##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10  Q

|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(Mark One)
|[ X ]      |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

|                                               |  |                                                                                        
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------
|[    ]                                         |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE ACT OF 1934
|For the transition period from              to

Commission file number 000-21583

Candlewood Hotel Company, Inc.




(Exact name of registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 48-1188025                          
|                         |  |                                     
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

8621 E. 21st Street North, Suite 200
Wichita, Kansas 67206




(Address of principal executive offices)


(316) 631-1300




(Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|    |  |       |    |      
|--- |  | ----- | -- | -----
|Yes |  | [ X ] | No | [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act)

|    |  |       |    |      
|--- |  | ----- | -- | -----
|Yes |  | [   ] | No | [ X ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                             |  |                            
|---------------------------- |  | ---------------------------
|Class                        |  | Outstanding at May 15, 2003
|                             |  |                            
|Common Stock, $.01 par value |  | 9,025,000 shares           





---

TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II.OTHER INFORMATION    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|CERTIFICATIONS               
|EXHIBIT INDEX                
|EXHIBIT 10.39                



---



##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC.

FORM 10  Q
FOR THE QUARTER ENDED
MARCH 31, 2003

INDEX

|         |  |                                                                                                                       |  |       | 
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----- | 
|         |  |                                                                                                                       |  | PAGE  | 
|         |  |                                                                                                                       |  |      
|PART I.  |  | FINANCIAL INFORMATION                                                                                                 |  |       | 
|Item 1.  |  | Financial Statements                                                                                                  |  |       | 
|         |  | Consolidated Balance Sheets at March 31, 2003 (unaudited)   
and December 31, 2002                                    |  | 3     | 
|         |  | Consolidated Statements of Operations for the three-
   months ended March 31, 2003 and March 31, 2002   
(unaudited) |  | 4     | 
|         |  | Consolidated Statements of Cash Flows for the three-months
   ended March 31, 2003 and March 31, 2002   
(unaudited)  |  | 5     | 
|         |  | Notes to Consolidated Financial Statements                                                                            |  | 6-14  | 
|Item 2.  |  | Managements Discussion and Analysis of Financial
   Condition and Results of Operations                              |  | 15-26 | 
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 27    | 
|Item 4.  |  | Controls and Procedures                                                                                               |  | 27    | 
|PART II. |  | OTHER INFORMATION                                                                                                     |  |       | 
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                      |  | 28    | 
|         |  | Certifications                                                                                                        |  | 30-31 | 

2



---



##### Table of Contents









PART I. FINANCIAL
INFORMATIONItem 1. Financial Statements




CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except par value, stated value, and share data)

|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |         |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ----------- | ------- | ------------ | ------- | ------- | ------- | -
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         | March 31,   |         |              |         |        
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         | 2003        |         | December 31,
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         | (Unaudited) |         | 2002        
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |             
|Assets:                                                                                                                                                                                                                    |                                                                                               |                                                              |         |             |         |              |         |        
|Investment in hotels                                                                                                                                                                                                       |                                                                                               | $                                                            | 101,230 |             |         | $            | 100,720 |        
|Accumulated depreciation and amortization                                                                                                                                                                                  |                                                                                               |                                                              | (14,825 | )           |         |              | (13,771 | )      
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|Net investment in hotels                                                                                                                                                                                                   |                                                                                               |                                                              | 86,405  |             |         |              | 86,949  |        
|Cash and cash equivalents (including $360 and $357 of
restricted cash, respectively)                                                                                                                                       |                                                                                               |                                                              | 6,864   |             |         |              | 9,270   |        
|Deposits                                                                                                                                                                                                                   |                                                                                               |                                                              | 46,086  |             |         |              | 46,086  |        
|Accounts and other receivables                                                                                                                                                                                             |                                                                                               |                                                              | 4,674   |             |         |              | 3,705   |        
|Investments in joint ventures                                                                                                                                                                                              |                                                                                               |                                                              | 7,506   |             |         |              | 8,393   |        
|Other assets                                                                                                                                                                                                               |                                                                                               |                                                              | 10,697  |             |         |              | 13,934  |        
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|                                                                                                                                                                                                                           |                                                                                               | Total assets                                                 |         | $           | 162,232 |              |         | $       | 168,337 |  
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|Liabilities, Preferred Stock and Stockholders Deficit:                                                                                                                                                                    |                                                                                               |                                                              |         |             |         |              |         |        
|Mortgages and notes payable                                                                                                                                                                                                |                                                                                               | $                                                            | 58,919  |             |         | $            | 58,932  |        
|Accounts payable and other accrued expenses                                                                                                                                                                                |                                                                                               |                                                              | 14,354  |             |         |              | 15,083  |        
|Deferred gain on sale of hotels                                                                                                                                                                                            |                                                                                               |                                                              | 25,519  |             |         |              | 25,932  |        
|Other liabilities                                                                                                                                                                                                          |                                                                                               |                                                              | 101     |             |         |              | 98      |        
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|                                                                                                                                                                                                                           |                                                                                               | Total liabilities                                            |         |             | 98,893  |              |         |         | 100,045 |  
|Redeemable, convertible, cumulative preferred stock (Series A),
$1,000 stated value, 65,000 shares authorized and outstanding,
net of offering costs (including $7,638 and $6,319 of dividends
in arrears, respectively) |                                                                                               |                                                              | 70,808  |             |         |              | 69,209  |        
|Redeemable, convertible, cumulative preferred stock (Series B),
$1,000 stated value, 42,000 shares authorized and outstanding,
net of offering costs (including $4,935 and $4,083 of dividends
in arrears, respectively) |                                                                                               |                                                              | 45,608  |             |         |              | 44,553  |        
|Stockholders deficit:                                                                                                                                                                                                     |                                                                                               |                                                              |         |             |         |              |         |        
|                                                                                                                                                                                                                           | Common stock, $.01 par value, 100,000,000 shares authorized,
9,025,000 issued and outstanding |                                                              |         | 90          |         |              |         | 90      |        
|                                                                                                                                                                                                                           | Additional paid-in capital                                                                    |                                                              |         | 19,542      |         |              |         | 22,197  |        
|                                                                                                                                                                                                                           | Other comprehensive income                                                                    |                                                              |         | (177        | )       |              |         | (140    | )      
|                                                                                                                                                                                                                           | Accumulated deficit                                                                           |                                                              |         | (72,532     | )       |              |         | (67,617 | )      
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|                                                                                                                                                                                                                           |                                                                                               | Total stockholders deficit                                  |         |             | (53,077 | )            |         |         | (45,470 | )
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        
|                                                                                                                                                                                                                           |                                                                                               | Total liabilities, preferred stock and stockholders deficit |         | $           | 162,232 |              |         | $       | 168,337 |  
|                                                                                                                                                                                                                           |                                                                                               |                                                              |         |             |         |              |         |        

See accompanying notes.

3



---



##### Table of Contents






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

(Unaudited) (In thousands, except share and per share data)

|                                             |                                                        |   |                    |           |                |   |        |           |  
|-------------------------------------------- | ------------------------------------------------------ | - | ------------------ | --------- | -------------- | - | ------ | --------- | -
|                                             |                                                        |   | Three-Months Ended
|                                             |                                                        |   |                   
|                                             |                                                        |   | March 31, 2003     |           | March 31, 2002
|                                             |                                                        |   |                    |           |               
|Revenues:                                    |                                                        |   |                    |           |                |   |        |          
|Hotel operations                             |                                                        | $ | 28,546             |           |                | $ | 29,976 |          
|Franchise and management fee income          |                                                        |   | 1,053              |           |                |   | 931    |          
|Loss from joint ventures                     |                                                        |   | (1,094             | )         |                |   | (475   | )        
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Total hotel operating revenues                         |   |                    | 28,505    |                |   |        | 30,432    |  
|Deferred gain recognition on sales of hotels |                                                        |   | 405                |           |                |   | 283    |          
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Total revenues                                         |   |                    | 28,910    |                |   |        | 30,715    |  
|                                             |                                                        |   |                    |           |                |   |        |          
|Operating costs and expenses:                |                                                        |   |                    |           |                |   |        |          
|Hotel operating expenses                     |                                                        |   | 18,591             |           |                |   | 19,202 |          
|Corporate operating expenses                 |                                                        |   | 1,387              |           |                |   | 1,442  |          
|Rent expense on leased hotels                |                                                        |   | 11,482             |           |                |   | 7,174  |          
|Depreciation and amortization                |                                                        |   | 1,252              |           |                |   | 2,669  |          
|Impairment loss                              |                                                        |   |                   |           |                |   | 8,604  |          
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Total operating costs and expenses                     |   |                    | 32,712    |                |   |        | 39,091    |  
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             |                                                        |   | (3,802             | )         |                |   | (8,376 | )        
|Interest income                              |                                                        |   | 36                 |           |                |   | 93     |          
|Interest expense                             |                                                        |   | (1,147             | )         |                |   | (3,428 | )        
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Loss before preferred stock dividends                  |   |                    | (4,913    | )              |   |        | (11,711   | )
|Preferred stock dividends                    |                                                        |   | (2,332             | )         |                |   | (1,979 | )        
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Net loss available to common stockholders              |   | $                  | (7,245    | )              |   | $      | (13,690   | )
|                                             |                                                        |   |                    |           |                |   |        |          
|Per share data:                              |                                                        |   |                    |           |                |   |        |          
|                                             | Net loss per share of common stock  basic and diluted |   | $                  | (0.80     | )              |   | $      | (1.52     | )
|                                             |                                                        |   |                    |           |                |   |        |          
|                                             | Average weighted shares of common stock outstanding    |   |                    | 9,025,000 |                |   |        | 9,025,000 |  
|                                             |                                                        |   |                    |           |                |   |        |          

See accompanying notes.

4



---



##### Table of Contents






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

(Unaudited) (In thousands)

|                                                                            |                                              |                                             |                                                     |       |                    |        |                |       |        |        |  
|--------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------ | -------------- | ----- | ------ | ------ | -
|                                                                            |                                              |                                             |                                                     |       | Three-Months Ended
|                                                                            |                                              |                                             |                                                     |       |                   
|                                                                            |                                              |                                             |                                                     |       | March 31, 2003     |        | March 31, 2002
|                                                                            |                                              |                                             |                                                     |       |                    |        |               
|Cash flows from operating activities:                                       |                                              |                                             |                                                     |       |                    |        |                |      
|Net loss before preferred stock dividends                                   |                                              | $                                           | (4,913                                              | )     |                    | $      | (11,711        | )    
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                              |                                             |                                                     |       |                    |        |                |      
|                                                                            | Depreciation and amortization                |                                             |                                                     | 1,252 |                    |        |                | 2,669 |       
|                                                                            | Loss from joint ventures                     |                                             |                                                     | 932   |                    |        |                | 475   |       
|                                                                            | Deferred gain recognition on sales of hotels |                                             |                                                     | (405  | )                  |        |                | (283  | )     
|                                                                            | Impairment loss                              |                                             |                                                     |      |                    |        |                | 8,604 |       
|                                                                            | Change in:                                   |                                             |                                                     |       |                    |        |                |       |       
|                                                                            |                                              | Accounts and other receivables              |                                                     |       | (969               | )      |                |       | (350   | )     
|                                                                            |                                              | Other assets                                |                                                     |       | 3,055              |        |                |       | (492   | )     
|                                                                            |                                              | Accounts payable and other accrued expenses |                                                     |       | (729               | )      |                |       | (1,238 | )     
|                                                                            |                                              | Other liabilities                           |                                                     |       | 3                  |        |                |       | 43     |       
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|                                                                            |                                              |                                             | Net cash used in operating activities               |       |                    | (1,774 | )              |       |        | (2,283 | )
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|Cash flows from investing activities:                                       |                                              |                                             |                                                     |       |                    |        |                |      
|Change in hotels completed                                                  |                                              |                                             | (566                                                | )     |                    |        | (6,666         | )    
|Contributions to joint ventures                                             |                                              |                                             | (45                                                 | )     |                    |        |               |      
|Change in cost of sales of hotels                                           |                                              |                                             | (8                                                  | )     |                    |        |               |      
|Purchase of intangible assets                                               |                                              |                                             |                                                    |       |                    |        | (5             | )    
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|                                                                            |                                              |                                             | Cash used in investing activities                   |       |                    | (619   | )              |       |        | (6,671 | )
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|Cash flows from financing activities:                                       |                                              |                                             |                                                     |       |                    |        |                |      
|Proceeds from mortgages and notes payable                                   |                                              |                                             |                                                    |       |                    |        | 4,660          |      
|Payments on mortgages and notes payable                                     |                                              |                                             | (13                                                 | )     |                    |        | (4,293         | )    
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|                                                                            |                                              |                                             | Net cash (used in) provided by financing activities |       |                    | (13    | )              |       |        | 367    |  
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|Net decrease in cash and cash equivalents                                   |                                              |                                             | (2,406                                              | )     |                    |        | (8,587         | )    
|Cash and cash equivalents at beginning of period                            |                                              |                                             | 9,270                                               |       |                    |        | 17,966         |      
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|Cash and cash equivalents at end of period                                  |                                              | $                                           | 6,864                                               |       |                    | $      | 9,379          |      
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      
|Supplementary disclosure of cash flow information:                          |                                              |                                             |                                                     |       |                    |        |                |      
|Cash paid for interest                                                      |                                              | $                                           | 1,147                                               |       |                    | $      | 3,434          |      
|                                                                            |                                              |                                             |                                                     |       |                    |        |                |      

See accompanying notes.

5



---



##### Table of Contents






CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: Summary of Significant Accounting Policies



|A. |  | Organization and Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys current business of operating, franchising, owning and
managing extended-stay hotels originated in November 1995, with the
formation of Candlewood Hotel Company, L.L.C., a Delaware limited liability
company (Candlewood LLC). The Company was incorporated in the State of
Delaware in August 1996, and in November 1996, the Company succeeded to the
business of Candlewood LLC and completed an initial public offering of its
common stock (collectively, the Reorganization).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The accompanying unaudited consolidated financial statements of Candlewood
Hotel Company, Inc. (the Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission for reporting on
Form 10-Q. The statements include the accounts of Candlewood Hotel Company,
Inc. and its subsidiaries, including Candlewood LLC, which was the entity
through which business was conducted until completion of the Reorganization,
and various wholly-owned LLCs which own or lease certain hotels.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statements have been
omitted. The accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring accruals), which the Company
believes are necessary for the fair presentation of the Companys financial
position and results of operations. The condensed consolidated balance
sheet data at December 31, 2002 was derived from the Companys audited
financial statements. The interim financial statements should be read in
conjunction with the Companys 2002 Annual Report on Form 10-K filed with
the Securities and Exchange Commission. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for future periods or the entire year. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
|  
|   |  | All majority-owned subsidiaries have been consolidated into the unaudited
consolidated financial statements. All intercompany transactions have been
eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|B. |  | Investment in Hotels                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Investment in hotels is 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which is effective for
fiscal years beginning after December 15, 2001. The Company evaluates
hotels for impairment when conditions indicate that it is probable that the
sum of the expected future cash flows is less than the carrying value of the
hotels. Upon determination that a hotel has been impaired, the carrying
value of the hotel is reduced to fair value less costs to sell. For the
three-months ended March 31, 2002, the Company recorded an impairment loss
of $8.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

6



---



##### Table of Contents





|C. |  | Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|D. |  | Restricted Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Restricted cash represents cash that, under the terms of certain loan
agreements, has been set aside as a condition of loan financing. These
funds, which are held by the lenders, will be released to the Company upon
achievement of certain operating criteria, as defined in the loan
agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|E. |  | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | SFAS 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 and other receivables, accounts
payable and other 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. |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In April 2002, the Company purchased an interest rate cap as part of the
refinancing of mortgage debt with GMAC to manage interest rate risk. The
Company requires that hedging derivative instruments be effective in
reducing the interest rate risk exposure as they are designated. This
effectiveness is essential for qualifying for hedge accounting available for
only certain qualifying derivative instruments. Instruments that meet these
hedging criteria are formally designated as hedges at the inception of the
derivative contract. When the terms of an underlying transaction are
modified, or when the underlying hedged item ceases to exist, all changes in
the fair value of the instrument are marked-to-market with changes in value
included in net income each period until the instrument matures, is
terminated, or assigned. Any derivative instrument used for risk
management that does not meet the hedging criteria is marked-to-market
through earnings each period. During 2003, the Company expects to
reclassify to earnings approximately $12,000 of amounts held in accumulated
other comprehensive income. If a derivative instrument is terminated or the
hedging transaction is no longer determined to be effective, amounts held in
accumulated other comprehensive income are reclassified into earnings over
the term of the future cash outflows on the related debt.
|  
|   |  | To determine the fair values of derivative instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives, standard market conventions and
techniques such as discounted cash flow analysis, option pricing models,
replacement cost, and termination cost are used to determine fair value. All
methods of assessing fair value result in a general approximation of value,
and such value may never actually be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | As of March 31, 2003, the Companys interest rate cap was reported at its
fair value as other assets of $10,000 with the change in fair value since
the purchase date of $177,000 recorded in accumulated other comprehensive
loss in the equity section of the balance sheet. As a result of the above,
the Company incurred a total comprehensive loss of $7.3 million ($.81 per
weighted average common share) and $13.7 million ($1.52 per weighted average
common share) for the three-months ended March 31, 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

7



---



##### Table of Contents





|G. |  | Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Intangible assets of $1.3 million include ownership rights, title and
interest in the Candlewood Hotel name, costs for patents and trademarks and
costs to obtain franchise agreements. These assets are being amortized
using the straight-line method over a period of ten to twenty years and are
included in other assets on the accompanying consolidated balance sheets.                         
|  
|H. |  | Deferred Financing Costs                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on a method, which approximates the level yield basis.                                                                                                        
|  
|I. |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Room revenue and other revenues are recognized when earned. Recognition of
franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue, when recognized, is included in
franchise and management fee income on the accompanying consolidated
statements of operations.
|  
|   |  | The Companys sales of hotels have been accompanied by a leaseback of the
facilities under operating lease agreements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds. The
related profit is deferred and recognized in earnings over the remaining
lease term.                                                                                  
|  
|J. |  | Advertising                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Advertising costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                            
|  
|K. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Company is taxed as a corporation as defined in subchapter C under the
Internal Revenue Code for federal and state income tax purposes and accounts
for any temporary differences under the asset and liability method.                                                                                                                                                                          
|  
|L. |  | Opening and Organization Costs                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Opening costs are costs incurred prior to the opening of a hotel and include
costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. Organization costs relate to the formation of
the Company and Subsidiaries. Such costs are expensed as incurred.                                                                                                    
|  
|M. |  | Investments in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company has certain investments in joint ventures in which it owns 50%
or less of the voting equity that it accounts for under the equity method of
accounting.                                                                                                                                                                                                                                    

8



---



##### Table of Contents





|N. |  | Segment Reporting                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has two reportable segments, the operation of hotels and the
sale of hotels. Information related to the Companys reportable segments

for the three-months ended March 31, 2003 and 2002, respectively, is as
follows:
|  
|   |  | Three-months ended March 31, 2003                                                                                                                                                                                                  

|                                 |                      |        |              |         |         |       |        |   |  |   |        |         | 
|-------------------------------- | -------------------- | ------ | ------------ | ------- | ------- | ----- | ------ | - |  | - | ------ | ------- | 
|                                 |                      |        | Operation of |         | Sale of |       |        |   | 
|(In thousands)                   |                      | Hotels |              | Hotels  |         | Total
|                                 |                      |        |              |         |         |      
|Revenues from external customers |                      | $      | 28,505       |         |         | $     |       |   |  | $ | 28,505 |        
|Interest expense                 |                      |        | 1,147        |         |         |       |       |   |  |   | 1,147  |        
|Depreciation expense             |                      |        | 1,063        |         |         |       |       |   |  |   | 1,063  |        
|Segment (loss) profit            |                      |        | (3,778       | )       |         |       | 405    |   |  |   | (3,373 | )      
|Hotels assets:                   |                      |        |              |         |         |       |        |   |  |   |        |        
|                                 | Investment in hotels |        |              | 101,230 |         |       |        |  |  |   |        | 101,230 | 
|                                 | Accounts receivable  |        |              | 3,865   |         |       |        |  |  |   |        | 3,865   | 
|Deferred gain on sale of hotels  |                      |        |             |         |         |       | 25,519 |   |  |   | 25,519 |        



| |  | Three-months ended March 31, 2002
| |  | ---------------------------------

|                                 |                      |        |              |        |         |       |        |         |  |   |         |         | 
|-------------------------------- | -------------------- | ------ | ------------ | ------ | ------- | ----- | ------ | ------- |  | - | ------- | ------- | 
|                                 |                      |        | Operation of |        | Sale of |       |        |         | 
|(In thousands)                   |                      | Hotels |              | Hotels |         | Total
|                                 |                      |        |              |        |         |      
|Revenues from external customers |                      | $      | 30,432       |        |         | $     |       |         |  | $ | 30,432  |        
|Interest expense                 |                      |        | 3,428        |        |         |       |       |         |  |   | 3,428   |        
|Depreciation expense             |                      |        | 2,485        |        |         |       |       |         |  |   | 2,485   |        
|Impairment loss                  |                      |        |             |        |         |       | 8,604  |         |  |   | 8,604   |        
|Segment loss                     |                      |        | (1,857       | )      |         |       | (8,321 | )       |  |   | (10,178 | )      
|Hotels assets:                   |                      |        |              |        |         |       |        |         |  |   |         |        
|                                 | Investment in hotels |        |              | 99,208 |         |       |        | 161,403 |  |   |         | 260,611 | 
|                                 | Accounts receivable  |        |              | 3,485  |         |       |        |        |  |   |         | 3,485   | 
|Deferred gain on sale of hotels  |                      |        |             |        |         |       | 16,712 |         |  |   | 16,712  |        



|   |  | The difference between segment profit and net income is preferred stock
dividends and corporate expenses not specific to the Companys reportable
segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|O. |  | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (SFAS 148). SFAS No. 148 provides
transition methods for entities that elect to adopt the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires disclosure of comparable information regarding the Companys method
of accounting for stock-based employee compensation for all interim periods.
The Company accounts for its stock-based employee compensation, which is in
the form of common share option grants, under the intrinsic method of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Under APB 25, no compensation expense is
to be recognized for the common share option grants when the exercise price
of the options equals the market price of the underlying shares at the date
of grant. We did not recognize any compensation expense for the
three-months ended March 31, 2003 and 2002 related to options granted under
APB 25.

9



---



##### Table of Contents





|P. |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from such estimates.
|  
|Q. |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Certain reclassifications of prior period amounts have been made to conform
to the current period presentation. Such reclassifications have no effect
on the Companys operations or equity as originally presented.                                                                                                                                                                                                          

Note 2: Mortgages and Notes Payable

As of March 31, 2003, a wholly owned subsidiary of the Company (the
Subsidiary) has a loan agreement with GMAC Commercial Mortgage Corporation.
This Subsidiary owns 10 of the Companys hotels. Interest on the loan is
payable monthly, in arrears, on the first day of the calendar month. Interest
is calculated at a variable rate per annum, adjusted monthly, at a rate equal
to the 30-day LIBOR rate plus 4.25% (7.75% as of March 31, 2003). The debt has
a LIBOR interest rate floor of 3.50%. As a result, the Companys interest rate
on this debt cannot go below 7.75%. Interest is payable monthly and the
principal amount of the loan is payable monthly beginning in May 2003 and is
calculated based on a 25-year amortization schedule using the prevailing
interest rate as defined in the note. The loan matures in May 2005 and
provides for one 12-month extension. Amounts borrowed under the loan agreement
are secured by the 10 hotels, the land on which the hotels are constructed and
certain funds deposited in demand deposit accounts assigned to GMAC. The
Company, and certain other of the Companys wholly owned subsidiary LLCs,
guarantee the loan. At March 31, 2003, $55.0 million was outstanding under
this loan agreement.

In April 2002, the Company purchased an interest rate hedge to cap the 30-day
LIBOR interest rate on the GMAC note. The interest rate is capped at 7.50% and
the cap expires in May 2005 concurrent with the maturity of the note.
Accordingly, the maximum interest rate throughout the term of the GMAC note
cannot exceed 11.75% (7.50% LIBOR plus 4.25%).

The Company has also entered into a loan agreement with a financial institution
for the financing of one of the Companys hotels. Interest on the loan is
payable monthly, in arrears, beginning on the first full calendar month after
the date of the agreement. Interest payments are calculated at a fixed rate
based off the 10-year Treasury note at the time the loan was closed plus 3.08%
(8.30% as of March 31, 2003). Principal payments commenced the month
following loan closing and are calculated based on a 25-year amortization
schedule using the prevailing interest rate as defined in the note. The note
matures in June 2011. The loan amount borrowed is secured by the hotel and the
land on which the hotel is constructed, certain funds deposited in a demand
deposit account assigned to the bank, as well as a guarantee by the Company and
certain other of the Companys wholly-owned subsidiary LLCs. At March 31,
2003, approximately $3.9 million was outstanding under this note.

10



---



##### Table of Contents



Note 3: Investments in Joint Ventures

As of March 31, 2003, the Companys net investment in joint ventures is
approximately $7.5 million. The difference between the amount at which the
investment is carried in the Companys accounting records and the amount of the
underlying equity in the net assets of the investee is amortized into income
from joint ventures over the contractual life of the respective joint venture
entity. As of March 31, 2003, this amount was approximately $2.6 million and
is included in investments in joint ventures on the accompanying consolidated
balance sheets. For the quarters ended March 31, 2003 and 2002, equity loss in
joint ventures of approximately ($630,000) and ($88,000), respectively, was
recorded before recognition of the carrying value difference of approximately
($464,000) and ($388,000), respectively. There were no distributions made to
the Company during the quarters ended March 31, 2003 and 2002.

The Company has one significant joint venture that was formed in 1999 with
Boston Capital Institutional Advisors (Boston Capital) and Mass Mutual in
which the Company has a 50% ownership interest. Hotel operations for the joint
venture commenced in 2000, and as of March 31, 2003, the Company operated eight
hotels pursuant to this agreement. In June 2002, the Companys joint venture
partners declared that the Company was in default of its obligation to have at
least 10 hotels open or under construction and as a result it would be required
to make an additional equity contribution of $3.4 million to the joint venture
on or before July 25, 2002. The Company did not make this contribution. As a
result of this default and in accordance with the joint venture agreement, the
joint venture suspended payment of franchise royalty and management fees to the
Company and the interest rate on the joint venture debt to Boston Capital and
Mass Mutual increased from 12% to 21%. The Company and Boston Capital and Mass
Mutual reached an agreement with regards to the amount of the additional equity
contribution and in December 2002, the Company contributed $1.8 million to the
joint venture and Boston Capital and Mass Mutual waived contractual rights to
the $1.6 million balance. Simultaneous with the execution of this agreement,
the Company received all previously suspended royalty and management fees and
the interest rate on the joint venture debt thereafter reverted to 12%. In
addition, the Company and Boston Capital agreed that the Company would bear all
losses from the operation of the Chicago, Illinois  Wheeling hotel for the
period July 26, 2002 forward until the earlier to occur of March 31, 2003 or
the date of sale or refinance. The losses for this hotel totaled $162,000 for
the three-months ended March 31, 2003 and this amount is recorded as an equity
loss from joint venture hotels and included in loss from joint ventures on the
Companys consolidated statements of operations. In accordance with the profit
and loss allocation terms of the joint venture agreement, for the three-months
ended March 31, 2003, the Company recorded all of the $415,000 net pre-tax loss
of the joint venture. See Note 6  Subsequent Events.

The following is unaudited condensed financial information for the joint
venture as of March 31, 2003 and 2002:

|                              |  |      |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|March 31,                     |  |      |        |      |  |   |        | 
|(In thousands)                |  | 2003 |        | 2002
|                              |  |      |        |     
|Hotels completed              |  | $    | 69,859 |      |  | $ | 75,926 | 
|Other assets                  |  |      | 4,108  |      |  |   | 5,362  | 
|                              |  |      |        |      |  |   |        | 
|Total assets                  |  | $    | 73,967 |      |  | $ | 81,288 | 
|                              |  |      |        |      |  |   |        | 
|Total development liabilities |  | $    | 71,365 |      |  | $ | 75,381 | 
|Total equity                  |  |      | 2,602  |      |  |   | 5,907  | 
|                              |  |      |        |      |  |   |        | 
|Total liabilities and equity  |  | $    | 73,967 |      |  | $ | 81,288 | 
|                              |  |      |        |      |  |   |        | 

11



---



##### Table of Contents



|                              |  |      |       |      |  |   |       |  
|----------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|Three-months ended March 31,  |  |      |       |      |  |   |       |  
|(In thousands)                |  | 2003 |       | 2002
|                              |  |      |       |     
|Total revenue                 |  | $    | 4,425 |      |  | $ | 4,794 |  
|Hotel operating expenses      |  |      | 2,869 |      |  |   | 2,789 |  
|Depreciation and amortization |  |      | 695   |      |  |   | 742   |  
|Interest expense, net         |  |      | 1,276 |      |  |   | 1,402 |  
|                              |  |      |       |      |  |   |       |  
|Net pre-tax (loss)            |  | $    | (415  | )    |  | $ | (139  | )
|                              |  |      |       |      |  |   |       |  

As of March 31, 2003, the Company has guaranteed approximately $45 million of
mortgage debt on the joint venture properties. This debt is collateralized by
the hotels, the land on which the hotels are constructed and certain funds
deposited in demand deposit accounts assigned to the respective banks.
Maturity dates on this debt range from June 2003 to December 2007 with certain
notes providing extensions for up to two years under specific criteria
including loan to value ratios. This debt is not included in the Companys
consolidated financial statements (See Note 2) and the Company does not receive
any fees related to this guarantee.

Note 4: Redeemable, Convertible, Cumulative Preferred Stock

General

The Company has authorized blank check preferred stock in the amount of
5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of
issuance of any of the preferred stock, the Company determines whether the
stock is redeemable and the appropriate classification of the stock on the
balance sheet. At March 31, 2003, as more fully described below, the Company
had 65,000 and 42,000 shares, respectively, of Series A and Series B redeemable
preferred stock issued and outstanding.

Preferred Stock Offerings

In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of Series A Redeemable, Convertible, Cumulative Preferred Stock
at an offering price of $1,000 per share (Stated Value). The net proceeds to
the Company were approximately $61.3 million, after deducting commissions and
expenses of $3.7 million.

On August 3, 1998, the Company completed the private placement of $42.0 million
of its Series B Redeemable, Convertible, Cumulative Preferred Stock and
warrants to purchase its common stock. In total, 42,000 shares of Series B
Preferred Stock were issued at an offering price of $1,000 per share (Stated
Value). Series B preferred stockholders were also issued, at no additional
cost, warrants to purchase 336,000 shares of common stock at $12.00 per share.
These warrants expire on July 13, 2005. The net proceeds to the Company were
approximately $39.3 million, after deducting commissions and expenses of $2.7
million.

The Series A and Series B Preferred Stock accumulate dividends at a rate of
7.5% with dividend payments made quarterly, upon approval of the board of
directors, and in preference to any dividend on the Companys Common Stock.
These payments are approximately $2.5 million per quarter. The Company has not
made the last six scheduled preferred stock dividend payments. Pursuant to the
provisions of the certificate of designation for the Series A and Series B
Preferred Stock, the conversion price (i.e. the price at which the Preferred
Stock may convert into Common Stock) was reduced in February 2003 to $7.50 per
share to reflect the Companys decision to forego payment of its November 2002
and February 2003 preferred stock dividend payments. The Company intends to
assess its cash position on a quarterly basis and will likely elect to forego
additional scheduled dividend payments on the preferred stock. The reduction
in the conversion price to $7.50 has resulted in an increase in the dividend

12



---



##### Table of Contents



rate on the Series B preferred stock from 7.5% to 12.0%. No such provision
applies to the Series A preferred stock, however, the failure to make future
dividend payments will result in a further reduction in the conversion price of
the Series A preferred stock. As of March 31, 2003, the Company had
approximately $12.6 million of accumulated unpaid dividends in arrears, which
have been accrued and recorded as an increase to the carrying amount of the
Series A and Series B preferred stock.

Pursuant to a mandatory redemption clause in the Certificates of Designation
for the Series A and Series B Cumulative Convertible Preferred Stock, the
Company is required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to $107 million plus
unpaid dividends. As of March 31, 2003, the mandatory redemption amount was
approximately $119.6 million. If the Company fails to redeem the Preferred
Stock when due, it will be required to issue to each holder of Preferred Stock
on such date, and on each three month anniversary thereafter, warrants to
purchase 25% of the number of shares of Common Stock into which such holders
outstanding shares of Preferred Stock would be convertible on such date. The
warrants would be immediately exercisable at a purchase price of $.01 per share
of Common Stock.

In the event the Company liquidates, the holders of the Series A and Series B
Preferred Stock are entitled to receive a payment equal to the stated value of
their shares, plus any accrued but unpaid dividends (the Liquidation Amount),
prior to any distribution or payment to the holders of the Common Stock. As of
March 31, 2003, the Liquidation Amount was $119.6 million, including $12.6
million of unpaid dividends. Alternatively, the holders of the Series A and
Series B Preferred Stock may convert any or all of their shares into shares of
Common Stock. In the event of a corporate transaction that constitutes a
change of control, the Company is required to offer to redeem all of the
outstanding shares of Series A and Series B Preferred Stock for a price equal
to the greater of the Liquidation Amount or 175% of the stated value of the
shares. As of March 31, 2003, one hundred seventy five percent of the stated
value of the shares was $187.3 million. If the Company does not redeem the
Preferred Stock upon a change of control, the conversion price of the Preferred
Stock will be reduced to the lower of the then applicable conversion price or
the market price of the Common Stock on the redemption date divided by 1.75,
provided that the conversion price will not be reduced to an amount less than
the par value of the Common Stock.

Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.

The carrying amount of the redeemable preferred stock is being increased by
periodic accretions using the interest method, so that the carrying amount will
equal the mandatory redemption amount at the mandatory redemption date. For
the quarter ended March 31, 2003, approximately $484,000 was recorded as an
increase to the carrying value of the preferred stock.

Note 5: Sale / Leaseback

As of March 31, 2003, the Company had completed four separate sale-leaseback
transactions with Hospitality Properties Trust (HPT). These transactions
were completed in stages commencing in December 1997 with the most recent
transaction completed in April 2002. As of March 31, 2003, the Company has
sold 57 hotels to HPT for an aggregate sales price of $434.8 million.

Terms of the HPT sales agreement were all cash at the close of escrow for each
hotel sold. Each of the hotels sold has been leased back to a wholly owned
subsidiary of Candlewood pursuant to the terms of a master operating lease
agreement executed in April 2002, which superceded the previous operating lease
(the previous lease). This lease expires in December 2018 and may be renewed
in certain circumstances and at the election of the Company for up to three
15-year periods. The lease calls for

13



---



##### Table of Contents



monthly lease payments of approximately $3.8 million and requires the Company
to place a security deposit with HPT for each property equal to one years
lease payments. The security deposit will be released to the Company at the
end of the lease term.

The previous lease agreement provided for the Company to guarantee the payment
of rent until defined operating cash flows exceed the annual lease payments by
150% for 12 consecutive months. In connection with this obligation, the
Company was required to place deposits with HPT equal to approximately 5% of
the sales price, upon the initial closing of each transaction. These deposits
were charged to cost of sales as the hotels were sold. As part of the newly
executed lease, the Company was refunded the remaining balance of the guaranty
deposit, which was recorded as an additional deferred gain on sale of hotels
and will be recognized as income over the remaining lease term. In addition,
the new lease requires the Company to guarantee the payment of rent for the
duration of the lease.

In total, as of March 31, 2003, the Company had sold 57 hotels for $434.8
million of hotels with a total deferred gain of $32.8 million, which includes
the return of the guaranty deposits to the Company. Such gain has been
deferred and is being recognized in income as noted in the Companys accounting
policies (Note 1). For the quarters ended March 31, 2003 and 2002,
respectively, the Company recognized approximately $405,000 and $283,000 of
deferred gain into income. As of March 31, 2003, the Company has recognized a
total of $7.2 million of deferred gain into income. Sale proceeds, net of the
deferred gain and related cost of the hotels sold are presented on the
consolidated statements of operations.

Note 6: Subsequent Events

On April 1, 2003, pursuant to a prior agreement, the Company assumed ownership
of the Chicago, Illinois-Wheeling hotel from its joint venture with Boston
Capital and Mass Mutual. For a nominal amount, the Company assumed 100% of all
assets, liabilities and ownership interests, including an outstanding loan of
$7.5 million. This property will be consolidated into the Companys financial
statements beginning on April 1, 2003.

On April 25, 2003, the Company executed an agreement with HPT to manage 15
Summerfield Suites hotels owned by HPT which were previously operated by a
third party. Management of the hotels commenced on April 28, 2003 and the
management agreement expires on December 31, 2003, with succession one-year
renewal periods, however, each party is permitted to terminate the agreement
sooner on 30 days prior written notice. Under the management agreement, the
Company will receive a management fee of 3% of the gross revenues of the
hotels.

The Boston Capital joint venture had a $10.5 million first mortgage loan on the
Burlington, Massachusetts hotel that came due and payable to Boston Capital on
May 1, 2003. The loan has not been repaid or refinanced. On May 7, 2003, the
joint venture received a letter from Boston Capital declaring an event of
default under the loan agreement. Pursuant to the joint venture agreement,
any default by the joint venture on a first mortgage constitutes a default on
the mezzanine debt held by Boston Capital. As a result, the interest rate on
the mezzanine debt with Boston Capital has increased from 12% to 21%, and the
payment of royalty and management fees to the Company have been suspended.
Upon successful cure of the default, the interest rate would thereafter revert
to 12% and the payment of royalty and management fees would resume.

14



---



##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto.

General

Candlewood operates, franchises, owns and manages Candlewood Suites and
Cambridge Suites hotels (Candlewood hotels) to serve extended-stay business
and personal travelers. At December 31, 2002 and March 31, 2003, we had a
total of 77 company-operated hotels (which is comprised of owned, leased and
joint venture hotels), 30 franchised hotels and two managed hotels located in
34 states. In addition, at March 31, 2003, we had eight franchise hotels under
construction and 18 franchise agreements for hotels not yet under construction,
which are subject to a variety of conditions.

We classify our hotels into five categories: owned, leased, managed,
joint venture and franchised. Owned hotels are those hotels that we have
independently developed or acquired and own. Leased hotels are those hotels
that we previously sold and currently lease from a third party. Managed hotels
are those hotels that we manage for a third party, but do not lease or own.
Joint venture hotels are those hotels that we developed and own with our joint
venture partners. Franchised hotels are those hotels developed and owned by
third parties that utilize one of our franchise brands, Candlewood Suites or
Cambridge Suites. The following table sets forth our property portfolio at
March 31, 2003 and March 31, 2002:

|              |       |  |                  |     |            |  |            |     |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |     | 
|------------- | ----- |  | ---------------- | --- | ---------- |  | ---------- | --- | --------------- |  | ---- | - | ---------- |  | ----- | ------ |  |  | ----- | ------ |  |  | ------ | --- | 
|              |       |  | Number of Hotels |     |            |  |            |     | Number of Rooms |  |      |   |           
|              |       |  | March 31,        |     |            |  |            |     | March 31,       |  |      |   |           
|              |       |  |                  |     | Increase / |  |            |     | Increase /     
|              |       |  | 2003             |     | 2002       |  | (Decrease) |     | 2003            |  | 2002 |   | (Decrease)
|              |       |  |                  |     |            |  |            |     |                 |  |      |   |           
|Owned         |       |  | 11               |     |            |  | 32         |     |                 |  | (21  | ) |            |  | 1,300 |        |  |  | 3,896 |        |  |  | (2,596 | )  
|Leased        |       |  | 57               |     |            |  | 36         |     |                 |  | 21   |   |            |  | 6,888 |        |  |  | 4,292 |        |  |  | 2,596  |    
|Managed       |       |  | 2                |     |            |  | 2          |     |                 |  |     |   |            |  | 203   |        |  |  | 203   |        |  |  |       |    
|Joint Venture |       |  | 9                |     |            |  | 9          |     |                 |  |     |   |            |  | 1,159 |        |  |  | 1,159 |        |  |  |       |    
|Franchised    |       |  | 30               |     |            |  | 27         |     |                 |  | 3    |   |            |  | 3,018 |        |  |  | 2,749 |        |  |  | 269    |    
|              |       |  |                  |     |            |  |            |     |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |    
|              | Total |  |                  | 109 |            |  |            | 106 |                 |  |      | 3 |            |  |       | 12,568 |  |  |       | 12,299 |  |  |        | 269 | 

At March 31, 2003, we managed two hotels, which are independently owned by
our Chief Executive Officer, the Cambridge Suites by Candlewood and the Hotel
at Old Town, both located in Wichita, Kansas. As of April 25, 2003, we also
manage 15 Summerfield Suites hotels owned by HPT. Our revenues for managing
these hotels consist primarily of management fees that are based on a
percentage of gross revenues, operating profits, cash flow or a combination
thereof. These revenues are included in franchise and management fee income in
our consolidated statements of operations. We are not currently advancing any
funds to these hotels and do not intend to do so in the future.

Our consolidated statements of operations include revenues and expenses
for only those hotels which are owned or leased by consolidated subsidiaries of
Candlewood Hotel Company, Inc. (owned and leased hotels). We refer to these
hotels collectively as our corporate hotels. Revenues and expenses from
franchise hotels and unconsolidated subsidiary hotels (joint venture hotels
accounted for under the equity method of accounting) are not included in our
revenues and expenses. Franchise fees, royalty fees and management fees from
franchise, managed and joint venture hotels are included in franchise and
management fee income in our consolidated statements of operations. Equity in
income (loss) from joint venture hotels is included in loss from joint ventures
in our consolidated statements of operations.

We have sold and leased back 57 hotels to Hospitality Properties Trust
(HPT). The provisions of the transactions allow us to operate, as lessee,
over a defined lease term, hotels that we developed. Our results from
operations reflect these transactions. As a result of the sale-leaseback
transactions, we have recorded rent expense on the hotels leased back from HPT.
Since these hotels are leased and not owned,

15



---



##### Table of Contents



the financial statements do not reflect any depreciation and amortization
or interest expense for these hotels after the date of sale. The proceeds from
the sales of the hotels is recorded net of the deferred gain on sale. The gain
is deferred and not recognized into earnings until certain operating
performance levels are achieved. See Note 5 to Consolidated Financial
Statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosures. We
believe that the following critical accounting policies involve significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, including our investments
in real estate for impairment indicators in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. The judgments regarding the existence of
impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would
cause us to conclude that impairment indicators exist and an impairment loss is
warranted.

Sale / Leaseback of Hotels

We have accounted for our sale-leaseback of hotels in accordance with SFAS
No. 98, Accounting for Leases. Management is required to make estimates and
judgments to determine if the resulting lease agreement for the leaseback of
hotels qualifies for classification as an operating lease under SFAS No. 98.

Depreciation of Investment in Hotels

We depreciate our investment in hotels over a 40-year useful life, which
is a judgmental determination.

Fair Value of Financial Instruments

The valuation of financial instruments under SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, and derivative financial
instruments under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires us to make estimates and judgments that affect
the fair value of the instruments. Where possible, we base the fair values of
our financial instruments on listed market prices and third party quotes.
Where these are not available, we base our estimates on other factors relevant
to the financial instrument.

16



---



##### Table of Contents



Results of Operations

Comparison of fiscal quarters ended March 31, 2003 and 2002

Hotel Operations

Hotel Operations Revenue

Hotel operations revenue, which includes room revenue and other revenue
(e.g. guest telephone and sales of products from the Candlewood Cupboard), was
$28.5 million for the quarter ended March 31, 2003, compared to $30 million for
the quarter ended March 31, 2002. The decrease in revenue is a result of
reduced average occupancy rates caused principally by the slowdown in the
economy and a reduction in business travel. The following table sets forth the
operating statistics for all our corporate hotels for the quarters ended March
31, 2003 and March 31, 2002:

|                           |  |                       |       |      |  |        |       |   |  |   |       |   
|-------------------------- |  | --------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | --
|                           |  | For the quarter ended |       |      |  |       
|                           |  | March 31,             |       |      |  |       
|                           |  |                       |       |      |  |       
|                           |  | 2003                  |       | 2002 |  | Change
|                           |  |                       |       |      |  |       
|Occupancy                  |  |                       | 68.5  | %    |  |        | 72.4  | % |  |   | (3.9  | %)
|Average Daily Rate         |  | $                     | 54.93 |      |  | $      | 54.76 |   |  | $ | 0.17  |   
|Revenue per available room |  | $                     | 37.61 |      |  | $      | 39.67 |   |  | $ | (2.06 | ) 

Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms
available for the period, was 68.5% for the quarter ended March 31, 2003,
compared to 72.4% for the quarter ended March 31, 2002. Occupancy rates for
the quarter ended March 31, 2003 were negatively impacted by the slowdown in
the economy.

The average daily room rate for corporate hotels for the quarter ended
March 31, 2003 was $54.93, compared to $54.76 for the quarter ended March 31,
2002. Average daily room rates are determined by dividing room revenue by the
number of guestrooms occupied on a daily basis for the applicable period.
Other factors that influence average daily room rates include higher rates for
our one-bedroom suites and higher rates in certain hotel locations. It is our
practice to continuously review individual markets to assess the impact of
competition on local supply and demand and establish room rates that balance
occupancy in an attempt to maximize revenue.

Revenue per available room (RevPAR), calculated as the average occupancy
rate multiplied by the average daily rate, was $37.61 for the quarter ended
March 31, 2003, compared to $39.67 for the quarter ended March 31, 2002, a 5.2%
decrease. This decrease is primarily due to the lower average occupancy rate
we experienced in the quarter ended March 31, 2003 compared to March 31, 2002.

Hotel Operating Expenses

Hotel operating expenses for the quarter ended March 31, 2003 totaled
$18.6 million, compared to $19.2 million for the quarter ended March 31, 2002.
Hotel operating expenses consist of all expenses directly applicable to the
operation of the hotels, including corporate allocations for various operating,
marketing and accounting functions. The largest portion of hotel operating
expenses consisted of salaries, wages and fringe benefits. The balance of
hotel operating expenses was comprised of normal operating items, such as
utilities, property taxes, insurance, supplies, promotional materials,
maintenance items and similar expenses. The decrease in hotel operating
expenses is largely due to lower corporate allocations and property taxes,
partially offset by higher maintenance costs and operating costs for the one
additional hotel acquired in March 2002.

17



---



##### Table of Contents



Rent Expense on Leased Hotels

Rent expense on the 57 leased hotels for the quarter ended March 31, 2003
was $11.5 million, compared to $7.2 million for the quarter ended March 31,
2002. Rent expense is comprised of two elements, a base fixed rent and a
contingent rent. Contingent rent expense is a variable expense based on a
property achieving improved year over year revenue growth and is calculated on
an individual property basis. The increase in rent expense is primarily due to
an increase in base rent as a result of the sale and leaseback of the 21
additional hotels in April 2002.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the quarter ended March
31, 2003 totaled $1.1 million, compared to $2.5 million for the quarter ended
March 31, 2002. The decrease in depreciation and amortization expense is the
result of the sale and lease back of 21 hotels in April 2002. We do not record
depreciation and amortization expense for properties that are leased.

Corporate Operations

Other Income

Franchise and management fee income for the three-months ended March 31,
2003 totaled $1.1 million, compared to $931,000 for the three-months ended
March 31, 2002. The increase in franchise and management fee income is due to
the increase in the number of franchise hotels in operation and the increased
revenue generated by those franchise hotels that had completed or were near
completion of their ramp-up phase.

Loss from joint ventures for the three-months ended March 31, 2003 totaled
$1.1 million, compared to $475,000 for the three-months ended March 31, 2002.
This loss is due to the reduced profitability of the joint venture hotels as a
result of the slowdown in the economy and the reduction in business travel and
the amortization of the difference between the amount at which the Boston
Capital joint venture investment is carried on our accounting records and the
amount of the underlying book equity in the net assets of the joint venture.
This difference is primarily comprised of carrying costs incurred from the time
we purchased the land until the hotel was contributed to the joint venture.

We did not sell any hotels during the quarters ended March 31, 2003 and
March 31, 2002, but recognized $405,000 and $283,000, respectively, of the
total deferred gain on hotels sold in prior periods. We have sold nearly all
the properties that are available to sale and leaseback other than those
subject to joint venture financing.

Corporate Operating Expenses

Corporate operating expenses for the quarter ended March 31, 2003 totaled
$1.4 million, unchanged from the quarter ended March 31, 2002, and included all
expenses not directly related to the operations of specific hotels. The
largest portion of corporate operating expenses consisted of salaries, wages
and fringe benefits. The balance of other corporate operating expenses was
comprised of normal operating costs, such as office space lease, travel,
utilities, advertising, professional fees and similar expenses.

18



---



##### Table of Contents



Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
quarter ended March 31, 2003 totaled $190,000, compared to $184,000 for the
quarter ended March 31, 2002. Depreciation and amortization reflects
depreciation and amortization of intangible assets (e.g. patents, trademarks),
leasehold improvements and furnishings in our corporate office, and
depreciation of financial system hardware, software and peripheral equipment.

Interest Income and Expense

Interest income for the quarter ended March 31, 2003 was $36,000, compared
to $93,000 for the quarter ended March 31, 2002. Interest income for the
quarter ended March 31, 2003 resulted primarily from the temporary investment
of cash provided by operations and the April 2002 sale-leaseback transaction of
21 hotels. For the quarter ended March 31, 2002, interest income resulted
primarily from the temporary investment of cash provided by operations and the
August 2001 sale-leaseback transaction of two hotels. The decrease in interest
income for the quarter ended March 31, 2003 is largely due to lower cash levels
and lower investment rate yields.

Interest expense for the quarter ended March 31, 2003 was $1.1 million,
compared to $3.4 million for the quarter ended March 31, 2002. The decrease in
interest expense is due to lower debt levels as a result of the repayment of
certain obligations with the proceeds from the April 2002 sale-leaseback
transaction and lower LIBOR interest rates.

Sales of Hotels

As of March 31, 2003, we had sold to and leased back from HPT 57 hotels,
including 21 hotels sold during the second quarter of 2002. A deferred gain
was recorded on the sales, a portion of which has been recorded in income in
the quarters ended March 31, 2003 and March 31, 2002. The following table sets
forth the rent expense and deferred gain recognized into earnings related to
our leased hotels for the quarters ended March 31, 2003 and March 31, 2002 (in
thousands):

|                              |  |                                 |        |      |  |   |       | 
|----------------------------- |  | ------------------------------- | ------ | ---- |  | - | ----- | 
|                              |  | For the quarter ended March 31,
|                              |  |                                
|                              |  | 2003                            |        | 2002
|                              |  |                                 |        |     
|Rent expense on leased hotels |  | $                               | 11,482 |      |  | $ | 7,174 | 
|Gain recognized into earnings |  | $                               | 405    |      |  | $ | 283   | 

Liquidity and Capital Resources

We had cash and cash equivalents of $6.9 million at March 31, 2003,
compared to $9.4 million at March 31, 2002. Net cash used in operating
activities totaled $1.8 million for the three-months ended March 31, 2003,
compared to $2.3 million of cash used in operating activities for the
three-months ended March 31, 2002. For the three-months ended March 31, 2003,
we recorded a net loss from operations of $4.9 million, $1.3 million of
non-cash depreciation and amortization expense, $932,000 of loss on investment
in joint ventures and $405,000 of non-cash deferred gain income on hotels sold.
Sources of cash included a $3.1 million decrease in other assets primarily due
to the reimbursement of hotel expenditures from the furniture, fixtures and
equipment (FF&E) cash reserve accounts, which we used in operations. These
FF&E reserve accounts are stipulated in the lease and lending agreements and
require us to make monthly contributions equal to approximately 5.0% of total
gross hotel revenues. The cash reserved is for replacement and refurbishment
of hotel furniture and fixtures. Uses of cash for the three-months ended March
31, 2003 consisted primarily of a $1.0 million increase in accounts and other
receivables and a $729,000 decrease in accounts payable and other accrued
expenses. For the three-months ended March 31, 2002, we recorded a net loss
from operations of $11.7 million including $8.6 million of non-cash impairment
loss, $2.7 million of non-cash depreciation and amortization expense, $475,000
of loss on investment in joint ventures and $283,000 of non-cash deferred gain
income on

19



---



##### Table of Contents



hotels sold. Uses of cash for the three-months ended March 31, 2002
included a $1.2 million decrease in accounts payable and other accrued
expenses, a $492,000 increase in other assets (primarily FF&E reserve payments)
and a $350,000 increase in accounts and other receivables.

Net cash used in investing activities for the three-months ended March 31,
2003 totaled $619,000, compared to $6.7 million of net cash used in investing
activities for the three-months ended March 31, 2002. Uses of cash for the
three-months ended March 31, 2003 and March 31, 2002 consisted primarily of
cash expenditures for property, equipment and leasehold improvements in
connection with completed and leased hotels of $566,000 and $6.7 million,
respectively.

For the three-months ended March 31, 2003, net cash used in financing
activities was $13,000, compared to $367,000 of net cash provided by financing
activities for the three-months ended March 31, 2002. Net cash used in
financing activities during the three-months ended March 31, 2003 consisted of
$13,000 of principal payments on notes payable. For the three-months ended
March 31, 2002, net cash provided by financing activities included $4.7 million
of proceeds from mortgages and notes payable partially offset by $4.3 million
of principal payments on notes payable.

On April 1, 2003, pursuant to the terms of a prior agreement between the
partners, for a nominal amount, we assumed 100% of all assets, liabilities and
ownership interests in the Chicago, IllinoisWheeling hotel from the joint
venture, including an outstanding loan of $7.5 million. In June 2002, our
joint venture partners declared that we were in default of our obligation to
have at least 10 hotels open or under construction and as a result we would be
required to make an additional equity contribution of $3.4 million to the joint
venture on or before July 25, 2002. We did not make this contribution. As a
result of this default and in accordance with the joint venture agreement, the
joint venture suspended payment of franchise royalty and management fees to us,
and the interest rate on the joint venture debt to Boston Capital and Mass
Mutual increased from 12% to 21%. In December 2002, we reached an agreement
with Boston Capital and Mass Mutual in regards to the amount of the additional
equity contribution and we contributed $1.8 million to the joint venture and
Boston Capital and Mass Mutual waived contractual rights to the $1.6 million
balance. Simultaneous with the execution of this agreement, we received all
previously suspended royalty and management fees. In addition, we agreed to
bear all losses from the operation of the Chicago, Illinois  Wheeling hotel
for the period July 26, 2002 forward until the earlier to occur of March 31,
2003 or the date of sale or refinance.

As of March 31, 2003, we have guaranteed approximately $45 million of the
construction debt on the Boston Capital joint venture properties. Maturity
dates for this debt range from June 2003 to December 2007. Approximately $13.3
million of this debt is scheduled to mature in 2003. As of March 31, 2003,
$5.7 million of the debt scheduled to mature in 2003 can be extended, under the
terms of the existing loan agreement, for an additional year. Since this
guaranteed debt relates to an entity, which we do not wholly- own or control,
it is not included in our consolidated financial statements.

The Boston Capital joint venture has a $10.5 million first mortgage loan
on the Burlington, Massachusetts hotel that came due and payable to Boston
Capital on May 1, 2003. The loan has not been repaid or refinanced. On May 7,
2003, the joint venture received a letter from Boston Capital declaring an
event of default under the loan agreement. Pursuant to the joint venture
agreement, any default by the joint venture on a first mortgage constitutes a
default on the mezzanine debt held by Boston Capital. As a result, the
interest rate on the mezzanine debt with Boston Capital has increased from 12%
to 21%, and the payment of royalty and management fees to Candlewood has been
suspended. Upon successful cure of the default, the interest rate would
thereafter revert to 12% and the payment of royalty and management fees would
resume. The monthly impact of the increase in the interest rate on the
mezzanine debt is approximately $120,000. The monthly impact on our revenues
due to the suspension of royalty and management fees is approximately $140,000.

As of March 31, 2003, we had borrowed $58.9 million from GMAC and one
other financial institution. This debt had scheduled maturity dates ranging
from May 2005 to June 2011 with interest

20



---



##### Table of Contents



rates, which range from 7.75% to 8.30%.

Our Series A and Series B Preferred Stock accumulate dividends at a rate
of 7.5% with dividend payments made quarterly, upon approval of the board of
directors, and in preference to any dividend on our Common Stock. These
payments are approximately $2.5 million per quarter. We have not made the last
six scheduled preferred stock dividend payments. We intend to assess our cash
position on a quarterly basis and will likely elect to forego additional
scheduled dividend payments on our preferred stock. As of March 31, 2003, we
had approximately $12.6 million of accumulated unpaid dividends. Pursuant to
the provisions of the certificate of designation for the Series A and Series B
Preferred Stock, the conversion price (i.e. the price at which the Preferred
Stock may convert into Common Stock) was reduced in February 2003 to $7.50 per
share to reflect our decision to forego payment of the November 2002 and
February 2003 preferred stock dividend payments. The reduction in the
conversion price to $7.50 has resulted in an increase in the dividend rate on
the Series B preferred stock from 7.5% to 12.0%. No such provision applies to
the Series A preferred stock, however, the failure to make future dividend
payments will result in a further reduction in the conversion price of the
Series A preferred stock.

Pursuant to a mandatory redemption clause in the Certificates of
Designation for the Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to $107 million plus
unpaid dividends. As of March 31, 2003, the mandatory redemption amount was
approximately $119.6 million. If we fail to redeem the Preferred Stock when
due, we are required to issue to each holder of Preferred Stock on such date,
and on each three month anniversary thereafter, warrants to purchase 25% of the
number of shares of Common Stock into which such holders outstanding shares of
Preferred Stock would be convertible on such date. The warrants would be
immediately exercisable at a purchase price of $.01 per share of Common Stock.

In the event we liquidate, the holders of the Series A and Series B
Preferred Stock are entitled to receive a payment equal to the stated value of
their shares, plus any accrued but unpaid dividends (the Liquidation Amount),
prior to any distribution or payment to the holders of our Common Stock. As of
March 31, 2003, the Liquidation Amount was $119.6 million, including $12.6
million of unpaid dividends. Alternatively, the holders of the Series A and
Series B Preferred Stock may convert any or all of their shares into shares of
Common Stock. In the event of a corporate transaction that constitutes a
change of control, we are required to offer to redeem all of the outstanding
shares of Series A and Series B Preferred Stock for a price equal to the
greater of the Liquidation Amount or 175% of the stated value of the shares.
As of March 31, 2003, one hundred seventy five percent of the stated value of
the shares was $187.3 million. If we do not redeem the Preferred Stock upon a
change of control, the conversion price of the Preferred Stock will be reduced
to the lower of the then applicable conversion price or the market price of the
Common Stock on the redemption date divided by 1.75, provided that the
conversion price will not be reduced to an amount less than the par value of
the Common Stock.

21



---



##### Table of Contents



The following table summarizes our contractual cash and debt obligations
for the next five years as of March 31, 2003 (in thousands):

Payments due by Period:

|                                 |       |   |         |         |        |   |           |        |           |   |         |         |  |   |        |        |       |   |         |         | 
|-------------------------------- | ----- | - | ------- | ------- | ------ | - | --------- | ------ | --------- | - | ------- | ------- |  | - | ------ | ------ | ----- | - | ------- | ------- | 
|                                 |       |   |         |         |        |   | Less than |        |           |   |         |         |  |   |        |        | After
|                                 |       |   | Total   |         | 1 year |   | 1-3 years |        | 4-5 years |   | 5 years
|                                 |       |   |         |         |        |   |           |        |           |   |        
|Long-Term Debt                   |       | $ | 58,919  |         |        | $ | 734       |        |           | $ | 54,429  |         |  | $ | 134    |        |       | $ | 3,622   |        
|Rent Expense for Leased Hotels   |       |   | 716,737 |         |        |   | 45,507    |        |           |   | 91,014  |         |  |   | 91,014 |        |       |   | 489,202 |        
|Rent Expense on Corporate Office |       |   | 507     |         |        |   | 507       |        |           |   |        |         |  |   |       |        |       |   |        |        
|Rent Expense on hotel equipment  |       |   | 858     |         |        |   | 605       |        |           |   | 241     |         |  |   | 12     |        |       |   |        |        
|Preferred Stock Redemption       |       |   | 119,573 |         |        |   |          |        |           |   | 119,573 |         |  |   |       |        |       |   |        |        
|                                 |       |   |         |         |        |   |           |        |           |   |         |         |  |   |        |        |       |   |         |        
|                                 | Total |   | $       | 896,594 |        |   | $         | 47,353 |           |   | $       | 265,257 |  |   | $      | 91,160 |       |   | $       | 492,824 | 

We believe that a combination of our cash and cash equivalents and cash
from operations will be sufficient to provide capital for operations through
December 2003. However, if we experience a material decline in operating
performance (including RevPAR), we may not generate sufficient cash flow to
support our operations through December 2003. In addition, in order to meet
our long-term financing obligations, we will be required to raise additional capital. In particular, we
do not currently project that we will generate sufficient cash flow to repay
the mandatory redemption of the preferred stock in 2004. We continue to
consider a number of financing alternatives, including credit facilities,
additional sale leaseback transactions, the issuance of equity, debt or
equity-linked securities and joint ventures, which are necessary to provide the
capital needed to meet our financing needs. We are unable to assure that we
will be able to obtain financing on a timely basis, on acceptable terms, or at
all.

Certain Business Considerations

Investors are cautioned that certain statements contained in this document
as well as some of our statements in periodic press releases and some oral
statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as believes, anticipates, estimates,
expects or similar expressions. In addition, any statements concerning
future financial performance, ongoing business strategies or prospects, and
possible future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention, and
we disclaim any obligation, to update these statements.

Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:

If Our Results of Operations Decline Materially (including RevPAR), We May
Not Have Sufficient Working Capital to Meet Our Day-to-Day Operating Cash Flow
Needs.We had cash and cash equivalents of $6.9 million at March 31, 2003.
We currently expect our cash and cash equivalents balance to decline during the
year ended December 31, 2003. If we experience a material decline in operating
performance during 2003, our cash flows will decline at a faster than
anticipated pace which would likely result in our inability to maintain
sufficient cash balances to meet day-to-day working capital needs.

22



---



##### Table of Contents



If Our Net Worth Continues to Decline, We Will Fail to Comply With the
Terms of Our Agreements with HPT, Which Could Result In the Loss of Our Rights
as a Tenant Under the Applicable Hotels.The terms of our lease agreement with
HPT requires us to guarantee the payment of rent for the duration of the lease
and, as a guarantor, to maintain a minimum net worth of $75 million. At
December 31, 2002, our net worth as defined in the agreement was $68.3 million.
This breach gives HPT the right to start proceedings that would result in the
cancellation of the lease agreement and we would lose our rights as a tenant.
HPT has agreed not to take action with respect to this breach through January
1, 2004 so long as we maintain a minimum net worth of $60 million. At March
31, 2003, our net worth as defined in the agreement was $63.3 million. We
expect that our worth will decline during the year ended December 31, 2003, and
we cannot assure you that it will not decline below $60 million. We also
cannot assure you that we will be able to obtain another waiver from HPT in the
future or that our net worth will increase to satisfy the $75 million minimum
net worth requirement on January 1, 2004. If the lease agreement is cancelled
and we lose our rights as tenants under the applicable hotels, we may not be
able to continue our operations.

We May be Unable to Service our Debt and lease Obligations.Our ability
to make payments on, to repay or to refinance our indebtedness and to make our
scheduled lease payments and preferred stock dividends will depend upon our
ability to generate capital in the future and increase RevPAR. We cannot
predict whether current occupancy levels and room rates can be maintained or
improved upon. Future occupancy and room rates may be impacted by a number of
factors including:



| |  |  | the number and geographic location of new hotels;             
| | - |  | --------------------------------------------------------------
|
| |  |  | the season in which new hotels open;                          
|
| |  |  | competition;                                                  
|
| |  |  | market acceptance of our hotels;                              
|
| |  |  | general economic conditions;                                  
|
| |  |  | unexpected events, such as the World Trade Center attacks; and
|
| |  |  | the profitability of the businesses of our core customers.   

Accordingly, we cannot make any assurances that our business will generate
sufficient cash flow from operations to fund our debt obligations or make our
scheduled lease and preferred stock dividend payments as they become due. For
example, in February 2003, we did not make the scheduled dividend payment.
This marked the sixth successive dividend payment we have not made. In
addition, on May 1, 2003, our significant joint venture investee failed to
repay a $10.5 million loan when it became due. We do not currently have
sufficient capital to pay all of our debts if they were due today. We cannot
provide any assurances that we will be able to refinance any of our
indebtedness on commercially reasonable terms, or at all. Our ability to make
payments on, to repay or to refinance our indebtedness and to make our
scheduled lease and preferred stock dividend payments also is, to a certain
extent, subject to general economic, competitive, legislative, regulatory and
other factors beyond our control. Our inability to make payments on, to repay,
or to refinance our debt, lease and preferred stock obligations could result in
litigation and have a material adverse effect on our business and results of
operations. We have also guaranteed approximately $45 million of debt on the
Boston Capital joint venture properties. Maturity dates for this debt range
from June 2003 to December 2007, with approximately $13.3 million of this debt
scheduled to mature in 2003. See Liquidity and Capital Resources.

We Do Not Have Sufficient Funds to Redeem our Preferred Stock When it
Becomes Due.Pursuant to a mandatory redemption provisions in the Certificates
of Designation for our Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem our Preferred Stock in September 2004. As of
March 31, 2003, the mandatory redemption amount was approximately $119.6
million. If we fail to redeem the Preferred Stock when due, we are required to
issue to each holder of Preferred Stock on such date, and on each three month
anniversary thereafter, warrants to purchase 25% of the number of shares of
Common Stock into which such holders outstanding shares of Preferred Stock
would be convertible on such date. The warrants would be immediately
exercisable at a purchase price of $.01 per

23



---



##### Table of Contents



share of Common Stock. We do not currently have, and do not believe that
our operations will generate, sufficient capital to make the scheduled payment
to redeem our Preferred Stock, and cannot provide any assurances that we will
be able to obtain the financing necessary to do so.

We have Never Been Profitable. At March 31, 2003, we operated 77 hotels.
This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:

     the inability to maintain high occupancy rates or to attract guests for extended-stays;

     the inability to achieve expected nightly rates;

     the inability to operate the hotels at expected expense levels;

     the ability to attract and retain quality personnel; and

     liability for accidents and other events occurring at hotel properties.

If we are unable to efficiently and effectively operate our hotels, we may
never be profitable.

Adverse Economic Conditions May Negatively Impact Our Occupancy Rates and
Results of Operations.Since our core customers are extended-stay business
travelers, moderate or severe economic downturns or adverse economic conditions
negatively affect our operations. These economic conditions may be widespread
or isolated to one or more geographic regions. Economic downturns generally
cause a decline in the occupancy rates of our hotels as our core customers
limit their extended-stay travel. For example, the tragedy at the World Trade
Center caused significant short-term declines in our occupancy rates and room
rates. Decreases in our occupancy rates result in a decrease in our operating
revenue. In addition, as our occupancy rates decrease, we expect that
competition will increase and that the average daily room rate of our hotels
will be negatively impacted. As a result, recessions or other general economic
conditions may have a negative impact on our results of operations and
financial condition.

Our Growth is largely Dependant on Franchising Hotels. We intend to grow
primarily by franchising Candlewood Suites and Cambridge Suites hotels. Our
financial condition may impact our ability to continue to sell franchises. For
example, the State of Virginia recently revoked our ability to sell franchises
in that state due to our inability to meet certain financial covenants. Our
ability to franchise hotels and obtain franchisees involves additional
substantial risks, including:



| |  |  | there are a limited number of franchising opportunities;                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;       
|
| |  |  | unavailability of financing to potential franchisees on favorable terms, or at all;                                                          
|
| |  |  | delays in completion of construction of franchised hotels;                                                                                   
|
| |  |  | termination of signed franchise agreements;                                                                                                  
|
| |  |  | incurring substantial costs if we abandon a franchising project prior to completion;                                                         
|
| |  |  | a franchisees failure to obtain all necessary zoning and construction permits;                                                              
|
| |  |  | competition for suitable franchise sites from our
competitors, some of whom may have greater financial resources than
Candlewood franchisees;
|
| |  |  | our franchisees actual costs exceeding budgeted or contracted amounts; and                                                                   
|
| |  |  | our franchised properties not achieving desired revenue or profitability levels once opened.                                                 

Our franchise agreements provide for a variety of conditions in regards to the
franchisees obligations to build the hotels and, accordingly, these hotels may
never be constructed or opened. If we are unable to successfully franchise
hotels on time or within budget, or at all, our business and results of
operations would suffer.

24



---



##### Table of Contents



We Depend on a Single Type of Lodging Facility. We intend to exclusively
develop, manage and
franchise extended-stay hotels under our Candlewood Suites and Cambridge
Suites brands. We currently do not intend to develop any lodging facilities
other than hotels focused on extended-stay business travelers and do not intend
to develop lodging facilities with other franchisors. Accordingly, we will be
subject to risks inherent in concentrating investments in a single type of
lodging facility, such as a shift in demand or a reduction in business
following adverse publicity, which could have a material adverse effect on our
business and results of operations. In addition, we have a limited history
upon which we can gauge consumer acceptance of our hotels and, accordingly, we
cannot provide assurance that guests who are looking for conventional or
extended-stay hotel accommodations will readily accept out hotels.
Furthermore, we compete against other facilities with substantially greater
brand recognition.

We are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate
investments is significantly dependent upon our ability to maintain or increase
cash provided by operating our investments. The value of our hotels and the
income from our hotels may be materially adversely affected by:



| |  |  | changes in national economic conditions;                                         
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | changes in general or local economic conditions and neighborhood characteristics;
|
| |  |  | competition from other lodging facilities;                                       
|
| |  |  | changes in the availability, cost and terms of financing;                        
|
| |  |  | the ongoing need for capital improvements;                                       
|
| |  |  | changes in operating expenses;                                                   
|
| |  |  | changes in real property tax rates;                                              
|
| |  |  | changes in governmental rules and policies;                                      
|
| |  |  | the impact of present or future environmental laws;                              
|
| |  |  | natural disasters; and                                                           
|
| |  |  | other factors which are beyond our control.                                      

In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to
dispose of an investment when we find disposition advantageous or necessary, or
that the sale price of any disposition will recoup or exceed the amount of our
investment.

Our Hotels May Experience Seasonal Fluctuations. Based upon our
experience operating extended-stay hotels, we expect that occupancy and
revenues may be lower than normal during the months of November, December and
January due to the holiday season. Because many of our expenses do not
fluctuate with occupancy, declines in occupancy may cause fluctuations or
decreases in our quarterly results.

We Depend on Key Personnel. Our success depends to a significant extent
upon the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief Financial
Officer. The loss of the services of either of these individuals could have a
material adverse effect upon our business and results of operations.

Because Shares of our Common Stock Trade on the Over The Counter Bulletin
Board, the Liquidity of our Common Stock May Be Limited.Our Common Stock was
delisted from The Nasdaq SmallCap Market on June 19, 2002 and our Common Stock
now trades on the Over The Counter Bulletin Board. Consequently, the liquidity
of our Common Stock will likely be impaired, not only in the number of shares
which can be bought and sold, but also because of delays in the timing of
transactions and a reduction in securities analyst and the news media coverage,
if any, that we receive. As a result, holders of our Common Stock might find
it more difficult to trade their Common Stock promptly, or at all, and at
reasonable prices or to obtain accurate quotations as to its price.

25



---



##### Table of Contents



Certain of these factors are discussed further elsewhere in this Form 10-Q
and the Companys other filings with the Securities and Exchange Commission.

Impact of New Accounting Standards

On June 29, 2001 the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations. SFAS No. 141 eliminates the pooling-of-interest
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. The requirements of
SFAS No. 141 are effective for any business combination accounted for by the
purchase method that is completed after June 20, 2001. Additionally, SFAS No.
142, Goodwill and Other Intangibles, was issued. Under SFAS No. 142,
goodwill and other indefinite lived intangibles are no longer amortized, but
are periodically reviewed for impairment. Intangibles with definite lives are
amortized over their useful lives. SFAS No. 142 is effective for years
beginning after December 15, 2001. SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, was also issued for years
beginning after December 15, 2001. SFAS No. 144 revises the measurement and
recognition of impairment, specifically on assets held for disposal.

In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No.
45). FIN No. 45 significantly changes the current practice in the accounting
for, and disclosure of, guarantees. FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice, which is
generally to record a liability only when a loss is probable and reasonably
estimable, as those terms are defined in SFAS No. 5, Accounting for
Contingencies. FIN No. 45 also requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the
guarantee is remote, which is another change from current practice. The
disclosure requirements of FIN No. 45 are currently effective, although the
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (Interpretation 46), which required the
consolidation of an entity by an enterprise (i) if that enterprise, known as a
primary beneficiary, has a variable interest that will absorb a majority of
the entitys expected losses if they occur, receive a majority of the entitys
expected residual returns if they occur, or both and (ii) if the entity is a
variable interest entity, as defined by Interpretation 46. An entity is a
variable interest entity if (a) the total equity investment at risk in the
entity is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (b) the equity
investors do not have the characteristics of a controlling financial interest
in the entity. Interpretation 46 applies immediately to all variable interest
entities created after January 31, 2003. For variable interest entities created
by public companies before February 1, 2003, Interpretation 46 must be applied
no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The initial determination of whether an entity
is a variable interest entity shall be made as of the date at which a primary
beneficiary becomes involved with the entity and reconsidered as of the date
one of three triggering events described by Interpretation 46 occur. We do not
believe that the adoption of this interpretation will have a material effect on
our financial statements.

We do not believe the issuance of these statements and interpretations
will have a material impact on our results of operations or financial position.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which rescinded SFAS No. 4
requiring gains and losses from extinguishment of debt to be classified as
extraordinary. We adopted SFAS No. 145 in 2002 and classify these amounts as
operating expenses.

26



---



##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings are affected by changes in interest rates as a significant
portion of our outstanding indebtedness is at variable rates based on LIBOR or
Treasury notes. If interest rates change by .01 percent, the market value of
our mortgages and notes payable, based on the outstanding balance, effected by
the variable rates at March 31, 2003, would change by approximately $5,500.
Additionally, we have market risk on our short-term investments, which are
considered cash equivalents, due to changes in interest rates. If interest
rates increase by .01 percent, the market value of our short-term investments,
based on the outstanding balance at March 31, 2003, would change by
approximately $700.

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities and its
amendments, Statements 137 and 138 in June of 1999 and June of 2000,
respectively. We adopted Statement No. 133, as amended, effective January 1,
2001. The Statement requires us to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivatives change in fair value will be immediately recognized in earnings.
As of March 31, 2003, the Company had one derivative financial instrument, an
interest rate cap, which was recorded at fair value of $10,000 as of March 31,
2003, with the change in fair value since the purchase date recorded in
accumulated other comprehensive loss in the equity section of the balance
sheet.




Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Securities
Exchange Act of 1934 reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Also, the Company has investments in certain unconsolidated
entities. As the Company does not control or manage these entities, its
disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those it maintains with respect to
its consolidated subsidiaries.

Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective.

There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.

27



---



##### Table of Contents









PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

See the Exhibit Index beginning on page 33.

(b)  Reports on Form 8-K

None.

28



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                   |     |                                     
|------------------ | --- | ------------------------------------
|                   |     | CANDLEWOOD HOTEL COMPANY, INC.      
|                   |     |                                     
|Date: May 15, 2003 | By: | /s/ Jack P. DeBoer                  
|                   |     |                                     
|                   |     | Jack P. DeBoer                      
|                   |     | Chairman and Chief Executive Officer
|                   |     |                                     
|Date: May 15, 2003 | By: | /s/ Warren D. Fix                   
|                   |     |                                     
|                   |     | Warren D. Fix                       
|                   |     | Executive Vice President and        
|                   |     | Chief Financial Officer             

29



---



##### Table of Contents






CERTIFICATIONS

I, Jack P. DeBoer, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Candlewood Hotel
Company, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                    |  |                                     
|------------------- |  | ------------------------------------
|Dated: May 15, 2003 |  | /s/ Jack P. DeBoer                  
|                    |  |                                     
|                    |  | Jack P. DeBoer                      
|                    |  | Chairman and Chief Executive Officer

30



---



##### Table of Contents



I, Warren D. Fix, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Candlewood Hotel
Company, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                    |  |                             
|------------------- |  | ----------------------------
|Dated: May 15, 2003 |  | /s/ Warren D. Fix           
|                    |  |                             
|                    |  | Warren D. Fix               
|                    |  | Executive Vice President and
|                    |  | Chief Financial Officer     

31



---



##### Table of Contents






EXHIBIT INDEX

| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | ------- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit |  |            
| | No.     |  | Description
| |         |  |            
| | 3.1     |  |             | Restated Certificate of Incorporation of Candlewood Hotel Company, Inc. (1)                                                                                                                                                                                                                                             
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 3.2     |  |             | Amended and Restated Bylaws of Candlewood Hotel Company, Inc. (11)                                                                                                                                                                                                                                                      
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 3.3     |  |             | Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series A Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc. (5)                                            
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 3.4     |  |             | Certificate of Amendment of Certificate of Designations of Series A Preferred Stock. (9)                                                                                                                                                                                                                                
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 3.5     |  |             | Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series B Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc. (9)                                            
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 4.1     |  |             | Specimen Certificate of Common Stock. (2)                                                                                                                                                                                                                                                                               
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 4.2     |  |             | Form of Warrant. (9)                                                                                                                                                                                                                                                                                                    
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 4.3     |  |             | Amended and Restated Stockholders Agreement dated as of July 10, 1998. (9)                                                                                                                                                                                                                                              
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.1    |  |             | Form of Indemnification Agreement for Executive Officers and Directors. (1)                                                                                                                                                                                                                                             
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.2    |  |             | Indemnification Agreement Schedule. (10)                                                                                                                                                                                                                                                                                
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.3    |  |             | 1996 Equity Participation Plan and Form of Stock Option Agreements. (3)                                                                                                                                                                                                                                                 
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.4    |  |             | First Amendment to the 1996 Equity Participation Plan effective as of May 18, 1998. (10)                                                                                                                                                                                                                                
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.5    |  |             | Employment Agreement between Candlewood Hotel Company, Inc. and Jack P. DeBoer dated as
of September 1, 1996. (1)                                                                                                                                                                                                       
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.6    |  |             | Credit Facility Agreement between Candlewood Hotel Company, Inc. and Doubletree
Corporation dated as of November 11, 1996. (4)                                                                                                                                                                                          
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.7    |  |             | Subordinated Promissory Note from Candlewood Hotel Company, Inc. to Doubletree
Corporation dated as of November 11, 1996. (4)                                                                                                                                                                                           
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.8    |  |             | Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of August
27, 1997. (5)                                                                                                                                                                                                                     
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.9    |  |             | Amended and Restated Registration Rights Agreement dated as of July 10, 1998. (9)                                                                                                                                                                                                                                       
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.10   |  |             | Purchase and Sale Agreement, dated as of November 19, 1997, by and among Candlewood
Hotel Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser.
(6)                                                                                                                                           
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.11   |  |             | First Amendment to Purchase and Sale Agreement and Agreement to Lease and Fourth
Amendment to Lease Agreement and Incidental Documents, dated as of January 7, 1999, by
and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 1, Inc., HPT and HPT
CW, and seventeen entities which are parties thereto. (10)
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.12   |  |             | Agreement to Lease, dated as of November 19, 1997, by and between Candlewood Hotel
Company, Inc. and HPT. (6)                                                                                                                                                                                                           
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.13   |  |             | Purchase and Sale Agreement, dated as of May 14, 1998, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser. (7)                                                                                                                                                
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.14   |  |             | First Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and
Incidental Documents, dated as of June 18, 1998, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (10)                                                                           
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.15   |  |             | Second Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and
Incidental Documents, dated as of July 31, 1998, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (8)                                                                           
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.16   |  |             | Third Amendment to Purchase and Sale Agreement and Agreement to Lease and Sixth
Amendment to Lease Agreement and Incidental Documents, dated as of December 23, 1998, by
and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 2, Inc., HPT, HPT CW II
and seventeen entities which are parties thereto. (10)
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.17   |  |             | Agreement to Lease, dated as of May 14, 1998, by and between Candlewood Hotel Company,
Inc. and HPT. (7)                                                                                                                                                                                                                
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.18   |  |             | Securities Purchase Agreement dated as of September 30, 1998. (9)                                                                                                                                                                                                                                                       
| |         |  |             |                                                                                                                                                                                                                                                                                                                         
| | 10.19   |  |             | Lease Agreement dated April 30, 1998 by and between Candlewood Hotel Company, Inc. and
Vantage Point Properties, Inc. (10)                                                                                                                                                                                              
| |         |  |             |                                                                                                                                                                                                                                                                                                                         

32



---



##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                               
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 10.20  |             |  | Third Amendment to Agreement to Lease by and between Candlewood Hotel Company, Inc. and
HPT. (10)                                                                                                             
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.21  |             |  | Purchase and Sale Agreement by and among Candlewood Hotel Company, Inc., Candlewood
Philadelphia-Mt. Laurel, NJ, LLC, Candlewood Las Vegas, NV, LLC and HPT. (11)                                             
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.22  |             |  | Purchase and Sale Agreement, dated as of April 11, 2002, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and Hospitality Properties
Trust, as purchaser. (12)          
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.23  |             |  | Second Amended and Restated Lease Agreement, dated as of April 11, 2002, by and between
HPT CW Properties Trust, as landlord, and Candlewood Leasing No. 1, Inc., as tenant.
(12)                             
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.24  |             |  | Second Amended and Restated Assignment and Security Agreement, dated as of April 11,
2002, by and between Candlewood Leasing No. 1, Inc., assignor, and HPT CW Properties
Trust, assignee. (12)               
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.25  |             |  | Fourth Amendment to Agreement to Lease, dated as of April 11, 2002, by and between
Hospitality Properties Trust and Candlewood Hotel Company, Inc. (12)                                                       
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.26  |             |  | Second Amended and Restated Guaranty Agreement, dated as of April 11, 2002, by
Candlewood Hotel Company, Inc., as guarantor, for the benefit of HPT CW Properties Trust
and Hospitality Properties Trust. (12)
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.27  |             |  | Second Amended and Restated Security Agreement, dated as of April 11, 2002, by and
between Candlewood Leasing No. 1, Inc., as tenant, and HPT CW Properties Trust, as
secured party. (12)                     
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.28  |             |  | Second Amended and Restated Stock Pledge Agreement, dated as of April 11, 2002, by
Candlewood Hotel Company, Inc., as pledgor, for the benefit of HPT CW Properties Trust ,
as secured party. (12)            
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.29  |             |  | Form of Letter Agreement between Candlewood Hotel Company, Inc. and certain executive
officers and schedule related thereto. (13)                                                                             
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.30  |             |  | Limited Liability Company Agreement of Candlewood Hotel Company Fund I, LLC, dated as of
June 1, 1999, between Candlewood Ventures I, LLC and BCIA CW Member, LLC. (14)                                       
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.31  |             |  | Guaranty of Candlewood Hotel Company, Inc., dated as of June 1, 1999, in favor of
Candlewood Hotel Company Fund I, LLC. (14)                                                                                  
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.32  |             |  | Loan Agreement, dated as of June 1, 1999, between Candlewood Hotel Company Fund I, LLC
and Boston Capital Institutional Advisors LLC. (14)                                                                    
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.33  |             |  | Promissory Note of Candlewood Hotel Company Fund I, LLC, dated as of June 1, 1999, in
favor of Boston Capital Institutional Advisors LLC. (14)                                                                
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.34  |             |  | Key Principal Recourse Agreement, dated as of June 1, 1999, by Candlewood Hotel Company,
Inc. for the benefit of Boston Capital Institutional Advisors LLC. (14)                                              
|        |        |             |  |                                                                                                                                                                                                               
|        | *10.35 |             |  | Senior Executive Transaction Bonus Plan. (15)                                                                                                                                                                 
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.36  |             |  | Waive Letter dated as of March 27, 2003 by and between Hospitality Properties Trust,
Candlewood Hotel Company, Inc. and Candlewood Leasing No. 1, Inc. (15)                                                   
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.37  |             |  | Loan Agreement dated April 12, 2002 by and among Candlewood Portfolio 1, LLC, certain
other Candlewood entities and GMAC Commercial Mortgage Corporation. (15)                                                
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.38  |             |  | Promissory Note from Candlewood Portfolio 1, LLC and certain other Candlewood entities
to GMAC Commercial Mortgage Corporation dated as of April 12, 2002. (15)                                               
|        |        |             |  |                                                                                                                                                                                                               
|        | 10.39  |             |  | Management Agreement dated April 25, 2003 by and between HPT TRS SPES, Inc., as owner,
and Candlewood Management, LLC as Manager.                                                                             
|        |        |             |  |                                                                                                                                                                                                               
|        | 11.1   |             |  | Statement re Computation of Per Share Earnings - not applicable.                                                                                                                                              



|* |  | Compensation Plan or Agreement
|- |  | ------------------------------

33



---



##### Table of Contents



|(1)  |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.s Registration Statement on Form S-1 (Registration No.
333-12021) filed September 13, 1996.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.s Registration Statement on Form S-1/A (Registration No.
333-12021) filed October 17, 1996.
|    
|(3)  |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.s Registration Statement on Form S-1/A (Registration No.
333-12021) filed October 30, 1996.
|    
|(4)  |  | Incorporated by reference from Candlewood Hotel Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.                                                
|    
|(5)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on October 8, 1997.                                                             
|    
|(6)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on January 7, 1998.                                                             
|    
|(7)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on June 9, 1998.                                                                
|    
|(8)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K/A filed August 6, 1998.                                                               
|    
|(9)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K/A filed August 10, 1998.                                                              
|    
|(10) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.                                          
|    
|(11) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended September 30, 2001.                                           
|    
|(12) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on April 26, 2002.                                                              
|    
|(13) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended June 30, 2002.                                                
|    
|(14) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended September 30, 2002.                                           
|    
|(15) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.                                          

34