Registration was issued on December 24, 1996. Candlewood is also
a registered service mark of the Company with the State of Kansas and a
trademark application for proposed use for Candlewood has been made in Canada
and was filed in November 1996. A notice of allowance was issued by the Canadian
Intellectual Property Office on November 6, 1997. The Company has until June 25,
1999 to file a declaration of use on this mark. Your Studio Hotel is a
registered service mark of the Company on the supplemental register of the
United States Patent and Trademark Office. The Certificate of Registration was
issued 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.

        A service mark application for the Company's Candle Flame/Twin Circle
logo has been made with the United States Patent and Trademark Office with a
filing date of April 15, 1997. Currently, the mark has been published for
opposition on January 13, 1998. Its status is pending. The Company has also
filed a service mark application for "Delivering Exceptional Value" on April 15,
1997 with the U.S.

                                       13

<PAGE>   14

Patent and Trademark Office. This application had been scheduled for
registration but was withdrawn from that status by the U.S. Patent and Trademark
Office on January 23, 1998. Telephone conversations with the examining attorney
indicate that the Official Gazette staff rejected the application on March 18,
1998. Finally, the Company has filed service mark applications for "Cambridge
Suites" and "Cambridge Suites by Candlewood" under an intent to use. Both
applications were filed May 27, 1997. The examining attorney for these
applications has tentatively denied registration of these marks.

        The Company also claims common law rights to the trade name and service
marks for various Candlewood products and services. To date, the Company has not
filed trademark or service mark applications for any other mark.

INSURANCE

        The Company currently has the types and amounts of insurance coverage
that it considers appropriate for a company of its size in its business. While
management believes that its insurance coverage is adequate, if the Company were
held liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and adversely
affected. Specifically, there are certain types of hotel-related losses,
generally of a catastrophic nature, such as earthquakes and floods, that may be
uninsurable or not economically insurable. The Company uses its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to obtaining appropriate insurance on the Company's 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 the Company's 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 the Company might not be adequate to restore its
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 the Company's hotels.

EMPLOYEES

        As of December 31, 1997, the Company and its subsidiaries employed on a
full or part-time basis 361 persons, 264 of whom were employed at the Company's
hotels, and 97 of whom were employed in the Company's corporate headquarters.
The Company's employees are not subject to any collective bargaining agreements,
and management believes that its relationship with its employees is good.

PROPERTIES
        In addition to the properties described above, the Company also
maintains its corporate headquarters in Wichita, Kansas. The Company leases its
office space on a short-term basis. The Company has expanded out of its present
space and is subleasing additional space in a remote location. The Company
anticipates signing a lease on a new facility in the first half of 1998 and
expects to move into the new location in the first half of 1999. The Company
does not anticipate any difficulty in securing additional office space, as
needed, on terms acceptable to the Company.

                                       14
<PAGE>   15

CERTAIN BUSINESS CONSIDERATIONS

        This Annual Report on Form 10-K contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and elsewhere in this Annual Report on Form 10-K.

        Limited Operating History; Risks of Operations. The Company began
operating its first extended-stay hotel in May 1996 and has a limited operating
history upon which to evaluate the Company's performance and its claims about
the proposed construction, operation, features, rates and demand for Candlewood
hotels, among other things. At December 31, 1997, the Company operated
twenty-one hotels, fifteen of which opened in the fourth quarter. These hotels
have not generated sufficient cash to cover the Company's operating expenses.
The Company has incurred losses to date and there can be no assurance that the
Company will be profitable in the future. Operation of individual hotels and a
chain of multiple hotels is subject to numerous risks including the inability to
operate the hotels at expected expense levels, the inability to maintain high
occupancy rates or to attract guests for extended stays, liability for accidents
and other events occurring at hotel properties and the inability to achieve
expected nightly rates. If the Company is unable to efficiently and effectively
operate its hotels, the Company's business and results of operations would be
materially and adversely effected.

        Future Capital Needs and Risks of Additional Financing. The development
of hotels is capital intensive. The Company has arranged with a third party
lender to finance up to 70% of the cost of individual Company-developed hotels.
The Company has and expects to continue to seek financing of up to 80% of the
cost of certain Company-developed hotels utilizing Doubletree's guarantee to
facilitate such financing. The use of the Doubletree guarantee reduces the
Company's profit opportunity, if any, with respect to certain Company-developed
hotels. 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. There can be no assurance that any financing applications submitted
by the Company will be approved by the third party lender on a timely basis, or
at all, that the Company will be able to utilize the Doubletree guarantee, or
that the Company will be able to finance greater than 70% of the cost of any
Company-developed hotel with the third party lender. If the applications are not
approved or if loans are not funded on a timely basis, the Company may be unable
to construct additional Candlewood hotels, may experience delays in its planned
development of hotels, and expects that it will be required to seek additional
financing. In addition, the Company's ability to meet its debt service
obligations will depend upon the future performance of the Company's operations,
which, in turn, is subject to prevailing economic conditions and to financial,
business and other factors beyond its control. The Company has no current
arrangements with respect to, or sources of, additional debt financing.
Additionally, no assurance can be given that financing will be available to the
Company when needed or upon terms acceptable to the Company. If such capital or
financing is unavailable, the Company may not be able to develop further hotels.

        Development Risks. The Company intends to grow primarily by developing
and franchising additional Candlewood extended-stay hotels. Development involves
substantial risks, including: costs exceeding budgeted or contracted amounts;
delays in completion of construction; failing to obtain all necessary zoning and
construction permits; financing not being available on favorable terms;
developed properties not achieving desired revenue or profitability levels once
opened; competition for suitable development sites from competitors, some of
whom have greater financial resources than the Company; incurring substantial
costs if a development project must be abandoned prior to completion; changes in


                                       15
<PAGE>   16

governmental rules, regulations and interpretations; and changes in general
economic and business conditions. There can be no assurance that the Company
will acquire properties, complete the development and construction of hotels or
that any such development or construction will be completed on time or within
budget.

        Risks Associated with Rapid Growth. The Company's rapid development
plans will require the implementation of specialized operational and financial
systems and will require additional management, operational and financial
resources. For example, the Company will be required to recruit and train
property managers and other personnel for each new hotel as well as additional
personnel at its headquarters. There can be no assurance that the Company will
be able to achieve its planned rate of expansion or manage its expanding
operations effectively. If the Company is unable to manage its growth
effectively, the Company's business and results of operations could be
materially and adversely effected.

        Dependence on Single Type of Lodging Facility and Single Brand. The
Company intends exclusively to develop, manage and franchise Candlewood hotels.
The Company currently does not intend to develop any lodging facilities other
than business hotels focused on extended-stay travelers in the mid-priced
segment of the market and does not intend to develop lodging facilities with
other franchisors. Accordingly, the Company will be subject to risks inherent in
concentrating investments in a single type of lodging facility and a single
franchise brand, such as a shift in demand or a reduction in business following
adverse publicity related to the brand, which could have a material adverse
effect on the Company's business and results of operations. The Company has
limited history upon which it can gauge consumer acceptance of its hotels, and
there can be no assurance that the Company's hotels will be readily accepted by
guests who are looking for extended-stay hotel accommodations. Further, the
Company's hotels will compete against other facilities with substantially
greater brand recognition.

        Real Estate Investment Risks. The Company's investment in its hotels
will be subject to varying degrees of risk related to the ownership and
operation of real property. The underlying value of the Company's real estate
investments is significantly dependent upon its ability to maintain or increase
cash provided by operating such investments. The value of the Company's hotels
and income from the 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 real property tax rates, changes in the availability, cost and terms
of financing, the impact of present or future environmental laws, the ongoing
need for capital improvements, changes in operating expenses, changes in
governmental rules and policies, natural disasters and other factors which are
beyond the control of the Company. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio in response to
changes in economic and other conditions will be limited. There can be no
assurance that the Company will be able to dispose of an investment when it
finds disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of the Company's investment.

        Seasonality. Based upon the experience of the existing hotels,
management expects 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 the Company's expenses do not fluctuate with occupancy, such declines in
occupancy may cause fluctuations or decreases in the Company's quarterly
earnings.


                                       16

<PAGE>   17

        Dependence on Key Personnel. The Company's success depends to a
significant extent upon the efforts and abilities of its 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 the Company's business and results of
operations.

ITEM 3. LEGAL PROCEEDINGS

        The Company is and from time to time has been party to commercial
litigation relating to its business. Candlewood believes that none of these
matters is material and intends to defend itself vigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.



                                       17
<PAGE>   18



                                     PART II

ITEM 5.        MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
               MATTERS

        The Company's initial public offering of common stock was effective as
of November 5, 1996. The common stock is listed on the Nasdaq National Market
under the symbol "CNDL". The following table sets forth, for the calendar
periods indicated, the range of high and low closing prices for the common
stock, as reported by the Nasdaq National market:
<TABLE>
<CAPTION>
1997                                            High             Low
----                                            ----             ---
<S>                                          <C>               <C>
Fourth Quarter                               $  10 7/8         $  7 5/8
Third Quarter                                   11 1/2            7 3/8
Second Quarter                                  10 1/4            7 7/8
First Quarter                                   13 3/4            8

1996                                            High              Low
----                                            ----              ---
Fourth Quarter*                              $  10 1/8         $  8 1/4
</TABLE>

-----------
*       Reflective of the period from November 5, 1996 (commencement of the
        Company's initial public offering) until December 31, 1996.

        The closing sales price of the Company's common stock on March 23, 1998
was $8 1/4. The approximate number of stockholders of record on March 23, 1998
was 78. The approximate number of beneficial stockholders on March 23, 1998
was 689.

        The Company has not paid dividends on its Common Stock. The Preferred
Stock accrues cumulative dividends from the Closing Date at a rate of 7.5% of
the stated value of the shares ($1,000 per share), payable in cash initially on
August 31, 1998, and quarterly thereafter when and if declared by the Board of
Directors, in preference to any dividend on the Common Stock. The Company
currently does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future. The payment of dividends for the Common Stock in the
future will be at the discretion of the Board of Directors and will be dependent
upon the Company's financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors. The
Company anticipates that future financing, including any lines of credit, may
restrict or prohibit the Company's ability to pay dividends. After payment of
dividends on the Preferred Stock, the Company intends to retain any future
earnings for reinvestment in the development and expansion of its business.


                                       18
<PAGE>   19



ITEM 6. SELECTED FINANCIAL DATA
        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

        The selected consolidated financial data set forth below as of and for
the years ended December 31, 1997 and 1996, and the period from October 1, 1995
(inception) to December 31, 1995, have been derived from the audited
consolidated financial statements of the Company and notes thereto included
elsewhere in this Form 10-K. 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 and related notes thereto of the Company.
<TABLE>
<CAPTION>

                                                                                           Period from
                                                                                         October 1, 1995
                                                    Year Ended         Year Ended          (Inception) to
                                                 December 31, 1997   December 31, 1996   December 31, 1995(1)
                                                 -----------------   -----------------   --------------------
STATEMENT OF OPERATIONS DATA:
<S>                                              <C>                 <C>                 <C>
Hotel operations revenues ......................      $     6,223       $       686       $      --
Hotel operating expenses .......................            4,792               400              --
Corporate operating expenses ...................            2,529             1,637               204
Depreciation and amortization ..................            1,022               249                 5
Interest income ................................            1,216               328              --
Interest expense ...............................             (134)              (81)             --
Net loss .......................................             (817)           (1,353)             (209)
Net loss per share (pro forma 1996 and 1995) (2)            (0.23)            (0.23)            (0.04)
Weighted average shares outstanding (pro forma .        9,025,000         5,764,071         5,175,000
1996 and 1995) (2)
</TABLE>

<TABLE>
<CAPTION>

                                               December 31, 1997   December 31, 1996  December 31, 1995
                                               -----------------   -----------------  -----------------
BALANCE SHEET DATA:
<S>                                            <C>                 <C>                 <C>
Cash and cash equivalents .................            $ 35,355            $ 33,792            $    123
Total assets ..............................             181,807              51,674               1,283
Accounts payable and other accrued expenses              16,040               2,435                  92
Long term debt ............................              63,416              15,457                --
Minority interest .........................                --                  --                     8
Members' equity ...........................                --                  --                 1,183
Stockholders' equity ......................              32,589              33,406                --
</TABLE>

--------

(1)     Although Candlewood LLC was not formed until November 16, 1995, certain
        expenses applicable to its business were incurred during the period from
        October 1, 1995 to November 16, 1995 and were funded by capital
        contributions of members. Accordingly, the Company's statements of
        operations have been presented as if the Company's operations began on
        October 1, 1995.

(2)     Pro forma net loss per share is based on (i) the 5,175,000 shares of
        Common Stock of the Company issued in conjunction with the
        Reorganization as if such shares had been issued and outstanding for all
        periods presented, (ii) the 3,850,000 shares of Common Stock of the
        Company (based on the weighted shares outstanding during the period)
        issued in conjunction with the Company's initial public offering in
        November 1996 and (iii) the amount of pro forma net loss as if the
        Company had

                                       19
<PAGE>   20

        operated as a C Corporation for all periods presented. See Notes 2.i and
        2.j of Notes to Consolidated Financial Statements.

ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

        The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto appearing
elsewhere herein.

OVERVIEW

        The Company began operations in October 1995 to develop, own, operate,
manage and franchise Candlewood Suites, hotels designed for business travelers
and focusing on extended-stay guests. The Company's first Candlewood hotel was
completed in May 1996. Two additional hotels opened in the first quarter of
1997, and by the end of 1997, the Company operated 21 hotels located in 16
different states. As of December 31, 1997, the Company was constructing 22
additional Company-owned hotels and was performing market-feasibility due
diligence with respect to an additional 34 potential hotel sites.

        The Company was incorporated in August 1996 to succeed to the business
of Candlewood Hotel Company, L.L.C., a Delaware limited liability Company
("Candlewood LLC"). Candlewood LLC was formed in November 1995. 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 in
May 1996. The financial information in this section includes the financial
information of Candlewood LLC where applicable.

        The following is a summary of the Company's development status as of
December 31, 1997.
<TABLE>
<CAPTION>
                                               PROPERTIES               ROOMS
                                               ----------               -----
<S>                                            <C>                      <C>
Owned and operated                                 16                   1,691
Operated under long-term leases                     5                     558
Under Construction                                 22                   2,600
Sites Under Contract                               34                   4,416
                                               ----------               -----
        TOTAL                                      77                   9,265
</TABLE>


        The Company expects to complete the construction of the facilities under
construction at December 31, 1997 at various times during 1998 and to commence
construction of the majority of the sites that were under option at December 31,
1997 at various dates in 1998. There can be no assurance, however, that the
Company will acquire the sites under option or complete construction within the
anticipated time periods. The Company's ability to complete development of sites
under construction and under option may be materially impacted by various
factors including zoning, permitting, and environmental issues, as well as
weather-induced construction delays.

        In addition to the construction of Company-owned Candlewood hotels, the
Company had entered into a total of 10 franchise agreements as of December 31,
1997. As of December 31, 1997, 3 franchised hotels were open and six were under
construction. The Company is also a party to two development agreements which
collectively grant 19 options to construct and operate two Candlewood hotels in
1997, five Candlewood hotels in 1998, six Candlewood hotels in 1999, and six
Candlewood hotels in 2000 in

                                       20


<PAGE>   21

11 areas. Development agreements do not obligate the developer to build or open
any Candlewood hotels; however, such agreements allow the Company to terminate
the developer's exclusive territorial rights if the developer fails to submit
franchise applications pursuant to a development schedule. There can be no
assurance that any Candlewood hotels will be opened pursuant to the terms and at
the times specified in the development agreements, the franchise agreements, or
at all.

SIGNIFICANT EVENTS

        In October of 1997, the Company completed a $65 million private
placement of 65,000 shares of Series A Preferred Stock at an offering price of
$1,000 per share. The net proceeds to the Company, after deducting commissions
and expenses of $3.5 million, were $61.5 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 quarterly, including up to the date of
conversion, thereafter when and if declared by the board of directors. The
Preferred Stock will have the right to convert, at the option of the holder, at
any time, into shares of Common Stock at the conversion price of $9.50 per
share. Subsequent to September 30, 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 Preferred Stock will be redeemed under a
mandatory redemption clause, at the Stated Value plus unpaid dividends.

        In November, 1997, the Company entered into an agreement with
Hospitality Properties Trust to sell 15 hotels for a total purchase price of
$100 million. Concurrently, the Company agreed to lease back the hotels under
noncancelable operating leases. The Company completed the sale and related lease
back of five of the hotels in December, 1997, and is scheduled to complete the
transaction in the first half of 1998. Total sales proceeds from the five hotels
sold were $35.9 million. A deferred gain on the sale of $6.8 million was
recorded at December 31, 1997 and will be amortized to income over the lease
term.

RESULTS OF OPERATIONS

        Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

        Hotel Operations

        The following is a summary of the properties operated during the
specified periods and the related average occupancy rates and daily room rates:
<TABLE>
<CAPTION>

         Year Ended December 31, 1997                     Year Ended December 31, 1996
         ----------------------------                     ----------------------------
                    Average         Average                         Average         Average
  Facilities     Occupancy Rate      Daily         Facilities    Occupancy Rate      Daily
     Open            Rate          Room Rate          Open           Rate          Room Rate
     ----            -----         ---------          ----           -----         ---------
  <S>            <C>               <C>             <C>            <C>              <C>
      21             52.1%           $51.31            1              56%            $47.71
</TABLE>

        Average occupancy rates are determined by dividing the rooms occupied on
a daily basis by the total number of rooms. Due to the Company's rapid
expansion, its overall average occupancy rate has been negatively impacted by
the lower occupancy typically experienced during the pre-stabilization period
for newly-opened facilities. This negative impact on occupancy is expected to
diminish as the ratio of new property openings during a period to total
properties in operation at the end of that period decreases. A total of 20
properties commenced operations in 1997 compared to one property which was

                                       21
<PAGE>   22

opened in 1996. Average daily room rates are determined by dividing room revenue
by the number of rooms occupied on a daily basis for the applicable period. The
Company believes that the average daily room rates vary due primarily to (i)
stays of less than one week, which are charged at a higher nightly rate, (ii)
higher rates for the Company's one-bedroom suites, and (iii) higher rates in
certain hotel locations. Future occupancy and room rates may be impacted by a
number of factors, including the number and geographic location of new
facilities as well as the season in which such facilities commence operations.
There can be no assurance that the foregoing occupancy and room rates can be
maintained.

        As of December 31, 1997, the Company owned and operated 21 Candlewood
hotels. As of December 31, 1996, the Company owned and operated one Candlewood
hotel in Wichita, Kansas, which opened on May 5, 1996. The following table
presents summary financial information for the Company's 22 hotels for the
period ending December 31, 1997 and, for the Wichita, Kansas hotel for the
period from May 5, 1996 to December 31, 1996. The results of operations for this
period are not necessarily indicative of the future results of operations of
Company-owned hotels.
<TABLE>
<CAPTION>

                                                                May 5, 1996
                                                            (Commencement of
                                       January 1, 1997       Operations) to
                                    to December 31, 1997    December 31, 1996
                                    --------------------    -----------------
<S>                                 <C>                     <C>
Hotel operating revenue .....            $6,223,000            $  686,000
Other revenue ...............               221,000                  --
Hotel operating expenses ....             4,792,000               400,000
Depreciation and amortization             1,022,000               180,000
</TABLE>

        Hotel operating revenue for the year ending December 31, 1997, compared
to the period from May 5, 1996 to December 31, 1996, was $6,223,000 and
$686,000, respectively. Hotel operating revenue consists of room revenue, guest
telephone, vending, and pay-per-view movie rental. During the same periods, the
length of stay averaged approximately 15 and 13 days, respectively. Other
revenue for the year ending December 31, 1997 was $221,000 compared to $0 for
the period from May 5, 1996 to December 31, 1996. Other revenue consists of
development and royalty fees from franchisees. The increase in room revenue and
other revenue from 1996 to 1997 was primarily due to the increase in the number
of hotels open and operating. Revenue per available room (RevPAR) was $26.74 for
the period ended December 31, 1997, and $26.77 for the period ended December 31,
1996.

        Hotel operating expenses consisted of all expenses directly applicable
to the operation of the hotel and includes an allocation of corporate operating
expenses. The largest portion of hotel operating expenses was salaries, wages
and fringe benefits. The balance of hotel operating expenses was comprised of
normal operating items, such as electricity, gas and other utilities, property
taxes, insurance, cleaning supplies, promotional materials, maintenance items,
and similar expenses. Hotel operating expenses for the year ended December 31,
1997 and the period from May 5, 1996 to December 31, 1996, totaled $4,792,000
and $400,000, respectively. The increase in hotel operating expenses was
primarily attributable to the increase in number of hotels open and operating.
The increase in property operating expenses as a percentage of total revenue for
1997 as compared to 1996 is primarily a result of lower occupancies and revenue
during the pre-stabilization period for the 20 properties that were opened
during 1997. As a result of the foregoing, the Company realized operating
margins in 1997 and the period from May 5, 1996 to December 31, 1996 of 23% and
42%, respectively.

                                       22
<PAGE>   23
        Depreciation and amortization expenses for the year ended December 31,
1997 and the period from May 5, 1996 to December 31, 1996, were $1,022,000 and
$180,000, respectively. The increase in depreciation and amortization for 1997
as compared to 1996 is the result of the full year of operation in 1997 of the
Wichita property opened in 1996 and the partial periods of operation in 1997 for
the 20 properties opened in 1997. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years, except in the case of opening expenses, which
are amortized over no more than the first 12 months of operations. For the
period from May 5, 1996 to December 31, 1996, depreciation and amortization
expense reflects amounts for the pro-rata portion of a full year.

        The Company recognized total revenue for 1997 and the period from May 5,
1996 to December 31, 1996 of $35.6 million and $686,000, respectively, an
increase of $34.9 million. Approximately $5.9 million of the increased revenue
was attributable to hotel operations, and approximately $29 million was
attributable to the proceeds from the sale-leaseback transaction.

        Corporate Operations

        Corporate operating expenses included all expenses not directly related
to the development or operation of specific hotels. Such expenses, which totaled
approximately $2.5 million for the year ended December 31, 1997 and $1.7 million
for the period from May 5, 1996 to December 31, 1996, were related principally
to salaries, wages and fringe benefits. The increase in corporate operating
expenses for 1997 as compared to 1996 reflects the impact of additional
personnel and related expenses in connection with the Company's increased level
of activity. The balance of other corporate operating expenses was comprised of
normal operating costs, such as office space lease, telephone, utilities,
advertising and professional fees and similar expenses.

        The Company earned $1.2 million and $328,000 of interest income for the
year ended December 31, 1997 and the period from May 5, 1996 to December 31,
1996, respectively, which was related principally to short-term investment
(generally less than three months) of excess funds, including the proceeds from
the Company's initial public offering of Common Stock, its offering of Preferred
Stock and the sale-leaseback transaction.

        Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

        Hotel Operations - Wichita Hotel

        As of December 31, 1996, the Company owned and operated one Candlewood
hotel in Wichita, Kansas, which opened on May 5, 1996. The following table
presents summary financial information for the Wichita, Kansas hotel for the
period from May 5, 1996 to December 31, 1996. The results of operations for this
period are not necessarily indicative of the future results of operations of the
Wichita hotel or of other Company-owned hotels.

                                       23
<PAGE>   24
<TABLE>
<CAPTION>

                                                                                 May 5, 1996
                                                                                (Commencement
                                                                                     of
                                                                               Operations) to
                                                                              December 31, 1996
                                                                              -----------------
<S>                                                                            <C>
Hotel operating revenue......................................................  $    686,000
Other revenue................................................................             0
Hotel operating expenses.....................................................       400,000
Depreciation and amortization................................................       180,000
</TABLE>

        Hotel operating revenue for the period from May 5, 1996 to December 31,
1996, was $686,000. The average occupancy rate for the same period was 56%.
Occupancy rates are determined by dividing the number of guest rooms occupied on
a daily basis by the total number of guest rooms available at the facility.
During the same period, the length of stay averaged approximately 13 days and
the average daily room rate was $47.71. The Company believes that the average
daily room rate was favorably affected by stays that were shorter than six days,
as these shorter stays commanded a slightly higher rate. Other revenue for the
hotel consists of guest telephone, vending and pay-per-view movie revenues.
Revenue per available room (RevPAR) was $26.77 for the period ended December 31,
1996.

        Hotel operating expenses for the period from May 5, 1996 to December 31,
1996, totaled $400,000. Hotel operating expenses consists of all expenses
directly applicable to the operation of the hotel and includes an allocation of
corporate operating expenses. The largest portion of hotel operating expenses
was salaries, wages and fringe benefits. The balance of hotel operating expenses
was comprised of normal operating items, such as electricity, gas and other
utilities, property taxes, insurance, cleaning supplies, promotional materials,
maintenance items, and similar expenses.

        Depreciation and amortization expense for the period from May 5, 1996 to
December 31, 1996, was $249,000. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the respective assets,
ranging from three to forty years, except in the case of opening expenses, which
are amortized over no more than the first 12 months of operations. For the
period from May 5, 1996 to December 31, 1996, depreciation expense reflects
amounts for the pro-rata portion of a full year.

        Corporate Operations

        Corporate operating expenses included all expenses not directly related
to the development or operation of specific hotels. Such expenses, which totaled
approximately $1.7 million for the year ended December 31, 1996, were related
principally to salaries, wages and fringe benefits. The balance of other
corporate operating expenses was comprised of normal operating costs, such as
office space lease, telephone, utilities, advertising, professional fees and
similar expenses.

        Depreciation and amortization for the year ended December 31, 1996
totaled $69,000 and related to the furniture, equipment and intangible assets of
the corporate office. Depreciation was calculated using the straight-line method
over the estimated useful lives of the respective assets, ranging from three to
twenty years. Amortization expenses for intangible assets is computed using the
straight-line method over the life of the corresponding asset.


                                       24

<PAGE>   25

        The Company earned $328,000 of interest income for the year ended
December 31, 1996 which related principally to short-term investment of excess
funds, including the proceeds from the Company's initial public offering of
Common Stock.

LIQUIDITY AND CAPITAL RESOURCES

        The Company had cash and cash equivalents of $35.4 million and $33.8
million as of December 31, 1997 and December 31, 1996, respectively. During the
years ended December 31, 1997, and December 31, 1996, cash used in operating
activities totaled $418,000 and $411,000, respectively. The net loss during the
years 1997 and 1996 was approximately $817,000 and $1.4 million, respectively,
with the change resulting primarily from the increase in revenue associated with
hotels in operation. Increases in deposits, accounts receivable, capitalized
opening costs and other assets also resulted in the use of cash for operating
activities during the periods. These uses were offset by increases in accounts
payable and other accrued expenses, other liabilities and by expenses not
requiring the use of cash.

        Cash used by investing activities for the year ended December 31, 1997
and the year ended December 31, 1996 totaled approximately $144.1 million and
$14.9 million, respectively. The Company's expenditures for property and
equipment in connection with completed hotels, the construction of new hotels,
and the costs of hotels sold pursuant to the sale leaseback agreements, totaled
approximately $139.5 million and $13.6 million, respectively. Increases in
acquisition costs and the purchase of intangible assets also resulted in the use
of cash in investing activities, during these periods.

        During the year ended December 31, 1997, the primary sources of cash
were the net proceeds from the Company's sale of Preferred Stock, which totaled
approximately $61.5 million and loan proceeds totaling $63.3 million. The loan
proceeds were offset by $15.3 million of debt repayments primarily related to
the sale leaseback hotels. Proceeds from the sale of hotels under the sale
leaseback agreements generated $35.9 million of cash during 1997.

        To date, the Company's material commitments for capital expenditures
have consisted exclusively of amounts committed in connection with the
development and construction of Candlewood hotels. At December 31, 1997, the
Company had material commitments for capital expenditures of approximately $121
million related to the twenty-two hotels under construction.

        Before the closing of the initial public offering of the Company's
common stock, the Company's operations were financed primarily through capital
provided by Doubletree. In connection with the Company's reorganization,
Doubletree agreed to convert its capital commitments to the Company into a five
year, $15.0 million subordinated credit facility. As of December 31, 1997, $15.0
million was outstanding under the credit facility and bore interest at rates
ranging from 7.0% to 15.0%.


                                       25
<PAGE>   26

        The Company has arranged with GMAC for financing of up to $300 million
for the development of Company-owned and franchised hotels. As part of its
financial relationship with the Company, GMAC provides construction loans of up
to 70% of the cost of new Candlewood hotels, upon satisfaction of various
conditions. Following stabilization, the Company and franchisees are able to
convert these construction loans into long-term financing through GMAC.
Doubletree has agreed to guarantee certain portions of the loans up to 80% of
cost made to the Company or its franchisees pursuant to this arrangement.

        In order to fully utilize the Company's financial resources and
accelerate the roll-out of hotels, the Company has consummated its first
sale-leaseback transaction in the amount of $100 million with Hospitality
Properties Trust. This and future sale-leaseback transactions will enable the
Company to operate, as lessee, on a long-term basis hotels which it has or will
develop and/or hotels which would be developed by third parties pursuant to
development agreements. The provisions of the transaction allows the Company to
retain a portion of improved hotel economics. The Company's deferred gain on the
sale of hotels in 1997 was $6.8 million.

        The Company's anticipated sources of liquidity on a long-term basis
include cash flow from completed Candlewood hotels, secured and unsecured
borrowings, sale/leaseback arrangements and the issuance of debt or equity
securities.

        The Company believes that a combination of its cash and cash equivalents
and cash from operations, together with its subordinated credit facility and
construction loan guarantees from Doubletree, and third party lenders (if
approved on an individual basis) and additional sources of liquidity will be
sufficient to provide capital for development and operations into the third
quarter of 1998. There can be no assurance that changes will not occur that will
require the Company to seek additional capital or financing at an earlier date.
The Company has no current arrangements with respect to, or sources of, such
additional financing, and there can be no assurance that additional financing
will be available when needed or upon terms acceptable to the Company.

IMPACT OF THE YEAR 2000 ISSUE

        The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Based on its
recent assessment, management of the Company does not anticipate that any
significant modification or replacement of the Company's software will be
necessary for its computer systems to properly utilize dates beyond December 31,
1999, or that the Company will incur significant operating expenses to make any
such computer system improvements. The Company is in the process of contacting
its suppliers, lenders, and service providers regarding their need to make any
software modifications or replacements. The Company is not able to determine,
however, whether their failure to make such software corrections will have an
effect on the Company's operations or financial condition.



                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains certain forward-looking
statements, including without limitation statements containing the words
"believes," "anticipates," "estimates," "expects" and words of similar import.
Such forward-looking statements involve known and unknown risks,

                                       26


<PAGE>   27

uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: adverse changes in national or local economic conditions, competition
from other lodging properties, changes in real property tax rates and in the
availability, cost and terms of financing, the ongoing need for capital
improvements, changes in operating expenses, natural disasters (which may result
in uninsured losses), adverse changes in zoning laws, and other factors
referenced in this Annual Report on Form 10-K. Certain of these factors are
discussed in more detail elsewhere in this Annual Report on Form 10-K, including
without limitation under the captions "Certain Business Considerations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business and Properties." Given these uncertainties, undue
reliance should not be placed on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The response to this item is filed as a separate part of this Report
(see page F-1).

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE

        (a)    (i) As of October 20, 1997, the Board of Directors of the Company
dismissed KPMG Peat Marwick LLP ("KPMG") as the Company's independent
accountants, effective upon the completion of their timely quarterly review of
the Company's interim financial statements dated September 30, 1997, and
appointed Ernst & Young LLP ("E&Y") as the Company's independent accountants.

               (ii) The reports of KPMG on the Company's consolidated financial
statements for the period from October 1, 1995 (date of inception) to December
31, 1995 and for the fiscal year ended December 31, 1996, contained no adverse
opinion or disclaimer of opinion, and neither report was qualified or modified
as to uncertainty, audit scope or accounting principles.

               (iii) The decision to change independent accountants was
recommended by the Company's Audit Committee, and approved by the Board of
Directors at the Board's meeting on October 20, 1997.

               (iv) During the two most recent fiscal years (or portions
thereof) and through the date of this report, the Company has had no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of KPMG would have caused
KPMG to make reference thereto in their report on the consolidated financial
statement of the Company for such periods.

               (v) The Company requested that KPMG furnish it with a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statements. A copy of that letter dated October 27, 1997 was
filed as exhibit 16 to the Company's report on Form 8-K filed on October 27,
1997.

                                       27
<PAGE>   28

        (b) The Company engaged E&Y as its new independent accountants effective
October 20, 1997. During the period from October 1, 1995 (date of inception) to
December 31, 1995 and for the fiscal year ended December 31, 1996 and through
their engagement, the Company has not consulted with E&Y regarding the
application of accounting principles to a specified transaction, either
completed or proposed; the type of audit opinion that might be rendered on the
Company's financial statements; any accounting, auditing or financial reporting
issue; or any item that was either the subject of a disagreement or a reportable
event as defined in Item 304 of Regulation S-K.


                                       28

<PAGE>   29



                                    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" of the registrant's definitive Proxy
statement for its 1998 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 13, 1998.

ITEM 11.       EXECUTIVE COMPENSATION

        There is hereby incorporated herein by reference the information
appearing under the caption "Executive Compensation" of the registrant's
definitive Proxy statement for its 1998 Annual Meeting to be filed with the
Securities and Exchange Commission on or before April 13, 1998.

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" of
the registrant's definitive Proxy statement for its 1998 Annual Meeting to be
filed with the Securities and Exchange Commission on or before April 13, 1998.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        There is hereby incorporated herein by reference the information
appearing under the caption "Certain Transactions" of the registrant's
definitive Proxy statement for its 1998 Annual Meeting to be filed with the
Securities and Exchange Commission on or before April 13, 1998.


                                       29

<PAGE>   30



                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES 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' Reports are filed as part of this Report (see page F-1).

               2. Financial Statement Schedules. 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

               1. Report on Form 8-K, Other Events (reporting the sale of Series
        A Preferred Stock), filed on October 8, 1997.

               2. Report on Form 8-K, Change in Registrant's Certifying
        Accountant, filed on October 27, 1997;

               3. Report on Form 8-K, Acquisition or Disposition of Assets
        (reporting Sale-Leaseback Transaction), filed on January 7, 1998.

               4. Report on Form 8-K/A, Acquisition or Disposition of Assets
        (amending Form 8-K filed on January 7, 1998), filed on March 6, 1998.

                                       30


<PAGE>   31



                                          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, 1998                       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.
<TABLE>
<CAPTION>

        Signature                                 Title                    Date Signed
        ---------                                 -----                    -----------

<S>                                       <C>                            <C>
/s/ Jack P. DeBoer                        Chief Executive Officer        March 23, 1997
--------------------------------------    and Director (Principal
            Jack P. DeBoer                Executive Officer)


/s/ Warren D. Fix                         Executive Vice President,      March 20, 1997
--------------------------------------    Chief Financial Officer
             Warren D. Fix                and Secretary (Principal
                                          Financial and Accounting
                                          Officer)


/s/ James E. Roos                         President and Chief            March 20, 1997
--------------------------------------    Operating Officer
             James E. Roos

/s/ Gary E. Costley                       Director                       March 24, 1997
--------------------------------------
            Gary E. Costley

/s/ Robert J. Cresci                      Director                       March 20, 1997
--------------------------------------
           Robert J. Cresci

/s/ Richard J. Ferris                     Director                       March 25, 1997
--------------------------------------
           Richard J. Ferris

/s/ Robert S. Morris                      Director                       March 20, 1997
--------------------------------------
           Robert S. Morris

/s/ William L. Perocchi                   Director                       March 25, 1997
--------------------------------------
          William L. Perocchi

/s/ Frank J. Pados                        Director                       March 23, 1997
--------------------------------------
            Frank J. Pados

/s/ Tony M. Salazar                       Director                       March 24, 1997
--------------------------------------
            Tony M. Salazar
</TABLE>

                                       31

<PAGE>   32

                                  EXHIBIT INDEX
Exhibit
   No.                                         Description
   ---                                         -----------
   3.1     Restated Certificate of Incorporation of the Company. (1)

   3.2     Bylaws of the Company. (1)

   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)

   4.1     Specimen Certificate of Common Stock. (1)

   4.2     Stockholders Agreements, dated as of September 22, 1997. (3)

  10.1     Form of Indemnification Agreement for Executive Officers and
           Directors. (5)

  10.2     1996 Equity Participation Plan and Form of Stock Option Agreements.
           (5)

  10.3     Employment Agreement between the Company and Jack P. DeBoer dated as
           of September 1, 1996. (1)

  10.4     Credit Facility Agreement between the Company and Doubletree
           Corporation dated as of November 11, 1996. (2)

  10.5     Subordinated Promissory Note from the Company to Doubletree
           Corporation dated as of November 11, 1996. (2)

  10.6     Employment Agreement between the Company and James Roos dated as of
           June 2, 1997. (4)

  10.7     Series A Cumulative Convertible Preferred Stock Purchase Agreement
           dated as of August 27, 1997. (3)

  10.8     Registration Rights Agreement dated as of September 22, 1997. (3)

  10.9     Purchase and Sale Agreement, dated as of November 19, 1997, by and
           among the Company and certain of its affiliates, as sellers, and HPT,
           as purchaser. (6)

  10.10    Agreement to Lease, dated as of November 19, 1997, by and between the
           Company and HPT. (6)

  10.11    Lease Agreement, dated as of December 24, 1997, by and between HPTCW,
           as landlord, and Candlewood Leasing No. 1, Inc., as tenant. (6)

  10.12    Guaranty Agreement, dated as of December 24, 1997, by the Company for
           the benefit of HPTCW and HPT. (6)

  10.13    Stock Pledge Agreement, dated as of December 24, 1997, by the Company
           for the benefit of HPTCW. (6)

  10.14    Letter Offer from the Company to James E. Roos dated June 2,1997.

  11.1     Statement re Computation of Per Share Earnings -- not applicable.

  27.1     Financial Data Schedule.

----------
(1) Incorporated by reference pursuant to Rule 12b-32 from the Company's
    Registration Statement on Form S-1 (Registration No. 333-12021).

(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
    the fiscal year ended December 31, 1996.

(3) Incorporated by reference from the Company's Current Report on Form 8-K
    filed on October 8, 1997.

(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the period ended June 30, 1997.

(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the period ended September 30, 1997.

(6) Incorporated by reference from the Company's Current Report on Form 8-K
    filed January 7, 1998.

                                      E-1
<PAGE>   33

                 CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*
<TABLE>
<CAPTION>

<S>                                                                                       <C>
Reports of Independent Auditors (Ernst & Young LLP)....................................    F-2
Reports of Independent Auditors (KPMG Peat Marwick LLP)................................    F-3
Consolidated Balance Sheets at December 31, 1997 and 1996..............................    F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997
   and 1996, and the Period from October 1, 1995 (Inception) to
   December 31, 1995...................................................................    F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 1997 and 1996, and the Period from October 1, 1995
   (Inception) to December 31, 1995....................................................    F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997
   and 1996, and the Period from October 1, 1995 (Inception)
   to December 31, 1995................................................................    F-7
Notes to Consolidated Financial Statements.............................................    F-8
Schedule III - Real Estate and Accumulated Depreciation................................    S-1
</TABLE>


*   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

<PAGE>   34

                          [ERNST & YOUNG LLP LETTERHEAD]

                          Report of Independent Auditors

To the Board of Directors of
Candlewood Hotel Company, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Candlewood Hotel
Company, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. We have also audited the related financial statement
schedule listed in the accompanying index for the year ended December 31, 1997.
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 financial statements and schedule based on our
audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.

In our opinion, the 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, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. 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 to be included therein.


                                                   /s/ ERNST & YOUNG LLP


Chicago, Illinois
February 14, 1997

                                      F-2

<PAGE>   35

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Candlewood Hotel Company, Inc.:

We have audited the accompanying consolidated balance sheet of Candlewood Hotel
Company, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1996 and the period from October 1, 1995 (date of
inception) to December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Candlewood Hotel
Company, Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year ended December 31, 1996 and the
period from October 1, 1995 (date of inception) to December 31, 1995, in
conformity with generally accepted accounting principles.


                                                   /s/ KPMG PEAT MARWICK LLP
                                                   KMPG Peat Marwick LLP

Wichita, Kansas
February 21, 1997

                                      F-3
<PAGE>   36



                 CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
December 31,                                                      1997              1996
                                                               ---------         ---------
<S>                                                            <C>               <C>
ASSETS
Investment in hotels completed and under construction:
     Hotels completed                                          $  77,881         $   4,228
     Hotels under construction                                    48,289            11,554
     Other costs                                                   7,973             1,632
                                                               ---------         ---------
                                                                 134,143            17,414
     Accumulated depreciation and amortization                    (1,228)             (230)
                                                               ---------         ---------
     Net investment in hotels                                    132,915            17,184

Cash and cash equivalents (including $1,510 and $294 of
       restricted cash, respectively)                             35,355            33,792
Deposits                                                           8,594                 -
Accounts and other receivables                                     3,266               143
Other assets                                                       1,677               555
                                                               ---------         ---------

           Total assets                                        $ 181,807         $  51,674
                                                               =========         =========



LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable                                    $  63,416         $  15,457
Accounts payable and other accrued expenses                       16,040             2,435
Deferred gain on sale of hotels                                    6,807                 -
Other liabilities                                                  1,494               376
                                                               ---------         ---------
           Total liabilities                                      87,757            18,268

Redeemable, convertible preferred stock (Series "A"),
       $1,000 par value, 65,000 shares authorized
       and outstanding, net of offering costs                     61,461                 -

Stockholders' equity:
     Preferred stock, $.01 par value, 5,000,000 shares
        authorized, none issued
     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                                          (2,771)           (1,954)
                                                               ---------         ---------
           Total stockholders' equity                             32,589            33,406
                                                               ---------         ---------

           Total liabilities and stockholders' equity          $ 181,807         $  51,674
                                                               =========         =========

------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>   37



                 CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

          For the Years Ended December 31, 1997 and 1996 and the Period
             from October 1, 1995 (Inception) to December 31, 1995
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                           1997                1996               1995
                                                       -----------         -----------         -----------

REVENUES:
<S>                                                    <C>                 <C>                 <C>
Hotel operations                                       $     6,223         $       686         $
Other income                                                   221                   -                   -
                                                       -----------         -----------         -----------
    Total hotel operating revenues                           6,444                 686                   -
                                                       -----------         -----------         -----------
Proceeds from sale of hotels, net of deferred
     gain of $6,807                                         29,134                   -                   -
                                                       -----------         -----------         -----------
    Total Revenues                                          35,578                 686                   -
                                                       -----------         -----------         -----------

OPERATING COSTS AND EXPENSES:
Hotel operating expenses                                     4,792                 400                   -
Corporate operating expenses                                 2,529               1,637                 204
Depreciation and amortization                                1,022                 249                   5
                                                       -----------         -----------         -----------
    Total operating costs and expenses                       8,343               2,286                 209
Cost of hotels sold                                         29,134                   -                   -
                                                       -----------         -----------         -----------
                                                            (1,899)             (1,600)               (209)

Interest income                                              1,216                 328                   -
Interest expense                                              (134)                (81)                  -
                                                       -----------         -----------         -----------
    Net loss                                                  (817)             (1,353)               (209)

Preferred stock dividends unpaid at
     December 31, 1997                                      (1,248)                  -                   -
                                                       -----------         -----------         -----------
    Net loss available to common stockholders          $    (2,065)        $    (1,353)        $      (209)
                                                       ===========         ===========         ===========

Net loss per share of common stock - basic and
     diluted                                           $     (0.23)        $     (0.23)        $     (0.04)
                                                       ===========         ===========         ===========

Weighted average shares outstanding - basic and
     diluted                                             9,025,000           5,764,071           5,175,000
                                                       ===========         ===========         ===========

----------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>   38



                 CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

          For the Years Ended December 31, 1997 and 1996 and the Period
              from October 1, 1995 (Inception) to December 31, 1995
                                 (in thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                     Total                   Additional                   Total
                                    Member's      Common        Paid-in    Accumulated  Stockholders'
                                     Equity        Stock        Capital      Deficit       Equity
                                    --------      --------     --------     --------      --------
<S>                                 <C>           <C>          <C>          <C>           <C>
Balance at October 1, 1995
     (Inception)                    $   --        $   --       $   --       $   --        $   --
Capital Contribution                   1,392          --           --           --           1,392
Net loss                                (209)         --           --           --            (209)
                                    --------      --------     --------     --------      --------

Balance at December 31, 1995           1,183          --           --           --           1,183

Members' capital contributions        10,981          --           --           --          10,981
Distribution to Member               (11,973)         --           --           (392)      (12,365)
Issuance of common stock, net
     of offering costs                  --              39       34,921         --          34,960
Exchange of members'
     interests for common stock         (191)           51          349         (209)         --
Net Loss                                --            --           --         (1,353)       (1,353)
                                    --------      --------     --------     --------      --------

Balance at December 31, 1996            --              90       35,270       (1,954)       33,406

Net Loss                                --            --           --           (817)         (817)
                                    --------      --------     --------     --------      --------

Balance at December 31, 1997        $   --        $     90     $ 35,270     $ (2,771)     $ 32,589
                                    ========      ========     ========     ========      ========

-----------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>   39



                 CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

          For the Years Ended December 31, 1997 and 1996 and the Period
              from October 1, 1995 (Inception) to December 31, 1995
                                 (in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                        1997            1996          1995
                                                       ---------      ---------      ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                    <C>            <C>            <C>
Net loss                                               $    (817)     $  (1,353)     $    (209)
Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation and amortization                          1,022            249              5
    Change in:
      Deposits                                            (8,594)          --             --
      Accounts receivable                                 (3,123)          (140)            (3)
      Opening costs                                       (1,798)          (235)          --
      Other assets                                        (1,135)          (301)           (31)
      Accounts payable and other accrued expenses         13,605            993             92
      Other liabilities                                      422            376           --
                                                       ---------      ---------      ---------
        Net cash used in operating activities               (418)          (411)          (146)
                                                       ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for hotels completed and under
     construction                                       (139,521)       (13,552)          (881)
Increase in acquisition costs                             (4,544)        (1,391)            (6)
Purchase of intangible assets                                (10)            (3)           (44)
                                                       ---------      ---------      ---------
        Cash used in investing activities               (144,075)       (14,946)          (931)
                                                       ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock             61,461           --             --
Proceeds from mortgages and notes payable                 63,286         15,458           --
Proceeds from sale of hotels                              35,940           --             --
Payments on mortgages and notes payable                  (15,327)          --             --
Capital leases                                               696           --             --
Net proceeds from issuance of common stock                  --           34,960           --
Distribution to member                                      --          (12,365)          --
Members' capital contributions                              --           10,981          1,192
Minority interest                                           --               (8)             8
                                                       ---------      ---------      ---------
        Net cash provided by financing activities        146,056         49,026          1,200
                                                       ---------      ---------      ---------

Net increase in cash and cash equivalents                  1,563         33,669            123
Cash and cash equivalents at beginning of period          33,792            123           --
                                                       ---------      ---------      ---------
0Cash and cash equivalents at end of period            $  35,355      $  33,792      $     123
                                                       =========      =========      =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest               $   3,335      $      31      $    --
                                                       =========      =========      =========
----------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>   40

                 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") develops, constructs, owns,
    operates, manages and franchises a nationwide hotel chain under the name
    Candlewood Hotel. The hotels are designed to serve extended-stay, value
    oriented guests with high quality, fully equipped studio units. The first
    hotel commenced operations on May 5, 1996, and as of December 31, 1997, the
    Company had a portfolio of 24 properties ("Hotels"), of which 21 were
    managed by the Company and three were franchised and operated by third
    parties. Of the Company managed Hotels, sixteen are wholly-owned and five
    are leased from a third party. The Company also had a total of 22
    Company-owned Hotels under construction at year-end.

    B.   ORGANIZATION

    Candlewood Hotel Company, Inc. was incorporated in August 1996 to succeed to
    the business of Candlewood Hotel Company, LLC, a Delaware limited liability
    company ("Candlewood LLC"), in anticipation of an initial public offering of
    3,850,000 shares of the Company's common stock, $.01 par value per share.
    Candlewood LLC was formed in November 1995 to develop, own, operate and
    franchise Candlewood extended-stay Hotels designed particularly for the
    business traveler. Candlewood LLC began construction of its first Candlewood
    hotel in Wichita, Kansas in the fourth quarter of 1995, and construction was
    completed and the hotel opened for operations in May 1996.

    On November 8, 1996, the Company completed an initial public offering of
    3,850,000 shares of common stock at an initial public offering price of
    $10.00 per share (the "Offering"). The net proceeds to the Company from the
    Offering, after deducting the underwriting discounts and commissions and
    expenses of the Offering, were approximately $35.0 million. These proceeds
    were used to fund the national expansion of the Company through the
    development of Company-owned and operated Candlewood Hotels.

    Prior to the Offering, the membership interests in Candlewood LLC were owned
    50% by Doubletree Corporation ("Doubletree"), 42.5% by JPD Corporation, a
    Kansas corporation owned by Mr. Jack P. DeBoer, the Company's President, and
    certain trusts (the "DeBoer Trusts"), and 7.5% by the Warren D. Fix Family
    Partnership, L.P. (the "Fix Partnership"), the general partner and majority
    owner of which is Mr. Warren Fix, the Executive Vice President and Chief
    Financial Officer of the Company.

    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, and 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

                                       F-8

<PAGE>   41

    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 immediately prior to the
    Offering, was in the same proportion as their ownership of membership
    interests in Candlewood LLC immediately prior to the reorganization of the
    Company.

    In addition, prior to the Offering, approximately $12.4 million previously
    contributed to Candlewood LLC by Doubletree, including a preferred return
    amounting to approximately $392,000 on its capital contributions, was
    distributed by Candlewood LLC to Doubletree. Doubletree concurrently
    extended to the Company a $15.0 million subordinated credit facility, of
    which the amount of the distribution to Doubletree was funded in connection
    with the reorganization of the Company. The terms of the distribution to
    Doubletree, as well as the subsequent loan by Doubletree to the Company,
    were determined by the members of Candlewood LLC in the course of
    arms-length negotiations.

    In October of 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 $61.5 after deducting commissions and expenses. The Preferred
    Stock accumulates dividends at a rate of 7.5% of the Stated Value, per
    annum. The Preferred Stock is convertible 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. The Preferred Stock is subject
    to a mandatory redemption clause at August 31, 2004.

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.

    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. Interest
    costs for the construction of Hotels are capitalized. Upon completion, the
    costs of construction, including any capitalized costs, are transferred to
    Hotels completed and depreciated over the asset's useful life.

    OTHER COSTS
    Other costs include opening and acquisition costs. Opening costs are costs
    incurred prior to the opening of a hotel and are related to the hiring and
    training of hotel personnel, such as compensation, travel and relocation.
    Such costs are capitalized and amortized, commencing on the date a property
    is opened, over the shorter of the estimated period of benefit or twelve
    months.

                                      F-9
<PAGE>   42

    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 AND CASH EQUIVALENTS

    The Company considers all highly liquid assets with a maturity of three
    months or less when purchased to be cash equivalents.

    D.  RESTRICTED CASH

    Restricted cash represents cash that, under the terms of certain letters of
    credit, has been set aside for pending land acquisitions. These funds are
    applied as payments upon the closing of escrow of related acquisitions.

    E.  FAIR VALUE OF FINANCIAL INSTRUMENTS

    Statement of Financial Accounting Standards No. 107, Disclosures About Fair
    Value of Financial Instruments, defines the fair value of a financial
    instrument as the amount at which the instrument could be exchanged in a
    current transaction between willing parties. The carrying values of the
    Company's financial instruments, which include cash and cash equivalents,
    accounts receivable, accounts payable and accrued expenses, approximate fair
    values due to the short maturities of such instruments. The fair value of
    the Company's long-term debt, which approximates carrying value, is
    estimated based on the current rates offered to the Company for debt of the
    same remaining maturities.

    F.  INTANGIBLE ASSETS

    Pursuant to the terms of the Limited Liability Company Agreement of
    Candlewood LLC, JPD Corporation contributed the ownership rights, title and
    interest in the Candlewood Hotel name and logo and certain other intangibles
    to the Company in 1996 at the agreed-upon value of $200,000. Such amount is
    included in intangible assets and is being amortized using the straight-line
    method over a period of twenty years. Intangible assets also include certain
    other organization costs which are being amortized using the straight-line
    method over a period of five years.

    G.  REVENUE RECOGNITION

    Room revenue and other revenue are recognized when earned. Recognition of
    franchise fee revenue, included in other income, is deferred until all
    material services or conditions relating to the respective franchise have
    been substantially performed or satisfied by the Company.

    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.

    H.  INCOME TAXES

                                      F-10
<PAGE>   43

    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.

    I.  PRO FORMA PER SHARE INFORMATION

    Pro forma net loss per share information is presented as if (i) the Company
    had operated as a taxable entity (C Corporation) for the period from October
    1, 1995 (inception) to December 31, 1995 and for the entire year ended
    December 31, 1996 and (ii) the organization as described in Note 1 had been
    effective as of October 1, 1995 and the shares of common stock issued in
    conjunction with the organization had been issued and outstanding for all
    periods presented.

    J.  EARNINGS PER SHARE

    In 1997, the Financial Accounting Standards Board issued Statement No. 128,
    Earnings per Share. Statement 128 replaced the calculation of primary and
    fully diluted earnings per share with basic and diluted earnings per share.
    Unlike primary earnings per share, basic earnings per share excludes any
    dilutive effects of options, warrants and convertible securities. Diluted
    earnings per share is very similar to the previously reported fully diluted
    earnings per share. All earnings per share amounts for all periods have been
    presented, and where appropriate, restated to conform to the Statement 128
    requirements.

    K.  STOCK-BASED COMPENSATION

    On January 1, 1996, the Company adopted the provisions of Statement of
    Financial Accounting Standards No. 123, Accounting for Stock-Based
    Compensation ("FAS 123"), which permits entities to recognize as expense
    over the vesting period the fair value of all stock-based awards on the date
    of grant. Alternatively, FAS 123 also allows entities to apply the
    provisions of Accounting Principles Board Opinion No. 25, Accounting for
    Stock Issued to Employees ("APB 25") and related interpretations, which
    require compensation expense to be recorded on the date of grant only if the
    current market price of the underlying stock exceeded the exercise price.
    The Company has elected to apply the provisions of APB 25 and provide the
    pro forma disclosure provisions of FAS 123.

    L.  USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities at
    the date of the consolidated financial statements and the reported amounts
    of revenues and expenses during the reporting period. Actual results could
    differ from such estimates.

    M.  RECLASSIFICATIONS

    Certain reclassifications of prior period amounts have been made to conform
    with the current period presentation. Such reclassifications have no effect
    on the operations or equity as originally presented.

                                      F-11

<PAGE>   44



3.      INVESTMENT IN HOTELS COMPLETED AND UNDER CONSTRUCTION

Investment in Hotels consist of the following:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
(In thousands)                                1997            1996
                                            --------        --------

<S>                                         <C>             <C>
Hotels completed:
   Land                                     $ 15,753        $    267
   Buildings and improvements                 45,871           2,956
   Furniture, fixtures and equipment          16,257           1,005
                                            --------        --------
                                              77,881           4,228
Hotels under construction                     48,289          11,554
Other costs                                    7,973           1,632
                                            --------        --------
                                             134,143          17,414
Less accumulated depreciation                  1,228             230
                                            $132,915        $ 17,184
                                            ========        ========
--------------------------------------------------------------------------------
</TABLE>

Approximately $44,653,000 of the Hotels completed and Hotels under construction,
were held for sale at December 31, 1997, as part of the transaction described in
Note 11. Hotels completed and Hotels under construction also include capitalized
interest costs. The Company incurred interest costs of approximately $3,271,000
and $175,000 of which $3,137,000 and $94,000 in 1997 and 1996, respectively,
were capitalized. Depreciation expense for completed Hotels for the years ended
December 31, 1997 and 1996, was $991,454 and $179,851, respectively.

Other costs consist of opening and acquisition costs. At December 31, 1997 and
1996, respectively, other costs included approximately $2,032,000 and $235,000
of opening and $5,940,900 and $1,397,000 of acquisition costs. Acquisition costs
of approximately $157,000 were charged to operations in 1997. No such costs were
expensed in 1996 and 1995.

As of December 31, 1997, furniture, fixtures and equipment includes
approximately $807,000 of hotel phone systems under capital leases expiring in
October, 2000. The assets are amortized over their useful lives and amortization
is recorded in depreciation expense. Amortization of assets under capital leases
included in depreciation expense during 1997, was approximately $2,000. The
related obligations under the capital leases of $696,000 is recorded in other
liabilities. The imputed interest rate on the capitalized lease is 9.29% and is
based on the Company's incremental borrowing rate at the inception of the lease.

The minimum future lease payments under capital leases as of December 31, 1997,
for each of the next five years are:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands)

<S>                                                <C>
Year Ending December 31,
1998                                               $304
1999                                                304
2000                                                177
                                                   ----
Total minimum lease payments                       $785
Less amount representing interest                    89
                                                   ----
Present value of net minimum lease payments        $696
                                                   ====
--------------------------------------------------------------------------------
</TABLE>

                                      F-12
<PAGE>   45

4.      MORTGAGES AND NOTES PAYABLE

A summary of mortgages and notes payable is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                         December 31,
                                                                                ----------------------------------------------------
                                                                                              1997                          1996
                                                                                            -------                        -------
<S>                                                                                        <C>                            <C>
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 .50%,
    principal payments commencing twelve months following related Hotel opening
    or eighteen months from related loan closing with maturity dates ranging
    from March 15, 1999 to February 1, 2000                                                 $ 9,604                        $ 3,000

    Mortgage notes payable to a financial institution secured by individual
    Hotels, interest payable monthly at rates ranging from LIBOR plus 3.75% to
    4.25%, principal payments commencing twelve months following related Hotel
    opening or eighteen months from related loan closing with maturity dates
    ranging from June 1, 2000 to November 1, 2001                                            38,812                            --

Notes payable:
    Subordinate credit facility due to stockholder, interest payable quarterly
    at rates ranging from 7.0% to 15.0%, with principal of $12.5 million and
    $2.5 million  payable at maturity  in  November, 2001,  and July, 2002,
    respectively                                                                             15,000                         12,457
                                                                                            -------                        -------
                                                                                            $63,416                        $15,457
                                                                                            =======                        =======
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIBOR rates, depending on the maturity dates of the individual notes, ranged
from 5.72% to 5.84% at December 31, 1997. The LIBOR rate at December 31, 1996
was 5.60%. The prime lending rate at December 31, 1997 was 8.50%.

Scheduled principal payments required on mortgage and other notes payable
subsequent to December 31, 1997, are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands)

<S>                                           <C>
Year Ending December 31,
      1998                                    $       7,284
      1999                                           17,122
      2000                                           14,277
      2001                                           22,190
      2002                                            2,543
      Thereafter                                          -
                                              -------------
              Total                           $      63,416
                                              =============
--------------------------------------------------------------------------------
</TABLE>


                                      F-13
<PAGE>   46

5.      REDEEMABLE, CONVERTIBLE PREFERRED STOCK

In October of 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
$61,461,000, after deducting commissions and expenses of $3,539,000.

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 quarterly, including
up to the date of conversion; thereafter, dividends are paid when and if
declared by the board of directors.

Preferred Stockholders will 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 Preferred Stock will be redeemed under a mandatory
redemption clause, at the Stated Value plus unpaid dividends.

Preferred Stockholders have certain voting rights as defined in the stock
purchase 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 at an initial public offering price of $10.00
per share. The proceeds to the Company, were approximately $34,960,000, net of
offering costs of $2,695,000.

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, 1997 and
1996 were 9,025,000.

7.      STOCK OPTIONS

The Company has one stock option plan, the 1996 Equity Participation Plan (the
"Plan"), in which options may be granted to key personnel to purchase shares of
the Company's common stock at a price not less than the current market price at
the date of the grant. The options vest annually and ratably over the four-year
period from the date of grant and expire ten years after the grant date. The
Plan allows for 900,000 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.


                                      F-14
<PAGE>   47



A summary of the Company's stock option activity and related exercise price
information for the years ended December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                Weighted
                                                                Average
                                            Shares           Exercise Price
                                         -------------      -----------------

<S>                                      <C>                 <C>
Options outstanding, January 1, 1996              --             --

Granted                                        355,200         $   10.00
Exercised                                         --             --
Canceled                                        (1,000)        $   10.00
                                              --------         ---------

Options outstanding, December 31, 1996         354,200         $   10.00

Granted                                        296,250         $    8.74
Exercised                                         --             --
Canceled                                       (44,650)        $    9.96
                                              --------         ---------

Options outstanding, December 31, 1997         605,800         $    9.39
                                              ========         =========
--------------------------------------------------------------------------------
</TABLE>

As of December 31, 1997, the 605,800 options were outstanding at prices ranging
from $7.875 to $11.375 and 200,608 shares were exercisable by employees. There
were no shares exercisable at December 31, 1996.

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 pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                   1997                  1996
                                             ------------------    ------------------

<S>                                          <C>                   <C>
Net loss, as reported (in thousands)         $          (817)      $        (1,353)
Net loss, pro forma (in thousands)                    (1,119)               (1,390)
Net loss per share, as reported                        (0.23)                (0.23)
Net loss per share, pro forma                          (0.26)                (0.24)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

Expected dividend yield                                  0.0%                  0.0%
Expected stock price volatility                        44.50%                12.41%
Risk-free interest rate                                 6.09%                 6.02%
Expected life of options                              5 years               5 years
-----------------------------------------------------------------------------------
</TABLE>

                                      F-15


<PAGE>   48

The weighted average fair value of options granted during 1997 and 1996, is
$4.06 and $2.74 per share, 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 who are over 21 years of age and have completed ninety days
of service, as amended, are eligible to participate in the Plan and 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 at the rate up to 25% of all participants'
contributions, not to exceed 6% of the employee's compensation. For the year
ended December 31, 1997, the Company matched contributions in the amount of
approximately $22,000. There were no matching contributions provided by the
Company for the years ended December 31, 1996 and 1995.

9.      RELATED PARTY TRANSACTIONS

The Company obtains insurance coverages and leases its corporate office space
and related equipment (see Note 12) from a related party which is partially
owned by the Company's president. Additionally, certain corporate travel is
provided by an airline owned by the Company's president. A summary of the costs
incurred for these transactions and the related payable at year end is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands)

Year Ended December 31,                   1997        1996        1995
                                          ----        ----        ----

<S>                                       <C>         <C>         <C>
Insurance premiums                        $167        $ 23        $--
Corporate office / equipment rent          117         114          10
Corporate air travel                        41         --          --
                                          ----        ----        ----

     Total costs                          $325        $137        $ 10
                                          ====        ====        ====

   Amounts payable at December 31:        $ 37        $ 13        $--
                                          ====        ====        ====
--------------------------------------------------------------------------------
</TABLE>

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:

                                      F-16
<PAGE>   49


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands)
                                                   1997      1996      1995
                                                   ----      ----      ---
<S>                                                <C>       <C>       <C>
DEFERRED TAX ASSETS:
Taxable gain on sale / lease back transaction
     in excess of book income                      $475      $--       $--
Deferred franchise fee revenue                      153       150       --
Excess book expenses over tax                       128        26       --
                                                   ----      ----      ---
    Total gross deferred tax assets                 756       176       --
Valuation allowance                                 386        81       --
                                                   ----      ----      ---
    Total deferred tax assets                       370        95       --
                                                   ----      ----      ---

DEFERRED TAX LIABILITIES:
Excess tax depreciation over book                   106        20       --
Financial basis in excess of tax basis of
   intangible assets                                 75        75       --
                                                   ----      ----      ---
    Total deferred tax liabilities                  181        95       --
                                                   ----      ----      ---
        Net deferred tax asset                     $189      $--       $--
                                                   ====      ====      ===
--------------------------------------------------------------------------------
</TABLE>

As of December 31, 1997, the Company has recorded current taxes payable of
$189,500. The taxes payable resulted from items that are currently taxable for
federal and state income tax purposes but were not included in book net income.
Timing differences which 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.

11.     SALE/LEASEBACK

In November 1997, the Company entered into an agreement with Hospitality
Properties Trust ("HPT"), to sell fifteen Hotels for a total purchase price of
$100 million, once construction is completed, and to lease the Hotels back from
the buyer under a noncancelable operating lease. In December 1997, the Company
completed the sale and related leaseback of five of the Hotels referred to
above, and is scheduled to complete the sale of the remaining ten in the first
half of 1998.

Terms of the sale are all cash at the close of escrow for Hotels sold. The lease
term for the noncancelable operating lease is fourteen years, with three
fifteen-year renewal options at the election of the Company (Note 12). The lease
calls for monthly lease payments on the five Hotels of $300,000 and a security
deposit equal to one year's lease payments. The security deposit will be
released to the Company at the end of the lease term.

The agreement also provides for the Company to support cash flows until defined
operating cash flows exceed the annual lease payments by 150% for twelve
consecutive months. In connection with this support obligation, the Company was
required to fund, upon the closing of the first five Hotels, $5 million, refund
of which will be made to the Company if and when cash flows from operations
exceed required lease payments by 140% of defined cash flows from operations.
Accordingly, the $5 million has been charged to cost of sales for Hotels sold as
of December 31, 1997. Any portion of the $5 million refunded to the Company will
be recognized in income in accordance with generally accepted accounting
principles beginning in the period such funds are received.

                                      F-17

<PAGE>   50



Total sale proceeds from the five Hotels sold were $35.9 million and the
transaction resulted in a gain on the sale of Hotels of $6.8 million at December
31, 1997. Such gain has been deferred and will be recognized in income as noted
in the Company's accounting policies (Note 2). Sale proceeds, net of the
deferred gain, and related cost of the Hotels sold are presented on the
statement of operations

12.     COMMITMENTS

The Company leases corporate office space and related equipment under two
separate month-to-month lease agreements with total monthly payments of
approximately $20,000. In addition, the Company leases certain equipment under
noncancelable operating leases which expire at various dates through October
2002.

The Company leases five Hotels under a noncancelable operating lease for
fourteen years, expiring in December 2013. The lease calls for monthly lease
payments of $300,000, plus additional rent of 10% of defined excess revenues
over stipulated base year amounts.

Payments for all operating leases for the years ended December 31, 1997 and
1996, and for the period ended December 31, 1995, were approximately $283,000,
$94,000 and $13,000, respectively. Future minimum lease payments under
noncancelable operating leases having remaining terms in excess of one year at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands)

Year Ending December 31,
<S>                                       <C>
1998                                      $3,634
1999                                       3,631
2000                                       3,621
2001                                       3,614
2002                                       3,605
Thereafter                                32,346
                                          -------
Total future minimum lease payments       $50,451
                                          =======
--------------------------------------------------------------------------------
</TABLE>


                                      F-18
<PAGE>   51



13.     EPS-EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
(In thousands, except for share and per share data):            1997                1996               1995
                                                           ------------        ------------        ------------
<S>                                                        <C>                 <C>                 <C>
Net Loss                                                   $       (817)       $     (1,353)       $       (209)
Convertible preferred stock dividends                            (1,248)               --                  --
                                                           ------------        ------------        ------------
Income available to common stockholders -
     (Numerator for basic earnings per share)                    (2,065)             (1,353)               (209)
Dilutive securities - Convertible preferred
     stock dividends
                                                           ------------        ------------        ------------

Income available to common stockholders after
     assumed conversion of Preferred Stock -
     (Numerator for diluted earnings per share)            $     (2,065)       $     (1,353)       $       (209)
                                                           ============        ============        ============

Weighted-average common shares - (Denominator
     for basic earnings per share)                            9,025,000           5,764,071           5,175,000
Dilutive securities - Employee stock options
Dilutive securities - Convertible preferred stock
                                                           ------------        ------------        ------------
Adjusted weighted - average common shares and
     assumed conversion of Preferred Stock -
     (Denominator for diluted earnings per share)
                                                           ============        ============        ============

Basic earnings per share                                   $      (0.23)       $      (0.23)       $       (.04)
                                                           ============        ============        ============

Diluted earnings per share                                 $      (0.23)       $      (0.23)       $       (.04)
                                                           ============        ============        ============

Net Loss - (Numerator for diluted earnings per share
     after assumed conversion, not reported due to
     antidilutive effect)                                  $       (817)
Adjusted weighted-average common shares and assumed
     conversion - (Denominator for diluted earnings
     per share, not reported due to antidilutive
     effect)                                                 10,784,193
                                                           ------------        ------------        ------------
Diluted earnings per share (Not reported due to
     antidilutive effect)                                  $      (0.08)
                                                           ============        ============        ============
---------------------------------------------------------------------------------------------------------------
</TABLE>

For additional disclosures regarding the convertible preferred stock and the
employee stock options, see Notes (5) and (7).

Options to purchase 605,800 shares of common stock at a weighted average
exercise price of $9.39 per share were outstanding as of December 31, 1997, but
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.

On September 22, 1997 and October 2, 1997, the Company closed on $25 million and
$40 million, respectively, of Series "A" Cumulative Convertible Preferred Stock
(See Note 5). The assumed conversion of these shares would be antidilutive and,
therefore, was not included in the reported diluted earnings per share
calculation.



                                      F-19

<PAGE>   52




14.     QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is unaudited quarterly data for 1997 and 1996 (amounts in
thousands, except for per share amounts.)

<TABLE>
<CAPTION>
                                                FIRST       SECOND        THIRD       FOURTH
                                               QUARTER      QUARTER      QUARTER      QUARTER
                  1997                          3/31         6/30         9/30         12/31
--------------------------------------------------------------------------------------------
<S>                                            <C>        <C>          <C>          <C>
Hotel Operating Revenue                           539        1,278        1,770        2,857
Total revenues                                    539        1,278        1,770       31,991

Net income (loss)                                (374)        (163)        (352)          72

Net loss available to common shareholders        (374)        (163)        (388)      (1,140)

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                           (0.04)       (0.02)       (0.04)       (0.13)



                 1996
-----------------------------------------

Hotel Operating Revenue                          --            120          263          303
Total revenues                                   --            120          263          303

Net income (loss)                                (322)        (452)        (231)        (348)

Net loss available to common shareholders        (322)        (452)        (231)        (348)

Weighted average shares outstanding --
    basic and diluted                           5,175        5,175        5,175        7,518

Net loss per share of common stock --
    basic and diluted                           (0.06)       (0.09)       (0.04)       (0.05)
</TABLE>


                                      F-20
<PAGE>   53
                                  SCHEDULE III
                         CANDLEWOOD HOTEL COMPANY, INC.
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                Initial Cost to                Subsequent to
                                                                                     Company                    Acquisition
                                                                               ------------------------------------------------
            (1)                                                                           Depreciable                Depreciable
     Candlewood Hotels          Location                   Encumbrances          Land        Property          Land     Property
-------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                        <C>                 <C>        <C>                <C>      <C>
Wichita - Northeast             Wichita               KS        $ 2,982        $   267        $ 3,658        $    18        --
Denver                          Englewood             CO          3,811            656          4,882              7        --
Cincinnati                      Blue Ash              OH          3,400            410          3,621              2        --
Louisville                      Jeffersontown         KY          3,650            770          3,481           --          --
Kansas City                     Overland Park         KS          2,811            564          5,592           --          --
Wichita - Airport               Wichita               KS          1,666            395          3,685           --          --
Charlotte - Pineville           Charlotte             NC           --              455          3,979           --          --
Detroit - Southfield            Southfield            MI          4,034          1,317          5,198           --          --
Raleigh - Durham                Raleigh               NC           --              550          3,168           --          --
Knoxville                       Knoxville             TN           --              563          4,403           --          --
Houston - Clearlake             Houston               TX          3,554            678          5,096           --          --
Salt Lake - North Temple        Salt Lake City        UT          4,234            675          5,162           --          --
Salt Lake - Fort Union          Salt Lake City        UT          3,736          1,112          4,275           --          --
Phoenix - Black Canyon          Phoenix               AZ          3,202            759          3,942           --          --
Houston - Loop Central          Houston               TX          3,014          1,748          3,050           --          --
Houston - Town & Country        Houston               TX          1,801            885          2,694           --          --
Phoenix - Tempe                 Tempe                 AZ          1,986          1,322          2,692           --          --
Detroit - Auburn Hills          Auburn Hills          MI            438          1,179          1,626           --          --
Huntsville                      Madison               AL           --              580          3,709           --          --
Jacksonville                    Jacksonville          FL          3,255            991          3,807           --          --
Dallas / Ft. Worth              Ft. Worth             TX            842            531          2,332           --          --
Detroit - Troy                  Troy                  MI           --              896          1,059           --          --
Miami                           Miami                 FL           --            1,622          1,108           --          --
Detroit - Warren                Warren                MI           --              930          1,717           --          --
Des Moines                      W. Des Moines         IA           --              676          1,448           --          --
Dallas - Irving                 Irving                TX           --            1,241          1,385           --          --
Austin                          Austin                TX           --            1,319          1,066           --          --
Pittsburgh                      Pittsburgh            PA           --            1,048          1,579           --          --
Chicago - Libertyville          Libertyville          IL           --            1,011          1,098           --          --
New York / New Jersey           Somerset              NY           --              843            366           --          --
Charlotte - University          Charlotte             NC           --              727            480           --          --
Dallas - Arlington              Arlington             TX           --              802            482           --          --
Albuquerque                     Albuquerque           NM           --              974            220           --          --
Nashville                       Brentwood             TN           --            1,082            363           --          --
Orange County                   Irvine                CA           --            1,982            471           --          --
Houston - Westchase             Houston               TX           --              867            176           --          --
Corporate(4)                                                     15,000           --              885           --          --
Acquisition costs for                                              --            5,941           --             --          --
potential sites
Construction costs on                                              --            1,793           --             --          --
potential sites
                                                                ====================================================================
                                                                $63,416        $40,161        $93,955        $    27      $ --
                                                                ====================================================================
</TABLE>




<TABLE>
<CAPTION>

                                       Gross Amount Carried
                                    at Close of Period 12/31/97
                                  -------------------------------           (2)            (3)
            (1)                             Depreciable                 Accumulated     Date of      Date of
     Candlewood Hotels            Land       Property        Total      Depreciation  Construction  Acquisition
---------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>           <C>           <C>         <C>           <C>
Wichita - Northeast             $  285        $3,658        $3,943        $  447        May-96 a)     Apr-95
Denver                             663         4,882         5,545           285        Apr-97 a)     Jun-96
Cincinnati                         412         3,621         4,033           149        Jun-97 a)     Sep-96
Louisville                         770         3,481         4,251           111        Jun-97 a)     Sep-96
Kansas City                        564         5,592         6,156            77        Oct-97 a)     Dec-96
Wichita - Airport                  395         3,685         4,080          --          Nov-97 a)     Feb-97
Charlotte - Pineville              455         3,979         4,435          --          Dec-97 a)     Feb-97
Detroit - Southfield             1,317         5,198         6,515          --          Dec-97 b)     Feb-97
Raleigh - Durham                   550         3,168         3,718          --          N/A           Feb-97
Knoxville                          563         4,403         4,967          --          Dec-97 b)     Mar-97
Houston - Clearlake                678         5,096         5,774          --          Dec-97 a)     Mar-97
Salt Lake - North Temple           675         5,162         5,838          --          Nov-97 b)     Mar-97
Salt Lake - Fort Union           1,112         4,275         5,387          --          Nov-97 b)     Mar-97
Phoenix - Black Canyon             759         3,942         4,701          --          Dec-97 b)     Mar-97
Houston - Loop Central           1,748         3,050         4,798          --          Dec-97 b)     Mar-97
Houston - Town & Country           885         2,694         3,578          --          N/A           Mar-97
Phoenix - Tempe                  1,322         2,692         4,014          --          N/A           May-97
Detroit - Auburn Hills           1,179         1,626         2,805          --          N/A           May-97
Huntsville                         580         3,709         4,289          --          Dec-97 b)     Jun-97
Jacksonville                       991         3,807         4,798          --          Dec-97 b)     Jun-97
Dallas / Ft. Worth                 531         2,332         2,863          --          N/A           Jun-97
Detroit - Troy                     896         1,059         1,955          --          N/A           Jun-97
Miami                            1,622         1,108         2,730          --          N/A           Aug-97
Detroit - Warren                   930         1,717         2,647          --          N/A           Sep-97
Des Moines                         676         1,448         2,124          --          N/A           Sep-97
Dallas - Irving                  1,241         1,385         2,626          --          N/A           Sep-97
Austin                           1,319         1,066         2,385          --          N/A           Sep-97
Pittsburgh                       1,048         1,579         2,627          --          N/A           Sep-97
Chicago - Libertyville           1,011         1,098         2,109          --          N/A           Sep-97
New York / New Jersey              843           366         1,210          --          N/A           Sep-97
Charlotte - University             727           480         1,207          --          N/A           Oct-97
Dallas - Arlington                 802           482         1,284          --          N/A           Oct-97
Albuquerque                        974           220         1,194          --          N/A           Dec-97
Nashville                        1,082           363         1,445          --          N/A           Dec-97
Orange County                    1,982           471         2,454          --          N/A           Dec-97
Houston - Westchase                867           176         1,039          --          N/A           Dec-97
Corporate(4)                      --             885           885           159        N/A           N/A
Acquisition costs for            5,941          --           5,941          --          N/A           N/A
potential sites
Construction costs on            1,793          --           1,793          --          N/A           N/A
potential sites
                             ====================================================
                             $  40,188       $93,955     $ 134,143       $ 1,228
                             ====================================================
</TABLE>



NOTES:
-----
NA - Not applicable

(1) This schedule includes only those properties purchased through December 31,
    1997.

(2) For depreciable property, the Company uses a 40-year estimated life for
    buildings and components, ten years estimated life for furniture and
    fixtures, and a year to seven years estimated life on computer equipment,
    computer software, loan fees and closing costs, and opening costs.

(3) Dates of consturction presented at December 31, 1997, are either of the
    following:

               a) fully operational based on construction completion of project
                  or
               b) partially in operation based on construction not being fully
                  complete.

(4) The loan is not collateralized by specific properties and is a general
    company obligation.


                                      S-1

<PAGE>   54



                                  SCHEDULE III
                         CANDLEWOOD HOTEL COMPANY, INC.
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
                                 (IN THOUSANDS)


The changes in total real estate and depreciable property for the years ended
December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                     1997             1996             1995
                                  ---------         ---------        ---------
<S>                               <C>               <C>              <C>
Balance, beginning of year        $  17,414               887        $    --
Acquisitions                        145,863            16,527              887
Cost of hotels sold                 (29,134)             --               --
                                  ---------         ---------        ---------

Balance, end of year              $ 134,143         $  17,414        $     887
                                  =========         =========        =========
</TABLE>



The changes in accumulated depreciation for the years ended December 31, 1997,
1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                   1997          1996             1995
                                  ------        ------        -------------
<S>                               <C>           <C>           <C>
Balance, beginning of year        $  230        $ --          $        --
Depreciation expense                 998           230                 --
Dispositions and other              --            --                   --
                                  ------        ------        -------------

Balance, end of year              $1,228        $  230        $        --
                                  ======        ======        =============
</TABLE>



                                      S-2