##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

|                 |  |                                                                                         
|---------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
| X | |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|                
|                 |  | For the quarterly period ended June 30, 2002                                            
|                
|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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                             |  |                               
|---------------------------- |  | ------------------------------
|Class                        |  | Outstanding at August 12, 2002
|                             |  |                               
|Common Stock, $.01 par value |  | 9,025,000 shares              

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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
|PART II. OTHER INFORMATION   
|                              | Item 4. Submission of Matters to Vote of Security Holders                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.29                



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC.

FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2002

INDEX

|         |  |                                                                                       |  |                                                                                                                      |         |      |        | 
|-------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | ------- | ---- | ------ | 
|         |  |                                                                                       |  |                                                                                                                      |         | PAGE
|         |  |                                                                                       |  |                                                                                                                      |         |     
|        
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                      |         |     
|        
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                                      |         |     
|        
|         |  |                                                                                       |  | Consolidated Balance Sheets at June 30, 2002 (unaudited)
and December 31, 2001                                       |         |      | 3      | 
|        
|         |  |                                                                                       |  | Consolidated Statements of Operations for the three and
six-months ended June 30, 2002 and June 30, 2001
(unaudited) |         |      | 4      | 
|        
|         |  |                                                                                       |  | Consolidated Statements of Cash Flows for the six-months
ended June 30, 2002 and June 30, 2001 (unaudited)           |         |      | 5      | 
|        
|         |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                                           |         |      | 6 - 13 | 
|        
|Item 2.  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |                                                                                                                      | 13 - 26 |     
|        
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                      |         |     
|        
|Item 4.  |  | Submission of Matters to Vote of Security Holders                                     |  |                                                                                                                      | 27      |     
|        
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                      | 27      |     

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)

|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------ | --------------------------------------------- | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | -
|                                                                                                                                                       |                                                                                               |              |                                               |         | June 30, 2002 |         | December 31,
|                                                                                                                                                       |                                                                                               |              |                                               |         | (Unaudited)   |         | 2001        
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |             
|Assets                                                                                                                                                 |                                                                                               |              |                                               |         |               |         |              |        
|Investment in hotels:                                                                                                                                  |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       | Hotels completed                                                                              |              | $                                             | 99,572  |               |         | $            | 263,160 |        
|                                                                                                                                                       | Accumulated depreciation and amortization                                                     |              |                                               | (11,735 | )             |         |              | (24,878 | )      
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       | Net investment in hotels                                                                      |              |                                               | 87,837  |               |         |              | 238,282 |        
|Cash and cash equivalents (including $976 and $968 of
restricted cash, respectively)                                                                   |                                                                                               |              | 14,635                                        |         |               |         | 17,966       |        
|Deposits                                                                                                                                               |                                                                                               |              | 46,086                                        |         |               |         | 30,086       |        
|Accounts and other receivables                                                                                                                         |                                                                                               |              | 6,352                                         |         |               |         | 4,663        |        
|Investments in joint ventures                                                                                                                          |                                                                                               |              | 15,553                                        |         |               |         | 12,994       |        
|Other assets                                                                                                                                           |                                                                                               |              | 12,921                                        |         |               |         | 17,347       |        
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       |                                                                                               | Total assets |                                               | $       | 183,384       |         |              | $       | 321,338 |        
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|Liabilities and Stockholders (Deficit)                                                                                                                |                                                                                               |              |                                               |         |               |         |              |        
|Mortgages and notes payable                                                                                                                            |                                                                                               | $            | 58,956                                        |         |               | $       | 191,456      |        
|Accounts payable and other accrued expenses                                                                                                            |                                                                                               |              | 17,746                                        |         |               |         | 16,364       |        
|Deferred gain on sale of hotels                                                                                                                        |                                                                                               |              | 26,845                                        |         |               |         | 16,995       |        
|Other liabilities                                                                                                                                      |                                                                                               |              | 121                                           |         |               |         | 768          |        
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       |                                                                                               |              | Total
liabilities                             |         |               | 103,668 |              |         |         | 225,583 |  
|Redeemable, convertible, cumulative preferred stock (Series A),
$1,000 stated value, 65,000 shares authorized and outstanding,
net of offering costs |                                                                                               |              | 65,994                                        |         |               |         | 63,047       |        
|Redeemable, convertible, cumulative preferred stock (Series B),
$1,000 stated value, 42,000 shares authorized and outstanding,
net of offering costs |                                                                                               |              | 42,435                                        |         |               |         | 40,491       |        
|Stockholders (deficit):                                                                                                                               |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       | Common stock, $.01 par value, 100,000,000 shares authorized,
9,025,000 issued and outstanding |              |                                               | 90      |               |         |              | 90      |        
|                                                                                                                                                       | Additional paid-in capital                                                                    |              |                                               | 27,529  |               |         |              | 32,421  |        
|                                                                                                                                                       | Other comprehensive income                                                                    |              |                                               | (53     | )             |         |              |        |        
|                                                                                                                                                       | Accumulated deficit                                                                           |              |                                               | (56,279 | )             |         |              | (40,294 | )      
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       |                                                                                               |              | Total
stockholders (deficit)                 |         |               | (28,713 | )            |         |         | (7,783  | )
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        
|                                                                                                                                                       |                                                                                               |              | Total
liabilities and stockholders (deficit) |         | $             | 183,384 |              |         | $       | 321,338 |  
|                                                                                                                                                       |                                                                                               |              |                                               |         |               |         |              |        

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 Three-Months Ended |         | For the Six-Months Ended
|                                                                               |                                                |   |                            |         |                         
|                                                                               |                                                |   | June 30,                   |         | June 30,                 |   | June 30,  |        | June 30,
|                                                                               |                                                |   | 2002                       |         | 2001                     |   | 2002      |        | 2001    
|                                                                               |                                                |   |                            |         |                          |   |           |        |         
|Revenues:                                                                      |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|Hotel operations                                                               |                                                | $ | 32,397                     |         |                          | $ | 33,369    |        |          | $ | 62,373    |         |   | $ | 64,553    |       
|Other income                                                                   |                                                |   | 887                        |         |                          |   | 1,068     |        |          |   | 1,343     |         |   |   | 1,745     |       
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               | Total hotel operating revenues                 |   |                            | 33,284  |                          |   |           | 34,437 |          |   |           | 63,716  |   |   |           | 66,298 |  
|Proceeds from sales of hotels, net of deferred
gain of $0 and $0, respectively |                                                |   | 145,000                    |         |                          |   |          |        |          |   | 145,000   |         |   |   |          |       
|Deferred gain recognition on sales of hotels                                   |                                                |   | 355                        |         |                          |   | 346       |        |          |   | 638       |         |   |   | 692       |       
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               | Total revenues                                 |   |                            | 178,639 |                          |   |           | 34,783 |          |   |           | 209,354 |   |   |           | 66,990 |  
|Operating costs and expenses:                                                  |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|Hotel operating expenses                                                       |                                                |   | 20,570                     |         |                          |   | 18,270    |        |          |   | 39,772    |         |   |   | 36,145    |       
|Corporate operating expenses                                                   |                                                |   | 1,726                      |         |                          |   | 1,866     |        |          |   | 3,168     |         |   |   | 3,375     |       
|Rent expense on leased hotels                                                  |                                                |   | 10,946                     |         |                          |   | 6,335     |        |          |   | 18,120    |         |   |   | 12,661    |       
|Hotel opening costs                                                            |                                                |   |                           |         |                          |   | 132       |        |          |   |          |         |   |   | 230       |       
|Depreciation and amortization                                                  |                                                |   | 1,121                      |         |                          |   | 2,853     |        |          |   | 3,790     |         |   |   | 5,630     |       
|Impairment loss on assets held for sale                                        |                                                |   |                           |         |                          |   |          |        |          |   | 8,604     |         |   |   |          |       
|Loss on extinguishments of debt                                                |                                                |   | 2,115                      |         |                          |   |          |        |          |   | 2,115     |         |   |   |          |       
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               | Total operating costs and expenses             |   |                            | 36,478  |                          |   |           | 29,456 |          |   |           | 75,569  |   |   |           | 58,041 |  
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|Cost of hotels sold                                                            |                                                |   | 145,000                    |         |                          |   |          |        |          |   | 145,000   |         |   |   |          |       
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               |                                                |   | (2,839                     | )       |                          |   | 5,327     |        |          |   | (11,215   | )       |   |   | 8,949     |       
|Interest income                                                                |                                                |   | 92                         |         |                          |   | 134       |        |          |   | 185       |         |   |   | 381       |       
|Interest expense                                                               |                                                |   | (1,527                     | )       |                          |   | (4,514    | )      |          |   | (4,955    | )       |   |   | (9,124    | )     
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               | Income (loss) before preferred stock
dividends |   |                            | (4,274  | )                        |   |           | 947    |          |   |           | (15,985 | ) |   |           | 206    |  
|Preferred stock dividends                                                      |                                                |   | (2,000                     | )       |                          |   | (2,000    | )      |          |   | (3,979    | )       |   |   | (3,979    | )     
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|                                                                               | Net (loss) available to common
stockholders    |   | $                          | (6,274  | )                        |   | $         | (1,053 | )        |   | $         | (19,964 | ) |   | $         | (3,773 | )
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|Net
(loss) per share of common stock  basic and diluted                       |                                                | $ | (0.69                      | )       |                          | $ | (0.12     | )      |          | $ | (2.21     | )       |   | $ | (0.42     | )     
|                                                                               |                                                |   |                            |         |                          |   |           |        |          |   |           |         |   |   |           |       
|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)

|                                                                            |                                              |                                             |                                                     |       |                  |          |               |       |        |        |  
|--------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ----- | ---------------- | -------- | ------------- | ----- | ------ | ------ | -
|                                                                            |                                              |                                             |                                                     |       | Six-Months Ended
|                                                                            |                                              |                                             |                                                     |       |                 
|                                                                            |                                              |                                             |                                                     |       | June 30, 2002    |          | June 30, 2001
|                                                                            |                                              |                                             |                                                     |       |                  |          |              
|Cash flows from operating activities:                                       |                                              |                                             |                                                     |       |                  |          |               |      
|Net income (loss) before preferred stock dividends                          |                                              | $                                           | (15,985                                             | )     |                  | $        | 206           |      
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                              |                                             |                                                     |       |                  |          |               |      
|                                                                            | Depreciation and amortization                |                                             |                                                     | 3,790 |                  |          |               | 5,630 |       
|                                                                            | Loss from joint ventures                     |                                             |                                                     | 772   |                  |          |               | 281   |       
|                                                                            | Deferred gain recognition on sales of hotels |                                             |                                                     | (638  | )                |          |               | (692  | )     
|                                                                            | Impairment loss on assets held for sale      |                                             |                                                     | 8,604 |                  |          |               |      |       
|                                                                            | Loss on extinguishment of debt               |                                             |                                                     | 2,115 |                  |          |               |      |       
|                                                                            | Change in:                                   |                                             |                                                     |       |                  |          |               |       |       
|                                                                            |                                              | Accounts receivable                         |                                                     |       | (1,689           | )        |               |       | (753   | )     
|                                                                            |                                              | Other assets                                |                                                     |       | 2,659            |          |               |       | (2,523 | )     
|                                                                            |                                              | Accounts payable and other accrued expenses |                                                     |       | (1,625           | )        |               |       | (974   | )     
|                                                                            |                                              | Other liabilities                           |                                                     |       | (647             | )        |               |       | (135   | )     
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|                                                                            |                                              |                                             | Net cash provided by (used in) operating activities |       |                  | (2,644   | )             |       |        | 1,040  |  
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|Cash flows from investing activities:                                       |                                              |                                             |                                                     |       |                  |          |               |      
|Proceeds from sales of hotels                                               |                                              |                                             | 145,000                                             |       |                  |          |              |      
|Refund of guaranty deposit                                                  |                                              |                                             | 10,488                                              |       |                  |          |              |      
|Cash paid for security deposits                                             |                                              |                                             | (16,000                                             | )     |                  |          |              |      
|Change in hotels completed and under construction                           |                                              |                                             | (7,402                                              | )     |                  |          | (1,339        | )    
|Distributions from joint ventures                                           |                                              |                                             |                                                    |       |                  |          | 1,250         |      
|Purchase of intangible assets                                               |                                              |                                             | (220                                                | )     |                  |          | (52           | )    
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|                                                                            |                                              |                                             | Net cash provided by (used in) investing activities |       |                  | 131,866  |               |       |        | (141   | )
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|Cash flows from financing activities:                                       |                                              |                                             |                                                     |       |                  |          |               |      
|Proceeds from mortgages and notes payable                                   |                                              |                                             | 59,660                                              |       |                  |          | 5,016         |      
|Payments on mortgages and notes payable                                     |                                              |                                             | (192,160                                            | )     |                  |          | (7,183        | )    
|Other comprehensive income                                                  |                                              |                                             | (53                                                 | )     |                  |          |              |      
|Preferred stock dividends                                                   |                                              |                                             |                                                    |       |                  |          | (4,002        | )    
|Other liabilities                                                           |                                              |                                             |                                                    |       |                  |          |              |      
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|                                                                            |                                              |                                             | Net cash used in financing activities               |       |                  | (132,553 | )             |       |        | (6,169 | )
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|Net decrease in cash and cash equivalents                                   |                                              |                                             | (3,331                                              | )     |                  |          | (5,270        | )    
|Cash and cash equivalents at beginning of period                            |                                              |                                             | 17,966                                              |       |                  |          | 21,834        |      
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|Cash and cash equivalents at end of period                                  |                                              | $                                           | 14,635                                              |       |                  | $        | 16,564        |      
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      
|Supplementary disclosure of cash flow information:                          |                                              |                                             |                                                     |       |                  |          |               |      
|Cash paid for interest                                                      |                                              | $                                           | 5,621                                               |       |                  | $        | 10,340        |      
|                                                                            |                                              |                                             |                                                     |       |                  |          |               |      

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, 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, 2001 was
derived from the Companys audited financial statements. The interim
financial statements should be read in conjunction with the Companys 2001
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 generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could
differ from those estimates.

All majority-owned subsidiaries have been consolidated into the
unaudited consolidated financial statements. All intercompany transactions
have been eliminated.

B. Investment in Hotels

Hotels Completed

Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the Hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001. The Company evaluates hotels for
impairment when conditions indicate that it is probable that the sum of the
expected future cash flows is less than the carrying value of the hotels.
Upon determination that a hotel has been impaired, the carrying value of the
hotel is reduced to fair value less costs to sell. For the six-months ended
June 30, 2002, the Company has recorded an impairment loss of $8.6 million,
all of which was
6Table of Contents

recorded in the first quarter of 2002. As of June 30, 2002, no
permanent impairment conditions exist at any of the Companys hotels.

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

The carrying values of the Companys financial instruments, which
include cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses, approximate fair values due to the short maturities of
such instruments. The fair value of the Companys long-term debt, which
approximates carrying value, is estimated based on the current rates offered
to the Company for debt of the same remaining maturities.

F. Derivative Financial Instruments

In April 2002, the Company purchased an interest rate hedge as part of
the refinancing of mortgage debt with GMAC to manage interest rate risk.
This is the first time the Company has purchased a derivative financial
instrument. The Company requires that hedging derivative instruments are
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.

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 June 30, 2002, the Company had one derivative financial
instrument, an interest rate hedge, which was recorded at fair value with
the change in fair value since the purchase date recorded in other
comprehensive income in the equity section of the balance sheet.

G. Intangible Assets

Intangible assets 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. In 2001,
the Company adopted SFAS 142, Goodwill and Other Intangible Assets, upon
its effective date. The adoption did not have an effect

7



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on the earnings or the financial position of the Company.

H. Deferred Financing Costs

Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on a method, which approximates the level yield basis.

I. Revenue Recognition

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

The Companys sales of hotels are accompanied by a leaseback of the
facilities under operating lease agreements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds.
Related profit is deferred due to required support obligations under the
operating lease agreements until operations meet stipulated levels. At such
time, the deferred gain is recognized in earnings over the remaining lease
term.

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.

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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 six-months ended June 30, 2002 and 2001, respectively, is
as follows:

|                                 |                                         |        |                                |        |         |       |        |       |  |   |        |        | 
|-------------------------------- | --------------------------------------- | ------ | ------------------------------ | ------ | ------- | ----- | ------ | ----- |  | - | ------ | ------ | 
|                                 |                                         |        | Six-months ended June 30, 2002
|                                 |                                         |        |                               
|                                 |                                         |        | Operation of                   |        | Sale of |      
|(In thousands)                   |                                         | Hotels |                                | Hotels |         | Total
|                                 |                                         |        |                                |        |         |      
|Revenues from external customers |                                         | $      | 63,716                         |        |         | $     |       |       |  | $ | 63,716 |       
|Interest expense                 |                                         |        | 4,955                          |        |         |       |       |       |  |   | 4,955  |       
|Depreciation expense             |                                         |        | 3,408                          |        |         |       |       |       |  |   | 3,408  |       
|Segment profit                   |                                         |        | (2,539                         | )      |         |       | 638    |       |  |   | (1,901 | )     
|Hotels assets:                   |                                         |        |                                |        |         |       |        |       |  |   |        |       
|                                 | Hotels completed and under construction |        |                                | 99,572 |         |       |        |      |  |   |        | 99,572 | 
|                                 | Accounts receivable                     |        |                                | 1,790  |         |       |        | 3,468 |  |   |        | 5,258  | 
|Deferred gain on sale of hotels  |                                         |        |                               |        |         |       | 26,845 |       |  |   | 26,845 |       

|                                 |                                         |        |                                |         |         |       |        |        |  |   |        |         | 
|-------------------------------- | --------------------------------------- | ------ | ------------------------------ | ------- | ------- | ----- | ------ | ------ |  | - | ------ | ------- | 
|                                 |                                         |        | Six-months ended June 30, 2001
|                                 |                                         |        |                               
|                                 |                                         |        | Operation of                   |         | Sale of |      
|(In thousands)                   |                                         | Hotels |                                | Hotels  |         | Total
|                                 |                                         |        |                                |         |         |      
|Revenues from external customers |                                         | $      | 66,298                         |         |         | $     |       |        |  | $ | 66,298 |        
|Interest expense                 |                                         |        | 9,124                          |         |         |       |       |        |  |   | 9,124  |        
|Depreciation expense             |                                         |        | 5,281                          |         |         |       |       |        |  |   | 5,281  |        
|Segment profit                   |                                         |        | 3,087                          |         |         |       | 692    |        |  |   | 3,779  |        
|Hotels assets:                   |                                         |        |                                |         |         |       |        |        |  |   |        |        
|                                 | Hotels completed and under construction |        |                                | 261,554 |         |       |        | 28,860 |  |   |        | 290,414 | 
|                                 | Accounts receivable                     |        |                                | 2,138   |         |       |        | 3,027  |  |   |        | 5,165   | 
|Deferred gain on sale of hotels  |                                         |        |                               |         |         |       | 14,547 |        |  |   | 14,547 |        

The difference between segment profit and net income is corporate expenses
not specific to the Companys reportable segments.

O. 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.

P. Reclassifications

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

Note 2: Mortgages and Notes Payable

As of June 30, 2002, a wholly-owned subsidiary of the Company had entered
into a loan agreement with GMAC Commercial Mortgage Corporation for 10 of the
Companys hotels. This agreement was entered into by a separate wholly-owned
subsidiary of the Company which owns the related properties and 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 June
30, 2002). 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%. The principal
amount of the loan is payable monthly beginning in May 2003 and is calculated
based on a 25-year amortization schedule using the prevailing interest rate as
defined in the note. The loan matures in May 2005 and provides for one
12-month extension. Amounts borrowed under the loan agreement are secured by
the hotels, the land on which they are constructed and certain funds deposited
in demand deposit accounts assigned to
9Table of ContentsGMAC. The Company and certain other of the Companys wholly-owned
subsidiary LLCs guarantee the loan. At June 30, 2002, $55.0 million was
outstanding under this loan agreement.In April 2002, the Company purchased an interest rate hedge to cap the
30-day LIBOR interest rate on the GMAC note. The interest rate is capped
at 7.50% and the cap expires in May 2005 concurrent with the maturity of the
note. Accordingly, the maximum interest rate throughout the term of the GMAC
note cannot exceed 11.75% (7.50% LIBOR plus 4.25%). On June 30, 2002, the
derivative instrument was reported at its fair value as Other Assets of
approximately $134,000. An adjustment of approximately $53,000 to Other
Comprehensive Income was made for the change in fair value of this option
during the quarter. Over time, the unrealized gain or loss held in accumulated
Other Comprehensive Income will be reclassified to earnings. This
reclassification is consistent with when the hedged items are also recognized
in earnings. Within the next twelve months, the Company does not expect a
material amount currently held in accumulated other comprehensive income to be
reclassified to earnings.The Company has also entered into a loan agreement with a financial
institution for financing on one of the Companys hotels. Interest on the
loan is payable monthly, in arrears, beginning on the first full calendar month
after the date of the agreement. Interest payments are calculated at a fixed
rate based off the 10-year Treasury note at the time the loan was closed plus
3.08% (8.30% as of June 30, 2002). Principal payments commence the month
following loan closing and are calculated based on a 22.5-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 June 30, 2002,
$4.0 million was outstanding under this note.In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which rescinded FASB No. 4
requiring gains and losses from extinguishment of debt to be classified as
extraordinary. During the quarter ended June 30, 2002, the Company
extinguished a significant portion of its debt and recorded a loss of $2.1
million. The Company has elected early adoption of Statement No. 145 and has
classified this loss as an operating expense.Note 3: Investments in Joint VenturesAs of June 30, 2002, the Company had invested $15.6 million in joint
ventures. 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 June
30, 2002, this amount was approximately $4.0 million and is included in
investments in joint ventures on the accompanying consolidated balance sheets.
For the quarters ended June 30, 2002 and 2001, equity income in joint ventures
of $106,000 and $180,000, respectively, was recorded before recognition of the
carrying value difference of ($403,000) and ($294,000), respectively. These
amounts are included in other income on the accompanying consolidated
statements of operations. There were no distributions to the Company from its
joint ventures during the quarter ended June 30, 2002. During the quarter
ended June 30, 2001, the Company received distributions from its joint ventures
of $850,000.The Company has one significant joint venture that was formed in 1999 with
Boston Capital Institutional Advisors and Mass Mutual in which it has a 50%
ownership. Hotel operations for the joint venture commenced in 2000, and as of
June 30, 2002, the Company operated eight hotels pursuant to this agreement.
Under the terms of the agreement, if the Company did not have at least 10
hotels open or under construction by August 31, 2000, it may be required to
increase its capital contributions relating to existing joint venture hotels by
up to 5% of the estimated total costs. As of June 30, 2002, this
amount was estimated at approximately $3.4 million. In June 2002, the
Company was notified by its joint venture partners that it would be
required to make this additional equity contribution on or before
July 25, 2002. The Company has not made this contribution. The
Company is currently discussing alternatives to the equity
contribution with its joint venture partners. As of June 30,
2002, this amount has been accrued and recorded as an investment in
joint ventures. The Company is otherwise in compliance with the terms
of the joint venture agreement.10Table of ContentsThe following is unaudited condensed
financial information for the joint venture as of June 30, 2002 and 2001:

|                                        |  |          |        |      |  |   |        | 
|--------------------------------------- |  | -------- | ------ | ---- |  | - | ------ | 
|                                        |  | June 30,
|                                        |  |         
|(In thousands)                          |  | 2002     |        | 2001
|                                        |  |          |        |     
|Hotels completed and under construction |  | $        | 75,424 |      |  | $ | 77,353 | 
|Other assets                            |  |          | 5,209  |      |  |   | 4,473  | 
|                                        |  |          |        |      |  |   |        | 
|Total assets                            |  | $        | 80,633 |      |  | $ | 81,826 | 
|                                        |  |          |        |      |  |   |        | 
|Total development liabilities           |  | $        | 74,535 |      |  | $ | 74,785 | 
|Total equity                            |  |          | 6,098  |      |  |   | 7,041  | 
|                                        |  |          |        |      |  |   |        | 
|Total liabilities and equity            |  | $        | 80,633 |      |  | $ | 81,826 | 
|                                        |  |          |        |      |  |   |        | 

|                              |  |                           |        |      |  |   |       | 
|----------------------------- |  | ------------------------- | ------ | ---- |  | - | ----- | 
|                              |  | Six-Months ended June 30,
|                              |  |                          
|(In thousands)                |  | 2002                      |        | 2001
|                              |  |                           |        |     
|Total revenue                 |  | $                         | 10,058 |      |  | $ | 9,876 | 
|Hotel operating expenses      |  |                           | 5,716  |      |  |   | 4,772 | 
|Hotel opening costs           |  |                           |       |      |  |   | 140   | 
|Depreciation and amortization |  |                           | 1,489  |      |  |   | 1,333 | 
|Interest expense              |  |                           | 2,801  |      |  |   | 2,978 | 
|                              |  |                           |        |      |  |   |       | 
|Net pre-tax (loss) income     |  | $                         | 52     |      |  | $ | 653   | 
|                              |  |                           |        |      |  |   |       | 

In addition, as of June 30, 2002, the Company has guaranteed mortgage debt
on the joint venture properties of approximately $56.3 million. This debt is
collateralized by the hotels, the land on which the hotels are constructed and
certain funds deposited in demand deposit accounts assigned to the respective
banks. Maturity dates on this debt range from October 2002 to January 2008
with certain notes providing extensions for up to two years under specific
criteria including loan to value ratios. This debt is not included in the
Companys consolidated financial statements (See Note 2) and the Company does
not receive any fees related to this guarantee.

Note 4: Redeemable, Convertible, Cumulative Preferred Stock

General

The Company has authorized blank check preferred stock in the amount of
5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of
issuance of any of the preferred stock, the Company determines whether the
stock is redeemable and the appropriate classification of the stock on the
balance sheet. At June 30, 2002, as more fully described below, the Company
had 65,000 and 42,000 shares, respectively, of Series A and Series B redeemable
preferred stock issued and outstanding.

Preferred Stock Offerings

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

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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% of the Stated Value, per annum, payable in cash initially on August 31,
1998 and thereafter, quarterly, including up to the date of conversion, when
and if declared by the board of directors. Since November 2001, the Company
has suspended payment of 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 March 2002 to $8.51 per share to reflect the
Companys decision to forego payment of its February 2002 preferred stock
dividend payment and the grant of new employee stock options. The Company did
not make the Series A and Series B preferred stock dividend payment in May
2002. As a result, the Company has accrued the $2.0 million cumulative
dividend, which has been recorded as an increase to the carrying amount of the
Series A and Series B preferred stock. As of June 30, 2002, the Company has
approximately $6.0 million of preferred stock dividends in arrears.

Series A and Series B Preferred Stockholders have the right to convert, at
any time at their option into shares of Common Stock at a conversion price as
calculated under the terms of the agreement. Subsequent to August 31, 1999,
the Preferred Stock is redeemable in cash, in whole or part, at the option of
the Company at 200% of the Stated Value. At September 30, 2004, the Company is
required to redeem the Preferred Stock under a mandatory redemption clause, at
the Stated Value plus unpaid dividends. In the event the Company is unable to
redeem the Preferred Stock under the mandatory redemption clause at September
30, 2004, the Company will be required to issue warrants to each holder of
Preferred Stock on the redemption date and each 3-month anniversary thereafter
to purchase 25% of the number of shares of Common Stock into which each
holders shares would be convertible on such date at the then current
conversion price, as defined. Such warrants would be immediately exercisable
with respect to each share of Common stock for $.01.

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

The carrying amount of the redeemable preferred stock is being increased
by periodic accretions using the interest method, so that the carrying amount
will equal the mandatory redemption amount at the mandatory redemption date.
For the quarter ended June 30, 2002, approximately $450,000 was recorded as an
increase to the carrying value of the preferred stock.

Note 5: Sale / Leaseback

As of June 30, 2002, the Company had completed four separate
sale-leaseback transactions with Hospitality Properties Trust (HPT). These
transactions were completed in stages commencing in December 1997 with the most
recent transaction completed in April 2002 at which time an additional 21
hotels were sold for a sale price of $145 million. As of June 30, 2002, the
Company has sold 57 hotels to HPT for an aggregate sales price of $434.8
million.

Terms of the HPT sales agreement were all cash at the close of escrow for
each hotel sold. Each of the hotels sold has been leased back to a wholly
owned subsidiary of Candlewood pursuant to the terms of a master operating
lease agreement executed in April 2002, which superceded the previous operating

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lease (the previous lease). This lease expires in December 2018 and may
be renewed in certain circumstances and at the election of the Company for up
to three 15-year periods. The lease calls for monthly lease payments and
requires the Company to place a security deposit with HPT for each property
equal to one years lease payments. The security deposit will be released to
the Company at the end of the lease term.

The previous lease agreement provided for the Company to guarantee the
payment of rent until defined operating cash flows exceed the annual lease
payments by 150% for 12 consecutive months. In connection with this
obligation, the Company was required to place deposits with HPT equal to
approximately 5% of the sales price, upon the initial closing of each
transaction. These deposits were charged to cost of sales as the hotels were
sold. As part of the newly executed lease, the Company was refunded the $10.1
million 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 June 30, 2002, the Company had sold $434.8 million of
hotels with a total deferred gain of $32.8 million, which includes the return
of the guaranty deposits to the Company. Such gain has been deferred and is
being recognized in income as noted in the Companys accounting policies (Note
1). For the quarters ended June 30, 2002 and 2001, respectively, the Company
recognized approximately $355,000 and $346,000 of deferred gain into income.
As of June 30, 2002, the Company has recognized a total of $6.0 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.

General

Candlewood operates, franchises, owns and manages Candlewood Suites and
Cambridge Suites hotels (Candlewood hotels) to serve mid-market and upscale
extended-stay business and personal travelers. At December 31, 2001, we had a
total of 76 company-operated hotels (which is comprised of owned, leased and
joint venture hotels), 27 franchised hotels and two managed hotels located in
34 states. At June 30, 2002, we had a total of 77 company-operated hotels, 29
franchised hotels and two managed hotels located in 34 states. In addition, at
June 30, 2002, we had two franchise hotels under construction and 25 franchise
agreements for hotels not yet under construction, which are subject to a
variety of conditions. We are actively marketing management contracts to
existing and prospective franchisees to utilize our management experience and
expertise to manage their hotels.

We classify our hotels into five categories: owned, leased, managed,
joint venture and franchised. Owned hotels are those hotels that we have
independently developed and own. Leased hotels are those hotels that we
currently lease from a third party and operate. 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 tables set forth our property portfolio at
June 30, 2002 and June 30, 2001:

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|              |       |  |                  |     |            |  |            |    |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |     | 
|------------- | ----- |  | ---------------- | --- | ---------- |  | ---------- | -- | --------------- |  | ---- | - | ---------- |  | ----- | ------ |  |  | ----- | ------ |  |  | ------ | --- | 
|              |       |  | Number of Hotels |     |            |  |            |    | Number of Rooms |  |      |   |           
|              |       |  | June 30,         |     |            |  | June 30,   |    |                
|              |       |  |                  |     | Increase / |  |            |    | Increase /     
|              |       |  | 2002             |     | 2001       |  | (Decrease) |    | 2002            |  | 2001 |   | (Decrease)
|              |       |  |                  |     |            |  |            |    |                 |  |      |   |           
|Owned         |       |  | 11               |     |            |  | 33         |    |                 |  | (22  | ) |            |  | 1,300 |        |  |  | 4,185 |        |  |  | (2,885 | )  
|Leased        |       |  | 57               |     |            |  | 34         |    |                 |  | 23   |   |            |  | 6,888 |        |  |  | 3,893 |        |  |  | 2,995  |    
|Managed       |       |  | 2                |     |            |  | 2          |    |                 |  |     |   |            |  | 203   |        |  |  | 179   |        |  |  | 24     |    
|Joint Venture |       |  | 9                |     |            |  | 9          |    |                 |  |     |   |            |  | 1,159 |        |  |  | 1,159 |        |  |  |       |    
|Franchised    |       |  | 29               |     |            |  | 21         |    |                 |  | 8    |   |            |  | 2,965 |        |  |  | 2,251 |        |  |  | 714    |    
|              |       |  |                  |     |            |  |            |    |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |    
|              | Total |  |                  | 108 |            |  |            | 99 |                 |  |      | 9 |            |  |       | 12,515 |  |  |       | 11,667 |  |  |        | 848 | 

At June 30, 2002, we managed two hotels, the Cambridge Suites by
Candlewood and the Hotel at Old Town, both located in Wichita, Kansas. Our
revenues for managing these hotels consist primarily of management fees that
are based on a percentage of gross revenues, operating profits, cash flow or a
combination thereof. These revenues are included in other income in our
consolidated statements of operations.

Our consolidated statements of operations includes revenues and expenses
for only those hotels which are consolidated subsidiaries of Candlewood Hotel
Company, Inc. (owned and leased hotels). 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 hotel operations revenues
or expenses. Franchise fees, royalty fees, management fees, equity income from
investment in joint ventures and other fees received from franchise and joint
venture hotels are included in other income in our consolidated statements of
operations.

As of June 30, 2002, we have completed four separate sale-leaseback
transactions for a total of 57 hotels with Hospitality Properties Trust
(HPT). These transactions were completed in stages commencing in December
1997 with the most recent transaction completed in April 2002. 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, among others, affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, including our investments
in real estate for impairment indicators. 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.

Depreciation of Investment in Hotels

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

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Fair Value of Financial Instruments including Derivative Financial
Instruments

The valuation of financial instruments under SFAS No. 107 and derivative
financial instruments under SFAS No. 133 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 June 30, 2002 and June 30, 2001

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
$32.4 million for the quarter ended June 30, 2002, compared to $33.4 million
for the quarter ended June 30, 2001. The decrease in revenue is a result of
the slowdown in the economy and a reduction in business travel. The following
table sets forth the operating statistics for all our corporate hotels for the
quarters ended June 30, 2002 and June 30, 2001:

|                           |  |                       |       |      |  |        |       |   |  |   |       |  
|-------------------------- |  | --------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | -
|                           |  | For the quarter ended |       |      |  |       
|                           |  | June 30,              |       |      |  |       
|                           |  |                       |       |      |  |       
|                           |  | 2002                  |       | 2001 |  | Change
|                           |  |                       |       |      |  |       
|Occupancy                  |  |                       | 78.7  | %    |  |        | 74.3  | % |  |   | 4.4   | %
|Average Daily Rate         |  | $                     | 53.58 |      |  | $      | 59.70 |   |  | $ | (6.12 | )
|Revenue per available room |  | $                     | 42.14 |      |  | $      | 44.36 |   |  | $ | (2.22 | )

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 78.7% for the quarter ended June 30, 2002,
compared to 74.3% for the quarter ended June 30, 2001. Our focus in 2002 has
been to improve or maintain occupancy at our hotels by marketing to long-term
extended-stay guests, particularly those staying seven or more nights, and
adjusting our average daily rates.

The average daily room rate for corporate hotels for the quarter ended
June 30, 2002 was $53.58, compared to $59.70 for the quarter ended June 30,
2001. Average daily room rates are determined by dividing room revenue by the
number of guestrooms occupied on a daily basis for the applicable period. The
decrease in the average daily rate for the quarter ended June 30, 2002 is
primarily a result of our commitment to improve or maintain occupancy at our
hotels by targeting long-term extended-stay business, which is charged at a
lower daily rate, and adjusting rates in todays competitive environment.
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 $42.14 for the quarter ended
June 30, 2002, compared to $44.36 for the quarter ended June 30, 2001, a 5.0%
decrease.

Hotel Operating Expenses

Hotel operating expenses for the quarter ended June 30, 2002 totaled $20.6
million, compared to $18.3 million for the quarter ended June 30, 2001. 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,
15Table of Contents

wages and fringe benefits. The balance of hotel operating expenses was
comprised of normal operating items, such as utilities, property taxes,
insurance, supplies, promotional materials, maintenance items and similar
expenses. The increase in hotel operating expenses is largely due to increased
wages, media advertising, promotional costs associated with sales promotions,
operating costs for the San Antonio, Texas hotel acquired in March 2002 and
higher maintenance and insurance costs.

Rent Expense on Leased Hotels

Rent expense on the 57 leased hotels for the quarter ended June 30, 2002
was $10.9 million, compared to $6.3 million for the quarter ended June 30,
2001. 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 sale and leaseback of two hotels in
August 2001 and an additional 21 hotels in April 2002.

Hotel Opening 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. There were no opening costs for the
quarter ended June 30, 2002, as we had no hotel openings or projects under
construction during the quarter. Opening costs for the quarter ended June 30,
2001 totaled $132,000.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment) for the quarter ended June
30, 2002 totaled $923,000, compared to $2.7 million for the quarter ended June
30, 2001. The decrease in depreciation and amortization expense is due to the
sale of two hotels in August 2001 and an additional 21 hotels in April 2002.
For both 2002 and 2001, depreciation and amortization expense does not reflect
any expense for properties sold in the sale-leaseback transactions.

Corporate Operations

Other Income

Other income for the quarter ended June 30, 2002 totaled $887,000,
compared to $1.1 million for the quarter ended June 30, 2001. Other income
consists primarily of royalty fees (revenue-based fees received over the life
of the franchise agreement), franchise fees (a one-time fee received upon
execution of a signed franchise agreement), management fees and joint venture
equity income. Equity income represents our share of the profits of
unconsolidated joint venture hotels.

Franchise fee income (including application and royalty fees) for the
quarter ended June 30, 2002 totaled $826,000, compared to $835,000 for the
quarter ended June 30, 2001. Management fee income for the quarter ended June
30, 2002 totaled $358,000, compared to $346,000 for the quarter ended June 30,
2001. For the quarter ended June 30, 2002, we recorded a loss of ($296,000) on
our joint venture hotels, compared to ($114,000) for the quarter ended June 30,
2001. This loss is due to the amortization of the difference between the
amount at which the Boston Capital joint venture investment is carried on our
accounting records and the amount of the underlying book equity in the net
assets of the joint venture. This difference is primarily comprised of
carrying costs incurred from the time we purchased the land until the hotel was
contributed to the joint venture.

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As part of the sale-leaseback transaction, we sold 21 hotels during the
quarter ended June 30, 2002 and recognized $355,000 of the total deferred gain
on hotels sold. We did not sell any hotels during the quarter ended June 30,
2001 and recognized $346,000 of the total deferred gain on hotels sold.

Corporate Operating Expenses

Corporate operating expenses for the quarter ended June 30, 2002 totaled
$1.7 million, compared to $1.9 million for the quarter ended June 30, 2001, and
included all expenses not directly related to the development or operations of
specific hotels. The largest portion of corporate operating expenses consisted
of salaries, wages and fringe benefits. The balance of other corporate
operating expenses was comprised of normal operating costs, such as office
space lease, travel, utilities, advertising, professional fees and similar
expenses. The decrease in corporate operating expense is primarily due to
lower corporate administration and franchise sales and service costs.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
quarter ended June 30, 2002 totaled $198,000, compared to $174,000 for the
quarter ended June 30, 2001. 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 June 30, 2002 was $92,000, compared
to $134,000 for the quarter ended June 30, 2001. Interest income for the
quarter ended June 30, 2002 resulted primarily from the temporary investment of
cash provided by operations and proceeds from the April 2002 sale-leaseback
transaction of 21 hotels. For the quarter ended June 30, 2001, interest income
resulted primarily from the temporary investment of cash provided by
operations. The decrease for the quarter ended June 30, 2002 is largely due to
lower cash levels and lower investment rate yields.

Interest expense, net of capitalized interest, for the quarter ended June
30, 2002 was $1.5 million, compared to $4.5 million for the quarter ended June
30, 2001. The decrease in interest expense is due to lower debt levels as a
result of the April 2002 sale-leaseback transaction and lower LIBOR interest
rates, partially offset by a reduction in the amount of interest capitalized to
development projects as a result of not having any projects under construction
during 2002.

Sales of Hotels

As of June 30, 2002, we had sold to and leased back from HPT 57 hotels,
including 21 hotels sold during the second quarter of 2002. A deferred gain
was recorded on the sales, a portion of which has been recorded in income in
the quarters ended June 30, 2002 and June 30, 2001. The following table sets
forth the rent expense and earnings related to our leased hotels for the
quarters ended June 30, 2002 and June 30, 2001 (in thousands):

|                              |  |                                |        |      |  |   |       | 
|----------------------------- |  | ------------------------------ | ------ | ---- |  | - | ----- | 
|                              |  | For the quarter ended June 30,
|                              |  |                               
|                              |  | 2002                           |        | 2001
|                              |  |                                |        |     
|Rent expense on leased hotels |  | $                              | 10,946 |      |  | $ | 6,335 | 
|Gain recognized into earnings |  | $                              | 355    |      |  | $ | 346   | 

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##### Table of Contents



Comparison of six-months ended June 30, 2002 and 2001

Hotel Operations

Hotel Operations Revenue

Hotel operations revenue was $62.4 million for the six-months ended June
30, 2002, compared to $64.6 million for the six-months ended June 30, 2001.
The decrease in revenue is a result of the slowdown in the economy and a
reduction in business travel. The following table sets forth the operating
statistics for all our corporate hotels for the six-months ended June 30, 2002
and June 30, 2001:

|                           |  |                          |       |      |  |        |       |   |  |   |       |  
|-------------------------- |  | ------------------------ | ----- | ---- |  | ------ | ----- | - |  | - | ----- | -
|                           |  | For the six-months ended |       |      |  |       
|                           |  | June 30,                 |       |      |  |       
|                           |  |                          |       |      |  |       
|                           |  | 2002                     |       | 2001 |  | Change
|                           |  |                          |       |      |  |       
|Occupancy                  |  |                          | 75.6  | %    |  |        | 73.2  | % |  |   | 2.4   | %
|Average Daily Rate         |  | $                        | 54.14 |      |  | $      | 59.46 |   |  | $ | (5.32 | )
|Revenue per available room |  | $                        | 40.92 |      |  | $      | 43.53 |   |  | $ | (2.61 | )

The average occupancy rate for our corporate hotels was 75.6% for the
six-months ended June 30, 2002, compared to 73.2% for the six-months ended June
30, 2001. The average daily room rate for corporate hotels for the six-months
ended June 30, 2002 was $54.14, compared to $59.46 for the six-months ended
June 30, 2001. The decrease in the average daily rate for the six-months ended
June 30, 2002 was a result of our focus on improving or maintaining occupancy
at our hotels by marketing to the extended-stay customer and adjusting rates in
todays competitive environment. Revenue per available room was $40.92 for the
six-months ended June 30, 2002, a 6.0% decrease from a year ago. This decrease
is due to the lower average daily rate for the six-months ended June 30, 2002
compared to the six-months ended June 30, 2001.

Hotel Operating Expenses

Hotel operating expenses for the six-months ended June 30, 2002 totaled
$39.8 million, compared to $36.1 million for the six-months ended June 30,
2001. The increase in hotel operating expenses is largely due to increased
wages, media advertising, promotional costs associated with sales promotions,
operating costs for the Jersey City, New Jersey hotel which opened in April
2001 and the San Antonio, Texas hotel acquired in March 2002 and higher
maintenance and insurance costs.

Rent Expense on Leased Hotels

Rent expense on the 57 leased hotels for the six-months ended June 30,
2002 was $18.1 million, compared to $12.7 million for the six-months ended June
30, 2001. The increase in rent expense is due to an increase in base rent as a
result of the sale and leaseback of two hotels in August 2001 and an additional
21 hotels in April 2002.

Hotel Opening Costs

There were no opening costs for the six-months ended June 30, 2002, as we
had no hotel openings or projects under construction during the period.
Opening costs for the six-months ended June 30, 2001 totaled $230,000.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations for
the six-months ended June 30, 2002, totaled $3.4 million, compared to $5.3
million for the six-months ended June 30, 2001. The decrease in depreciation
and amortization expense is due to the sale of two hotels in August 2001 and an
additional 21 hotels in April 2002.

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Corporate Operations

Other Income

Other income for the six-months ended June 30, 2002 totaled $1.3 million,
compared to $1.7 million for the six-months ended June 30, 2001. Franchise fee
income for the six-months ended June 30, 2002 totaled $1.4 million, unchanged
from the six-months ended June 30, 2001. Management fee income for the
six-months ended June 30, 2002 totaled $670,000, compared to $635,000 for the
six-months ended June 30, 2001. The increase in management fee income was due
to increased management fees received from the eight Boston Capital joint
venture hotels and the East Lansing, Michigan joint venture hotel. For the
six-months ended June 30, 2002, we recorded a loss of ($772,000) on our joint
venture hotels, compared to ($281,000) for the six-months ended June 30, 2001.
This loss is due to the reduced profitability of the joint venture hotels as a
result of the slowdown in the economy and the reduction in business travel and
the amortization of the difference between the amount at which the Boston
Capital joint venture investment is carried on our accounting records and the
amount of the underlying book equity in the net assets of the joint venture.

We sold 21 hotels during the six-months ended June 30, 2002 and recognized
$638,000 of the total deferred gain on hotels sold. We did not sell any hotels
during the quarter ended June 30, 2001 and recognized $692,000 of the total
deferred gain on hotels sold.

Corporate Operating Expenses

Corporate operating expenses for the six-months ended June 30, 2002
totaled $3.2 million, compared to $3.4 million for the six-months ended June
30, 2001. The decrease in corporate operating expense is primarily due to
lower franchise sales and service and corporate administration costs.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
six-months ended June 30, 2002 totaled $382,000, compared to $349,000 for the
six-months ended June 30, 2001.

Interest Income and Expense

Interest income for the six-months ended June 30, 2002 was $185,000,
compared to $381,000 for the six-months ended June 30, 2001. Interest income
for the six-months ended June 30, 2002 resulted primarily from the temporary
investment of cash provided by operations and proceeds from the April 2002
sale-leaseback transaction. For the six-months ended June 30, 2001, interest
income resulted primarily from the temporary investment of cash provided by
operations. The decrease for the six-months ended June 30, 2002 is largely due
to lower cash levels and lower investment rate yields.

Interest expense, net of capitalized interest, for the six-months ended
June 30, 2002 was $5.0 million, compared to $9.1 million for the six-months
ended June 30, 2001. The decrease in interest expense is due to lower debt
levels as a result of the April 2002 sale-leaseback transaction and lower LIBOR
interest rates, partially offset by a reduction in the amount of interest
capitalized to development projects as a result of not having any projects
under construction during 2002.

Sales of Hotels

As of June 30, 2002, we had sold to and leased back from HPT 57 hotels, 21
of which were sold during the six-months ended June 30, 2002. A deferred gain
was recorded on the sales, a portion of which has been recorded in income in
the six-months ended June 30, 2002 and June 30, 2001. The following table sets
forth the rent expense and earnings related to our leased hotels for the
six-months ended June 30, 2002 and June 30, 2001 (in thousands):

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|                              |  |                                   |        |      |  |   |        | 
|----------------------------- |  | --------------------------------- | ------ | ---- |  | - | ------ | 
|                              |  | For the six-months ended June 30,
|                              |  |                                  
|                              |  | 2002                              |        | 2001
|                              |  |                                   |        |     
|Rent expense on leased hotels |  | $                                 | 18,120 |      |  | $ | 12,661 | 
|Gain recognized into earnings |  | $                                 | 638    |      |  | $ | 692    | 

Liquidity and Capital Resources

We had cash and cash equivalents of $14.6 million at June 30, 2002,
compared to $16.6 million at June 30, 2001. Net cash used in operating
activities totaled $2.6 million for the six-months ended June 30, 2002,
compared to $1.0 million of cash provided by operating activities for the
six-months ended June 30, 2001. For the six-months ended June 30, 2002, we
recorded a net loss from operations of $16.0 million, including an impairment
loss on hotels held for sale of $8.6 million, $2.1 million of loss on the
extinguishment of debt, $3.8 million of non-cash depreciation and amortization
expense and $638,000 of non-cash deferred gain income on hotels sold. Sources
of cash included a $2.7 million decrease in other assets. This decrease is
largely due to the refund of excess cash from the furniture, fixtures and
equipment (FF&E) cash reserve accounts. These accounts are stipulated in the
lending agreements and the cash reserved is for replacement and refurbishment
of hotel furniture and fixtures. The excess funds were returned to us as part
of the sale-leaseback and refinancing transactions in April 2002. Uses of cash
for the six-months ended June 30, 2002 consisted primarily of a $1.7 million increase in accounts and other receivables and a $1.6 million
decrease in accounts payable and other accrued expenses. For the six-months
ended June 30, 2001, we recorded net income from operations of $206,000
including $5.6 million of non-cash depreciation and amortization expense and
$692,000 of non-cash deferred gain income on hotels sold. Uses of cash for the
six-months ended June 30, 2001 included a $2.5 million increase in other assets
(primarily FF&E reserve payments), a $1.0 million decrease in accounts payable
and other accrued expenses and an increase of $753,000 in accounts and other
receivables.

Net cash provided by investing activities for the six-months ended June
30, 2002 totaled $131.9 million, compared to $141,000 of net cash used in
investing activities for the six-months ended June 30, 2001. Sources of cash
for the six-months ended June 30, 2002 consisted of $145.0 million in proceeds
from sales of hotels and $10.5 million of guaranty deposit refunded to us by
HPT as part of the April 2002 sale-leaseback transaction. Uses of cash for the
six-months ended June 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 $7.4 million of expenditures for property, equipment and
leasehold improvements in connection with completed and leased hotels. Uses of
cash for the six-months ended June 30, 2001 consisted of expenditures for
property and equipment, partially offset by cash distributions from the joint
ventures.

For the six-months ended June 30, 2002, net cash used in financing
activities was $132.6 million, compared to $6.2 million of net cash used in
financing activities for the six-months ended June 30, 2001. Net cash used in
financing activities during the six-months ended June 30, 2002 consisted of
$192.2 million of principal payments on notes payable, partially offset by
$60.0 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 2002. For the six months ended June 30, 2001, net cash used in
financing activities included $7.2 million of principal payments on notes
payable and $4.0 million of preferred stock dividend payments, partially offset
by $5.0 million of proceeds from mortgages and notes payable.

Under the terms of
the agreement with Boston Capital and Mass Mutual, since we did not
have at least 10 joint venture hotels open or under construction by
August 31, 2000, we may be required to increase our capital
contribution to the existing joint venture hotels. As of
June 30, 2002, we had eight hotels open with none under
construction and the additional capital contribution amount was
estimated at approximately $3.4 million. In June 2002, we were
notified by our joint venture partners that we would be required to
make this additional equity
contribution on or before July 25, 2002. We did not make this
contribution. We are currently discussing alternatives to the equity
contribution with our joint venture partners. The Company is otherwise in compliance with the
terms of the joint venture agreement.

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As of June 30, 2002, we have guaranteed approximately $56.3 million of the
construction debt on the Boston Capital joint venture properties. Maturity
dates for this debt range from October 2002 to January 2008. Approximately
$5.8 million and $18.1 million of this debt is scheduled to mature in 2002 and
2003, respectively. As of June 30, 2002, all of the debt scheduled to mature
in 2002 can be extended, under the terms of the existing loan agreement, for up
to two years. The debt scheduled to mature in 2003 cannot be extended. Since
this guaranteed debt relates to an entity, which we do not wholly own or
control, it is not included in our consolidated financial statements.

As of June 30, 2002, we had borrowed $59.0 million from GMAC and one other
financial institution. This debt had scheduled maturity dates ranging from May
2005 to June 2011 with interest rates, which ranged from 7.75% to 8.30%.

Our Series A and Series B Preferred Stock accumulate dividends at a rate
of 7.5% with dividend payments made quarterly, upon approval of the board of
directors, and in preference to any dividend on our Common Stock. These
payments are approximately $2.0 million per quarter. We did not make the last
three scheduled preferred stock dividend payments (November 2001, February 2002
and May 2002). We intend to assess our cash position on a quarterly basis and
may elect to forego additional scheduled dividend payments on our preferred
stock. As of June 30, 2002, we had approximately $6.0 million of accumulated
unpaid dividends. A failure to make future dividend payments will result in a
further reduction in the conversion price of the Preferred Stock and, in the
case of the Series B Preferred Stock, may result in a future adjustment to the
dividend rate to 12%.

Pursuant to a mandatory redemption clause in the Certificates of
Designation for the Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to $107 million plus
unpaid dividends. As of June 30, 2002, the mandatory redemption amount was
approximately $113.0 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.

Series A and B Preferred Stockholders also have the right to convert, at
any time at their option into shares of Common Stock, subject to certain
anti-dilution adjustments. The current conversion price of the Preferred Stock
is $8.51. 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
June 30, 2002, the Liquidation Amount was $113.0 million, including $6.0
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 June 30, 2002, 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.

We believe that a combination of our cash and cash equivalents, cash from
operations and borrowed funds from third-party lenders (if approved on an
individual basis) will be sufficient to provide capital for operations through
June 2003. However, in order to meet our long-term financing obligations, we
will be required to raise additional capital in the future.

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From time to time we will consider strategic acquisitions as a means of
growth, which may require additional capital. 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 build or acquire additional hotels. We are
unable to assure that we will be able to obtain financing on a timely basis, on
acceptable terms, or at all.

Certain Business Considerations

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

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

We have Never Been
Profitable. At June 30, 2002, we operated 77 hotels.
This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:



| |  |  | the inability to maintain high occupancy rates or to attract guests for extended-stays;
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | the inability to achieve expected nightly rates;                                       
|
| |  |  | the inability to operate the hotels at expected expense levels;                        
|
| |  |  | the ability to attract and retain quality personnel; and                               
|
| |  |  | liability for accidents and other events occurring at hotel properties.                

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

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

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

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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 preferred stock dividend or redemption payments as they become due.
For example, in May 2002, we did not make the scheduled dividend payment. This
marked the third successive dividend payment we have not made (November 2001
and February 2002). In addition, we may need to refinance all or a portion
of our indebtedness on or before the maturity date. We do not currently have
sufficient capital to pay all of our debts if they were due today or make the
scheduled payment to redeem our Preferred Stock. We cannot provide any
assurances that we will be able to refinance any of our indebtedness on
commercially reasonable terms, or at all. Our ability to make payments on,
to repay or to refinance our indebtedness and to make our scheduled preferred
stock dividend and redemption 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 obligations or preferred stock could result in litigation and have a
material adverse effect on our business and results of operations. See
Liquidity and Capital Resources in Managements Discussion and Analysis of
Financial Conditions and Results of Operations for further discussion.

Our Growth is
largely Dependant on Franchising Hotels. We intend to grow
primarily by franchising Candlewood Suites and Cambridge Suites hotels. Our
ability to franchise hotels and obtain franchisees involves substantial risks,
including:



| |  |  | there are a limited number of franchising opportunities;                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;       
|
| |  |  | 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 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.

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

23



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##### Table of Contents



demand or a reduction in business following adverse publicity, which could
have a material adverse effect on our business and results of operations. In
addition, we have a limited history upon which we can gauge consumer acceptance
of our hotels and, accordingly, we cannot provide assurance that our hotels
will be readily accepted by guests who are looking for conventional or
extended-stay hotel accommodations. Furthermore, we compete against other
facilities with substantially greater brand recognition.

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



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

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

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

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

Our Need for Continued Capital and Additional Financing Could Materially
Adversely Affect our Business and Results of Operations. The development of
hotels is capital intensive. Although we currently do not expect to develop
any company-owned Candlewood hotels in 2002, if we elect to develop any hotels,
we cannot assure you that we will be able to obtain the financing necessary to
develop such hotels on terms acceptable to us, or at all. Because we currently
do not have adequate cash balances to pay for the development costs of new
hotels, if our applications with lending institutions are not approved or our
loans are not funded on a timely basis, we may be unable to construct
additional Candlewood hotels. We have no current arrangements with respect to,
or sources of, additional debt financing. If we are unable to arrange for
additional capital or financing, we may not be able to develop further hotels.

24



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##### Table of Contents



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

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

Impact of New Accounting Standards

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

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

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which rescinded FASB No. 4
requiring gains and losses from extinguishment of debt to be classified as
extraordinary. During the quarter ended June 30, 2002, we extinguished a
significant portion of our debt and recorded a loss of $2.1 million. We have
elected early adoption of Statement No. 145 and have classified this loss as an
operating expense.

Quantitative and Qualitative Disclosure of Market Risk

Our earnings are affected by changes in interest rates as a significant
portion of our outstanding indebtedness is at a variable rate based on LIBOR.
If interest rates change by .01 percent, the market value of our mortgages and
notes payable, based on the outstanding balance, effected by LIBOR rates at
June 30, 2002, would change by approximately $5,500. Additionally, we have
market risk on our short-term investments, which are considered cash
equivalents, due to changes in interest rates. If interest rates
increase by .01 percent, the market value of our short-term investments, based on the
outstanding balance at June 30, 2002, would change by approximately $1,500.

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities and its
amendments, Statements 137 and 138 in June of 1999 and June of 2000,
respectively. We adopted Statement No. 133, as amended, effective January 1,
2001. The Statement requires us to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or

25



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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 June 30, 2002,
the Company had one derivative financial instrument, an interest rate hedge,
which was recorded at fair value of $134,000 as of June 30, 2002, with the
change in fair value since the purchase date recorded in other comprehensive
income in the equity section of the balance sheet.

26



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##### Table of Contents






PART II. OTHER INFORMATION




Item 4. Submission of Matters to Vote of Security Holders

On May 14, 2002, the Company held its 2002 Annual Meeting of Stockholders
to elect the Companys board of directors. The number of shares entitled to
vote was 9,025,000 shares of the Companys Common Stock, 65,000 shares of the
Companys Series A Preferred Stock and 42,000 shares of the Companys Series B
Preferred Stock. On an as-converted basis, the total number of shares of
Common Stock available to vote was 21,598,443. The total number of shares
represented in person or by proxy to vote was 17,013,031. Each of the current
directors was re-elected. Messrs. Cresci, Morris, Pados and Salazar were
re-elected with 16,990,211 affirmative votes and 22,820 votes against. Messrs.
DeBoer, Fix and Roos were re-elected with 16,768,711 affirmative votes and
244,320 votes against. Messrs. Issa, Nielsen and Schofield were re-elected
with 16,987,211 affirmative votes and 25,820 votes against. No other matters
were put to a vote of stockholders at the Annual Meeting.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See the Exhibit Index beginning on page 29.

(b)  Reports on Form 8-K

On April 26, 2002, the Company filed Report on Form 8-K, reporting the
Sale / Leaseback Transaction entered into with HPT on April 11, 2002.

On June 27, 2002, the Company filed Report on Form 8-K/A, amending the
Form 8-K filed on April 26, 2002, and disclosing the pro forma financial
information relating to the Sale / Leaseback Transaction.

27



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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: | August 13, 2002 |  | By: |  | /s/ Jack P. DeBoer
|      |                 |  |     |  |                    |                                                                              
|      |                 |  |     |  |                    | Jack P. DeBoer, Chairman
          and Chief Executive Officer               
|     
|     
|Date: | August 13, 2002 |  | By: |  | /s/ Warren D. Fix 
|      |                 |  |     |  |                    |                                                                              
|      |                 |  |     |  |                    | Warren D. Fix, Executive Vice President          
and Chief Financial Officer

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EXHIBIT INDEX

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

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|        |  |                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                               
|10.20   |  | Third Amendment to Agreement to Lease by and between Candlewood Hotel Company, Inc. and
HPT. (10)                                                                                                             
|10.21   |  | Purchase and Sale Agreement by and among Candlewood Hotel Company, Inc., Candlewood
Philadelphia-Mt. Laurel, NJ, LLC, Candlewood Las Vegas, NV, LLC and HPT. (12)                                             
|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. (13)          
|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.
(13)                             
|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. (13)               
|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. (13)                                                       
|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. (13)
|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. (13)                     
|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. (13)            
|10.29   |  | Form of Letter Agreement between Candlewood Hotel Company, Inc. and certain executive officers
and schedule related thereto.                                                                                  
|11.1    |  | Statement re Computation of Per Share Earnings  not applicable.                                                                                                                                              



---

|(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 Quarterly
Report on Form 10-Q for the period ended September 30, 2001.                                           
|    
|    
|    
|    
|(13) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on April 26, 2002.                                                              

30