<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 29, 1996
____________________
EXTENDED STAY AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-27360 36-3996573
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification No.)
500 E. BROWARD BOULEVARD
FT. LAUDERDALE, FLORIDA 33394
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 713-1600
____________________
================================================================================
<PAGE>
Item 2. Acquisition of Assets.
On July 29, 1996, Extended Stay America, Inc. ("the Company") acquired
substantially all of the assets of Kipling Hospitality Enterprise Corporation
("KHEC"), which owned and operated a 145-room Econo Lodge hotel in Lakewood,
Colorado. The Company intends to remodel and convert the hotel to the Company's
extended stay lodging format. In consideration for this acquisition, the
Company issued 200,000 shares of its common stock, par value $.01 per share (the
"Common Stock"), and paid an additional $24,500 in cash. The terms of the
acquisition, including the number of shares of Common Stock issued as
consideration, were determined through arm's-length negotiations, based on past
and projected levels of revenue and profitability of the acquired lodging
facility and the value of the assets acquired. The acquisition was accounted
for using the purchase method of accounting. Copies of the asset purchase
agreement and related agreements with respect to this acquisition are filed
herewith as Exhibit 2.1 and are incorporated herein by this reference.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
-----------------------------------------
The required financial statements of the business acquired are hereby
incorporated by reference to the Company's Post-Effective Amendment No. 4 to
Form S-1 Registration Statement (No. 333-102) dated July 3, 1996 (the
"Registration Statement") under the caption "Kipling Hospitality Enterprise
Corporation" appearing on pages F-35 through F-41 of the Prospectus constituting
part of the Registration Statement (the "Prospectus").
(b) Pro Forma Financial Information.
-------------------------------
The required pro forma financial information relating to the business
acquired is hereby incorporated by reference to the Registration Statement under
the caption "Pro Forma Financial Statements of Extended Stay America, Inc. and
Subsidiaries and Acquired Companies" appearing on pages F-2 through F-4 of the
Prospectus. All references on those pages to the acquisition of the KHEC
Facility as "proposed" should be changed to give effect to its consummation.
(c) Exhibits.
--------
The exhibits to this report are listed in the Exhibit Index set forth
elsewhere herein.
<PAGE>
SIGNATURE
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 hereunto duly authorized.
EXTENDED STAY AMERICA, INC.
By: /s/ Robert A. Brannon
---------------------------------
Robert A. Brannon
Senior Vice President and
Chief Financial Officer
Dated: August 12, 1996
<PAGE>
EXTENDED STAY AMERICA, INC.
---------------------------
Exhibit Index
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
2.1 Agreement to Purchase Hotel dated as of May 1, 1996 and related
agreements among ESA Properties, Inc., Kipling Hospitality Enterprise
Corporation, and J. Craig McBride (incorporated by reference to
Exhibit 2.4 to the Company's Report on Form 10-Q for the Quarter ended
March 31, 1996).
2.2 Agreement dated August 12, 1996 by the Company to furnish
supplementally copies of omitted schedules.
99.1 Financial information incorporated by reference.
<PAGE>
EXHIBIT 2.2
AGREEMENT
---------
Extended Stay America, Inc. (the "Company") hereby agrees to furnish
supplementally to the Securities and Exchange Commission, upon request, a copy
of any omitted exhibit to the Agreement to Purchase Hotel dated as of May 1,
1996 among ESA Properties, Inc., Kipling Hospitality Enterprise Corporation, and
J. Craig McBride.
EXTENDED STAY AMERICA, INC.
By: /s/ Robert A. Brannon
----------------------------------
Robert A. Brannon
Senior Vice President and
Chief Financial Officer
Dated: August 12, 1996
<PAGE>
EXHIBIT 99.1
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
These unaudited pro forma consolidated statements of operations are presented
as if the acquisitions of the Acquired Facilities and the proposed acquisitions
of the KHEC Facility and the M & M Facilities and the related issuances of
shares of common stock had occurred at the beginning of the relevant period.
For the year ended December 31, 1995, the statement also reflects the
acquisition of the Marietta Facility and estimated incremental expenses to
operate as a publicly held company as if it were publicly held on the date of
inception. Such pro forma information is based in part upon the consolidated
statements of operations of Extended Stay America, Inc. and subsidiaries and
the statements of operations of Welcome, Apartment/Inn, Hometown Inn, KHEC,
Gwinnett, and the M & M Facilities. They should be read in conjunction with the
financial statements listed in the index on page F-1 of this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made. The acquisition of the lodging facility from AATI
has not been included in these unaudited statements of operations because the
purchase price and the unaudited results of operations for the periods, when
measured in relation to the Company, did not meet certain materiality standards
and can be excluded as permitted by the rules and regulations of the Securities
and Exchange Commission.
These unaudited pro forma consolidated statements of operations are not
necessarily indicative of what the actual results of operations of the Company
would have been assuming such transactions had been completed as of the
beginning of the period, nor do they purport to represent the results of
operations for any future periods. Results of operations and the related
earnings or loss per share for future periods will be affected by a number of
factors, including but not limited to, the number of facilities opened and the
operating results therefrom, interest costs incurred on indebtedness (including
the amortization of the fees paid in cash and common stock to DLJ), corporate
operating and property management expenses, site selection costs and the number
of future shares issued.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION)
THROUGH DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPLETED COMPLETED PROPOSED
ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 817,133 $5,957,989 $ (135,614)(1) $6,639,508 $6,940,992 $ (152,131)(1) $13,428,369
Management fees........ 17,775 (17,775)(2)
Other revenue.......... 42,977 277,596 (6,398)(1) 314,175 431,323 (9,453)(1) 736,045
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total revenue........ 877,885 6,235,585 (159,787) 6,953,683 7,372,315 (161,584) 14,164,414
----------- ---------- ---------- ---------- ---------- ---------- -----------
Costs and expenses:
Property operating
expenses.............. 332,523 2,655,610 (61,941)(1) 2,908,417 3,045,884 (66,759)(1) 5,887,542
(17,775)(2)
Corporate operating
and property
management expenses... 2,042,039 391,114 800,000 (3) 3,233,153 543,464 (58,093)(2) 3,718,524
Site selection costs... 512,529 512,529 512,529
Depreciation and
amortization.......... 146,726 623,721 263,067 (4) 1,033,514 737,220 422,780 (4) 2,193,514
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total costs and
expenses............ 3,033,817 3,670,445 983,351 7,687,613 4,326,568 297,928 12,312,109
----------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from
operations.......... (2,155,932) 2,565,140 (1,143,138) (733,930) 3,045,747 (459,512) 1,852,305
Interest income
(expense).............. 848,510 (1,104,633) 1,104,633 (5) 848,510 (1,733,591) 1,689,591 (5) 804,510
----------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
income taxes.......... (1,307,422) 1,460,507 (38,505) $ 114,580 $1,312,156 $1,230,079 $ 2,656,815
Provision for income
taxes................. (45,000)(6) (45,000) (991,000)(6) (1,036,000)
----------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)...... $(1,307,422) $1,460,507 $ (83,505) $ 69,580 $1,312,156 $ 239,079 $ 1,620,815
=========== ========== ========== ========== ========== ========== ===========
Net income (loss) per
common share(7)....... $ (0.10) $ 0.01 $ 0.11
=========== ========== ===========
Weighted average
number of common and
equivalent shares
outstanding during
the period(7)......... 12,652,110 13,849,898 15,260,204
=========== ========== ===========
</TABLE>
<PAGE>
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPLETED COMPLETED PROPOSED
ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 1,137,841 $778,821 $ $ 1,916,662 $1,827,570 $ $ 3,744,232
Other revenue.......... 32,988 30,016 63,004 97,123 160,127
----------- -------- ------- ----------- ---------- --------- -----------
Total revenue........ 1,170,829 808,837 1,979,666 1,924,693 3,904,359
Costs and expenses:
Property operating
expenses.............. 442,540 288,123 730,663 790,051 1,520,714
Corporate operating
and property
management expenses... 1,580,655 58,937 1,639,592 145,739 (11,260)(2) 1,774,071
Site selection costs... 823,733 823,733 823,733
Depreciation and
amortization.......... 203,343 73,199 20,238 (4) 296,780 186,215 103,785 (4) 586,780
----------- -------- ------- ----------- ---------- --------- -----------
Total costs and
expenses............ 3,050,271 420,259 20,238 3,490,768 1,122,005 92,525 4,705,298
Income (loss) from
operations.......... (1,879,442) 388,578 (20,238) (1,511,102) 802,688 (92,525) (800,939)
Interest income
(expense).............. 1,450,132 (64,151) 64,151 (5) 1,450,132 (424,570) 399,570 (5) 1,425,132
----------- -------- ------- ----------- ---------- --------- -----------
Income (loss) before
income taxes........... (429,310) 324,427 43,913 (60,970) 378,118 307,045 624,193
Provision for income
taxes.................. (243,000)(6) (243,000)
----------- -------- ------- ----------- ---------- --------- -----------
Net income (loss)....... $ (429,310) $324,427 $43,913 $ (60,970) $ 378,118 $ 64,045 $ 381,193
=========== ======== ======= =========== ========== ========= ===========
Net loss per common
share(7)............... $ (0.02) $ (0.00) $ 0.02
=========== =========== ===========
Weighted average number
of common and
equivalent shares
outstanding during the
period(7).............. 22,467,393 23,025,192 24,785,595
=========== =========== ===========
</TABLE>
- ---------------------
(1) To eliminate the estimated revenues and expenses for the Acquired
Facilities, the Marietta Facility, the KHEC Facility, and the M & M
Facilities for the period January 1, 1995 through January 8, 1995 in order
to present a period comparable to the historical period for the Company.
(2) To eliminate in consolidation management fees charged to the Marietta
Facility prior to being acquired by the Company and franchise fees incurred
by KHEC.
(3) Reflects estimated increases in: (i) salaries and benefits--$238,000; (ii)
state capital-based taxes--$150,000; (iii) audit and tax fees--$75,000;
(iv) legal expenses--$37,000; (v) directors' and officers' insurance--
$150,000; (vi) additional expenses--$150,000, as if the Company had been a
public company on the date of inception.
(4) To adjust depreciation and amortization expense to reflect the expense
based on the purchase price paid and to be paid by the Company for the
Acquired Facilities, the Marietta Facility, the KHEC Facility, and the M &
M Facilities for any period prior to acquisition.
(5) To eliminate non-continuing interest expense paid by the Acquired
Facilities, the Marietta Facility, the KHEC Facility, and the M & M
Facilities prior to acquisition, net of interest income earned by the
Company on the amount of cash used in the acquisitions.
(6) To provide for estimated income tax expense.
(7) See notes 2, 5 and 14 to the Company's consolidated financial statements.
2
<PAGE>
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
This unaudited pro forma consolidated balance sheet is presented as if the
June 1996 Offering had been completed and the acquisition of the Gwinnett
Facility and the proposed acquisitions of the KHEC Facility and the M&M
Facilities had occurred on March 31, 1996. Such pro forma information is based
upon the consolidated balance sheet of the Company and the balance sheets of
Gwinnett, KHEC, and the M&M Facilities as of March 31, 1996. It should be read
in conjunction with the financial statements listed in the index on page F-1 of
this Prospectus. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
This unaudited pro forma consolidated balance sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of March 31, 1996, nor does it purport to
represent the future financial position of the Company.
<TABLE>
<CAPTION>
ACQUISITIONS
SUBSEQUENT
TO MARCH 31,
1996 AND
PROPOSED
ACTUAL ACQUISITIONS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $104,010,918 $ 628,882 $ (3,098,882)(1) $391,358,418
289,817,500 (2)
Refundable deposits... 621,654 621,654
Supply inventories.... 291,266 88,050 281,950 (1) 661,266
Prepaid expenses...... 366,142 2,198 (2,198)(1) 366,142
Other current assets.. 56,768 180,808 (180,808)(1) 56,768
------------ ----------- ------------ ------------
Total current
assets............. 105,346,748 899,938 286,817,562 393,064,248
------------ ----------- ------------ ------------
Property and equipment,
net.................... 51,658,313 20,257,229 20,347,771 (1) 92,263,313
Site deposits and
preacquisition costs... 3,913,811 3,913,811
Deferred loan costs..... 5,294,114 8,327 (8,327)(1) 5,294,114
Other assets............ 156,741 102,532 (102,532)(1) 156,741
------------ ----------- ------------ ------------
$166,369,727 $21,268,026 $307,054,474 $494,692,227
============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 925,504 $ 136,042 $ (136,042)(1) $ 925,504
Accrued salaries and
related expenses..... 67,855 22,177 (22,177)(1) 67,855
Due to related
parties.............. 71,845 211,334 (211,334)(1) 71,845
Other accrued
expenses............. 440,612 311,636 (891)(1) 751,357
Deferred revenue...... 330,856 19,087 (19,087)(1) 330,856
Current maturities of
long-term debt....... 6,335,578 (6,335,578)(1)
------------ ----------- ------------ ------------
Total current
liabilities........ 1,836,672 7,035,854 (6,725,109) 2,147,417
------------ ----------- ------------ ------------
Long-term debt.......... 13,564,248 (13,564,248)(1)
Shareholders' Equity:
Preferred stock, $.01
par value, 10,000,000
shares authorized, no
shares issued or
outstanding..........
Common stock, $.01 par
value, 200,000,000
shares authorized,
22,853,092 and
34,039,192 shares
issued and
outstanding for
Actual and Pro Forma,
respectively......... 228,531 226,733 (212,622)(1) 340,392
97,750 (2)
Additional paid in
capital.............. 166,041,256 30,270 38,149,874 (1) 493,941,150
289,719,750 (2)
Due from affiliated
companies and prepaid
services............. (521,395) 521,395 (1)
Accumulated
(deficit)/retained
earnings............. (1,736,732) 932,316 (932,316)(1) (1,736,732)
------------ ----------- ------------ ------------
Total shareholders'
equity............. 164,533,055 667,924 327,343,831 492,544,810
------------ ----------- ------------ ------------
$166,369,727 $21,268,026 $307,054,474 $494,692,227
============ =========== ============ ============
</TABLE>
- ---------------------
(1) To reflect the purchase adjustments relating to the acquisition of the
Gwinnett Facility for 172,100 shares of Common Stock and the proposed
acquisitions of the KHEC Facility and the M&M Facilities assuming the
acquisitions are completed through the issuance of approximately 101,000
and 1,138,000 shares, respectively, of Common Stock and to reflect the use
of $2,000,000 of the Company's cash representing the estimated costs to
remodel and to convert the KHEC property to an extended stay lodging
facility and the use of $470,000 of the Company's cash to retire debt of
the M&M Facilities assumed by the Company.
(2) To reflect the estimated net proceeds of the June 1996 Offering.
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying balance sheet of Kipling Hospitality
Enterprise Corporation as of December 31, 1995 and the related statements of
operations and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kipling Hospitality Enterprise
Corporation at December 31, 1995 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
May 4, 1996
4
<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
ASSETS ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 37,728 $ 40,136
Accounts receivable................................. 24,058 21,255
Supply inventories.................................. 40,338 40,338
Prepaid and other current assets.................... 32,425 5,314
---------- ----------
Total current assets.............................. 134,549 107,043
---------- ----------
Property and equipment, net........................... 1,468,171 1,454,178
Deferred loan costs, net.............................. 9,797 8,327
---------- ----------
$1,612,517 $1,569,548
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................... $ 40,758 $ 15,730
Accrued salaries and related expenses............... 16,152 15,537
Accrued property taxes.............................. 31,350 39,475
Accrued expenses.................................... 14,136 7,406
Deferred revenue.................................... 7,062 9,499
Note payable to related party....................... 33,486 33,486
Note payable to former shareholder.................. 80,000 80,000
Current maturities of long-term debt................ 63,437 64,454
---------- ----------
Total current liabilities......................... 286,381 265,587
---------- ----------
Long-term debt........................................ 1,116,934 1,105,358
---------- ----------
Total liabilities................................. 1,403,315 1,370,945
---------- ----------
Shareholder's Equity:
Common stock, $2 par value, 100,000 shares
authorized, 87,000 shares issued and outstanding... 174,000 174,000
Additional paid in capital.......................... 30,270 30,270
Due from affiliated companies and prepaid services.. (515,053) (521,395)
Retained earnings................................... 519,985 515,728
---------- ----------
209,202 198,603
---------- ----------
$1,612,517 $1,569,548
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE FOR THE
FOR THE THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue:
Room revenue.......................... $1,255,118 $273,374 $231,426
Telephone income...................... 47,426 11,740 7,595
Other, net............................ 22,075 5,592 5,702
---------- -------- --------
Total revenue....................... 1,324,619 290,706 244,723
---------- -------- --------
Costs and expenses:
Property operating expenses........... 736,994 165,893 167,465
Management salaries................... 53,269 11,013 6,787
Franchise expense..................... 58,093 12,348 11,260
Depreciation and amortization......... 89,018 16,634 18,132
---------- -------- --------
Total costs and expenses............ 937,374 205,888 203,644
---------- -------- --------
Income from operations.................. 387,245 84,818 41,079
Other income (expense):
Loss on sale of property and
equipment............................ (20,774)
Interest income....................... 20,287 66 76
Interest expense...................... (139,298) (34,788) (31,912)
---------- -------- --------
Net income.......................... 247,460 50,096 9,243
Retained earnings, beginning of period.. 374,996 374,996 519,985
Dividends............................. (102,471) (13,500)
---------- -------- --------
Retained earnings, end of period........ $ 519,985 $425,092 $515,728
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income................ $247,460 $ 50,096 $ 9,243
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............ 74,140 15,164 16,662
Amortization............ 14,878 1,470 1,470
Loss on sale of property
and equipment.......... 20,744
Change in:
Accounts receivable..... 6,398 4,021 2,804
Prepaid and other
current assets......... (31,709) 1 27,111
Accounts payable........ 8,996 (15,584) (25,028)
Accrued expenses........ (1,259) 28,159 3,217
-------- -------- --------
Net cash provided by
operating activities. 339,648 83,327 35,479
-------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment................ (72,240) (41,216) (2,670)
Proceeds from sale of
property and equipment... 13,779
-------- -------- --------
Net cash used in
investing activities. (58,461) (41,216) (2,670)
-------- -------- --------
Cash flows from financing
activities:
Advances to affiliated
companies................ (46,434) (6,342)
Advances from affiliated
companies................ 4,988
Principal payments on
long-term debt........... (124,345) (9,693) (10,559)
Proceeds from issuance of
long-term debt........... 10,065
Dividends................. (102,471) (13,500)
-------- -------- --------
Net cash used in
financing activities. (263,185) (4,705) (30,401)
-------- -------- --------
Net increase in cash........ 18,002 37,406 2,408
Cash at beginning of period. 19,726 19,726 37,728
-------- -------- --------
Cash at end of period....... $ 37,728 $ 57,132 $ 40,136
======== ======== ========
Noncash financing
transaction, prepaid
services to former
shareholder................ $ 80,000
========
Supplemental cash flow
disclosure, interest paid.. $149,804 $ 34,995 $ 37,612
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business. Kipling Hospitality Enterprise Corporation (the
"Company") operates a franchise hospitality property in Lakewood, Colorado. In
1996, the Company entered into an agreement to sell its hospitality property
and equipment to Extended Stay America, Inc.
Pervasiveness of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand
and on deposit, and highly liquid instruments with maturities of three months
or less when purchased. The carrying amount of cash and cash equivalents is the
estimated fair value at December 31, 1995.
Supply Inventory. Supply inventories consist primarily of linen, cleaning and
other room supplies and are stated at the lower of cost or market.
Property and Equipment. Property and equipment is stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. Maintenance and repairs are charged to
operations as incurred; major renewals and improvements are capitalized. The
gain or loss on the disposition of property and equipment is recorded in the
year of disposition.
The lives on the assets are as follows:
<TABLE>
<S> <C>
Building and improvements........................................ 40 years
Furniture, fixtures and equipment................................ 7 years
</TABLE>
Franchise Fee. Franchise fee is stated at cost and is amortized on a
straight-line basis over the period of the franchise agreement.
Income Taxes. The Company's shareholder elected that the Company be subject
to S Corporation regulations under the Internal Revenue Code. As such, the
shareholder is liable for federal and state income taxes.
Deferred Loan Costs. The Company has incurred costs in obtaining financing.
The costs have been deferred and are being amortized on a straight-line basis
over the life of the respective loans.
Revenue Recognition. Room revenue and other income are recognized when
earned.
Unaudited Interim Financial Statements. The unaudited interim financial
statements have been prepared pursuant to generally accepted accounting
principles applicable to interim financial statements and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature.
Results for the three months ended March 31, 1995 and 1996 are not necessarily
indicative of results to be expected for a full year. All data at March 31,
1995 and 1996 and for each of the three-month periods then ended are unaudited.
8
<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Land.......................................................... $ 539,000
Building and improvements..................................... 990,132
Furniture and fixtures........................................ 214,997
Transportation equipment...................................... 38,708
----------
1,782,837
Less accumulated depreciation................................. 314,666
----------
$1,468,171
==========
</TABLE>
3. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31, 1995:
<TABLE>
<S> <C>
Mortgage loan, principal and interest payable at approximately
$13,450 monthly through September 1997, interest at the
bank's base rate (base rate was 9.75% at December 31, 1995)
plus 2%...................................................... $1,172,664
Other......................................................... 7,707
----------
1,180,371
Less current maturities....................................... 63,437
----------
Long-term debt, net of current maturities..................... $1,116,934
==========
</TABLE>
The mortgage loan is collateralized by substantially all of the Company's
property and equipment. Aggregate maturities of long-term debt are as follows:
1996--$63,437; 1997--$1,116,934.
The Company believes that there is no material difference in the carrying
amount and estimated fair value of the long-term debt.
4. NOTE PAYABLE TO FORMER SHAREHOLDER:
The Company entered into a note payable agreement on September 15, 1995 to
pay a former shareholder $100,000 to perform consulting, accounting, and
bookkeeping services over a five year period. The note bears interest at 7% and
is payable in five annual installments commencing on September 15, 1995.
5. RELATED PARTY TRANSACTIONS:
Certain members of the Company's management provide management services to
companies owned by the shareholder. The Company allocated approximately $45,000
of expenses to the affiliated companies in 1995 for providing these services.
Due from affiliated companies and prepaid services at December 31, 1995
consists of:
<TABLE>
<S> <C>
Advances to affiliated companies................................ $326,000
Prepaid services to former shareholder (Note 4)................. 80,000
Receivable for allocated management services.................... 109,053
--------
$515,053
========
</TABLE>
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<PAGE>
KIPLING HOSPITALITY ENTERPRISE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
6. LITIGATION
From time to time, the Company has been involved in various legal
proceedings. Management believes that all such litigation is routine in nature
and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition.
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