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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 September 30, 2003

OR

|       |  |                                                                                         
|------ |  | ----------------------------------------------------------------------------------------
|/    / |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 November 14, 2003
|                             |  |                                 
|Common Stock, $.01 par value |  | 9,025,000 shares                

1



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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                   
|EXHIBIT INDEX                
|EXHIBIT 4.4                  
|EXHIBIT 10.45                
|EXHIBIT 31.1                 
|EXHIBIT 32.1                 



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CANDLEWOOD HOTEL COMPANY, INC.

FORM 10 - Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2003

INDEX

|         |  |                                                                                                                                 |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                 |  | PAGE
|         |  |                                                                                                                                 |  |     
|PART I.  |  | FINANCIAL INFORMATION                                                                                                           |  |     
|Item 1.  |  | Financial Statements                                                                                                            |  |     
|         |  | Consolidated Balance Sheets at September 30, 2003 (unaudited)
and December 31, 2002                                             |  | 3   
|         |  | Consolidated Statements of Operations for the three and nine-months ended September 30, 2003 and September 30, 2002
(unaudited) |  | 4   
|         |  | Consolidated Statements of Cash Flows for the nine-months
ended September 30, 2003 and September 30, 2002
(unaudited)           |  | 5   
|         |  | Notes to Consolidated Financial Statements                                                                                      |  | 6   
|Item 2.  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                           |  | 15  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                      |  | 32  
|Item 4.  |  | Controls and Procedures                                                                                                         |  | 32  
|PART II. |  | OTHER INFORMATION                                                                                                               |  |     
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                |  | 33  

2



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##### Table of Contents









PART I. FINANCIAL INFORMATION
Item 1. Financial Statements




CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |         |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | -
|                                                                                                                                                                                          |                                                                                               |                                                              |         | September 30, |         |              |         |        
|                                                                                                                                                                                          |                                                                                               |                                                              |         | 2003          |         | December 31,
|                                                                                                                                                                                          |                                                                                               |                                                              |         | (Unaudited)   |         | 2002        
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |             
|Assets:                                                                                                                                                                                   |                                                                                               |                                                              |         |               |         |              |         |        
|Investment in hotels                                                                                                                                                                      |                                                                                               | $                                                            | 107,596 |               |         | $            | 100,720 |        
|Accumulated depreciation and amortization                                                                                                                                                 |                                                                                               |                                                              | (17,076 | )             |         |              | (13,771 | )      
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|Net investment in hotels                                                                                                                                                                  |                                                                                               |                                                              | 90,520  |               |         |              | 86,949  |        
|Cash and cash equivalents (including $0 and $357 of
restricted cash, respectively)                                                                                                        |                                                                                               |                                                              | 9,394   |               |         |              | 9,270   |        
|Deposits                                                                                                                                                                                  |                                                                                               |                                                              | 46,086  |               |         |              | 46,086  |        
|Accounts and other receivables                                                                                                                                                            |                                                                                               |                                                              | 5,746   |               |         |              | 3,705   |        
|Investments in joint ventures                                                                                                                                                             |                                                                                               |                                                              | 555     |               |         |              | 8,393   |        
|Deferred offering costs for redeemable preferred stock                                                                                                                                    |                                                                                               |                                                              | 2,154   |               |         |              |        |        
|Other assets                                                                                                                                                                              |                                                                                               |                                                              | 7,745   |               |         |              | 13,934  |        
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|                                                                                                                                                                                          |                                                                                               | Total assets                                                 |         | $             | 162,200 |              |         | $       | 168,337 |  
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|Liabilities, Preferred Stock and Stockholders Deficit:                                                                                                                                   |                                                                                               |                                                              |         |               |         |              |         |        
|Mortgages and notes payable                                                                                                                                                               |                                                                                               | $                                                            | 66,029  |               |         | $            | 58,932  |        
|Accounts payable and other accrued expenses                                                                                                                                               |                                                                                               |                                                              | 16,104  |               |         |              | 15,083  |        
|Deferred gain on sale of hotels                                                                                                                                                           |                                                                                               |                                                              | 24,685  |               |         |              | 25,932  |        
|Redeemable preferred stock                                                                                                                                                                |                                                                                               |                                                              | 107,000 |               |         |              |        |        
|Dividends in arrears on redeemable preferred stock                                                                                                                                        |                                                                                               |                                                              | 18,227  |               |         |              |        |        
|Other liabilities                                                                                                                                                                         |                                                                                               |                                                              | 65      |               |         |              | 98      |        
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|                                                                                                                                                                                          |                                                                                               | Total liabilities                                            |         |               | 232,110 |              |         |         | 100,045 |  
|Redeemable, convertible, cumulative preferred stock (Series A),
$1,000 stated value, 65,000 shares authorized and outstanding,
(including $6,319 of dividends in arrears, respectively) |                                                                                               |                                                              |        |               |         |              | 69,209  |        
|Redeemable, convertible, cumulative preferred stock (Series B),
$1,000 stated value, 42,000 shares authorized and outstanding,
(including $4,083 of dividends in arrears, respectively) |                                                                                               |                                                              |        |               |         |              | 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                                                                    |                                                              |         | 16,254        |         |              |         | 22,197  |        
|                                                                                                                                                                                          | Other comprehensive income                                                                    |                                                              |         | (182          | )       |              |         | (140    | )      
|                                                                                                                                                                                          | Accumulated deficit                                                                           |                                                              |         | (86,072       | )       |              |         | (67,617 | )      
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|                                                                                                                                                                                          |                                                                                               | Total stockholders deficit                                  |         |               | (69,910 | )            |         |         | (45,470 | )
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        
|                                                                                                                                                                                          |                                                                                               | Total liabilities, preferred stock and stockholders deficit |         | $             | 162,200 |              |         | $       | 168,337 |  
|                                                                                                                                                                                          |                                                                                               |                                                              |         |               |         |              |         |        

See accompanying notes.

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

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

|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |         |  
|------------------------------------------------------- | ----------------------------------------- | - | --------------------- | ------ | ------------------------- | - | ------------- | ------ | ------------- | - | --------- | ------- | - | - | --------- | ------- | -
|                                                        |                                           |   | For the Quarter Ended |        | For the Nine-Months Ended
|                                                        |                                           |   |                       |        |                          
|                                                        |                                           |   | September 30,         |        | September 30,             |   | September 30, |        | September 30,
|                                                        |                                           |   | 2003                  |        | 2002                      |   | 2003          |        | 2002         
|                                                        |                                           |   |                       |        |                           |   |               |        |              
|Revenues:                                               |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|Hotel operations                                        |                                           | $ | 35,219                |        |                           | $ | 32,493        |        |               | $ | 94,621    |         |   | $ | 94,866    |        
|Franchise and management fee income                     |                                           |   | 1,363                 |        |                           |   | 803           |        |               |   | 3,753     |         |   |   | 2,918     |        
|Loss from joint ventures                                |                                           |   | (1,233                | )      |                           |   | (25           | )      |               |   | (3,197    | )       |   |   | (797      | )      
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        | Total hotel operating revenues            |   |                       | 35,349 |                           |   |               | 33,271 |               |   |           | 95,177  |   |   |           | 96,987  |  
|Proceeds from sales of hotels                           |                                           |   |                      |        |                           |   |              |        |               |   |          |         |   |   | 145,000   |        
|Deferred gain recognition on sales of hotels            |                                           |   | 405                   |        |                           |   | 406           |        |               |   | 1,215     |         |   |   | 1,044     |        
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        | Total revenues                            |   |                       | 35,754 |                           |   |               | 33,677 |               |   |           | 96,392  |   |   |           | 243,031 |  
|Operating costs and expenses:                           |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|Hotel operating expenses                                |                                           |   | 22,326                |        |                           |   | 20,196        |        |               |   | 59,913    |         |   |   | 59,968    |        
|Corporate operating expenses                            |                                           |   | 1,473                 |        |                           |   | 1,279         |        |               |   | 4,683     |         |   |   | 4,447     |        
|Rent expense on leased hotels                           |                                           |   | 12,764                |        |                           |   | 11,470        |        |               |   | 35,746    |         |   |   | 29,590    |        
|Depreciation and amortization                           |                                           |   | 1,306                 |        |                           |   | 1,144         |        |               |   | 3,909     |         |   |   | 4,934     |        
|Impairment loss                                         |                                           |   |                      |        |                           |   |              |        |               |   | 3,645     |         |   |   | 8,604     |        
|Loss on extinguishments of debt                         |                                           |   |                      |        |                           |   |              |        |               |   |          |         |   |   | 2,115     |        
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        | Total operating costs and expenses        |   |                       | 37,869 |                           |   |               | 34,089 |               |   |           | 107,896 |   |   |           | 109,658 |  
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|Cost of hotels sold                                     |                                           |   |                      |        |                           |   |              |        |               |   |          |         |   |   | 145,000   |        
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        |                                           |   | (2,115                | )      |                           |   | (412          | )      |               |   | (11,504   | )       |   |   | (11,627   | )      
|Interest income                                         |                                           |   | 26                    |        |                           |   | 73            |        |               |   | 90        |         |   |   | 258       |        
|Interest expense                                        |                                           |   | (4,636                | )      |                           |   | (1,172        | )      |               |   | (7,041    | )       |   |   | (6,127    | )      
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        | Loss before preferred stock
Dividends     |   |                       | (6,725 | )                         |   |               | (1,511 | )             |   |           | (18,455 | ) |   |           | (17,496 | )
|Preferred stock dividends                               |                                           |   |                      |        |                           |   | (2,023        | )      |               |   | (5,097    | )       |   |   | (6,002    | )      
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|                                                        | Net loss available to common
Stockholders |   | $                     | (6,725 | )                         |   | $             | (3,534 | )             |   | $         | (23,552 | ) |   | $         | (23,498 | )
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|Net loss per share of common stock -
basic and diluted  |                                           | $ | (0.75                 | )      |                           | $ | (0.39         | )      |               | $ | (2.61     | )       |   | $ | (2.60     | )      
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        
|Weighted average shares outstanding -
basic and diluted |                                           |   | 9,025,000             |        |                           |   | 9,025,000     |        |               |   | 9,025,000 |         |   |   | 9,025,000 |        
|                                                        |                                           |   |                       |        |                           |   |               |        |               |   |           |         |   |   |           |        

See accompanying notes.

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

(Unaudited) (In thousands)

|                                                                            |                                              |                                             |                                           |        |                    |       |                    |        |        |          |  
|--------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | ----------------------------------------- | ------ | ------------------ | ----- | ------------------ | ------ | ------ | -------- | -
|                                                                            |                                              |                                             |                                           |        | Nine-Months Ended 
|                                                                            |                                              |                                             |                                           |        |                   
|                                                                            |                                              |                                             |                                           |        | September 30, 2003 |       | September 30, 2002
|                                                                            |                                              |                                             |                                           |        |                    |       |                   
|Cash flows from operating activities:                                       |                                              |                                             |                                           |        |                    |       |                    |       
|Net loss before preferred stock dividends                                   |                                              | $                                           | (18,455                                   | )      |                    | $     | (17,496            | )     
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                              |                                             |                                           |        |                    |       |                    |       
|                                                                            | Depreciation and amortization                |                                             |                                           | 3,909  |                    |       |                    | 4,934  |       
|                                                                            | Loss from joint ventures                     |                                             |                                           | 2,294  |                    |       |                    | 797    |       
|                                                                            | Deferred gain recognition on sales of hotels |                                             |                                           | (1,215 | )                  |       |                    | (1,044 | )     
|                                                                            | Impairment loss                              |                                             |                                           | 3,645  |                    |       |                    | 8,604  |       
|                                                                            | Loss on extinguishments of debt              |                                             |                                           |       |                    |       |                    | 2,115  |       
|                                                                            | Change in:                                   |                                             |                                           |        |                    |       |                    |        |       
|                                                                            |                                              | Accounts and other receivables              |                                           |        | (2,014             | )     |                    |        | (1,530 | )       
|                                                                            |                                              | Other assets                                |                                           |        | 6,088              |       |                    |        | 962    |         
|                                                                            |                                              | Accounts payable and other accrued expenses |                                           |        | 5,003              |       |                    |        | (720   | )       
|                                                                            |                                              | Other liabilities                           |                                           |        | (33                | )     |                    |        | (647   | )       
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|                                                                            |                                              |                                             | Net cash used in operating activities     |        |                    | (778  | )                  |        |        | (4,025   | )
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|Cash flows from investing activities:                                       |                                              |                                             |                                           |        |                    |       |                    |       
|Proceeds from sales of hotels                                               |                                              |                                             |                                          |        |                    |       | 145,000            |       
|Refund of guaranty deposit                                                  |                                              |                                             |                                          |        |                    |       | 10,452             |       
|Cash paid for security deposits                                             |                                              |                                             |                                          |        |                    |       | (16,000            | )     
|Change in cost of sales of hotels                                           |                                              |                                             | (32                                       | )      |                    |       |                   |       
|Change in hotels completed                                                  |                                              |                                             | (1,716                                    | )      |                    |       | (8,096             | )     
|Contributions to joint ventures                                             |                                              |                                             | (1,283                                    | )      |                    |       |                   |       
|Distributions from joint ventures                                           |                                              |                                             | 4,465                                     |        |                    |       | 314                |       
|Purchase of intangible assets                                               |                                              |                                             | (118                                      | )      |                    |       | (220               | )     
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|                                                                            |                                              |                                             | Net cash provided by investing activities |        |                    | 1,316 |                    |        |        | 131,450  |  
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|Cash flows from financing activities:                                       |                                              |                                             |                                           |        |                    |       |                    |       
|Proceeds from mortgages and notes payable                                   |                                              |                                             |                                          |        |                    |       | 59,660             |       
|Payments on mortgages and notes payable                                     |                                              |                                             | (414                                      | )      |                    |       | (192,172           | )     
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|                                                                            |                                              |                                             | Net cash used in financing activities     |        |                    | (414  | )                  |        |        | (132,512 | )
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|Net increase (decrease) in cash and cash equivalents                        |                                              |                                             | 124                                       |        |                    |       | (5,087             | )     
|Cash and cash equivalents at beginning of period                            |                                              |                                             | 9,270                                     |        |                    |       | 17,966             |       
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|Cash and cash equivalents at end of period                                  |                                              | $                                           | 9,394                                     |        |                    | $     | 12,879             |       
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       
|Supplementary disclosure of cash flow information:                          |                                              |                                             |                                           |        |                    |       |                    |       
|Cash paid for interest                                                      |                                              | $                                           | 4,449                                     |        |                    | $     | 6,794              |       
|                                                                            |                                              |                                             |                                           |        |                    |       |                    |       

See accompanying notes.

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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.
|  
|   |  | The Company has entered into asset sale agreements to sell substantially
all of its assets. If these asset sale transactions are approved by its
stockholders, the Company plans to enter into a plan of dissolution (the
Plan of Dissolution) to liquidate its remaining assets. Pursuant to
the Asset Purchase Agreement by and between the Company and Hospitality
Properties Trust (HPT) executed on October 27, 2003 (the HPT Purchase
Agreement), the Company will sell its remaining twelve hotels to HPT.
In connection with that transaction, the Company and HPT will also enter
in a Termination Agreement pursuant to which the lease agreement
governing 64 hotels to which HPT and the Company are parties will be
terminated (see Note 5). In addition, pursuant to the Asset Purchase
Agreement by and between the Company and Six Continents Hotels, Inc.
(SCH) executed on October 27, 2003 (the SCH Purchase Agreement), the
Company will sell the rights to all the remaining Candlewood franchise
agreements as well as certain trademarks and brand names to SCH.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | After completion of the transactions contemplated by the Purchase
Agreements (the Sale Transactions), the Company intends on entering
into the proposed Plan of Dissolution whereby the Company will sell its
remaining assets and wind up its corporate existence. The proceeds from
the Asset Purchase Agreements and dissolution process will be paid to
the Companys preferred and common stockholders according to the
provisions of the proposed amendment to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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|   |  | the Companys Certificates of Incorporation, Certificates of
Designations for the Series A and Series B Preferred Stock, and the
Delaware laws governing the process of dissolution. If the amendments
to the Certificates of Designations are approved, the preferred
stockholders will be entitled to receive the first $25 million of
liquidation proceeds; common stockholders would then receive $500,000 of
the remaining liquidation proceeds; and thereafter the preferred
stockholders would receive 90% of any remaining liquidation proceeds and
the common stockholders would receive 10% of any remaining liquidation
proceeds, to the extent available.                                                                                                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Board of Directors of the Company, by unanimous vote, has approved these
proposed transactions. The Company filed a preliminary proxy statement with
the Securities and Exchange Commission on November 6, 2003 seeking
shareholder approval of the above proposed transactions. The accompanying
unaudited consolidated financial statements do not reflect any adjustments
relating to the above proposed transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | 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 and investments in joint ventures 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 asset. Upon determination that an
asset has been impaired, the carrying value of the asset is reduced to
estimated fair value less costs to sell. For the nine-months ended
September 30, 2003 and 2002, the Company recorded impairment losses of $3.6
million (related to an investment in joint ventures) and $8.6 million
(related to investment in hotels), respectively.
|  
|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.                                                                                                                                                                                     

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|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 at a
cost of $187,000. 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 September 30, 2003, the Companys interest rate cap was reported at
its fair value as other assets of $2,100 with the remaining unamortized
change in fair value since the purchase date of approximately $182,000
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 available to common shareholders of
$23.6 million ($2.61
per weighted average common share) and $23.6 million ($2.62 per weighted
average common share) for the nine-months ended September 30, 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|G. |  | Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Intangible assets of $1.4 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|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.                                                                                                                                                                                                                                    
|  
|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 nine-months ended September 30, 2003 and 2002, respectively, is as
follows:                                                                                                                                                                  

|                                     |                      |              |        |         |  |       |        |   |  |   |        |         | 
|------------------------------------ | -------------------- | ------------ | ------ | ------- |  | ----- | ------ | - |  | - | ------ | ------- | 
|Nine-months ended September 30, 2003 |                      | Operation of |        | Sale of |  |      
|(In thousands)                       |                      | Hotels       |        | Hotels  |  | Total
|                                     |                      |              |        |         |  |       |       
|Revenues from external customers     |                      | $            | 95,177 |         |  | $     |       |   |  | $ | 95,177 |        
|Interest expense                     |                      |              | 3,672  |         |  |       |       |   |  |   | 3,672  |        
|Depreciation expense                 |                      |              | 3,327  |         |  |       |       |   |  |   | 3,327  |        
|Impairment loss                      |                      |              |       |         |  |       | 3,645  |   |  |   | 3,645  |        
|Segment loss                         |                      |              | (7,481 | )       |  |       | (2,430 | ) |  |   | (9,911 | )      
|Hotels assets:                       |                      |              |        |         |  |       |        |   |  |   |        |        
|                                     | Investment in hotels |              |        | 107,596 |  |       |        |  |  |   |        | 107,596 | 
|                                     | Accounts receivable  |              |        | 5,188   |  |       |        |  |  |   |        | 5,188   | 
|Deferred gain on sale of hotels      |                      |              |       |         |  |       | 24,685 |   |  |   | 24,685 |        

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|                                     |                      |              |        |         |  |       |        |   |  |   |         |         | 
|------------------------------------ | -------------------- | ------------ | ------ | ------- |  | ----- | ------ | - |  | - | ------- | ------- | 
|Nine-months ended September 30, 2002 |                      | Operation of |        | Sale of |  |       |        |  
|(In thousands)                       |                      | Hotels       |        | Hotels  |  | Total
|                                     |                      |              |        |         |  |       |       
|Revenues from external customers     |                      | $            | 96,987 |         |  | $     |       |   |  | $ | 96,987  |        
|Interest expense                     |                      |              | 6,127  |         |  |       |       |   |  |   | 6,127   |        
|Depreciation expense                 |                      |              | 4,363  |         |  |       |       |   |  |   | 4,363   |        
|Impairment loss                      |                      |              |       |         |  |       | 8,604  |   |  |   | 8,604   |        
|Segment loss                         |                      |              | (3,061 | )       |  |       | (7,560 | ) |  |   | (10,621 | )      
|Hotels assets:                       |                      |              |        |         |  |       |        |   |  |   |         |        
|                                     | Investment in hotels |              |        | 100,182 |  |       |        |  |  |   |         | 100,182 | 
|                                     | Accounts receivable  |              |        | 5,504   |  |       |        |  |  |   |         | 5,504   | 
|Deferred gain on sale of hotels      |                      |              |       |         |  |       | 26,403 |   |  |   | 26,403  |        



|   |  | The difference between segment loss and net loss 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 148 provides
transition methods for entities that elect to adopt the fair value method of
accounting for stock-based employee compensation. In addition, SFAS 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 nine-months
ended September 30, 2003 and 2002 related to options granted under APB 25.
|  
|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

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 September 30, 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

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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 limited liability
companies (LLCs), guarantee the loan. At September 30, 2003, $54.7 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. 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 September 30, 2003). Principal payments 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 September 30, 2003, approximately $3.9 million was
outstanding under this note.

On April 1, 2003, the Company assumed the obligations under a bank loan
relating to the Companys Chicago, Illinois  Wheeling hotel, a hotel formerly
owned by a joint venture investment of the Company. See Note 3  Investments
in Joint Ventures. 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 based on the prime interest rate plus 1% (5%
as of September 30, 2003). Fixed principal payments are calculated based on a
20-year amortization schedule using the prevailing interest rate as defined in
the note. The note originally matured on June 30, 2003, at which time we did
not make the required principal payment. The loan was amended in September
2003 with a new maturity date of December 30, 2003. 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 September 30, 2003, approximately $7.4 million was
outstanding under this note. If the proposed Sale Transaction is completed, we
anticipate repaying this loan from the sale proceeds.

Note 3: Investments in Joint Ventures

As of September 30, 2003, the Companys net investment in joint ventures was
approximately $555,000. 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 September 30, 2003, this amount was approximately $100,000 and
is included in investments in joint ventures on the accompanying consolidated
balance sheets. For the quarters ended September 30, 2003 and 2002, equity
(loss) income in joint ventures of approximately ($1.2 million) and $439,000,
respectively, was recorded before recognition of the carrying value difference
of approximately ($1,000) and ($464,000), respectively. For the quarter ended
September 30, 2002, the Company received distributions from its joint ventures
of $200,000. There were no distributions made to the Company during the
quarter ended September 30, 2003.

The Company had one significant joint venture that was formed in 1999 with
Boston Capital Institutional Advisors (Boston Capital) and Mass Mutual in
which the Company held a 50% ownership interest. In total, eight hotels were
developed by the joint venture and hotel operations for the joint venture

11



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commenced in 2000. On April 1, 2003, pursuant to a prior agreement, the
Company assumed ownership of the Chicago, Illinois-Wheeling hotel from the
joint venture including 100% of all assets, liabilities and ownership
interests. In total, the Company assumed $1.3 million of total liabilities in
excess of total assets. This property was consolidated into the Companys
financial statements beginning on April 1, 2003. In July 2003, the joint
venture ceased its hotel operations when the seven remaining hotels were sold
in a sale-leaseback transaction with Hospitality Properties Trust. See Note 5
 Sale / Leaseback. In accordance with the profit and loss allocation terms
of the joint venture agreement, for the nine-months ended September 30, 2003,
the Company recorded all of the $2.3 million net pre-tax loss of the joint
venture.

The following is unaudited condensed financial information for the joint
venture as of September 30, 2003 and 2002:

|                                |  |      |        |      |  |   |        | 
|------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|Nine-months ended September 30, |  | 2003 |        | 2002
|                                |  |      |        |     
|(In thousands)                  |  |      |        |      |  |   |        | 
|Total revenue                   |  | $    | 9,713  |      |  | $ | 15,472 | 
|Hotel operating expenses        |  |      | 7,227  |      |  |   | 8,213  | 
|Depreciation and amortization   |  |      | 1,272  |      |  |   | 2,234  | 
|Loss on extinguishments of debt |  |      | 573    |      |  |   |       | 
|Loss on sale of hotels          |  |      | 136    |      |  |   |       | 
|Interest expense, net           |  |      | 2,822  |      |  |   | 4,378  | 
|                                |  |      |        |      |  |   |        | 
|Net pre-tax (loss)              |  | $    | (2,317 | )    |  | $ | 647    | 
|                                |  |      |        |      |  |   |        | 

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 is
applicable for the first reporting period that ends after December 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.

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 September 30, 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.

12



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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 eight 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 August 2003 to $7.00 per
share to reflect the Companys decision to forego payment of its May 2003 and
August 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 below the $7.50 threshold in effect for the Series B
Preferred Stock 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. As of September 30, 2003, the Company had approximately $18.2 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 September 30, 2003, the mandatory redemption amount
was approximately $125.2 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
September 30, 2003, the Liquidation Amount was $125.2 million, including $18.2
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 September 30, 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.

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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 and nine-months ended September 30, 2003, approximately $507,000
and $1.5 million, respectively, were recorded as an increase to the carrying
value of the preferred stock.

In July 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 generally requires
liability classification of mandatorily redeemable preferred stock. The
liability for the mandatorily redeemable preferred shares should be recorded at
fair value. Any difference between fair value and the redemption value would
be accreted through interest expense. Issuance costs previously recognized as
a reduction to the carrying amount of the mandatorily redeemable preferred
shares would be reclassified to a deferred charge (asset account) and
amortized. Dividends on mandatorily redeemable preferred shares and any
accretion on the preferred shares would be classified as a liability and
included in interest expense. The Company adopted SFAS 150 on July 1, 2003.
As a result of the adoption of SFAS 150, the Company reflected its redeemable
Series A and Series B Preferred Stock at its redemption amount of $107 million
and the related dividends in arrears of $18.2 million in liabilities on the
September 30, 2003 balance sheet. The remaining unamortized preferred stock
issuance costs of $2.2 million are reflected in assets as a deferred charge on
the September 30, 2003 balance sheet and are amortized into interest expense.
In addition, for the three and nine months ended September 30, 2003, accrued
but unpaid dividends on the Series A and Series B Preferred Stock of $2.9
million and the related amortization of the preferred stock issuance costs
totaling $507,000 were included in interest expense in the statement of
operations.

Note 5: Sale / Leaseback

As of September 30, 2003, the Company had completed four separate
sale-leaseback transactions with HPT. These transactions were completed in
stages commencing in December 1997 with the most recent transaction completed
in April 2002. In July 2003, as part of the dissolution of the Companys joint
venture with Boston Capital and Mass Mutual, the joint venture sold all seven
of its hotels to HPT. These hotels were then leased to the Company. As a
result of this transaction, as of September 30, 2003, the total number of
hotels leased by the Company from HPT increased to 64.

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 master lease agreement was amended in July 2003 (See Note
3) to include the seven additional hotels with the lease term remaining the
same (expiration in December 2018). The lease calls for monthly lease payments
of approximately $4.3 million and requires the Company to place a security
deposit with HPT for each property equal to one years lease payments. HPT did
not require an additional security deposit for the lease of the seven new
hotels. The security deposit will be released to the Company at the end of the
lease term.

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The terms of the amended lease agreement with HPT requires the Company to
guarantee the payment of rent for the duration of the lease and, as a
guarantor, to maintain a minimum net worth in an amount at least equal to the
aggregate of one years minimum rent ($52 million). At September 30, 2003, the
Companys net worth as defined in the agreement was $53.2 million. The Company
expects that its net worth will decline during the quarter ended December 31,
2003, and cannot be certain that its net worth, as defined, will not decline
below $52 million. If the lease agreement is cancelled and the Company loses
its rights as tenants under the applicable hotels, the Company may not be able
to continue its operations.

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 September 30, 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. See Note 1  Summary of Significant Accounting Policies. For the
quarters ended September 30, 2003 and 2002, respectively, the Company
recognized approximately $405,000 and $406,000 of deferred gain into income.
As of September 30, 2003, the Company has recognized a total of $1.2 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.




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.

Proposed Asset Sale

We have entered into asset sale agreements to sell substantially all
of our assets. If these asset sale transactions are approved by our
stockholders, we plan to enter into a plan of dissolution (the Plan of
Dissolution) to liquidate our remaining assets. Pursuant to the Asset
Purchase Agreement by and between Candlewood and Hospitality Properties
Trust (HPT) dated October 27, 2003 (the HPT Purchase Agreement), we
will sell our remaining twelve hotels to HPT. In connection with that
transaction, Candlewood and HPT will also enter in a Termination Agreement
pursuant to which the lease agreement governing 64 hotels to which HPT and
Candlewood are parties will be terminated. In addition, pursuant to the
Asset Purchase Agreement by and between Candlewood and Six Continents
Hotels, Inc. (SCH), a subsidiary of Intercontinental Hotels Group, PLC,
dated October 27, 2003 (the SCH Purchase Agreement and, together with the
HPT Purchase Agreement, the Purchase Agreements), we will sell our rights
to all existing Candlewood franchise agreements as well as certain
trademarks and brand names to SCH.

After completion of the transactions contemplated by the Purchase
Agreements, we intend to enter into a Plan of Dissolution whereby we will
sell our remaining assets and wind up our corporate existence. The
liquidation proceeds will be paid to our preferred and common stockholders
according to the provisions of the proposed amendments to our Restated
Certificate of Incorporation, Certificates of Designations for our Series A
and Series B Preferred Stock, and the Delaware laws governing the process
of dissolution. If the amendments to our Certificates of Designations are
approved, our preferred stockholders will be entitled to receive the first
$25 million of liquidation proceeds; our common stockholders would then
receive $500,000 of the remaining liquidation proceeds; and thereafter our
preferred stockholders would receive 90% of any remaining liquidation

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proceeds and our common stockholders would receive 10% of
any remaining liquidation proceeds, to the extent available.

Our Board of Directors, by unanimous vote, has approved these proposed
transactions. We filed a preliminary proxy statement with the Securities and
Exchange Commission on November 6, 2003 seeking our shareholder approval of the
above proposed transactions. Stockholders are encouraged to read the proxy
statement in its entirety.

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, 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. At
September 30, 2003, we had a total of 77 company-operated hotels, 34 franchised
hotels and 17 managed hotels located in 34 states. In addition, at September
30, 2003, we had five franchise hotels under construction and 20 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
September 30, 2003 and 2002:

|              |       |  |                  |     |            |  |            |     |                 |  |      |    |            |  |       |        |  |  |       |        |  |  |        |       | 
|------------- | ----- |  | ---------------- | --- | ---------- |  | ---------- | --- | --------------- |  | ---- | -- | ---------- |  | ----- | ------ |  |  | ----- | ------ |  |  | ------ | ----- | 
|              |       |  | Number of Hotels |     |            |  |            |     | Number of Rooms |  |      |    |           
|              |       |  | September 30,    |     |            |  |            |     | September 30,   |  |      |    |           
|              |       |  |                  |     | Increase / |  |            |     | Increase /     
|              |       |  | 2003             |     | 2002       |  | (Decrease) |     | 2003            |  | 2002 |    | (Decrease)
|              |       |  |                  |     |            |  |            |     |                 |  |      |    |           
|Owned         |       |  | 12               |     |            |  | 11         |     |                 |  | 1    |    |            |  | 1,443 |        |  |  | 1,300 |        |  |  | 143    |      
|Leased        |       |  | 64               |     |            |  | 57         |     |                 |  | 7    |    |            |  | 7,776 |        |  |  | 6,888 |        |  |  | 888    |      
|Managed       |       |  | 17               |     |            |  | 2          |     |                 |  | 15   |    |            |  | 2,024 |        |  |  | 203   |        |  |  | 1,821  |      
|Joint Venture |       |  | 1                |     |            |  | 9          |     |                 |  | (8   | )  |            |  | 128   |        |  |  | 1,159 |        |  |  | (1,031 | )    
|Franchised    |       |  | 34               |     |            |  | 29         |     |                 |  | 5    |    |            |  | 3,326 |        |  |  | 2,959 |        |  |  | 367    |      
|              |       |  |                  |     |            |  |            |     |                 |  |      |    |            |  |       |        |  |  |       |        |  |  |        |      
|              | Total |  |                  | 128 |            |  |            | 108 |                 |  |      | 20 |            |  |       | 14,697 |  |  |       | 12,509 |  |  |        | 2,188 | 

At September 30, 2003, we managed 17 hotels, 15 Summerfield Suites hotels
owned by HPT and two hotels independently owned by our Chief Executive Officer,
the Cambridge Suites by Candlewood and the Hotel at Old Town, both located in
Wichita, Kansas. On October 6, 2003, we ceased management of the 15
Summerfield Suites hotels (1,821 rooms) upon termination of a management
agreement with HPT. Our revenues for managed 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.

Our consolidated statements of operations include revenues and expenses
for only those hotels 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
franchised, 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.

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We have sold and leased back 57 hotels from Hospitality Properties Trust
(HPT), not including the seven hotels our joint venture sold to HPT in July
2003 which we subsequently leased back. The provisions of the transactions
allow us to operate, as lessee, over a defined lease term, hotels that we
developed. Our results from operations reflect these transactions. As a
result of the sale-leaseback transactions, we have recorded rent expense on the
hotels leased back from HPT. Since these hotels are leased and not owned, the
financial statements do not reflect any depreciation and amortization or
interest expense for these hotels after the date of sale. The proceeds from
the sales of the hotels is recorded net of the deferred gain on sale. The gain
is deferred and not recognized into earnings until certain operating
performance levels are achieved. See Note 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.

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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.

Results of Operations

Comparison of fiscal quarters ended September 30, 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
$35.2 million for the quarter ended September 30, 2003, compared to $32.5
million for the quarter ended September 30, 2002. The increase in revenue is a
result of revenues from the seven additional hotels leased from HPT in July
2003 and the hotel acquired from the Boston Capital joint venture in April
2003. The following table sets forth the operating statistics for our
corporate hotels for the quarters ended September 30, 2003 and September 30,
2002:

|                           |  |                       |       |      |  |        |       |   |  |   |       |   
|-------------------------- |  | --------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | --
|                           |  | For the quarter ended |       |      |  |       
|                           |  | September 30,         |       |      |  |       
|                           |  |                       |       |      |  |       
|                           |  | 2003                  |       | 2002 |  | Change
|                           |  |                       |       |      |  |       
|Occupancy                  |  |                       | 76.7  | %    |  |        | 77.7  | % |  |   | (1.0  | %)
|Average Daily Rate         |  | $                     | 53.84 |      |  | $      | 53.85 |   |  | $ | (0.01 | ) 
|Revenue per available room |  | $                     | 41.29 |      |  | $      | 41.86 |   |  | $ | (0.57 | ) 

Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms
available for the period, was 76.7% for the quarter ended September 30, 2003,
compared to 77.7% for the quarter ended September 30, 2002. Occupancy rates
for the quarter ended September 30, 2003 were negatively impacted by the
continued slowdown in the economy.

The average daily room rate for corporate hotels for the quarter ended
September 30, 2003 was $53.84, compared to $53.85 for the quarter ended
September 30, 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 $41.29 for the quarter ended
September 30, 2003, compared to $41.86 for the quarter ended September 30,
2002, a 1.4% decrease. This decrease is primarily due to the lower average

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occupancy rate we experienced in the quarter ended September 30, 2003
compared to September 30, 2002.

Hotel Operating Expenses

Hotel operating expenses for the quarter ended September 30, 2003 totaled
$22.3 million, compared to $20.2 million for the quarter ended September 30,
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 increase in hotel operating
expenses is primarily due to operating costs for the seven additional hotels
leased from HPT in July 2003 and the hotel acquired from the Boston Capital
joint venture in April 2003, partially offset by lower corporate allocations
and advertising costs.

Rent Expense on Leased Hotels

Rent expense on the 64 leased hotels during the quarter ended September
30, 2003 was $12.8 million, compared to $11.5 million for the 57 hotels leased
during the quarter ended September 30, 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 due to an increase in base rent as a result of the leasing
of seven additional hotels in July 2003.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the quarter ended
September 30, 2003 totaled $1.1 million, compared to $955,000 for the quarter
ended September 30, 2002. The increase in depreciation and amortization
expense is the result of higher leasehold improvement depreciation expense as a
result of increased capital expenditures at our leased hotels, the increased
number of leased hotels and the acquisition of the Chicago, Illinois
 Wheeling
hotel in April 2003. Other than for leasehold improvements we make as tenant
of the leased hotels, we do not record depreciation and amortization expense
for properties that are leased.

Corporate Operations

Other Income

Franchise and management fee income for the quarter ended September 30,
2003 totaled $1.4 million, compared to $803,000 for the quarter ended September
30, 2002. The increase in franchise and management fee income is primarily due
to the increase in management fees as a result of the 15 Summerfield Suites
hotels we managed from late April 2003 through September 2003.

Loss from joint ventures for the quarter ended September 30, 2003 totaled
$1.2 million, compared to $25,000 for the quarter ended September 30, 2002.
This loss is primarily due to the write-off of certain costs associated with
the dissolution of the Boston Capital joint venture in July 2003.

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Corporate Operating Expenses

Corporate operating expenses for the quarter ended September 30, 2003
totaled $1.5 million, compared to $1.3 million for the quarter ended September
30, 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. The increase in corporate operating expense is primarily due to
legal and professional fee expenses incurred in our evaluation of various
strategic and financing alternatives, partially offset by lower franchise costs
and other general corporate expenses.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
quarter ended September 30, 2003 totaled $190,000, unchanged from the quarter
ended September 30, 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 September 30, 2003 was $26,000,
compared to $73,000 for the quarter ended September 30, 2002. Interest income
for the quarter ended September 30, 2003 resulted primarily from the temporary
investment of cash provided by operations and cash from the dissolution of our
joint venture with Boston Capital and Mass Mutual. For the quarter ended
September 30, 2002, interest income resulted primarily from the temporary
investment of cash provided by operations and the April 2002 sale-leaseback
transaction of 21 hotels. The decrease in interest income for the quarter
ended September 30, 2003 is largely due to lower cash levels and lower
investment rate yields.

Interest expense for the quarter ended September 30, 2003 was $4.6
million, compared to $1.2 million for the quarter ended September 30, 2002.
The increase in interest expense is due to the inclusion in interest expense of
$3.4 million of accrued dividends and accretion of deferred offering costs on
our redeemable preferred stock as a result of the adoption of SFAS No. 150 on
July 1, 2003 (see Impact of New Accounting Standards below) and higher debt
levels resulting from the assumption of the loan on the Wheeling, Illinois
property from the Boston Capital joint venture.

Sales of Hotels

In July 2003, our Boston Capital joint venture sold all seven of its
hotels to HPT. Concurrent with this sale, we agreed to lease the seven hotels
from HPT. As a result, as of September 30, 2003, we leased a total of 64
hotels from HPT. We have sold nearly all of our hotels that are available for
sale-leaseback transactions. A deferred gain was recorded on the sales (other
than the sale by the joint venture), a portion of which has been recorded in
income in the quarters ended September 30, 2003 and September 30, 2002. The
following table sets forth the rent expense and deferred gain recognized into
earnings related to our leased hotels for the quarters ended September 30, 2003
and September 30, 2002 (in thousands):

|                              |  |                       |        |      |  |   |        | 
|----------------------------- |  | --------------------- | ------ | ---- |  | - | ------ | 
|                              |  | For the quarter ended
|                              |  | September 30,        
|                              |  |                      
|                              |  | 2003                  |        | 2002
|                              |  |                       |        |     
|Rent expense on leased hotels |  | $                     | 12,764 |      |  | $ | 11,470 | 
|Gain recognized into earnings |  | $                     | 405    |      |  | $ | 406    | 

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Comparison of nine-months ended September 30, 2003 and 2002

Hotel Operations

Hotel Operations Revenue

Hotel operations revenue was $94.6 million for the nine-months ended
September 30, 2003, compared to $94.9 million for the nine-months ended
September 30, 2002. The decrease in revenue is a result of the slowdown in the
economy and a reduction in business travel, partially offset by revenues from
the seven additional hotels leased from HPT in July 2003 and the hotel acquired
from the Boston Capital joint venture in April 2003. The following table sets
forth the operating statistics for all our corporate hotels for the nine-months
ended September 30, 2003 and September 30, 2002:

|                           |  |                           |       |      |  |        |       |   |  |   |       |   
|-------------------------- |  | ------------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | --
|                           |  | For the nine-months ended |       |      |  |       
|                           |  | September 30,             |       |      |  |       
|                           |  |                           |       |      |  |       
|                           |  | 2003                      |       | 2002 |  | Change
|                           |  |                           |       |      |  |       
|Occupancy                  |  |                           | 73.0  | %    |  |        | 76.3  | % |  |   | (3.3  | %)
|Average Daily Rate         |  | $                         | 53.64 |      |  | $      | 54.04 |   |  | $ | (0.40 | ) 
|Revenue per available room |  | $                         | 39.17 |      |  | $      | 41.23 |   |  | $ | (2.06 | ) 

The average occupancy rate for our corporate hotels was 73% for the
nine-months ended September 30, 2003, compared to 76.3% for the nine-months
ended September 30, 2002. The average daily room rate for corporate hotels for
the nine-months ended September 30, 2003 was $53.64, compared to $54.04 for the
nine-months ended September 30, 2002. Revenue per available room was $39.17
for the nine-months ended September 30, 2003, a 5% decrease from a year ago.
This decrease is due to the lower average occupancy rate for the nine-months
ended September 30, 2003 compared to the nine-months ended September 30, 2002.

Hotel Operating Expenses

Hotel operating expenses for the nine-months ended September 30, 2003
totaled $59.9 million, compared to $60.0 million for the nine-months ended
September 30, 2002. For 2003, lower corporate allocations and advertising
costs have been offset by higher operating costs for the seven additional
hotels leased from HPT in July 2003, the hotel acquired from the Boston Capital
joint venture in April 2003 and the full nine-month impact of operating costs
for the San Antonio, Texas hotel acquired in March 2002.

Rent Expense on Leased Hotels

Rent expense on the 64 leased hotels for the nine-months ended September
30, 2003 was $35.7 million, compared to $29.6 million for the nine-months ended
September 30, 2002. The increase in rent expense is due to an increase in base
rent as a result of having leased seven additional hotels in July 2003 and the
full nine-month impact of the sale and leaseback of 21 hotels in April 2002.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations for
the nine-months ended September 30, 2003 totaled $3.3 million, compared to $4.4
million for the nine-months ended September 30, 2002. The decrease in
depreciation and amortization expense is a result of the sale and leaseback of
21 hotels in April 2002.

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Corporate Operations

Other Income

Franchise and management fee income for the nine-months ended September
30, 2003 totaled $3.8 million, compared to $2.9 million for the nine-months
ended September 30, 2002. The increase in franchise and management fee income
is primarily due to the increase in management fees as a result of the 15
Summerfield Suites hotels we began managed from late April 2003 through
September 2003.

Loss from joint ventures for the nine-months ended September 30, 2003
totaled $3.2 million, compared to $797,000 for the nine-months ended September
30, 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, the write-off of certain costs associated with the dissolution of the
joint venture in July 2003, our purchase of the Chicago, Illinois  Wheeling
joint venture hotel in April 2003, and the amortization of the difference
between the amount at which the Boston Capital joint venture investment was
carried on our accounting records and the amount of the underlying book equity
in the net assets of the joint venture. This difference was primarily
comprised of carrying costs incurred from the time we purchased the land until
the hotel was contributed to the joint venture.

Corporate Operating Expenses

Corporate operating expenses for the nine-months ended September 30, 2003
totaled $4.7 million, compared to $4.4 million for the nine-months ended
September 30, 2002. For the nine-months ended September 30, 2003, expenses
incurred in our evaluation of various strategic and financing alternatives were
offset by lower franchise costs and other general corporate expenses.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
nine-months ended September 30, 2003 totaled $583,000, compared to $572,000 for
the nine-months ended September 30, 2002.

Interest Income and Expense

Interest income for the nine-months ended September 30, 2003 was $90,000,
compared to $258,000 for the nine-months ended September 30, 2002. Interest
income for the nine-months ended September 30, 2003 resulted primarily from the
temporary investment of cash provided by operations and cash from the
dissolution of our joint venture with Boston Capital and Mass Mutual. For the
nine-months ended September 30, 2002, interest income resulted primarily from
the temporary investment of cash provided by operations and proceeds from the
April 2002 sale-leaseback transaction. The decrease in interest income for the
nine-months ended September 30, 2003 is largely due to lower cash levels and
lower investment rate yields.

Interest expense for the nine-months ended September 30, 2003 was $7.0
million, compared to $6.1 million for the nine-months ended September 30, 2002.
The increase in interest expense is due to the inclusion in interest expense
of $3.4 million of accrued dividends and accretion of deferred offering costs
on our redeemable preferred stock as a result of the adoption of SFAS No. 150
on July 1, 2003 (see Impact of New Accounting Standards below), partially
offset by lower debt levels as a result of the April 2002 sale-leaseback
transaction.

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Sales of Hotels

As of September 30, 2003, we had sold to and leased back from HPT 57
hotels, 21 of which were sold during the nine-months ended September 30, 2002.
A deferred gain was recorded on the sales, a portion of which has been recorded
in income in the nine-months ended September 30, 2003 and September 30, 2002.
In July 2003, the joint venture sold all seven of its hotels to HPT.
Concurrent with this sale, we agreed to lease the seven hotels from HPT. As a
result, as of September 30, 2003, we leased a total of 64 hotels from HPT. The
following table sets forth the rent expense and deferred gain recognized into
earnings related to our leased hotels for the nine-months ended September 30,
2003 and September 30, 2002 (in thousands):

|                              |  |                           |        |      |  |   |        | 
|----------------------------- |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                              |  | For the nine-months ended
|                              |  | September 30,            
|                              |  |                          
|                              |  | 2003                      |        | 2002
|                              |  |                           |        |     
|Rent expense on leased hotels |  | $                         | 35,746 |      |  | $ | 29,590 | 
|Gain recognized into earnings |  | $                         | 1,215  |      |  | $ | 1,044  | 

Liquidity and Capital Resources

We had cash and cash equivalents of $9.4 million at September 30, 2003,
compared to $12.9 million at September 30, 2002. Net cash used in operating
activities totaled $778,000 for the nine-months ended September 30, 2003,
compared to $4 million of cash used in operating activities for the nine-months
ended September 30, 2002. For the nine-months ended September 30, 2003, we
recorded a net loss from operations of $18.5 million, including $3.6 million of
non-cash impairment loss, $3.9 million of non-cash depreciation and
amortization expense, $2.3 million of loss on investment in joint ventures and
$1.2 million of non-cash deferred gain income on hotels sold. Sources of cash
included a $6.1 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, and a $5.0 million
increase in accounts payable and other accrued expenses. The FF&E reserve
accounts are stipulated in our 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 nine-months ended September 30,
2003 consisted primarily of a $2 million increase in accounts and other
receivables. For the nine-months ended September 30, 2002, we recorded a net
loss from operations of $17.5 million including $8.6 million of non-cash
impairment loss, $2.1 million of loss on extinguishments of debt, $4.9 million
of non-cash depreciation and amortization expense, $797,000 of loss on
investment in joint ventures and $1.0 million of non-cash deferred gain income
on hotels sold. Sources of cash for the nine-months ended September 30, 2002
included a $1.0 million decrease in other assets primarily due to the
reimbursement of hotel expenditures from the FF&E cash reserve accounts, which
we used in operations. Uses of cash for the nine-months ended September 30,
2002 included a $1.5 million increase in accounts and other receivables, a
$720,000 decrease in accounts payable and other accrued expenses and a $647,000
decrease in other liabilities.

Net cash provided by investing activities for the nine-months ended
September 30, 2003 totaled $1.3 million, compared to $131.5 million of net cash
provided by investing activities for the nine-months ended September 30, 2002.
Net cash provided by investing activities for the nine-months ended September
30, 2003 consisted of $4.5 million of distribution from the Boston Capital
joint venture. Net cash used in investing activities for the nine-months ended
September 30, 2003 consisted of $1.7 million in expenditures for property,
equipment and leasehold improvements in connection with completed and leased
hotels and $1.3 million in contributions to joint ventures associated with the
acquisition of the Chicago, Illinois  Wheeling hotel. Sources of cash from
investing activities for the nine-months ended September 30, 2002 consisted of
$145.0 million in proceeds from sales of hotels and $10.5 million of a guaranty
deposit refunded to us by HPT as part of the April 2002 sale-leaseback
transaction. Net cash used in investing activities for the nine-months ended
September 30, 2002 consisted of $16.0 million of cash paid for security
deposits related to the 21 hotels sold and leased back from HPT in April 2002
and

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$8.1 million of expenditures for property, equipment and leasehold
improvements in connection with completed and leased hotels.

For the nine-months ended September 30, 2003, net cash used in financing
activities was $414,000, compared to $132.5 million of net cash used in
financing activities for the nine-months ended September 30, 2002. Net cash
used in financing activities during the nine-months ended September 30, 2003
consisted of principal payments on notes payable. Net cash used in financing
activities during the nine-months ended September 30, 2002 consisted of $192.2
million of principal payments on notes payable, partially offset by $59.7
million of proceeds from mortgages and notes payable. The principal payments
on notes payable represent payments made to pay off note balances on hotels
sold in the April 2002 sale-leaseback transaction. The proceeds from mortgages
and notes payable represent the proceeds from the refinancing of our debt in
April 2002.

As part
of the acquisition of the Chicago, Illinois  Wheeling hotel in
April 2003, we assumed $7.5 million of mortgage notes payable and acquired $5.3
million of property, equipment and fixtures, $668,000 of accounts payable and
other accrued expenses and $300,000 of other assets including accounts
receivable and prepaid expenses. These amounts represent non-cash activities
and are not reflected in our statements of cash flows.

On July 22, 2003, our Boston Capital joint venture sold seven hotels to
HPT for $65 million, which we agreed to lease. The proceeds of the transaction
of $65.0 million were used to repay all of the mortgage and mezzanine debt of
the joint venture, with the balance distributed to the partners. The joint
venture recognized a loss of $136,000 on the sale of these remaining hotels.
In accordance with the profit and loss allocation terms of the joint venture
agreement, for the nine-months ended September 30, 2003, we recorded all of the
$2.3 million net pre-tax loss of the joint venture.

On the fifteenth of each month, we are required to make a lease payment of
$4.3 million to HPT related to the 64 hotels we lease from HPT. Our operations
do not generate sufficient cash to fund these obligations. As a result, in
order to meet this obligation, we must use our cash reserved for continuing
operations and rely upon additional reimbursements from the FF&E reserve
accounts discussed above. We anticipate that we will not have sufficient cash
to make the lease payment on January 15, 2004.

As of September 30, 2003, we had borrowed $66 million from GMAC, financial
institutions and banks. This debt has scheduled maturity dates ranging from
December 2003 to June 2011 with interest rates, which range from 5% to 8.30%.
On December 30, 2003, $7.4 million of this debt will mature. We anticipate
that we will not have sufficient cash to repay this obligation.

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
eight 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 September 30, 2003,
we had approximately $18.2 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 August 2003 to $7.00 per
share to reflect our decision to forego payment of the May 2003 and August 2003
preferred stock dividend payments. The reduction in the conversion price to
$7.50 in February 2003 resulted in an increase in the dividend rate (beginning
in March 2003) 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

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Preferred Stock in September 2004. The mandatory redemption amount is
equal to $107 million plus unpaid dividends. As of September 30, 2003, the
mandatory redemption amount was approximately $125.2 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
September 30, 2003, the Liquidation Amount was $125.2 million, including $18.2
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 September 30, 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. In connection with the Sale Transactions, we are seeking
stockholder approval of an amendment to the Certificates of Designations for
our Series A and Series B Preferred Stock to change the dividend rights,
redemption rights and liquidation preferences of the Preferred Stock such that
the holders of the our Common Stock will be entitled to receive a portion of
the Liquidation proceeds in excess of $25 million.

The following table summarizes our contractual cash and debt obligations
for the next five years as of September 30, 2003 (in thousands):

Payments due by Period:

|                                 |       |   |         |         |        |   |           |         |           |   |         |         |  |   |         |         |       |   |         |         | 
|-------------------------------- | ----- | - | ------- | ------- | ------ | - | --------- | ------- | --------- | - | ------- | ------- |  | - | ------- | ------- | ----- | - | ------- | ------- | 
|                                 |       |   |         |         |        |   | Less than |         |           |   |         |         |  |   |         |         | After
|                                 |       |   | Total   |         | 1 year |   | 1-3 years |         | 4-5 years |   | 5 years
|                                 |       |   |         |         |        |   |           |         |           |   |        
|Long-Term Debt                   |       | $ | 66,029  |         |        | $ | 8,248     |         |           | $ | 54,057  |         |  | $ | 139     |         |       | $ | 3,585   |        
|Rent Expense for Leased Hotels   |       |   | 793,111 |         |        |   | 52,007    |         |           |   | 104,015 |         |  |   | 104,015 |         |       |   | 533,074 |        
|Rent Expense on Corporate Office |       |   | 231     |         |        |   | 231       |         |           |   |        |         |  |   |        |         |       |   |        |        
|Rent Expense on hotel equipment  |       |   | 606     |         |        |   | 423       |         |           |   | 175     |         |  |   | 8       |         |       |   |        |        
|Preferred Stock Redemption       |       |   | 125,227 |         |        |   | 125,227   |         |           |   |        |         |  |   |        |         |       |   |        |        
|                                 |       |   |         |         |        |   |           |         |           |   |         |         |  |   |         |         |       |   |         |        
|                                 | Total |   | $       | 985,204 |        |   | $         | 186,136 |           |   | $       | 158,247 |  |   | $       | 104,162 |       |   | $       | 536,659 | 

We had cash and cash equivalents of $9.4 million at September 30, 2003.
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, we currently expect our cash and cash equivalents
balance to decline during the quarter ended December 31, 2003. 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, if our operating performance does not improve
materially (including RevPAR), we will not have sufficient funds to meet our
operating needs in the first quarter of 2004. Furthermore, in order to meet
our long-term financing obligations, we will be required to raise additional
capital. We do not currently project that we will generate sufficient cash
flow to repay the mandatory redemption of the preferred stock in 2004. In
addition to the proposed Sale Transaction, we continue to consider a number of
financing alternatives, including credit facilities, the issuance of equity,
debt or equity-linked securities and joint ventures, which are necessary to
provide the capital needed to meet our financing needs. In conjunction with
these activities, the Company has

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incurred and charged to operating expense
approximately $609,000 of legal and professional fees as of
September 30, 2003. We are unable to assure that we will be able to
obtain financing on a timely basis, on acceptable terms, or at all. If we are
unable to obtain financing on a timely basis or complete the proposed Sale
Transactions, we do not anticipate having the ability to meet our obligations
as the obligations become due.

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, those risks described in the preliminary proxy statement
we filed with the SEC on November 6, 2003 and the following:

We Cannot Be Sure When the Proposed Asset Sale Transactions Contemplated
by the Purchase Agreements With HPT and SCH Will Be Complete.The consummation
of the Sale Transactions are subject to the satisfaction of various conditions,
including the requirement that we obtain stockholder approval of the asset
sales in and the approval of the amendment to the Certificates of Designations
of the Series A and B Preferred Stock. In addition, HPT may terminate our asset
sale agreement with HPT if, among other things:



| |  |  | we have not obtained stockholder approval;                                                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we materially breach our representations and warranties,
covenants, or agreements contained in the agreement;                           
|
| |  |  | if our agreement with HPT to terminate our lease at the
closing of the Sale Transactions (the Termination Agreement) is
terminated; or
|
| |  |  | if our asset sale agreement with SCH is terminated.                                                                                     

SCH may terminate our asset sale agreement with SCH if, among other things:



| |  |  | we have not obtained stockholder approval;                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | we materially breach our representations and warranties,
covenants, or agreements contained in the agreement; or
|
| |  |  | if our asset sale agreement with HPT is terminated.                                                             

We cannot guarantee that we will be able to meet the closing conditions
set forth in the asset sale agreements. If we are unable to meet the closing
conditions, HPT and/or SCH will not be obligated to purchase our assets. If
the asset sales contemplated by the asset sale agreements are not approved by
our stockholders or do not close, our Board, in discharging their fiduciary
obligations to our stockholders, will evaluate other alternatives which may be
less favorable to our stockholders than the contemplated asset sales with HPT
and SCH.

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If we do not close the asset sale contemplated by the HPT Purchase
Agreement, we may fail to comply with the terms of our lease agreement, which
could result in the loss of our rights as a tenant to the applicable hotels.
The terms of our amended lease agreement with HPT require us to guarantee the
payment of rent for the duration of the lease and, as a guarantor, to maintain
a minimum net worth of $52 million. At September 30, 2003, our net worth (as
defined in the lease agreement with HPT) was $53.2 million. We expect that our
net worth will decline during the year ending December 31, 2003 below $52
million. Failure to maintain a net worth above $52 million would result in a
breach of our lease agreement with HPT which would give 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. If HPT cancels the lease agreement and we
lose our rights as tenants under the applicable hotels, we will likely not be
able to continue operations.

If we fail to fully pay our rent obligations to HPT on time, HPT can
Terminate the Termination Agreement and Our Asset Sale Agreement With HPT.The
terms of the Termination Agreement require that we make all rent payments to
HPT in full when they become due and payable. If we fail to make such rent
payments, HPT can terminate the Termination Agreement and the asset sale
agreement.

The terms of our amended and restated lease agreement with HPT require us
to make monthly base rent payments to HPT in the amount of $4.3 million on the
first day of every month. The Termination Agreement with HPT provides: (i) a
modification of the rent payment due date from the first day of each month to
the fifteenth day of each month from the date thereof until the closing date of
the asset sale agreement; (ii) for the termination of all of Candlewoods lease
obligations with HPT upon the closing date of the asset sale to HPT and (iii)
for the release of any and all claims that HPT may have against us under any
prior agreements and transactions between HPT and Candlewood.

We currently believe that we have enough funds to make the rent payments in
full when they become due for the remainder of 2003. If the HPT asset sale
agreement does not close by January 15, 2004, we cannot assure you that we will
have enough funds to make the rent payment for the month of January 2004. In
such case, HPT would have the right to terminate the HPT asset sale agreement
which could lead to the termination of the SCH asset sale agreement.

We will incur additional alternative minimum tax if the Sale Transactions
close after December 31, 2003.As noted above, the consummation of the Sale
Transactions are subject to the satisfaction of various conditions. If such
conditions are not satisfied so as to enable the asset sales to occur prior to
December 31, 2003, we will incur a significant amount of additional alternative
minimum tax due to limitations on using net operating loss carryforwards to
offset alternative minimum taxable income. If we incur additional alternative
minimum tax, the amount of funds available for distribution to our stockholders
will be reduced by the amount of such additional tax liability.

We May Not Have Sufficient Working Capital to Meet Our Day-to-Day
Operating Cash Flow Needs.We had cash and cash equivalents of $9.4 million
at September 30, 2003. 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. We currently expect our cash and cash
equivalents balance to decline during the quarter ended December 31, 2003. 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, if our operating performance does not improve
(including RevPAR), we will not have sufficient funds to meet our operating
needs in the first quarter of 2004. Furthermore, in order to meet our
long-term financing obligations, we will be required to raise additional
capital. We do not currently project that we will generate sufficient cash
flow to repay the mandatory redemption of the preferred stock in 2004. We are
unable to assure that we will be able to obtain financing on a timely basis, on
acceptable terms, or at all.

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

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terms of our amended 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 in
an amount at least equal to
the aggregate of one years minimum rent ($52 million). At September 30,
2003, our net worth as defined in the agreement was $53.2 million. We expect
that our net worth will decline during the quarter ended December 31, 2003, and
we cannot assure you that it will not decline below $52 million. 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 we will be able to reverse the recent declines in occupancy
levels and room rates. 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, we have not made scheduled dividend payments on our preferred stock
during the past eight quarters. 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. 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
September 30, 2003, the mandatory redemption amount was approximately $125.2
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. 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 September 30, 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;                        

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| |  |  | 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.

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

29



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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 September 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.

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, we chose not to apply to sell franchises in the State of Virginia
based on our understanding of, and inability to meet, certain financial
covenants of the state. 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.

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 September 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 September 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

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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 is applicable
for the first reporting period that ends after December 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.

In July 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. SFAS 150 generally
requires liability classification of mandatorily redeemable preferred stock.
The liability for the mandatorily redeemable preferred shares should be
recorded at fair value. Any difference between fair value and the redemption
value would be accreted through interest expense. Issuance costs previously
recognized as a reduction to the carrying amount of the mandatorily redeemable
preferred shares would be reclassified to a deferred charge (asset account) and
amortized. Dividends on mandatorily redeemable preferred shares and any
accretion on the preferred shares would be classified as a liability and
included in interest expense. We adopted SFAS 150 on July 1, 2003. As a
result of the adoption of SFAS 150, we reflected our redeemable Series A and
Series B Preferred Stock at its redemption amount of $107 million and the
related dividends in arrears of $18.2 million in liabilities on our September
30, 2003 balance sheet. The remaining unamortized preferred stock issuance
costs of $2.2 million are reflected in assets as a deferred charge on our
September 30, 2003 balance sheet. In addition, for the three months ended
September 30, 2003, accrued but unpaid dividends on the Series A and Series B
Preferred Stock and the related amortization of the preferred stock issuance
costs totaling $3.4 million were included in interest expense in our statement
of operations.

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

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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.




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,
the 10-year Treasury note or Prime. 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 September 30, 2003, would change by
approximately $6,600. Additionally, we have market risk on our short-term
investments, which are considered cash equivalents, due to changes in interest
rates. If interest rates increase by .01 percent, the market value of our
short-term investments, based on the outstanding balance at September 30, 2003,
would change by approximately $900.

In September 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 September of 1999 and
September 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 September 30, 2003, the Company had
one derivative financial instrument, an interest rate cap, which was recorded
at fair value of $2,100 as of September 30, 2003, with the remaining
unamortized 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.

As required by SEC Rule 13a-15(b), 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 as of the end of the quarter covered by this Report.
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 changes in the Companys internal controls over
financial reporting during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting.

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PART II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

See the Exhibit Index beginning on page 36.

(b)  Reports on Form 8-K

None.

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##### 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: November 14, 2003 |  | By: |  | /s/ Jack P. DeBoer                  
|                        |  |     |  |                                     
|                        |  |     |  | Jack P. DeBoer                       |  | 
|                        |  |     |  | Chairman and Chief Executive Officer |  | 
|                        |  |     |  |                                      |  | 
|Date: November 14, 2003 |  | By: |  | /s/ Warren D. Fix                   
|                        |  |     |  |                                     
|                        |  |     |  | Warren D. Fix                        |  | 
|                        |  |     |  | Executive Vice President and         |  | 
|                        |  |     |  | Chief Financial Officer              |  | 

34



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##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                         
|No.     |  | Description                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|2.1     |  | Asset Purchase and Sale Agreement, dated as of October 27, 2003, by and among Candlewood
Hotel Company, Inc., Candlewood Hotel Company, L.L.C. and Six Continents Hotels, Inc.
(18)                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                         
|2.2     |  | Purchase and Sale Agreement, dated as of October 27, 2003, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates and Hospitality Properties Trust. (18)                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|2.3     |  | Termination Agreement dated as of October 27, 2003, by and among Candlewood Hotel
Company, Inc., Candlewood Leasing No. 1, Inc., HPT CW Properties Trust, HPT CW MA Realty
Trust, HH HPTCW II Properties LLC and Hospitality Properties Trust. (18)                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                         
|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)                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                         
|4.4     |  | Amendment No. 1 dated October 27, 2003, amending that certain Amended & Restated
Stockholders Agreement dated July 10, 1998                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|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)                                                                           

35



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|        |  |                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                         
|No.     |  | Description                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|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)                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                         
|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   |  | Waiver 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. (16)                                                                                                                                                                                  

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|        |  |                                                                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                         
|No.     |  | Description                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                         
|10.40   |  | Purchase and Sale Agreement, dated as of July 21, 2003, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and Hospitality Properties
Trust, as purchaser. (17)                                     
|        |  |                                                                                                                                                                                                                                         
|10.41   |  | Fifth Amendment to Agreement to Lease, dated as of July 21, 2003, by and between
Hospitality Properties Trust and Candlewood Hotel Company, Inc. (17)                                                                                   
|        |  |                                                                                                                                                                                                                                         
|10.42   |  | First Amendment to Second Amended and Restated Lease Agreement, dated as of July 21,
2003, by and between HPT CW Properties Trust and certain of its affiliates, as landlord,
and Candlewood Leasing No. 1, Inc., as tenant. (17)       
|        |  |                                                                                                                                                                                                                                         
|10.43   |  | Third Amended and Restated Guaranty Agreement, dated as of July 21, 2003, by Candlewood
Hotel Company, Inc., as guarantor, for the benefit of HPT CW Properties Trust and
certain of its affiliates, as landlord. (17)                  
|        |  |                                                                                                                                                                                                                                         
|10.44   |  | Confirmation of Incidental Documents, dated as of July 21, 2003, by Candlewood Hotel
Company, Inc. and certain of its affiliates, as tenant, for the benefit of HPT CW
Properties Trust and certain of its affiliates, as landlord. (17)
|        |  |                                                                                                                                                                                                                                         
|10.45   |  | Voting Agreement, dated as of October 27, 2003, by and among Candlewood Hotel Company,
Inc. and certain stockholders of Candlewood as set forth therein.                                                                                
|        |  |                                                                                                                                                                                                                                         
|11.1    |  | Statement re Computation of Per Share Earnings - not applicable.                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                         
|21.1    |  | Subsidiaries of the Registrant. (17)                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                         
|31.1    |  | Rule 13a-14(a) Certifications                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                         
|32.1    |  | Section 1350 Certifications                                                                                                                                                                                                             

|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    |  | Compensation Plan or Agreement                                                                                                                                                   
|     |  |                                                                                                                                                                                  
|(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 June 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.                                          

37



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##### Table of Contents



|     |  |                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------
|(16) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended March 31, 2003.
|     |  |                                                                                                                                   
|(17) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended June 30, 2003. 
|     |  |                                                                                                                                   
|(18) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on October 28, 2003.             

38