<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EXTENDED STAY AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 36-3996573
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION OF INDUSTRIAL CLASSIFICATION EMPLOYER
INCORPORATION OR CODE NUMBER) IDENTIFICATION
ORGANIZATION) NUMBER)
500 E. BROWARD BOULEVARD
FT. LAUDERDALE, FLORIDA 33394
TELEPHONE (954) 713-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
GEORGE D. JOHNSON, JR.
CHIEF EXECUTIVE OFFICER
EXTENDED STAY AMERICA, INC.
500 E. BROWARD BOULEVARD
FT. LAUDERDALE, FLORIDA 33394
TELEPHONE (954) 713-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
JOHN T. MCCARTHY, ESQ. JOHN J. SABL, ESQ.
BELL, BOYD & LLOYD SIDLEY & AUSTIN
THREE FIRST NATIONAL PLAZA ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60602 CHICAGO, ILLINOIS 60603
TELEPHONE: (312) 372-1121 TELEPHONE: (312) 853-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 5,750,000 shares $26.50 $152,375,000 $52,544
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 750,000 shares of Common Stock which may be purchased pursuant to
an over-allotment option granted by the Company to the Underwriters.
(2) Calculated in accordance with Rule 457(c) and based upon the average of
the high and low sale prices of Extended Stay America, Inc. common stock
reported on the Nasdaq National Market on May 2 1996, as reported in The
Wall Street Journal.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXTENDED STAY AMERICA, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF PART I OF FORM S-1.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT CAPTION OR LOCATION
ITEM NUMBER AND CAPTIONS IN PROSPECTUS
------------------------ -------------------
<S> <C>
1.Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page
2.Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front and Outside Back Cover Pages;
Additional Information
3.Summary Information, Risk
Factors, and Ratios of Earnings
to Fixed Charges............... Prospectus Summary; Risk Factors
4.Use of Proceeds.................. Use of Proceeds; Management's Discussion
and Analysis of Financial Condition and
Results of Operations
5.Determination of Offering Price.. Outside Front Cover Page; Price Range of
Common Stock; Underwriting
6.Dilution......................... *
7.Selling Security Holders......... *
8.Plan of Distribution............. Outside Front Cover Page; Underwriting
9.Description of Securities to be
Registered..................... Description of Capital Stock
10.Interests of Named Experts and
Counsel........................ *
11.Information with Respect to the Outside Front Cover Page; Prospectus
Registrant..................... Summary; Risk Factors; Recent
Developments; Dividend Policy;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Financing; Principal
Stockholders; Shares Eligible for Future
Sale; Financial Statements
12.Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities..... *
</TABLE>
- ---------------------
*Item inapplicable or answer is negative and omitted from Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 9, 1996
PROSPECTUS
, 1996
5,000,000 SHARES
LOGO
COMMON STOCK
All of the 5,000,000 shares of Common Stock offered hereby are being issued
and sold by Extended Stay America, Inc. The Common Stock is traded on the
Nasdaq National Market under the symbol "STAY." On May 2, 1996, the closing
sale price of the Common Stock was $26 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total(3)......................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 750,000 additional shares
of Common Stock at the price to the public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as, and if accepted by them, subject
to certain prior conditions, including the right of the Underwriters to reject
orders in whole or in part. It is expected that delivery of such shares will be
made in New York, New York, on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY
INCORPORATED
CS FIRST BOSTON
SMITH BARNEY INC.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH CS FIRST BOSTON
CORPORATION (OTHER THAN CS FIRST BOSTON, INC. OR ANY OF ITS SUBSIDIARIES) OR
OTHER PERSONS ENGAGING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR
THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE
COMPANY PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7 AND 10B-8 UNDER THE
SECURITIES EXCHANGE ACT OF 1934.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless the context suggests otherwise, references in this
Prospectus to the "Company" mean Extended Stay America, Inc. and its
subsidiaries and references to the year ended December 31, 1995 mean the period
from January 9, 1995, the Company's date of inception, through December 31,
1995. Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting."
THE COMPANY
Extended Stay America, Inc. was organized in January 1995 to develop, own,
and manage extended stay lodging facilities which are designed to appeal to
value-conscious guests. The Company's facilities are designed to offer quality
accommodations for guests at substantially lower rates than most other extended
stay lodging providers and hotels in the economy segment of the traditional
lodging industry. They feature fully furnished rooms which are generally rented
on a weekly basis to guests such as business travelers (particularly those with
limited expense accounts), professionals on temporary work assignment, persons
between domestic situations, and persons relocating or purchasing a home, with
most guests staying for multiple weeks. The Company's facilities provide a
variety of features that are attractive to the extended stay guest such as a
fully-equipped kitchenette, weekly housekeeping with twice-weekly towel
service, color television with cable or satellite hook-up, coin laundromat, and
telephone service with voice mail messaging. To help maintain affordability of
room rates, labor intensive services such as daily cleaning, room service, and
restaurants are not provided.
The extended stay category is one of the most rapidly evolving sectors of the
U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay
rooms increased at a compounded annual growth rate of approximately 3.3%,
compared with compounded annual room growth of approximately 1.4% for the
overall lodging industry over the same period. However, the vast majority of
these rooms have been developed in the high-price end of the category. The
economy extended stay sector of the lodging industry appears to present a
number of attractive characteristics compared to traditional hotels, including
higher occupancy rates and operating margins. Based on published occupancy
rates for other participants in the extended stay market, the Company believes
that demand in the economy extended stay market is greater, relative to supply,
than in the lodging industry generally. The Company is not aware of any
operator who serves the economy extended stay market niche on a national level.
The Company's goal is to become a national provider of economy extended stay
lodging. The Company intends to achieve this goal by rapidly developing
properties in selected markets, providing high value accommodations for its
guests, actively managing its properties to increase revenues and reduce
operating costs, and increasing awareness of the economy extended stay concept.
Through May 1, 1996, the Company had developed and opened three facilities,
acquired four others, and had agreements to acquire two additional facilities.
As of such date, the Company had 19 facilities under construction,
substantially all of which the Company expects to have opened by the end of
1996. The Company plans to begin construction of approximately 45 additional
facilities during the remainder of 1996 and to continue an active development
program thereafter. The Company's plans call for the average facility to have
approximately 125 extended stay rooms and to take approximately 7-9 months to
construct.
The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who
are the two largest shareholders of the Company. Mr. Johnson, who is the
President and Chief Executive Officer of the Company, was formerly the
President of the Consumer Products Division of Blockbuster Entertainment Group,
a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of
Directors of the Company, is the Chairman
3
<PAGE>
and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-
Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of
Blockbuster Entertainment Corporation. The Company's management team has
extensive experience in the acquisition and development of real estate and the
operation of properties on a national scale.
The Company was initially capitalized with approximately $60 million in
equity from a group of private investors, a number of whom constitute part of
the Company's management team. On December 19, 1995, the Company completed an
initial public offering of 5,060,000 shares of Common Stock at a price of
$13.00 per share (the "IPO") and a concurrent offering to the Company's then
existing shareholders of 2,067,825 additional shares of Common Stock at a price
of $12.09 per share, being the initial public offering price per share less the
underwriting discounts and commissions (the "Concurrent Offering", and,
collectively with the IPO, the "Prior Offerings"). The net proceeds to the
Company from the Prior Offerings were approximately $85 million after deduction
of the underwriting discounts and commissions and other offering expenses. In
addition, pursuant to an existing mortgage facility and a mortgage facility the
Company expects to enter into, the Company may be able to borrow up to $400
million to finance its properties.
The Company was formed in 1995 as a Delaware corporation and its executive
offices are located at 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394
and its telephone number is (954) 713-1600.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered(1)............. 5,000,000 shares
Common Stock to be outstanding after 27,853,092 shares
this offering(2)...................
Use of proceeds..................... To finance the development of additional
extended stay lodging facilities and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol....... STAY
</TABLE>
- --------------------
(1) Assumes no exercise of the over-allotment option granted by the Company to
the Underwriters.
(2) Excludes 4,417,060 shares of Common Stock reserved for issuance under the
Option Plans (as defined below). As of March 31, 1996, options with respect
to 2,436,258 shares of Common Stock have been granted under the Option
Plans. Also excludes approximately 116,000 shares of Common Stock the
Company expects to issue in connection with a pending acquisition.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Summary and under the captions "Risk
Factors," "Recent Developments," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and elsewhere in
this Prospectus, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the Company's limited operating history
and uncertainty as to the Company's future profitability; the ability to meet
construction and development schedules and budgets; the ability to develop and
implement operational and financial systems to manage rapidly growing
operations; the uncertainty as to the consumer demand for economy extended stay
lodging; increasing competition in the extended stay lodging market; the
ability to integrate and successfully operate acquired properties and the risks
associated with such properties; the ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; and other factors
referenced in this Prospectus. See "Risk Factors."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
------------------------- --------------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(2)
<S> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue................ $ 877,885 $6,983,658 $ 1,170,829 $ 1,889,586
Operating expenses..... 2,887,091 6,782,841 2,846,928 3,212,945
Depreciation and
amortization.......... 146,726 1,041,514 203,343 298,780
Loss from operations... (2,155,932) (840,697) (1,879,442) (1,622,139)
Interest income........ 848,510 804,510 1,450,132 1,425,132
Income taxes........... 0 0 0 0
Net loss............... $(1,307,422) $ (36,187) $ (429,310) $ (197,007)
=========== ========== ============ ============
Net loss per share(3).... $ (0.10) $ (0.00) $ (0.02) $ (0.01)
Weighted average number
of shares of common
stock and equivalents
outstanding(3).......... 12,652,110 13,834,129 22,467,393 22,969,438
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
ACTUAL PRO FORMA(4)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $104,010,918 $226,010,918
Total assets.................................... 166,369,727 293,394,727
Long-term debt(5)............................... 0 0
Shareholders' equity............................ 164,533,055 291,558,055
</TABLE>
- --------------------
(1) Giving pro forma effect to the acquisition of the Norcross, Georgia lodging
facility in January 1996 and the Norcross, Georgia and Riverdale, Georgia
lodging facilities in February 1996 (collectively, the "Acquired
Facilities"), the acquisition of the Marietta, Georgia lodging facility in
August 1995 (the "Marietta Facility"), and the proposed acquisition of the
lodging facility in Lakewood, Colorado (the "KHEC Facility") from Kipling
Hospitality Enterprise Corporation ("KHEC") as if they all had occurred at
the beginning of the period and to the Company operating as a publicly held
entity as of such date. See the pro forma financial statements and notes
thereto and note 5 to the Company's consolidated financial statements, all
of which are contained elsewhere herein.
(2) Giving pro forma effect to the acquisition of the Acquired Facilities and
the proposed acquisition of the KHEC Facility as if they had occurred at
the beginning of the period. See the pro forma financial statements and
notes thereto and note 5 to the Company's consolidated financial
statements, all of which are contained elsewhere herein.
(3) See notes 2 and 5 to the Company's consolidated financial statements
contained elsewhere herein.
(4) Giving pro forma effect to the proposed acquisition of the KHEC Facility
and this offering as if they occurred on March 31, 1996. See the pro forma
financial statements and notes thereto contained elsewhere herein.
(5) Does not give effect to future borrowings.
5
<PAGE>
RISK FACTORS
Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the specific factors set forth below as well as the other
information contained in this Prospectus in evaluating an investment in the
Common Stock.
LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION
The Company first began operating economy extended stay hotels in August
1995 and has a limited operating history upon which investors may evaluate the
Company's performance. The Company has incurred losses to date and there can
be no assurance that the Company will be profitable in the future. Given the
substantial development and financing expenses relating to the Company's
expansion, it expects to have net losses for the foreseeable future.
DEVELOPMENT RISKS
The Company intends to grow primarily by developing additional Company-owned
lodging facilities. Development involves substantial risks, including the risk
that development costs will exceed budgeted or contracted amounts, the risk of
delays in completion of construction, the risk of failing to obtain all
necessary zoning and construction permits, the risk that financing might not
be available on favorable terms, the risk that developed properties will not
achieve desired revenue or profitability levels once opened, the risk of
competition for suitable development sites from competitors which have greater
financial resources than the Company, the risks of incurring substantial costs
in the event a development project must be abandoned prior to completion,
changes in governmental rules, regulations, and interpretations (including
interpretations of the requirements of the Americans with Disabilities Act),
and general economic and business conditions. Although the Company intends to
manage development to reduce such risks, there can be no assurance that
present or future developments will perform in accordance with the Company's
expectations. As of May 1, 1996, the Company operated seven facilities
(Spartanburg, South Carolina; Columbia, South Carolina; Marietta, Georgia;
Norcross, Georgia (2); Riverdale, Georgia; and Downers Grove, Illinois). As of
such date, the Company had 19 facilities under construction, substantially all
of which the Company expects to have opened by the end of 1996. The Company
plans to begin construction of approximately 45 additional facilities during
the remainder of 1996 and to continue an active development program
thereafter. There can be no assurance, however, that the Company will complete
the development and construction of the facilities or will acquire each of the
planned properties and complete development of a Company-owned facility
thereon, or that any such developments will be completed in a timely manner or
within budget.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company's rapid development plans will require the implementation of
enhanced operational and financial systems and will require additional
management, operational, and financial resources. For example, the Company
will be required to recruit and train property managers and other personnel
for each new lodging facility as well as additional accounting personnel. In
addition, the Company needs to complete the development of a systemwide
integrated computer network. There can be no assurance that the Company will
be able to manage its expanding operations effectively. The failure to
implement such systems and add such resources on a cost-effective basis could
have a material adverse effect on the Company's results of operations and
financial condition.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The economy extended stay segment of the lodging industry, in which the
Company operates, may be adversely affected by changes in national or local
economic conditions and other local market conditions, such as an oversupply
of hotel space or a reduction in demand for hotel space in a geographic area,
changes in travel patterns, extreme weather conditions, changes in
governmental regulations which influence or determine wages,
6
<PAGE>
prices, or construction costs, changes in interest rates, the availability of
financing for operating or capital needs, and changes in real estate tax rates
and other operating expenses. The Company's principal assets will consist of
real property, and real estate values are sensitive to changes in local market
and economic conditions and to fluctuations in the economy as a whole. In
addition, due in part to the strong correlation between the lodging industry's
performance and economic conditions, the lodging industry is subject to
cyclical changes in revenues and profits. These risks may be exacerbated by
the relatively illiquid nature of real estate holdings. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. There can be no assurance that downturns or
prolonged adverse conditions in real estate or capital markets or in national
or local economies, and the inability of the Company to dispose of an
investment when it finds disposition to be advantageous or necessary, will not
have a material adverse impact on the Company.
COMPETITION IN THE LODGING INDUSTRY
There is no single competitor or small number of competitors of the Company
that is or are dominant in the economy extended stay market. However, some of
the Company's indirect competitors have substantially larger networks of
locations and greater financial resources than the Company. A number of major
lodging companies recently have announced their intent to aggressively develop
extended stay lodging properties which may compete with the Company's
properties. Competition in the U.S. lodging industry is based generally on
convenience of location, price, range of services and guest amenities offered,
and quality of customer service. The Company considers the location of its
lodging facilities, the reasonableness of its room rates, and the services and
guest amenities provided by it to be among the most important factors in its
business. Demographic or other changes in one or more of the Company's markets
could impact the convenience or desirability of the sites of certain lodging
facilities, which would adversely affect their operations. Further, there can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services, or amenities or significantly
expand or improve facilities in a market in which the Company's facilities
compete, thereby adversely affecting the Company's operations. See "Business--
Competition."
RISKS ASSOCIATED WITH ACQUISITIONS
Although the Company expects that the construction and development of new
extended stay lodging facilities will be its primary means of expansion, the
Company has also made, and may continue making, acquisitions of existing
extended stay lodging facilities or other properties that are suitable for
conversion to the extended stay concept. There can be no assurance that the
Company will be able to acquire other extended stay lodging facilities on
terms favorable to the Company. When the Company does make such acquisitions,
it encounters various associated risks, including possible environmental and
other regulatory costs, goodwill amortization, diversion of management's
attention, and unanticipated problems or liabilities, some or all of which
could have a material adverse effect on the Company's operations and financial
performance.
RISKS OF BORROWING
The Company expects to incur substantial borrowings in connection with its
expansion. Pursuant to an existing mortgage facility and a mortgage facility
the Company expects to enter into, the Company may be able to borrow up to
$400 million to finance its properties, depending on certain conditions. This
compares to total equity of $291.6 million as of March 31, 1996, including
assumed net proceeds from this offering of approximately $124.0 million and
the issuance of shares of Common Stock in connection with the proposed
acquisition of the KHEC Facility. These borrowings will be secured by
mortgages on the Company's properties and various accounts and other assets.
The Company may incur additional debt from time to time. See "--Need for
Additional Capital." Leverage increases the risks to the Company of any
variations in its results, construction cost overruns, or any other factors
affecting its cash flow or liquidity. In addition, the Company's interest
costs could increase as the result of general increases in interest rates
because a portion of the Company's borrowings under these facilities will bear
interest at floating rates, the rates on individual term loans under these
facilities will depend on the level of prevailing yields on U.S. Treasury
securities at the times loans are made, and additional borrowings may bear
interest at floating rates. See "Financing."
7
<PAGE>
NEED FOR ADDITIONAL CAPITAL
The extent to which the Company will be able to borrow under mortgage
facilities will be dependent on the Company meeting certain conditions and
maintaining certain reserves. In addition, the mortgage facilities may
restrict the ability of the Company to incur additional debt in the future.
Although the Company is unable to quantify its needs for additional financing,
the Company expects that it will need to procure additional financing over
time, the amount of which will depend on a number of factors including the
number of properties the Company constructs or acquires and the cash flow
generated by its properties. There can be no assurance regarding the
availability or terms of additional financing the Company may be able to
procure over time. Any future debt financings or issuances of preferred stock
by the Company will be senior to the rights of the holders of Common Stock,
and any future issuances of Common Stock will result in the dilution of the
then existing shareholders' proportionate equity interests in the Company.
RESTRICTIONS ON OPERATIONS IN MORTGAGE FACILITIES
The Company's financing arrangements contain a number of provisions that
impose restrictions on the Company which could, under certain circumstances,
limit the Company's operating and financial flexibility and adversely affect
its results of operations. These provisions include restrictions on the
ability of the Company to incur additional indebtedness, prepay indebtedness,
declare dividends, enter into certain financing arrangements, acquire or
dispose of certain assets, or make certain investments. In addition, the
Company's ability to utilize these mortgage facilities is subject to it
meeting certain conditions. See "Financing."
NEW MANAGEMENT
Since its formation in January 1995, the Company has recruited a management
team, most of whom have had no prior experience in the lodging industry. The
Company's success depends upon the ability of these individuals to develop
expertise in managing such business. See "Management--Directors and Officers."
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances, and
regulations. In addition, in the event any future legislation is adopted, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. The Company attempts
to minimize its exposure to potential environmental liability through its
site-selection procedures. The Company typically secures an option to purchase
land subject to certain contingencies. Prior to exercising such option and
purchasing the property, the Company conducts a Phase I environmental
assessment (which generally involves a physical inspection and database
search, but not soil or groundwater analyses). Under various federal, state,
and local environmental laws, ordinances, and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under, or in such
property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In addition, the presence of contamination from hazardous or
toxic substances, or the failure to properly remediate such contaminated
property, may adversely affect the owner's ability to borrow using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is or ever was owned or operated by such person. Certain
environmental laws and common-law principles could be used to impose liability
for releases of hazardous materials, including asbestos-containing materials
("ACMs"), into the environment, and third parties may seek recovery from
owners or operators of real properties for personal injury associated with
exposure to released ACMs or other hazardous materials. Environmental laws
also may impose restrictions on the manner in which property may be used or
transferred or in which businesses may be operated, and these restrictions may
require expenditures. In connection with the ownership of its properties, the
Company may be potentially liable for any such costs. The
8
<PAGE>
cost of defending against claims of liability or remediating contaminated
property and the cost of complying with environmental laws could materially
adversely affect the Company's results of operations and financial condition.
LOSSES IN EXCESS OF INSURANCE COVERAGE
The Company intends to maintain comprehensive insurance on each of its
properties, including liability, fire, and extended coverage, in the types and
amounts customarily obtained by an owner and operator in the Company's
industry. Nevertheless, there are certain types of losses, generally of a
catastrophic nature, such as hurricanes, earthquakes, and floods, that may be
uninsurable or not economically insurable. The Company uses its discretion in
determining amounts, coverage limits, and deductibility provisions of
insurance, with a view to obtaining appropriate insurance on the Company's
properties at a reasonable cost and on suitable terms. This may result in
insurance coverage that in the event of a loss would not be sufficient to pay
the full current market value or current replacement value of the Company's
lost investment and the insurance proceeds received by the Company might not
be adequate to restore its economic position with respect to such property.
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly Mr. George
D. Johnson, Jr., President and Chief Executive Officer, and Mr. Robert A.
Brannon, Senior Vice President and Chief Financial Officer. The loss of the
services of any of these individuals could have a material adverse effect upon
the Company. See "Management--Directors and Officers." The Company does not
have employment or consulting agreements with any of its officers other than
Mr. Harold E. Wright nor does it carry key man life insurance on any of its
officers.
CONTROL OF THE COMPANY BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
As of March 31, 1996, George D. Johnson, Jr., H. Wayne Huizenga, and Stewart
H. Johnson beneficially owned approximately 47.6% of the outstanding shares of
Common Stock of the Company and these individuals together with other
executive officers and directors of the Company as a group owned approximately
56.3% of the outstanding shares of Common Stock. By reason of such holdings,
such shareholders acting as a group will be able to effectively control the
affairs and policies of the Company and will be able to elect a sufficient
number of directors to control the Company's Board of Directors and to approve
or disapprove any matter submitted to a vote of the shareholders, including
certain fundamental corporate transactions (such as certain mergers and sales
of assets) requiring shareholder approval. See "Principal Shareholders." In
addition, the Company's debt agreements contain, and future financing
arrangements may contain, provisions regarding the composition of the
Company's Board of Directors. See "Financing."
ANTITAKEOVER EFFECT OF CHARTER, BYLAWS, STATUTORY PROVISIONS, AND FINANCING
ARRANGEMENTS
The ownership positions of Messrs. George D. Johnson, Jr., H. Wayne
Huizenga, and Stewart H. Johnson and the other executive officers and
directors of the Company as a group, together with the anti-takeover effects
of Section 203 of the Delaware General Corporation Law which, in general,
imposes restrictions upon acquirors of 15% or more of the Common Stock, and of
certain provisions in the Company's Certificate of Incorporation and Bylaws,
may have the effect of delaying, deferring, or preventing a change of control
of the Company, even if such event would be beneficial to shareholders. For
example, the Certificate of Incorporation requires that all shareholder action
must be effected at a duly-called annual or special meeting of shareholders,
and the Bylaws require that shareholders follow an advance notification
procedure for certain shareholder nominations of candidates for the Board of
Directors and for certain other business to be conducted at any meeting of
shareholders. In addition, the Company's Certificate of Incorporation
authorizes "blank check" preferred stock, so that the Company's Board of
Directors may, without shareholder approval, issue preferred shares through a
shareholders rights plan or otherwise which could inhibit a change of control.
In the event that the current
9
<PAGE>
members of the Company's Board of Directors cease to constitute a majority of
the Board or either Mr. George D. Johnson, Jr. or Mr. Huizenga cease to be a
member of the Board, amounts outstanding under its financing arrangements
would become immediately due. See "Principal Shareholders," "Financing," and
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
At March 31, 1996, the Company had 22,853,092 shares of Common Stock
outstanding, 7,850,062 of which were freely tradeable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act of
1933, as amended (the "Securities Act")) without restriction or registration
under the Securities Act. The remaining 15,003,030 shares of Common Stock will
become eligible for sale in the public market at various times, subject to
compliance with an exemption from the registration requirements of the
Securities Act, such as Rule 144 or Rule 144A, or registration under the
Securities Act. The holders of these shares have agreed that they will not
sell any shares of Common Stock held by them until June 11, 1996 without the
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), one of
the representatives of the Underwriters, subject to certain exceptions,
including pursuant to a foreclosure by a lender on a loan for which shares of
Common Stock have been pledged as collateral. The Company has registered under
the Securities Act all of those 15,003,030 shares of Common Stock so that such
shareholders may make resales in the public market of their Common Stock upon
expiration of their lock-up agreements described above. The holders of
approximately 13.3 million shares of Common Stock (including all shares
beneficially owned by the Company's directors and executive officers) have
agreed that they will not sell any shares of Common Stock for a period of 90
days from the date of this Prospectus without the consent of DLJ, subject to
exceptions similar to those contained in their prior lock-up agreements. The
Company also has registered under the Securities Act 4,000,000 shares of
Common Stock which may be issued from time to time in connection with
potential future acquisitions of various businesses and resales of such shares
by the recipients thereof, and the Company has issued an aggregate of 722,237
of such shares of Common Stock and expects to issue approximately 116,000
shares of Common Stock in connection with the proposed acquisition of the KHEC
Facility. See "Recent Developments." The Company also intends to register
under the Securities Act all shares reserved for issuance under the 1995 Plan,
the 1996 Plan, and the Directors' Plan (each as defined below and collectively
the "Option Plans"). Shares so registered could be sold in the public market.
No predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for sale will have on the market
price for shares of Common Stock prevailing from time to time. Sales of
substantial amounts of shares of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of equity
securities. See "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company intends to retain its earnings to finance its growth and for
general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's debt
agreements contain, and future financing agreements may contain, limitations
on the payment of cash dividends or other distributions of assets. See
"Dividend Policy."
10
<PAGE>
RECENT DEVELOPMENTS
On January 26, 1996, the Company acquired substantially all of the assets of
Apartment/Inn, L.P., a Georgia limited partnership ("Apartment/Inn").
Apartment/Inn owned and operated a 196-room economy extended stay lodging
facility in Norcross, Georgia which is similar in concept to the Company's
lodging facilities. In consideration for such acquisition, the Company issued
an aggregate of 293,629 shares of Common Stock. The acquisition was accounted
for using the purchase method of accounting. For historical and pro forma
financial information concerning this acquisition, see "Index to Financial
Statements--Apartment/Inn, L.P." and "--Pro Forma Financial Statements of
Extended Stay America, Inc. and Subsidiaries."
On February 23, 1996, the Company acquired substantially all of the assets
of Hometown Inn I, LTD and Hometown Inn II, LTD (collectively "Hometown Inn").
Hometown Inn owned and operated a 130-room economy extended stay lodging
facility in Norcross, Georgia and a 144-room economy extended stay lodging
facility in Riverdale, Georgia, both of which are similar in concept to the
Company's lodging facilities. In consideration for such acquisition, the
Company issued 428,608 shares of Common Stock and paid an additional $75,000
in cash. The acquisition was accounted for using the purchase method of
accounting. For historical and pro forma financial information concerning this
acquisition, see "Index to Financial Statements--Hometown Inn I, LTD and
Hometown Inn II, LTD" and "--Pro Forma Financial Statements of Extended Stay
America, Inc. and Subsidiaries."
On April 23, 1996, the Company entered into an agreement to acquire
substantially all of the assets of American Apartmen-Tels Investors II, L.P.
("AATI") which owns and operates a 59-room extended stay lodging facility in
Lenexa, Kansas for a purchase price of approximately $3.3 million in cash.
This purchase includes adjacent land on which the Company intends to build a
new 60-room economy extended stay lodging facility. On May 1, 1996, the
Company also entered into an agreement to acquire the KHEC Facility, a 145-
room traditional lodging facility located in Lakewood, Colorado, which the
Company intends to remodel and convert to the economy extended stay format.
The purchase price will be approximately $3.0 million, which the Company
expects to pay by delivering shares of Common Stock. The Company expects to
account for these acquisitions using the purchase method of accounting.
Consummation of these proposed acquisitions is subject to a number of
conditions.
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $124.0 million ($142.6 million if the Underwriters' over-
allotment option is exercised in full) assuming a public offering price of
$26.00 per share (the closing sale price of the Common Stock on May 2, 1996 on
the Nasdaq National Market) and after deduction of the estimated underwriting
discounts and commissions and other offering expenses. The Company intends to
use substantially all of such net proceeds to expand its business by
developing additional economy extended stay lodging facilities and for other
general corporate purposes. Pending use of the proceeds as set forth above,
they will be invested in short-term interest bearing investments.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock began trading in the Nasdaq National Market on December 14,
1995. The following table sets forth, for the periods indicated, the high and
low sale prices of the Common Stock as quoted on the Nasdaq National Market.
On May 2, 1996, the last reported sale price of the Common Stock on the Nasdaq
National Market was $26 per share. At March 31, 1996, there were approximately
150 record holders and approximately 3,500 beneficial holders of Common Stock.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
---------------
HIGH LOW
<S> <C> <C>
Year Ended December 31, 1995:
Fourth Quarter (from December 14, 1995)................. $28 $20 1/4
Year Ended December 31, 1996:
First Quarter........................................... 31 1/4 20
Second Quarter (through May 2, 1996).................... 27 1/4 22
</TABLE>
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock, and the Board of
Directors intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes and, therefore, does not anticipate
paying any such dividends in the foreseeable future. In addition, the
Company's debt agreements contain, and future financing agreements may
contain, a minimum net worth covenant and limitations on payment of any cash
dividends or other distributions of assets, which covenants and limitations
could restrict the Company's ability to pay dividends. See "Financing."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to give pro forma effect to this offering (based upon
an assumed offering price of $26.00 per share) and the acquisition of the KHEC
Facility. This table should be read in conjunction with the selected financial
data, the historical and pro forma financial statements of the Company, and
the related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL PRO FORMA
<S> <C> <C>
Long-term debt(1)............................ $ 0 $ 0
Shareholders' equity:
Preferred Stock, par value $.01 per share,
10,000,000 shares authorized; no shares
issued and outstanding.................... 0 0
Common Stock, par value $.01 per share,
200,000,000 shares authorized; 22,853,092
shares issued and outstanding; 27,969,438
shares issued and outstanding pro forma... 228,531 279,694
Additional paid-in capital................. 166,041,256 293,015,093
Accumulated deficit........................ (1,736,732) (1,736,732)
------------ ------------
Total shareholders' equity(2)............ 164,533,055 291,558,055
------------ ------------
Total capitalization..................... $166,369,727 $293,394,727
============ ============
</TABLE>
- ---------------------
(1) Does not give effect to future borrowings.
(2) Excludes 2,436,258 shares of Common Stock subject to issuance upon
exercise of outstanding stock options and 1,980,802 additional shares
reserved for issuance under the Option Plans at March 31, 1996.
12
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
historical and pro forma financial statements of the Company and from the
historical financial statements of Welcome Inn America 89-1, L.P. ("Welcome").
The selected financial data for Welcome is included because Welcome may be
deemed to be a predecessor of the Company. The historical financial statements
of the Company for the year ended December 31, 1995 have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon
appears elsewhere herein. The financial data for such year is not necessarily
indicative of results for subsequent periods. The pro forma data is unaudited
but, in the opinion of management, all pro forma adjustments necessary to
reflect the effects of these transactions have been made. The historical
financial statements of Welcome for the years ended December 31, 1992, 1993,
and 1994, and for the period from January 1, 1995 through August 18, 1995,
have been audited by Coopers & Lybrand L.L.P., independent accountants, whose
report for the years ended December 31, 1993 and 1994 and for the period from
January 1, 1995 through August 18, 1995 thereon appears elsewhere herein.
Operating statement data for the three months ended March 31, 1995 and 1996
and balance sheet data as of March 31, 1996 are derived from unaudited
financial statements of the Company included herein. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for the fair presentation
of its financial position and the results of its operations for these periods.
The selected financial data set forth below for the year ended December 31,
1991 has been derived from Welcome's unaudited internal financial statements
and reflects all adjustments which management considers necessary for a fair
and consistent presentation of the results of operations for that period.
These selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the historical and pro forma financial statements and related notes thereto of
the Company and the historical financial statements and related notes thereto
of Welcome, Apartment/Inn, Hometown Inn, and KHEC contained elsewhere herein.
THE COMPANY
<TABLE>
<CAPTION>
FOR THE THREE
YEAR ENDED MONTHS ENDED FOR THE THREE MONTHS
DECEMBER 31, 1995 MARCH 31, 1995 ENDED MARCH 31, 1996
------------------------ -------------- --------------------------
PRO
ACTUAL FORMA(1) ACTUAL ACTUAL PRO FORMA(2)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenue............... $ 877,885 $6,983,658 $ $ 1,170,829 $ 1,889,586
Operating expenses.... 2,887,091 6,782,841 248,601 2,846,928 3,212,945
Depreciation and
amortization......... 146,726 1,041,514 203,343 298,780
Loss from operations.. (2,155,932) (840,697) (248,601) (1,879,442) (1,622,139)
Interest income....... 848,510 804,510 1,450,132 1,425,132
Income taxes.......... 0 0 0 0
Net loss.............. $ (1,307,422) $ (36,187) $ (248,601) $ (429,310) $ (197,007)
============ ========== ========== ============ ============
Net loss per share(3). $ (0.10) $ (0.00) $ (0.02) $ (0.02) $ (0.01)
============ ========== ========== ============ ============
Weighted average
number of shares of
common stock and
equivalents
outstanding(3)....... 12,652,110 13,834,129 11,489,017 22,467,393 22,969,438
============ ========== ========== ============ ============
<CAPTION>
AS OF
DECEMBER 31,
1995 AS OF MARCH 31, 1996
------------ --------------------------
ACTUAL ACTUAL PRO FORMA(4)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $123,357,510 $104,010,918 $226,010,918
Total assets.......... 149,618,649 166,369,727 293,394,727
Long-term debt(5)..... 0 0 0
Shareholders' equity.. 147,222,245 164,533,055 291,558,055
</TABLE>
13
<PAGE>
WELCOME INN AMERICA 89-1, L.P.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1995 THROUGH
------------------------------------------ AUGUST 18,
1991(6) 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenue............... $ 686,970 $ 866,314 $999,371 $1,079,287 $712,837
Operating expenses.... 503,508 502,611 557,002 561,746 367,217
Depreciation and
amortization......... 153,066 159,874 138,987 141,362 95,546
--------- --------- -------- ---------- --------
Income from
operations........... 30,396 203,829 303,382 376,179 250,074
Interest expense...... 470,698 398,650 382,306 360,639 272,152
--------- --------- -------- ---------- --------
Net income (loss)..... $(440,302) $(194,821) $(78,924) $ 15,540 $(22,078)
========= ========= ======== ========== ========
</TABLE>
- ---------------------
(1) Giving pro forma effect to the acquisition of the Acquired Facilities and
the Marietta Facility and the proposed acquisition of the KHEC Facility as
if they all had occurred at the beginning of the period and to the Company
operating as a publicly held entity as of such date. See the pro forma
financial statements and notes thereto and note 5 to the Company's
consolidated financial statements, all of which are contained elsewhere
herein.
(2) Giving pro forma effect to the acquisition of the Acquired Facilities and
the proposed acquisition of the KHEC Facility as if they had occurred at
the beginning of the period. See the pro forma financial statements and
notes thereto and note 5 to the Company's consolidated financial
statements, all of which are contained elsewhere herein.
(3) See notes 2 and 5 to the Company's consolidated financial statements
contained elsewhere herein.
(4) Giving pro forma effect to the proposed acquisition of the KHEC Facility
and this offering as if they occurred on March 31, 1996. See the pro forma
financial statements and notes thereto contained elsewhere herein.
(5) Does not give effect to future borrowings.
(6) The Marietta Facility commenced operations in February 1991.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in January 1995 to develop, own, and manage
extended stay lodging facilities. The Company began construction of its first
lodging facility in Spartanburg, South Carolina on February 1, 1995. This
facility was completed and commenced operations in August 1995. The Company's
activities during the quarter ended March 31, 1995 consisted of corporate
organization, site selection, and site development. The Company did not have
operating facilities or other revenue sources during the quarter ended March
31, 1995. On May 1, 1995, the Company contracted to manage an extended stay
facility in Marietta, Georgia which was subsequently acquired by the Company
on August 18, 1995. On August 18, 1995 the Company also issued 11,718,000
shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common
Stock in exchange for net proceeds of approximately $55.8 million. In October
1995, the Company executed a mortgage facility providing for up to $200
million in mortgage loans, which may be used to finance on a long-term basis
newly constructed facilities. The Company completed the Prior Offerings in
December 1995 from which it received net proceeds of approximately $85
million.
As of March 31, 1996 the Company had 5 operating facilities, 17 facilities
under construction, and options to purchase 64 sites for development in 23
states. The Company expects to complete the construction of the facilities
currently under construction and to commence construction on the majority of
these sites under option during 1996. There can be no assurances, however,
that the Company will complete the acquisition of the sites under option or,
if acquired, commence construction during 1996 and the Company's ability to do
so may be materially impacted by various factors including zoning, permitting,
and environmental due diligence issues and weather-induced construction
delays.
Although the Company expects that the construction and development of new
extended stay lodging facilities will be its primary means of expansion, the
Company has also made, and may continue making, acquisitions of existing
extended stay facilities or other properties that are suitable for conversion
to the extended stay concept.
During the quarter ended March 31, 1996, the Company acquired three
operating facilities (two in Norcross, Georgia and one in Riverdale, Georgia).
On January 26, 1996, the Company acquired substantially all of the assets of
Apartment/Inn, which owned and operated a 196-room economy extended stay
lodging facility in Norcross, Georgia. In consideration for the acquisition,
the Company issued an aggregate of 293,629 shares of Common Stock. On February
23, 1996, the Company acquired substantially all of the assets of Hometown Inn
which owned and operated a 130-room economy extended stay lodging facility in
Norcross, Georgia and a 144-room economy extended stay lodging facility in
Riverdale, Georgia. In consideration for the acquisition, the Company issued
an aggregate of 428,608 shares of Common Stock and paid an additional $75,000
in cash. These acquisitions were accounted for using the purchase method of
accounting.
On April 23, 1996, the Company entered into an agreement to acquire
substantially all of the assets of AATI, which owns and operates a 59-room
extended stay lodging facility in Lenexa, Kansas, for a purchase price of
approximately $3.3 million in cash. This purchase includes adjacent land on
which the Company intends to build a new 60-room economy extended stay lodging
facility. On May 1, 1996, the Company also entered into an agreement to
acquire from KHEC a 145-room traditional lodging facility located in Lakewood,
Colorado, which the Company intends to remodel and convert to the economy
extended stay format. The purchase price will be approximately $3.0 million,
which the Company expects to pay by delivering shares of Common Stock. The
Company will account for these acquisitions using the purchase method of
accounting. Consummation of these proposed acquisitions is subject to a number
of conditions.
15
<PAGE>
RESULTS OF OPERATIONS
PROPERTY OPERATIONS
Property operations for the year ended December 31, 1995 included the
Spartanburg, South Carolina property from the date of opening on August 1,
1995 and the Marietta, Georgia facility from the date of acquisition on August
18, 1995. These properties realized average occupancy of 83% and average
weekly room rates of $198 for their periods of operation by the Company during
1995. The Company did not have operating facilities during the quarter ended
March 31, 1995. The Company began the quarter ended March 31, 1996 with two
operating facilities and acquired three additional operating facilities during
that quarter. During the period owned by the Company, these properties
realized average occupancy of 90% and average weekly room rates of $198 during
the quarter ended March 31, 1996.
The Company recognized total room revenues of $817,133, along with other
revenues, consisting of telephone and vending revenues which vary based on
occupancy, of $42,977 during 1995. Total room revenues for the quarter ended
March 31, 1996 were $1,137,841 and other revenues were $32,988. Property
operating expenses, consisting of all expenses directly allocable to the
operation of the properties but excluding any allocation of corporate
operating expenses and depreciation, were $332,523 or 38.7% of total revenues
for 1995 and $442,540 or 37.8% of total revenues for the quarter ended March
31, 1996.
Depreciation of the cost of the facilities was provided using the straight-
line method over the estimated useful lives of the properties. The provision
for the period ended December 31, 1995 was $126,772 and the provision for the
quarter ended March 31, 1996 was $193,113. These provisions reflect a pro-rata
allocation of the annual depreciation charge for the period for which the
properties were in operation.
CORPORATE OPERATIONS
The Company realized management fees of $17,775 in 1995 from its management
of the Marietta facility prior to its acquisition of that facility. The
Company has not managed properties for a fee since that property was acquired.
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of facilities. Expenses
of $2,042,039 for the year ended December 31, 1995, $1,580,655 for the quarter
ended March 31, 1996, and $195,823 for the quarter ended March 31, 1995
consist primarily of personnel expenses, professional and consulting fees, and
related travel expenses. The increase in corporate operating and property
management expenses for the quarter ended March 31, 1996 as compared with the
quarter ended March 31, 1995 reflects an increase in personnel and related
expenses in connection with the Company's increased level of operating
properties and site development. The total amount of these expenses will
increase in the future with the development of additional facilities.
Site selection costs of $512,529 for the year ended December 31, 1995,
$823,733 for the quarter ended March 31, 1996 and $52,778 for the quarter
ended March 31, 1995 consist of real estate and construction personnel costs
which are not directly related to a site that will be developed by the
Company, along with expenditures made to third parties for services and costs
related to the investigation of such sites. The increase in these costs for
the quarter ended March 31, 1996 as compared with the quarter ended March 31,
1995 reflects the increased level of sites under development. These costs will
continue in the future and could increase depending on the rate of expansion
because the Company's development personnel must evaluate numerous potential
sites in an effort to identify sites meeting the Company's standards.
Depreciation and amortization in the amount of $19,954 for the year ended
December 31, 1995, and $10,230 for the quarter ended March 31, 1996 were
provided using the straight-line method over the estimated useful lives of the
assets for assets not directly related to the operation of the facilities,
including primarily organization costs and office furniture and equipment.
These assets were acquired subsequent to March 31, 1995 and therefore no
provision for depreciation and amortization was made for the quarter ended
March 31, 1995.
16
<PAGE>
The Company realized $848,510 of interest income during the year ended
December 31, 1995 and $1,450,132 during the quarter ended March 31, 1996 which
was primarily attributable to the short-term investment of funds received from
the initial capitalization of the Company in the third quarter of 1995 and the
consummation of the Prior Offerings on December 19, 1995. There were no funds
held for investment by the Company during the quarter ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
From the inception of the Company in January 1995 through August 18, 1995,
the Company's operations were financed primarily by loans from the Company's
two largest shareholders in an aggregate amount of approximately $6.1 million.
These loans accrued interest at an annual rate of 8.75% with such interest
being capitalized as a cost of development of the Spartanburg, South Carolina
facility. The loans were repaid in full in August 1995 from the proceeds of
$55.8 million received upon the issuance of 11,718,000 shares (adjusted to
reflect a 210-for-1 stock split in October 1995) of Common Stock. In December
1995, the Company completed the Prior Offerings from which the Company
received net proceeds of approximately $85 million upon the issuance of
7,127,825 shares of Common Stock.
The Company had cash balances of $123.4 million as of December 31, 1995 and
$104.0 million as of March 31, 1996. Substantially all of the cash balances as
of December 31, 1995 and March 31, 1996 were invested in an overnight sweep
account with a commercial bank which invests in short-term, interest bearing
reverse repurchase agreements for U.S. government securities. The market value
of the securities held pursuant to the agreements approximates the carrying
amount. In consideration for the three existing facilities acquired by the
Company in the quarter ended March 31, 1996, the Company issued Common Stock
valued at approximately $17.9 million and paid cash, including the payment of
related expenses, of approximately $356,000. In addition, approximately $15.4
million was used to acquire land and develop and furnish the 17 sites under
construction during the quarter. This compares to approximately $281,000 used
to develop one property during the first quarter of 1995. A total of
approximately $2.7 million, less refunds of site deposits of $240,000, was
used for site deposits and preacquisition costs in the three months ended
March 31, 1996, compared to approximately $120,000 used for such costs in the
comparable prior year period.
The Company expects to finance the construction and development of its
lodging facilities principally with its cash balances and with loans under
mortgage facilities. The Company has an existing mortgage facility (the
"Existing Mortgage Facility") which provides for up to $200 million in loans,
subject to certain conditions and limitations, for facilities after completion
of construction. The Company also has received a commitment for a new mortgage
facility which is expected to provide up to $300 million in mortgage
financing, subject to certain conditions and limitations, for completed
facilities. The Company expects that, upon completion of this new mortgage
facility, it will reduce the size of the Existing Mortgage Facility to $100
million. See "Financing."
The Company in the future may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue corporate debt
instruments. Any debt incurred or issued by the Company may be secured or
unsecured, with a fixed or variable interest rate, and may be subject to such
terms as the Board of Directors of the Company deems prudent. The Company
expects that it will need to procure additional financing over time, although
there can be no assurance that such financing will be available when needed.
SEASONALITY AND INFLATION
Based upon the operating history of the Company's facilities, management
believes that extended stay lodging facilities are not as seasonal in nature
as the overall lodging industry. Management does expect, however, that
occupancy and revenues may be lower than average during the months of December
and January due to the holiday season. Because many of the Company's expenses
do not fluctuate with occupancy, such declines in occupancy may cause
fluctuations or decreases in the Company's quarterly earnings.
17
<PAGE>
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenue or operating results of the
Company from its inception on January 9, 1995. There can be no assurance,
however, that inflation will not affect future operating or construction costs.
See "Risk Factors--Development Risks."
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement No.
121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This statement requires the Company to
identify properties for which it has committed to an exit plan or which may be
otherwise impaired. The fixed assets for such properties must be written down
to fair market value. The Company anticipates that the adoption of SFAS 121,
required for fiscal years beginning after December 15, 1995, will not result in
a reduction of net fixed assets or an increase in expenses in the fiscal year
1996 statement of operations.
The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation", effective for fiscal years beginning after December
15, 1995. Under SFAS 123, companies are encouraged but not required to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value accounting rules. Companies
that choose not to record compensation expense under the new rules will be
required to disclose pro forma net income and earnings per share under the new
method. The Company has not yet determined the financial statement impact of
SFAS 123 and has elected not to recognize the impact of this pronouncement in
its fiscal 1995 statement of operations, but will disclose as required in the
fiscal 1996 financial statements on a pro forma comparative basis the effect of
SFAS 123 on net income and earnings per share.
18
<PAGE>
BUSINESS
OVERVIEW
Extended Stay America, Inc. was organized in January 1995 to develop, own,
and manage extended stay lodging facilities which are designed to appeal to
value-conscious guests. The Company's facilities are designed to offer quality
accommodations for guests at substantially lower rates than most other extended
stay lodging providers and hotels in the economy segment of the traditional
lodging industry. They feature fully furnished rooms which are generally rented
on a weekly basis to guests such as business travelers (particularly those with
limited expense accounts), professionals on temporary work assignment, persons
between domestic situations, and persons relocating or purchasing a home, with
most guests staying for multiple weeks. The Company's facilities provide a
variety of features that are attractive to the extended stay guest such as a
fully-equipped kitchenette, weekly housekeeping with twice-weekly towel
service, color television with cable or satellite hook-up, coin laundromat, and
telephone service with voice mail messaging. To help maintain affordability of
room rates, labor intensive services such as daily cleaning, room service, and
restaurants are not provided.
The extended stay category is one of the most rapidly evolving sectors of the
U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay
rooms increased at a compounded annual growth rate of approximately 3.3%,
compared with compounded annual room growth of approximately 1.4% for the
overall lodging industry over the same period. However, the vast majority of
these rooms have been developed in the high-price end of the category. The
economy extended stay sector of the lodging industry appears to present a
number of attractive characteristics compared to traditional hotels, including
higher occupancy rates and operating margins. Based on published occupancy
rates for other participants in the extended stay market, the Company believes
that demand in the economy extended stay market is greater, relative to supply,
than in the lodging industry generally. The Company is not aware of any
operator who serves the economy extended stay market niche on a national level.
The Company's goal is to become a national provider of economy extended stay
lodging. The Company intends to achieve this goal by rapidly developing
properties in selected markets, providing high value accommodations for its
guests, actively managing its properties to increase revenues and reduce
operating costs, and increasing awareness of the economy extended stay concept.
Through May 1, 1996, the Company had developed and opened three facilities,
acquired four others, and had agreements to acquire two additional facilities.
As of such date, the Company had 19 facilities under construction,
substantially all of which the Company expects to have opened by the end of
1996. The Company plans to begin construction of approximately 45 additional
facilities during the remainder of 1996 and to continue an active development
program thereafter. The Company's plans call for the average facility to have
approximately 125 extended stay rooms and to take approximately 7-9 months to
construct.
The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who
are the two largest shareholders of the Company. Mr. Johnson, who is the
President and Chief Executive Officer of the Company, was formerly the
President of the Consumer Products Division of Blockbuster Entertainment Group,
a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of
Directors of the Company, is the Chairman and Chief Executive Officer of
Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and
Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation
("Blockbuster"). The Company's management team has extensive experience in the
acquisition and development of real estate and the operation of properties on a
national scale.
GROWTH AND DEVELOPMENT STRATEGY
The Company's goal is to become a national provider of economy extended stay
facilities. The Company plans to rapidly develop new economy extended stay
lodging facilities. Although the Company expects that the construction and
development of new extended stay lodging facilities will be its primary means
of expansion, the Company has also made, and may continue making, acquisitions
of existing extended stay lodging facilities or other properties that are
suitable for conversion to the extended stay concept.
19
<PAGE>
Through May 1, 1996, the Company has developed and opened three economy
extended stay facilities and acquired four other facilities since the Company
began operations in 1995. As of such date, the Company had 19 facilities under
construction, substantially all of which the Company expects to have opened by
the end of 1996. The Company plans to begin construction of approximately 45
additional facilities during 1996 and to continue an active development program
thereafter. The Company's strategy is to identify regions of the country that
contain the demographic factors necessary to support one or more economy
extended stay lodging facilities and to focus its development in those regions
in order to obtain the maximum benefit from operational efficiencies. The
Company expects target sites will generally have a large and/or growing
population in the surrounding area with a large employment base. Such sites
also are generally expected to have good visibility from a major traffic artery
and be in close proximity to convenience stores, restaurants, and shopping
centers.
For the economy extended stay facilities developed and opened by the Company
in Spartanburg, South Carolina, Columbia, South Carolina, and Downers Grove,
Illinois, the average development cost was approximately $5.1 million with an
average of 133 rooms. The cost to develop a facility varies significantly by
geographic location. For the nineteen facilities that were under construction
as of May 1, 1996, the estimated average cost is approximately $4.6 million
with an average of approximately 125 rooms. The cost of these facilities is
expected to vary from a low of approximately $3.7 million to a high of $5.9
million with the number of rooms ranging from a low of 111 to a high of 150.
Sites for development are selected by the Company's real estate
professionals, subject to review and approval by senior management. The Company
currently maintains offices in Spartanburg, South Carolina, Park Ridge,
Illinois, Bellevue, Washington, Morristown, New Jersey, El Segundo, California,
San Rafael, California, and Phoenix, Arizona for these real estate
professionals and the construction supervisors for the region. The Company
expects to open regional offices in other geographic areas in the future as the
Company increases the number of regions in which it is focusing its
development. The Company utilizes independent general contractors for the
construction of its lodging facilities and is using a number of such
contractors depending upon geographic area, costs of construction, and
financial and physical capacities of the contractors. The Company's
construction personnel will oversee the progress of construction on a regular
basis during the development cycle.
Certain members of the Company's management team have extensive experience in
the rapid development of standardized commercial properties nationwide. In
connection with past development activities, in particular the nationwide roll-
out of Blockbuster video stores, these individuals were responsible for site
selection, construction management, and subsequent operation of hundreds of
locations.
OPERATING STRATEGY
The Company's business strategy is to develop the economy extended stay
concept by providing an affordable and attractive lodging alternative for
value-conscious travelers looking for extended stay accommodations. The
Company's goal is to provide its guests with the level of amenities needed to
optimize room and occupancy rates while maintaining high operating margins at
its facilities. The Company attempts to achieve this goal through the
following:
Appeal to Value Conscious Guests. The Company's facilities are designed
to offer quality accommodations for guests at substantially lower rates
than most other extended stay lodging providers and hotels in the economy
segment of the traditional lodging industry. As of May 1, 1996, the
Company's facilities offered extended stay accommodations for $169 to $269
per week. Room rates at the Company's facilities may vary significantly
depending upon market factors affecting such locations. These rates
contrast with average weekly rates of approximately $546 for traditional
extended stay hotels and approximately $332 for hotels in the economy
segment of the lodging industry.
Lodging Facility Features. The Company's facilities contain a variety of
non-labor intensive features that are attractive to the extended stay guest
such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly
towel service, color television with cable or satellite hook-up, coin
laundromat, and telephone service with voice mail messaging.
20
<PAGE>
Standardized Concept. The Company has developed standardized plans and
specifications for its facilities which should lower construction and
purchasing costs and establish uniform quality and operational standards.
The Company also expects to benefit from the experience of various members
of the Company's management team in developing numerous commercial
properties to a uniform set of design standards and in operating systems on
a cost-effective basis.
Operating Efficiencies. The Company believes that the design and price
level of its facilities attract guest stays of several weeks, which should
result in a more stable revenue stream and which, coupled with low-labor
amenities, could in turn lead to reduced administrative and operational
costs and higher operating margins. In addition, members of the Company's
management team have extensive experience in the utilization of
sophisticated control and information systems which should enable the
Company to manage, on a Company-wide basis, individual facility specific
factors such as pricing, payroll, and occupancy levels.
Each Company facility employs a property manager who is responsible for the
operations of the particular property. The property manager shares duties with
and oversees a staff typically consisting of an assistant manager, a desk
clerk, a maintenance person, and a housekeeping/laundry staff of approximately
8-10 persons (most of whom are part-time employees). The office at each
facility is generally open daily from 7:00 a.m. to 11:00 p.m., although an
employee normally is on duty twenty-four hours a day to respond to guests'
needs.
The majority of daily operational decisions are made by the property manager.
Each property manager is under the supervision of a regional manager who will
be responsible for five to ten facilities, depending on geographic location.
The regional manager oversees the performance of the property managers in such
areas as guest service, property maintenance, and payroll and cost control. The
corporate office utilizes state-of-the-art information systems to support its
regional managers. Each facility is measured against a detailed revenue and
expense budget, as well as against the performance of the Company's other
facilities. The Company is developing centralized pricing, purchasing,
marketing, and operational procedures in order to achieve operating
efficiencies.
The Company's current operating subsidiaries are ESA Development, Inc. ("ESA
Development") and ESA Properties, Inc. ("ESA Properties"), which acquire and
develop properties, and ESA Management, Inc. ("ESA Management"), which provides
construction and management services for all of the lodging facilities owned by
the Company and its subsidiaries. The Company expects that each lodging
facility will be owned by a separate single-purpose subsidiary formed for such
purpose. See "Financing."
LODGING FACILITIES
As of May 1, 1996, the Company had seven economy extended stay lodging
facilities in operation and nineteen facilities under construction in a total
of eleven states. The following table sets forth certain information regarding
the Company's lodging facilities that are in operation.
<TABLE>
<CAPTION>
DATE OPENED NUMBER
LOCATION OR ACQUIRED OF ROOMS
<S> <C> <C>
Spartanburg, South Carolina........................ August 1995 123
Marietta, Georgia.................................. August 1995 119
Norcross, Georgia.................................. January 1996 196
Norcross, Georgia.................................. February 1996 130
Riverdale, Georgia................................. February 1996 144
Columbia, South Carolina........................... April 1996 120
Downers Grove, Illinois............................ May 1996 154
</TABLE>
21
<PAGE>
The following table sets forth certain information regarding the Company's
lodging facilities that are under construction.
<TABLE>
<CAPTION>
PLANNED
ESTIMATED NUMBER
LOCATION OPENING DATE OF ROOMS
<S> <C> <C>
Greensboro, North Carolina................... Second Quarter 1996 129
Chesapeake, Virginia......................... Second Quarter 1996 132
Chattanooga, Tennessee....................... Second Quarter 1996 120
Sharonville, Ohio............................ Third Quarter 1996 130
Winston-Salem, North Carolina................ Third Quarter 1996 111
Charleston, South Carolina................... Third Quarter 1996 126
Virginia Beach, Virginia..................... Third Quarter 1996 120
Maryland Heights, Missouri................... Third Quarter 1996 150
Lexington, Kentucky.......................... Third Quarter 1996 126
Brentwood, Tennessee......................... Fourth Quarter 1996 120
Springdale, Ohio............................. Fourth Quarter 1996 126
Little Rock, Arkansas........................ Fourth Quarter 1996 120
Rolling Meadows, Illinois.................... Fourth Quarter 1996 125
Novi, Michigan............................... Fourth Quarter 1996 124
Louisville, Kentucky......................... Fourth Quarter 1996 120
Itasca, Illinois............................. Fourth Quarter 1996 125
Memphis, Tennessee........................... Fourth Quarter 1996 126
Greece, New York............................. Fourth Quarter 1996 125
Burr Ridge, Illinois......................... Fourth Quarter 1996 119
</TABLE>
The design plans for the Company's economy extended stay lodging facilities
call for a newly-constructed apartment style complex with two to three story
buildings containing an average of approximately 125 guest rooms with
laundromat and office areas. The Company utilizes both interior and exterior
corridor building designs, depending primarily on local zoning and weather
factors. Rooms generally offer approximately 250 to 300 square feet of fully
furnished living space, including a kitchenette and a dining/working area. The
kitchenette is fully-equipped with a refrigerator, stovetop, microwave, and
sink.
INDUSTRY OVERVIEW
TRADITIONAL LODGING INDUSTRY
The U.S. lodging industry is estimated to have generated approximately $51
billion in annual room revenues in 1995 and had approximately 3.3 million
rooms at the end of 1995. Over 60% of the industry's rooms are owned, managed,
or franchised by the 10 largest lodging chains.
Industry statistics, which the Company believes to be reliable, indicate
that the U.S. lodging industry's performance is strongly correlated to
economic activity. Room supply and demand historically have been sensitive to
shifts in economic growth, which has resulted in cyclical changes in average
daily room and occupancy rates. Overbuilding in the lodging industry in the
mid and late 1980s, when approximately 500,000 rooms were added, resulted in
an oversupply of rooms. The Company believes this oversupply and the general
downturn in the economy led to depressed industry performance and a lack of
capital available to the industry in the late 1980s and early 1990s.
The Company believes that the lodging industry has benefited from a
gradually improving supply and demand balance, evidenced by increased average
daily room and occupancy rates. Room supply growth in the lodging industry has
slowed in recent years as the industry absorbs the oversupply of rooms that
resulted from an average annual room supply growth of approximately 3.5% for
1988 through 1991. According to industry reports, which the Company believes
are reliable, this growth slowed to an average of 1.4% for 1992 through 1995.
The 3.1% average annual increase in demand (measured by occupied rooms) for
1992 through 1995 as
22
<PAGE>
compared to increases in supply during the same period reflects an improved
supply and demand balance in the industry. The Company believes these factors
were primarily responsible for the increase in industry occupancy rates from
61.7% for 1991 to 66.1% for 1995 and the increase in average daily room rates
from $58.11 for 1991 to $65.62 for 1995.
The lodging industry generally can be segmented by the level of service
provided and the pricing of the rooms. Segmentation by level of service is
divided into the following categories: full service hotels, which offer food
and beverage services, meeting rooms, room service, and similar guest services;
limited service hotels, which generally offer only rooms with amenities such as
swimming pools, continental breakfast, or similar limited services; and all-
suites, which generally have limited public spaces but provide guests with two
rooms or distinct partitioned areas and which may or may not offer food and
beverage service to guests. Segmentation by price level may generally be
divided into the following categories with the respective average daily room
rates for 1995: budget ($36), economy ($47), mid-price ($61), upscale ($80),
and luxury ($118).
The all-suites segment of the lodging industry is a relatively new segment,
having developed largely over the past 10 years, and is principally oriented
toward business travelers in the mid-price to upscale price levels. All-suite
hotels were developed partially in response to the increasing number of
corporate relocations, transfers, and temporary assignments and the need of
business travelers for more than just a room. To address those needs, all-suite
hotels began to offer suites with additional space and, in some cases, an
efficiency kitchen, and guests staying for extended periods of time were
offered discounts to daily rates when they paid on a weekly or monthly basis.
Because of the perceived positive price/value relationship, all-suite hotels
have generally outperformed the lodging industry as a whole over the last five
years.
EXTENDED STAY MARKET
The Company believes that the extended stay market, in which the Company
participates, is a continuation of the all-suites phenomenon, and that the same
price/value relationship which has enabled the all-suites segment to achieve
higher than industry average occupancy rates and operating margins will also
carry through to the extended stay market. Demand for extended stay lodging has
been stimulated by the economic and social changes resulting from the increased
volume of corporate reorganizations and trends toward down-sizing and out-
sourcing of various functions, the break-up and geographic dispersion of the
traditional family, and technological improvements which have allowed
businesses to relocate outside of large metropolitan areas. These changes have
created new accommodation needs for, among others, corporate executives and
trainees, consultants, sales representatives, construction workers, and people
in between jobs or houses. The extended stay category is one of the most
rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the
number of dedicated extended stay rooms has increased at a compounded annual
growth rate of approximately 3.3%, compared with compounded annual room growth
of approximately 1.4% for the overall lodging industry over the same period.
However, the vast majority of these rooms have been developed in the high-price
end of the category.
ECONOMY EXTENDED STAY CONCEPT
Economy extended stay lodging competes on the basis of price compared to the
extended stay market generally, thereby providing an economic inducement to
guests who are already attracted to the extended stay concept. In addition,
economy extended stay lodging provides a new and affordable lodging alternative
for guests who are value conscious, have lower incomes, or are on limited
expense accounts. Based on published occupancy rates for other participants in
the extended stay market, the Company believes that there is a strong demand
for economy extended stay accommodations and that there is little organized
competition for that business on a national or regional basis. Of the
approximately 3.3 million total available rooms in the U.S. lodging industry at
the end of 1995, there were approximately 38,000, or 1.2%, dedicated extended
stay rooms at approximately 325 separate properties. More than two-thirds of
these extended stay properties were controlled by only two other competitors,
both of which are priced toward the upscale segment of the extended stay
market.
23
<PAGE>
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service levels,
convenience of location, reputation, reservation systems, name recognition, and
supply and availability of alternative lodging in local markets, including
short-term lease apartments. The Company's facilities compete with a number of
competitors, including budget and economy segment hotels and other companies
focusing on the extended stay market. All of the Company's existing facilities
are located in developed areas that include competing lodging facilities. In
addition, each of the Company's proposed facilities is likely to be located in
an area that includes competing facilities. The number of competitive lodging
facilities in a particular area could have a material adverse effect on the
levels of occupancy and average weekly room rates of the Company's existing and
future facilities.
The Company anticipates that competition within the economy extended stay
lodging market will increase as participants in other segments of the lodging
industry and others focus on this relatively new market. A number of major
lodging companies recently have announced their intent to aggressively develop
extended stay lodging properties which may compete with the Company's
properties. Numerous other extended stay lodging facilities exist, most of
which are oriented toward the upscale segment. The Company may compete for
development sites with established entities which have greater financial
resources than the Company and better relationships with lenders and sellers.
These entities may generally be able to accept more risk than the Company can
prudently manage. Further, there can be no assurance that new or existing
competitors will not significantly reduce their rates or offer greater
convenience, services, or amenities or significantly expand, improve, or
develop facilities in a market in which the Company competes, thereby adversely
affecting the Company's operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment a
hazardous substance at a property owned by another may be liable for the costs
of removal or remediation of hazardous substances released into the environment
at that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's ability to sell
such real estate or to borrow using such real estate as collateral. In
connection with the ownership and operation of its properties, the Company may
be potentially liable for any such costs.
The Company has obtained recent Phase I environmental site assessments
("Phase I Surveys") on its existing properties and intends to obtain Phase I
Surveys prior to the purchase of any future properties. The Phase I Surveys are
intended to identify potential environmental contamination and regulatory
compliance concerns. Phase I Surveys generally include historical reviews of
the properties, reviews of certain public records, preliminary investigations
of the sites and surrounding properties and the preparation and issuance of
written reports. Phase I Surveys generally do not include invasive procedures,
such as soil sampling or ground water analysis.
The Phase I Surveys have not revealed any environmental liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations, or liquidity,
nor is the Company aware of any such liability or concern. Nevertheless, it is
possible that Phase I Surveys will not reveal all environmental liabilities or
compliance concerns or that there will be material environmental liabilities or
compliance concerns of which the Company will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, or (ii) the current
environmental condition of the Company's existing and future properties will
not be affected by the condition of the neighboring properties (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
the Company.
24
<PAGE>
GOVERNMENTAL REGULATION
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements, and compliance with specific standards of
conduct. The Company believes that each of its facilities has the necessary
permits and approvals to operate its respective business and the Company
intends to continue to obtain such permits and approvals for its new
facilities. In addition, the Company is subject to laws governing its
relationship with employees, including minimum wage requirements, overtime,
working conditions, and work permit requirements. An increase in the minimum
wage rate, employee benefit costs, or other costs associated with employees
could adversely affect the Company. Both at the federal and state level from
time to time, there are proposals under consideration to increase the minimum
wage.
Under the Americans With Disabilities Act ("ADA"), all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA
requirements in the designs for its facilities, no assurance can be given that
a material ADA claim will not be asserted against the Company, which could
result in a judicial order requiring compliance, and the expenditure of
substantial sums to achieve compliance, an imposition of fines, or an award of
damages to private litigants. These and other initiatives could adversely
affect the Company as well as the lodging industry in general.
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that its insurance coverage is adequate, if the Company were held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and
adversely affected.
EMPLOYEES
As of March 31, 1996, the Company and its subsidiaries employed
approximately 180 persons. The Company expects that it will significantly
increase the number of its employees as it expands its business. The Company's
employees are not subject to any collective bargaining agreements and
management believes that its relationship with its employees is good.
PROPERTIES
In addition to its lodging facilities described above (see "--Lodging
Facilities"), the Company also maintains a corporate headquarters and seven
regional offices. The Company's principal executive offices are located in Ft.
Lauderdale, Florida and the Company's regional offices are located in
Spartanburg, South Carolina; Park Ridge, Illinois; Bellevue, Washington;
Morristown, New Jersey; El Segundo, California; San Rafael, California; and
Phoenix, Arizona. The Company generally rents its office space on a short-term
basis, although it has recently entered into a new five-year lease for its
corporate headquarters in Ft. Lauderdale, Florida. These offices are
sufficient to meet the Company's present needs and it does not anticipate any
difficulty in securing additional office space, as needed, on terms acceptable
to the Company.
LEGAL PROCEEDINGS
The Company is not a party to any litigation or claims, other than routine
matters incidental to the operation of the business of the Company. To date,
no claims have had a material adverse effect on the Company nor does the
Company expect that the outcome of any pending claims will have such an
effect.
25
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of the Company and its subsidiaries,
their ages at March 31, 1996, and their positions with the Company or such
subsidiaries are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
H. Wayne Huizenga(1)...... 58 Chairman of the Board of Directors
George D. Johnson, Jr.(1). 53 President, Chief Executive Officer, and
Director
Robert A. Brannon......... 45 Senior Vice President, Chief Financial
Officer,
Secretary, and Treasurer
Michael R. Beck........... 34 Vice President--Real Estate of ESA
Properties, Inc.
Corry W. Oakes............ 29 Vice President--Construction of ESA
Management, Inc.
Gregory R. Moxley......... 41 Vice President--Finance and Controller
Michael M. Wilson......... 56 Vice President--Marketing of ESA Management,
Inc.
James M. Harley........... 44 Vice President--Operations of ESA Management,
Inc.
Shawn R. Ruben............ 29 Vice President--Development of ESA
Management, Inc.
Robert W. Levis........... 32 Vice President--Corporate Development of ESA
Management, Inc.
Harold E. Wright.......... 53 President of ESA Development, Inc.
Donald F. Flynn(2)(3)..... 56 Director
Stewart H. Johnson(3)..... 52 Director
John J. Melk(2)........... 59 Director
Peer Pedersen(3).......... 71 Director
</TABLE>
- ---------------------
(1) Member of Executive Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
(3) Member of the Audit Committee of the Board of Directors
All directors are elected to serve until the next annual meeting of
shareholders and until their successors are elected and qualified. Officers
serve at the pleasure of the Board.
H. Wayne Huizenga became a director of the Company in August 1995 and serves
as Chairman of its Board of Directors. Mr. Huizenga also currently serves as
Chairman of the Board of Directors and Chief Executive Officer of Republic
Industries, Inc., ("Republic"), a diversified company with operations in solid
waste collection, disposal, and recycling, electronic security services, and
out-of-home advertising, and served until 1995 as Vice-Chairman of Viacom,
Inc. ("Viacom"), a diversified media and entertainment company, a position he
assumed upon its merger with Blockbuster in 1994. Mr. Huizenga became a
director of Blockbuster in February 1987 and was elected as Chairman of the
Board and Chief Executive Officer from April 1987 through September 1994. He
is a co-founder of Waste Management, Inc. (now WMX Technologies, Inc.
("WMX")), a waste disposal and collection company, where he served in various
capacities, including President, Chief Operating Officer, and director until
May 1984. From May 1984 to present, Mr. Huizenga has been an investor in
several businesses and is the sole shareholder and Chairman of the Board of
Huizenga Holdings, Inc., a holding and management company with various
business interests. In connection with these business interests, Mr. Huizenga
has been actively involved in strategic planning for, and executive management
of, these businesses. He also has a majority ownership interest in the Florida
Marlins, a Major League Baseball franchise, and owns the Florida Panthers, a
National Hockey League franchise, the Miami Dolphins, a National Football
League franchise, and Joe Robbie Stadium in South Florida.
26
<PAGE>
George D. Johnson, Jr. has been President, Chief Executive Officer, and a
director of the Company since January 1995. He is responsible for all aspects
of development, operation, marketing, and personnel of the Company. Mr. Johnson
is the former President of the Consumer Products Division of Blockbuster
Entertainment Group, a division of Viacom. In this position he was responsible
for all U. S. video and music stores. Mr. Johnson has over 30 years of
experience developing and managing various businesses. He was formerly the
managing general partner of WJB Video, the largest Blockbuster franchisee which
developed over 200 video stores prior to a merger with Blockbuster in 1993 and
is the managing general partner of American Storage Limited Partnership, a
chain of 23 self-storage facilities located in the Carolinas and Georgia. He
currently serves on the board of directors of Viacom, Republic, and Duke Power
Company and has been the Chairman of the Board of Directors of Johnson
Development Associates, Inc. since its founding in 1986. Johnson Development
Associates, Inc. is a real estate management, leasing, and development company
controlling approximately two million square feet of commercial, retail, and
industrial property located in the Carolinas and Georgia which are owned by
various partnerships controlled by Mr. Johnson and his brother, Stewart H.
Johnson. Mr. Johnson practiced law in Spartanburg, South Carolina from 1967
until 1986 and served three terms in the South Carolina House of
Representatives.
Robert A. Brannon has been Chief Financial Officer of the Company since
February 1995 and Senior Vice President, Secretary, and Treasurer since August
1995. He is responsible for overseeing accounting procedures and controls,
along with financial reporting and cash management. Prior thereto, he served as
Vice President--Finance for the Domestic Home Video division of the Blockbuster
Entertainment Group, where he was responsible for financial management and
control of over 2,000 video stores. Prior to joining Blockbuster in 1993, Mr.
Brannon was Chief Financial Officer for WJB Video and for American Storage
Limited Partnership. In those capacities, Mr. Brannon was responsible for the
financial aspects of the development of over 200 video stores and 23 self-
storage facilities. Prior to his participation in these businesses, Mr. Brannon
served as a Certified Public Accountant in various management and staff
positions with local and national accounting firms.
Michael R. Beck has been Vice President--Real Estate of the Company from
September 1995 to January 1996 and Vice President--Real Estate of ESA
Properties since January 1996. Mr. Beck is responsible for identifying and
negotiating the purchase of suitable locations for the Company's expansion.
Prior to joining the Company, Mr. Beck served in various capacities including
Vice President--Development at Blockbuster Entertainment Group from July 1993
to May 1995, where he was responsible for new store development including real
estate construction and distribution for Blockbuster Video and Blockbuster
Music. From May 1989 to July 1993, Mr. Beck served in various capacities at WJB
Video, including the position of Director of Strategic Planning where he was
responsible for real estate acquisition and construction, marketing, and video
tape purchasing.
Corry W. Oakes has been Vice President--Construction of the Company from
January 1995 to January 1996 and Vice President--Construction of ESA Management
since January 1996. Mr. Oakes is responsible for managing initial construction
of all properties as well as ongoing renovations and repairs. Prior thereto, he
served as a National Director of Construction for the Blockbuster Entertainment
Group. In that capacity, he was responsible for the development of over 400
video and music stores during 1994 alone. Prior to joining Blockbuster in 1993,
Mr. Oakes served as Construction Manager for WJB Video. Mr. Oakes also served
as property manager with Westover Development Company, a real estate
development firm.
Gregory R. Moxley became Controller of the Company in October 1995 and Vice
President--Finance in January 1996, where he is responsible for the accounting,
budgeting, and financial reporting functions. From 1990 until joining the
Company, Mr. Moxley held various positions, including Director of Financial
Reporting and Assistant Treasurer, with One Price Clothing Stores, Inc., a
national chain of women's apparel stores. Prior to that, Mr. Moxley served as a
Certified Public Accountant in various management and staff positions with
Ernst & Young from 1978 to 1990.
Michael M. Wilson has been Vice President--Marketing of ESA Management since
February 1996. Mr. Wilson is responsible for developing and implementing
marketing strategy and public relations. From September
27
<PAGE>
1993 until he joined the Company, he served as Director of Marketing--Special
Projects for Blockbuster, where he was responsible for marketing and
developing proprietary technology. Before joining Blockbuster in 1993, Mr.
Wilson was Director of Marketing of WJB Video. Prior thereto, Mr. Wilson
founded and served as President of two private consumer products companies,
Lasso Closure Corp. and Torus Corporation, and served as Senior V.P. for
Henderson Advertising in Greenville, South Carolina.
James M. Harley has been Vice President--Operations of ESA Management since
September 1995. Mr. Harley is responsible for managing the operations of the
Company's extended stay facilities. From September 1993 until he joined the
Company, he served as Vice President--Asset Management for Homestead Village,
a division of Security Capital Pacific Trust ("Security Capital"). Before
joining Security Capital in 1993, Mr. Harley served as Vice President--
Development for Holiday Inn Worldwide.
Shawn R. Ruben has been Vice President--Development of ESA Management since
December 1995. Mr. Ruben is responsible for managing the due diligence process
on all of the Company's properties as well as land closings and loan
approvals. Prior thereto, he served as National Director of Real Estate for
the Blockbuster Entertainment Group, where he was responsible for new store
development, asset management, and all real estate legal matters. Before
joining Blockbuster in 1991, Mr. Ruben practiced law in Florida.
Robert W. Levis has been Vice President--Corporate Development of ESA
Management since April 1996. Mr. Levis is responsible for corporate strategy,
including acquisitions. From 1992 until he joined the Company, Mr. Levis was
Director, Corporate Development for Blockbuster where he was responsible for
corporate strategy for new lines of business, including mergers and
acquisitions. From 1995 until he joined the Company, Mr. Levis was also Vice
President, Corporate Development and Finance for Discovery Zone, Inc.
("Discovery Zone"), an owner and franchisor of family indoor entertainment and
fitness facilities, during the period it was managed by Blockbuster. On March
25, 1996, Discovery Zone announced that it had filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. Prior thereto, Mr. Levis was a
Manager, Real Estate and Hospitality Consulting with KPMG Peat Marwick.
Harold E. Wright has been President of ESA Development, Inc., a wholly-owned
subsidiary of the Company, since June 1995. Mr. Wright is responsible for
selection and development of suitable locations in certain geographic areas.
See "--Management Compensation," and "--Employment and Stock Option
Agreements." Prior to joining ESA Development, Inc., Mr. Wright was President
of HVI, Inc., formerly Homestead Venture, Inc., a site selection and
development company of extended stay facilities in the Southwest. From 1989 to
1992, Mr. Wright was President of Homestead Properties, Inc., which developed
and operated three extended stay properties in North Carolina. Prior to that
time, Mr. Wright was involved in commercial and real estate development in
Georgia and Florida.
Donald F. Flynn became a director of the Company in August 1995. Mr. Flynn
is Chairman and Chief Executive Officer of Flynn Enterprises, Inc., a business
consulting and venture capital company, and from July 1992 until March 1996
was Chairman of Discovery Zone. From July 1992 until May 1995, Mr. Flynn also
served as Chief Executive Officer of Discovery Zone. Mr. Flynn also currently
serves as a director of WMX, Waste Management International plc, Wheelabrator
Technologies, Inc., and Psychemedics, Inc. ("Psychemedics"). Mr. Flynn is a
former director of Blockbuster. From 1972 to 1990, Mr. Flynn served in various
positions with WMX, including Senior Vice President and Chief Financial
Officer.
Stewart H. Johnson became a director of the Company in August 1995. Mr.
Johnson is currently the Chairman of the Board of Directors, Chief Executive
Officer, and President of Morgan Corporation, a construction company
specializing in grading, site preparation, and sewer and utility installation.
Mr. Johnson has been directing the operations of Morgan Corporation since
1971. Mr. Johnson also serves as Secretary for Johnson Development Associates,
Inc. Mr. Johnson is the brother of George D. Johnson, Jr.
28
<PAGE>
John J. Melk became a director of the Company in August 1995. He has been
Chairman and Chief Executive Officer of H/2/0 Plus, Inc. since 1988. H/2/0 Plus
develops and manufactures health and beauty products and distributes them
through a national chain of company-owned retail stores as well as through over
500 wholesale/department stores. Prior to 1984, Mr. Melk held various positions
with WMX and its subsidiaries, and served as President of Waste Management
International, Ltd. based in London, England. Mr. Melk currently serves as a
director of Psychemedics and Republic and is a former Vice-Chairman and
director of Blockbuster. Mr. Melk is also Chairman of M.W. Partners, which is a
major investor in residential and commercial real estate development, resort
hotels, marinas, and other private ventures.
Peer Pedersen became a director of the Company in August 1995. He is the
founder and has been Chairman of the law firm of Pedersen & Houpt, P.C., in
Chicago, Illinois for more than five years. He serves on the board of directors
of Aon Corporation, Boston Chicken, Inc., and WMX.
MANAGEMENT COMPENSATION
The Company was incorporated in January 1995 and did not conduct any
operations prior to that time. The Company's executive officers commenced their
service with the Company at various times during 1995 and none was employed by
the Company during all of 1995. Accordingly, the following table sets forth, on
an annualized basis with respect to the salary information, the information
regarding the compensation paid by the Company to its Chief Executive Officer
and each of the other four most highly compensated officers of the Company
(hereinafter, the "Named Executive Officers") for services rendered in all
capacities to the Company during 1995. The Company does not have a restricted
stock award program or a long-term incentive plan. Directors of the Company are
not paid any cash compensation for their services but are reimbursed for their
out-of-pocket expenses.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C>
George D. Johnson, Jr...... 200,000 -- -- 200,000 --
President and Chief
Executive Officer
Robert A. Brannon.......... 175,000 -- -- 301,875 --
Senior Vice President,
Chief Financial Officer,
Secretary, and Treasurer
Michael R. Beck............ 100,000 -- -- 21,000 --
Vice President--Real
Estate of ESA Properties,
Inc.
Corry W. Oakes............. 100,000 -- -- 21,000 22,837(1)
Vice President--
Construction of ESA
Management, Inc.
Harold E. Wright........... 175,000 -- -- -- 51,179(1)
President of ESA
Development, Inc.
</TABLE>
- ---------------------
(1) Represents the taxable portion of reimbursed relocation expenses.
29
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options made to the
Named Executive Officers during 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL PRICE APPRECIATION
OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
DATE OF OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION ---------------------
NAME GRANT GRANTED FISCAL YEAR PRICE(1) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
George D. Johnson, Jr... 11/17/95 200,000 17.7% $13.00 11/17/05 $1,635,126 $4,143,730
Robert A. Brannon....... 8/18/95 301,875 26.7 4.76 8/18/05 903,675 2,290,087
Michael R. Beck......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310
Corry W. Oakes.......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310
Harold E. Wright........ -- -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Under the 1995 Plan, the exercise price must be the fair market value on
the date of grant. Except for specific situations, the options granted
become exercisable as to one-fourth of the grant on each of the first,
second, third, and fourth anniversary of the date of grant.
(2) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future performance
of the Common Stock. There can be no assurance that the amounts reflected
in this table will be achieved.
AGGREGATE 1995 OPTION/SAR VALUES
The following table provides certain information concerning the value of
unexercised options to purchase Common Stock at December 31, 1995 for the Named
Executive Officers. No options to purchase Common Stock were exercised during
1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT 12/31/95 AT 12/31/95(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
<S> <C> <C> <C> <C>
George D. Johnson, Jr....... -- 200,000 -- 2,900,000
Robert A. Brannon........... -- 301,875 -- 6,864,638
Michael R. Beck............. -- 21,000 -- 477,540
Corry W. Oakes.............. -- 21,000 -- 477,540
Harold E. Wright............ -- -- -- --
</TABLE>
- ---------------------
(1) This column indicates the aggregate amount, if any, by which the market
value of the Common Stock on December 31, 1995 exceeded the options'
exercise price based on the closing per share sale price of the Common
Stock on such date of $27.50 as quoted on the Nasdaq National Market as
reported by The Wall Street Journal.
EMPLOYMENT AND STOCK OPTION AGREEMENTS
In June 1995, Mr. Wright entered into an employment agreement, which was
terminated in March 1996, with ESA Development, a wholly-owned subsidiary of
the Company which was formed for the purpose of developing economy extended
stay facilities in the Midwest and certain other areas. In connection with the
termination of a business relationship before joining ESA Development, Mr.
Wright entered into a non-compete agreement that may restrict him from
performing certain functions for ESA Development in the states of Texas, New
Mexico, Colorado, Arizona, Nevada, Utah, California, Oklahoma, Louisiana,
Florida and the greater metropolitan areas of Las Vegas, Nevada; Portland,
Oregon; Atlanta, Georgia; Charlotte, North Carolina and
30
<PAGE>
Washington, D.C. until the end of 1996. As a result, neither Mr. Wright nor ESA
Development will operate in those areas and Mr. Wright will focus his time and
efforts locating and developing sites for ESA Development in regions not
restricted by his non-compete agreement.
Pursuant to his employment agreement, Mr. Wright was entitled to receive a
minimum annual base salary of $175,000. The agreement had an initial term of
two years and was to have been automatically renewed for one-year periods
thereafter unless notice of termination was given by either party. The
agreement provided that in the event Mr. Wright's employment with ESA
Development was terminated for any reason other than for cause, Mr. Wright was
entitled to receive an amount equal to his then base salary for the remainder
of the then current term. In addition, in the event ESA Development did not
grant to Mr. Wright, during each twelve month period from June 1 through May 31
of the term of the agreement, options to purchase shares of common stock of ESA
Development in an amount equal to 2 1/2 times his then base salary at the fair
market value per share on the date of grant, Mr. Wright could declare his
employment terminated other than for cause.
In June 1995, Mr. Wright also entered into a stock option agreement with ESA
Development which was also terminated in March 1996 and all options granted
thereunder terminated. Pursuant to the stock option agreement, ESA Development
granted to Mr. Wright non-qualified options to purchase a total of 1,437.5
shares of the common stock of ESA Development. The options were to vest ratably
on each of the next four anniversaries of the date of the option grant. With
respect to options underlying 437.5 shares, the exercise price per share was
$1,000 and the term of the options was ten years. With respect to options
underlying the remaining 1,000 shares, the exercise price per share was $1,000
plus interest accrued at 10% per year, compounded annually, from the date of
the option grant through the date of exercise of the option, and the term of
the options was five years.
In March 1996, Mr. Wright and ESA Development entered into a new employment
agreement for the period commencing on March 18, 1996 and ending on June 30,
1999. Pursuant to this employment agreement, Mr. Wright is to act as the
President of ESA Development and is entitled to receive a minimum annual base
salary of $175,000. ESA Development also agreed to pay Mr. Wright additional
compensation equal to $15,000 for each site upon which ESA Development or its
subsidiaries has commenced construction of an extended stay lodging facility
during the term of the agreement. This additional compensation shall apply only
to the first 40 sites for 1996, 1997, and 1998 and the first 20 sites for 1999
and may be paid by delivering shares of the Company's Common Stock with a fair
market value equal to the amount due. In addition, pursuant to this employment
agreement, the Company granted to Mr. Wright, under the 1996 Plan, ten-year
options to purchase 600,000 shares of the Company's Common Stock at an exercise
price per share of $21.00 (the fair market value on the date of grant), which
options vest as to one-fourth of the grant on September 19, 1996 and June 1 of
each of 1997, 1998, and 1999, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until August 1995, Mr. George D. Johnson, Jr., the Company's Chief Executive
Officer, approved the terms of the compensation of the Company's executive
officers. In August 1995, the Company's Board of Directors formed a
Compensation Committee, which is currently composed of Messrs. Flynn and Melk,
which determines the compensation of the Company's executive officers.
STOCK OPTION PLANS
1995 PLAN
The Board of Directors of the Company adopted in August 1995, and the
existing shareholders of the Company have approved, the Amended and Restated
1995 Employee Stock Option Plan (the "1995 Plan") which will be administered by
the Compensation Committee of the Board of Directors, which consists solely of
non-employee directors. The Compensation Committee has authority to determine
the persons to be granted options under the 1995 Plan, the number of shares
subject to each option, the time or times at which options will
31
<PAGE>
be granted, the option price of the shares subject to each option (which price
shall not be less than the fair market value of the shares at the date of
grant), and the time or times when each option becomes exercisable and the
duration of the exercise period. Except for specific situations, such as a
change in control of the Company, options which have been granted become
exercisable as to one-fourth of the grant on each of the first, second, third,
and fourth anniversary of the date of grant.
Options may be granted under the 1995 Plan to key employees and consultants,
(other than members of the Compensation Committee) of the Company. Options may
be granted with respect to a total of not more than 1,677,060 shares of Common
Stock under the 1995 Plan, subject to antidilution and other adjustment
provisions. No options may be granted to a single optionee under the 1995 Plan
in excess of 50% of the total number of shares authorized for issuance under
the 1995 Plan. No options may be granted under the 1995 Plan after August 18,
2005. If an option expires or is terminated or canceled unexercised as to any
shares, such released shares may again be optioned (including a grant in
substitution for a canceled option). The Compensation Committee has granted,
under the 1995 Plan, ten-year options to purchase 150,000 shares and 200,000
shares of Common Stock to Messrs. Huizenga and George D. Johnson, Jr.,
respectively, at an exercise price per share equal to $13.00 and ten year
options to purchase Common Stock at an exercise price per share equal to $4.76
to the other Named Executive Officers, among others, for the following number
of shares: Mr. Brannon, 301,875; Mr. Beck, 21,000; and Mr. Oakes, 21,000. In
January 1996, the Compensation Committee granted additional ten-year options to
purchase 500,821 shares of Common Stock to employees at exercise prices per
share ranging from $26.75 to $29.625, including grants to Named Executive
Officers for the following number of shares: Mr. Brannon, 39,252; Mr. Beck,
28,037; Mr. Oakes, 28,037; and Mr. Wright, 39,252. As of March 31, 1996,
options to purchase an aggregate of 1,676,873 shares of Common Stock had been
granted under the 1995 Stock Option Plan.
1996 PLAN
The Board of Directors of the Company adopted in January 1996, subject to
approval by the Company's shareholders at the next annual meeting, the Amended
and Restated 1996 Employee Stock Option Plan (the "1996 Plan"). The 1996 Plan
will be administered by the Compensation Committee of the Board of Directors
and the terms of the 1996 Plan are substantially identical to those of the 1995
Plan. Options may be granted with respect to a total of not more than 2,500,000
shares of Common Stock under the 1996 Plan, subject to antidilution and other
adjustment provisions. No options may be granted under the 1996 Plan after
January 24, 2006. As of March 31, 1996, options to purchase 679,385 shares of
Common Stock had been granted under the 1996 Plan, including ten-year options
to purchase 600,000 shares of Common Stock granted to Mr. Wright at an exercise
price per share equal to $21.00.
DIRECTORS' PLAN
The Board of Directors of the Company adopted in November 1995, and the
existing shareholders of the Company have approved, a 1995 Stock Option Plan
for Non-Employee Directors (the "Directors' Plan"). The Directors' Plan is
administered by the Board of Directors.
Options shall be granted under the Directors' Plan only to non-employee
directors of the Company. Options may be granted with respect to a total of not
more than 240,000 shares of Common Stock under the Directors' Plan, subject to
antidilution and other adjustment provisions. If an option expires or is
terminated or canceled unexercised as to any shares, such released shares may
again be optioned.
A one-time option covering 20,000 shares of Common Stock shall be
automatically granted to each non-employee director of the Company effective
upon initial election to the Board of Directors of the Company. During the
four-year period following the initial election of a non-employee director to
the Board of Directors, an additional option covering 5,000 shares of Common
Stock shall be granted to such non-employee director on each anniversary of the
initial grant; provided that such non-employee director remains a director and
that not
32
<PAGE>
more than four such additional options shall be granted to any one non-
employee director. The option price for all options granted under the
Directors' Plan shall be the fair market value of a share of Common Stock on
the date of grant. Each option granted under the Directors' Plan is for a term
of ten years, subject to earlier termination if the optionee's service as a
director terminates. Each option granted under the Directors' Plan becomes
exercisable with respect to all of the shares subject to the option six months
after the date of its grant. Options to purchase 20,000 shares of Common Stock
at an exercise price per share of $13.00 were automatically granted under the
Directors' Plan on the closing of the IPO on December 19, 1995 to each of
Messrs. Flynn, Stewart H. Johnson, Melk, and Pedersen.
33
<PAGE>
CERTAIN TRANSACTIONS
In order to finance the construction of the Company's Spartanburg, South
Carolina facility and the Company's initial operations, George D. Johnson,
Jr., the Company's President and Chief Executive Officer, and H. Wayne
Huizenga, the Chairman of the Board of Directors of the Company, loaned an
aggregate of approximately $6.1 million at various times between February 1995
and July 1995. Those loans accrued interest at an annual rate of 8.75% and
were repaid in full in August 1995 with the proceeds from the subscriptions of
the Company's existing shareholders described below.
In connection with the formation of the Company in January 1995, Mr. George
D. Johnson, Jr. purchased 1,677,060 shares (adjusted to reflect a 210-for-1
stock split in October 1995) of Common Stock for an aggregate purchase price
of $2,000. In August 1995, the Company entered into Subscription Agreements
pursuant to which certain investors, including H. Wayne Huizenga, George D.
Johnson, Jr., Donald F. Flynn, Stewart H. Johnson, John J. Melk, Peer
Pedersen, and Robert A. Brannon, contributed $55.8 million to the capital of
the Company in exchange for 11,718,000 shares (adjusted to reflect a 210-for-1
stock split in October 1995) of Common Stock ($4.76 per share). Approximately
one-half of such amount was contributed in August 1995 and the balance in
October 1995.
As consideration for the commitment to provide the Existing Mortgage
Facility, the Company issued 750,540 shares of Common Stock, with a then
estimated fair market value of approximately $3.6 million, to Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), one of the representatives
of the Underwriters. In connection therewith, DLJ Capital Corporation, an
affiliate of DLJ, also purchased 500,430 shares of Common Stock for a purchase
price of $2.4 million. See "Financing."
In the Concurrent Offering, the Company sold to its existing shareholders
(other than DLJ and its affiliates), on a pro-rata basis, for $25 million,
2,067,825 shares of Common Stock for $12.09 per share, such price being the
IPO price per share less underwriting discounts and commissions. These
existing shareholders included the Company's directors and certain of its
officers. The amounts paid by the Company's directors and certain of its
officers in the Concurrent Offering were as follows: Mr. H. Wayne Huizenga,
$7,253,456; Mr. George D. Johnson, Jr., $3,048,747; Mr. Stewart H. Johnson,
$954,396; Mr. Robert A. Brannon, $381,765; Mr. Donald F. Flynn, $381,765; Mr.
John J. Melk, $1,145,285; and Mr. Peer Pedersen, $1,145,285. In addition, the
amounts paid by trusts for the benefit of various members of the immediate
family of George D. Johnson, Jr. was an aggregate of $5,726,429 and the
amounts paid by trusts for the benefit of various members of the immediate
family of Stewart H. Johnson was an aggregate of $381,754.
The Company has airplane leasing arrangements with companies owned by George
D. Johnson, Jr., Stewart Johnson, and certain of their family members. In
connection therewith, the Company incurred aggregate charges of approximately
$412,000 during the year ended December 31, 1995. The Company believes that
the terms of its use of the planes are at least as favorable to the Company as
those it could have obtained from an unaffiliated party. In April 1995, the
Company acquired a parcel of real estate in Spartanburg, South Carolina for
approximately $562,000 from a limited partnership controlled by George D.
Johnson, Jr. and Stewart H. Johnson. The Company believes that the terms of
the acquisition were as favorable to it as it could have obtained from an
unaffiliated party.
In 1996 the Company entered into (i) a 10-year lease for a suite at Joe
Robbie Stadium for a base rental of $115,000 per year, subject to certain
additional charges and periodic escalation, and (ii) a 3-year lease for a
suite at Homestead Motor Sports Complex for a base rental of $53,250 per year,
subject to certain additional charges. Mr. Huizenga owns Joe Robbie Stadium
and has an approximately 50% ownership interest in Homestead Motor Sports
Complex.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 31, 1996, certain information
regarding the beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock, by each of the Company's directors and Named
Executive Officers, and by all directors and executive officers of the Company
as a group. As of such date, there were approximately 150 record holders and
approximately 3,500 beneficial holders of Common Stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
------------------
NAME(1) NUMBER PERCENT
<S> <C> <C>
George D. Johnson, Jr.(2).............................. 5,552,881 24.3%
H. Wayne Huizenga...................................... 4,589,955 20.1
Stewart H. Johnson(3).................................. 724,729 3.2
Donaldson, Lufkin & Jenrette
Securities Corporation(4)............................ 1,219,457 5.3
277 Park Avenue
New York, New York 10172
Robert A. Brannon...................................... 241,577 1.1
Michael R. Beck........................................ 18,000 *
Corry W. Oakes......................................... 16,425 *
Harold E. Wright....................................... 2,904 *
Donald F. Flynn(5)..................................... 241,577 1.1
John J. Melk(6)........................................ 744,730 3.3
Peer Pedersen.......................................... 724,730 3.2
All directors and executive officers as a group
(15 persons)(2)(3)(5)(6).............................. 12,868,008 56.3%
</TABLE>
- ---------------------
* Represents less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, the address of such person is c/o Extended Stay
America, Inc., 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394.
(2) Includes 3,623,650 shares of Common Stock held in various trusts for the
benefit of members of Mr. Johnson's immediate family, of which Mr.
Johnson's brother, Stewart H. Johnson, is a trustee and does not include
120,788 shares held in various trusts for the benefit of members of Stewart
H. Johnson's immediate family and with respect to which Mr. Johnson is
trustee, all of which shares Mr. Johnson may be deemed to beneficially own.
(3) Includes 120,788 shares Common Stock held in various trusts for the benefit
of members of Stewart H. Johnson's immediate family, of which George D.
Johnson, Jr. is trustee, but does not include 3,623,650 shares of Common
Stock held in various trusts for the benefit of members of George D.
Johnson, Jr.'s immediate family, of which Stewart H. Johnson is a trustee,
and 120,788 shares of Common Stock held in a trust of which Stewart H.
Johnson is a trustee, all of which shares Stewart H. Johnson may be deemed
to beneficially own.
(4) Includes 199,790 shares of Common Stock owned by DLJ Capital Corporation
and 269,127 shares of Common Stock owned by DLJ First ESC L.L.C., each of
which is an affiliate of DLJ.
(5) Represents 241,577 shares of Common Stock held in a trust, of which Mr.
Flynn is a trustee and beneficiary.
(6) Includes 724,730 shares of Common Stock beneficially owned by M Group
Investment IV, L.P., of which Mr. Melk is a general partner.
35
<PAGE>
FINANCING
EQUITY
The Company was initially capitalized with approximately $60 million of
equity from a group of private investors, a number of whom constitute part of
the Company's management team. On December 19, 1995, the Company completed the
Prior Offerings from which it received aggregate net proceeds of approximately
$85 million. The aggregate net proceeds of this offering are expected to be
approximately $124.0 million, based upon an assumed public offering price of
$26.00 per share, after deducting estimated underwriting discounts and
commissions and other offering expenses. See "Certain Transactions," "Shares
Eligible for Future Sale," and "Underwriting."
MORTGAGE FACILITIES
EXISTING MORTGAGE FACILITY
The Company has a mortgage facility with DLJ Mortgage Capital, Inc., an
affiliate of DLJ, providing for up to $200 million in mortgage financing,
subject to certain conditions (the "Existing Mortgage Facility"). Under the
Existing Mortgage Facility, each extended stay lodging facility financed
thereby will, upon obtaining a certificate of occupancy, receive funding of
50% to 60% of the lesser of the total development cost or the approved budget
thereof. In addition, the funding for each facility may be increased to not
more than 75% of the lesser of its cost or its appraised value within the
first 15 months of operation, with the amount of such additional funding
depending upon the lodging facility meeting certain debt service coverage
ratios. Interest on each loan will be payable monthly at a fixed rate equal to
the rate of 10-year U.S. Treasury securities on the date of funding plus 4.0%.
Principal amortization based on a 25-year term will begin not later than 15
months after the initial funding and will continue through various maturity
dates from December 31, 2006 through December 31, 2008. Prepayments of loans
may be made without penalty within five years of their respective maturity
dates. Amounts borrowed under the Existing Mortgage Facility will be secured
by, among other things, a first mortgage encumbering each lodging facility and
assignment of the revenues and profits from the respective facility. Funding
under the Existing Mortgage Facility is subject to, among other things, the
funding by the Company of certain escrow accounts and prior approval by the
lender of the construction and operating budgets.
The Existing Mortgage Facility requires the Company to maintain consolidated
tangible net worth (as defined therein) of at least $40 million. In addition,
the Existing Mortgage Facility contains certain affirmative and negative
covenants, including without limitation, limitations on any sale, mortgaging,
granting of options or other transfer of any legal or beneficial interest in
any property financed; making of dividends, share repurchases, or other
restricted payments by the Company other than dividends by the Company not
exceeding 50% of the excess of its net income for any period over its
cumulative losses not previously applied in computing the limitation;
financing new properties without first submitting such property for approval
by the lender for financing under the Existing Mortgage Facility; affiliated
party transactions; making certain investments; and engaging in businesses
other than the ownership, management, and operation of extended stay lodging
facilities.
All or any portion of the amounts outstanding under the Existing Mortgage
Facility may at any time become immediately due and payable, at the option of
the lender, if an event of default occurs, including, among other things, (i)
any payment of principal or interest or any payment of any fee or other amount
due under the Existing Mortgage Facility is not paid when the same becomes due
and payable; (ii) the Company fails to perform any obligation or observe any
agreement or covenant under the Existing Mortgage Facility or related loan,
collateral, or other documentation (collectively, the "Loan Documents") and
such failure remains unremedied past the applicable grace period, if any;
(iii) any material representation made or deemed to be made by the Company in
the Loan Documents shall prove to have been incorrect in any material respect
when made or deemed made; (iv) a default occurs and is continuing with respect
to any indebtedness of the Company and (in the case of a default other than a
payment default) such default permits the acceleration of indebtedness or any
such indebtedness is declared due and payable prior to its stated maturity;
(v) certain events of bankruptcy, insolvency or
36
<PAGE>
reorganization occur with respect to the Company or any of its subsidiaries;
(vi) any material provision of collateral documentation relating to a loan
ceases to be valid and binding on the Company or fails to create a valid
perfected and first priority lien on any of the collateral covered thereby;
(vii) a material adverse change, or an event which is reasonably likely to
have a material adverse change, occurs in the Company, in the ability of the
parties to the Loan Documents to perform their respective obligations, or the
legality, validity, or enforceability of the Loan Documents or the rights and
remedies of the lender thereunder; or (viii) the current members of the
Company's Board of Directors cease to constitute a majority of the Board.
PROPOSED MORTGAGE FACILITY
The Company also has received a commitment for a new mortgage facility (the
"Proposed Mortgage Facility") from CS First Boston Mortgage Capital
Corporation (an affiliate of CS First Boston Corporation, one of the
Representatives of the Underwriters) which is expected to provide up to $300
million in mortgage financing, subject to certain conditions and limitations,
for completed facilities. The Company expects that, upon completion of this
new mortgage facility, it will reduce the size of the Existing Mortgage
Facility to $100 million. The commitment for the Proposed Mortgage Facility is
subject to the negotiation and execution of documentation in form acceptable
to the lender, and the actual terms, conditions, and covenants incorporated
into the definitive documentation may differ from the summaries that follow.
There is no assurance that the Proposed Mortgage Facility will be entered
into, and the execution of that facility is not a condition to this offering.
Under the Proposed Mortgage Facility, each extended stay lodging facility
financed thereby will, upon obtaining a certificate of occupancy, receive
funding of 65% of the lesser of the total development cost, the approved
budget, or the appraised value, subject to limitations based on projected debt
service coverage ratios. The Company may choose either a fixed rate loan or a
floating rate loan at the time the loan is to be funded, subject, however, to
a requirement that a minimum of $50 million of loans must be made under the
chosen rate program before the other rate program can be selected. Interest on
each loan will be payable monthly at either (i) a fixed rate equal to the rate
of 7-year U.S. Treasury securities on the date of funding plus from 3.55% to
3.85%, depending upon the aggregate amount of fixed rate loans, or (ii) a
floating rate equal to the 30-day LIBOR rate plus 3%. Principal amortization
will generally be based on a 15-year term for fixed rate loans and based on a
20-year term with an assumed 9.9% interest rate for floating rate loans. Fixed
rate loans will mature on the earlier of 7 years and 3 months from the date
that the first such loan is funded or eight years from the execution of a
credit facility agreement. All floating rate loans will mature three years
from the execution of a credit facility agreement. Prepayments of fixed rate
loans may be made after five years, subject to certain penalties. Prepayments
of floating rate loans may be made after one year without penalty. Amounts
borrowed under the Proposed Mortgage Facility will be secured by, among other
things, a first mortgage encumbering each lodging facility so financed and an
assignment of the revenues and profits from such facilities.
Funding under the Proposed Mortgage Facility is subject to, among other
things, the completion of an equity or quasi-equity offering of at least $100
million (such as this offering), market capitalization of the Company of at
least $300 million, maintenance of certain debt service coverage ratios,
maintenance of the ratio of debt to total book capitalization of not more than
70%, maintenance of unrestricted and unpledged cash of not less than $20
million, the funding by the Company of certain escrow accounts, and prior
approval by the lender of the construction and operating budgets. The Proposed
Mortgage Facility also contains certain affirmative and negative covenants
similar to those contained in the Existing Mortgage Facility. The Company may,
however, finance new properties through other lenders without first submitting
such property for approval by the lender for financing under the Proposed
Mortgage Facility. However, in the event that the Company finances more than
$175 million of secured facility debt (other than construction financing and
certain other financings) with another lender within three years from the
execution of a credit facility agreement, without having financed at least
$100 million of such debt under the Proposed Mortgage Facility, the lender may
terminate its obligation to fund additional facilities under the Proposed
Mortgage Facility.
All or any portion of the amounts outstanding under the Proposed Mortgage
Facility would become due and payable, at the option of the lender, if an
event of default occurs, including, among other things, (i) a declared
37
<PAGE>
default or acceleration under other indebtedness of the Company; (ii) certain
events of bankruptcy with respect to the Company or any of its subsidiaries;
(iii) the Company's tangible net worth ceases to exceed $50 million; (iv) a
dividend payout by the Company in excess of 50% of the excess of its net income
for any period over its cumulative losses not previously applied in computing
the limitation; (v) the current members of the Company's Board of Directors
cease to constitute a majority of the Board; or (vi) either Mr. Huizenga or Mr.
George D. Johnson, Jr. cease to be Board members to the extent that they are
living and have not been declared judicially incompetent.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200 million shares of
Common Stock, $.01 par value per share, and 10 million shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). As of March 31, 1996,
22,853,092 shares of Common Stock were issued and outstanding and none of the
Preferred Stock was outstanding. The following description is a summary and is
qualified in its entirety by reference to the provisions of the Company's
Restated Certificate of Incorporation, as amended (the "Certificate"), and its
Bylaws (the "Bylaws"), copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Holders of a
majority of the shares of Common Stock represented at a meeting can elect all
of the directors. Holders of Common Stock are not permitted to act by written
consent. Shareholders must follow an advance notification procedure for certain
shareholder nominations of candidates for the Board of Directors and for
certain other business to be conducted at any meeting of shareholders. Subject
to preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution, or winding
up of the Company, holders of the Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock
have no preemptive rights and have no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Common Stock to be outstanding upon consummation of this offering will be,
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 10 million shares of Preferred Stock in one or
more series and to fix the voting powers, designations, preferences, and
relative, participating, optional, or other special rights, and qualifications,
limitations, and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series. Because the Board of Directors has
the power to establish the preferences and rights of the shares of any such
series of Preferred Stock, it may afford holders of any Preferred Stock
preferences, powers, and rights (including voting rights), senior to the rights
of holders of Common Stock, which could adversely affect the rights of holders
of Common Stock and could have the effect of delaying, deferring, or preventing
a change in control of the Company. The Company has no present plan to issue
any shares of Preferred Stock.
DELAWARE GENERAL CORPORATION LAW
The Company was incorporated in 1995 as a Delaware corporation and will be
subject to Section 203 of the Delaware General Corporation Law ("Section 203").
Pursuant to Section 203, with certain exceptions, a Delaware corporation may
not engage in any of a broad range of business combinations, such as mergers,
consolidations, and sales of assets, with an "interested shareholder" for a
period of three years from the date that such person became an interested
shareholder unless (i) the transaction that results in the person's becoming an
interested shareholder, or the business combination, is approved by the board
of directors of the corporation before the person becomes an interested
shareholder, (ii) upon consummation of the transaction which results in the
shareholder becoming an interested shareholder, the interested shareholder owns
85% or more of the voting stock of the corporation outstanding at the time the
transaction commenced (other than certain excluded shares), or (iii) on or
after the date the person becomes an interested shareholder, the business
combination is approved by the corporation's board of directors and by holders
of at least two-thirds of the corporation's outstanding voting stock, excluding
shares owned by the interested shareholder, at a meeting of shareholders. Under
Section
39
<PAGE>
203, an "interested shareholder" is defined as any person, other than the
corporation and any direct or indirect majority-owned subsidiaries of the
corporation, that is (i) the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) an affiliate or associate of the corporation
and the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an
interested shareholder. The Company has approved Messrs. George D. Johnson,
Jr., Stewart H. Johnson, and H. Wayne Huizenga as "interested shareholders."
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested shareholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage persons interested in acquiring the Company to
negotiate in advance with the Company's Board of Directors because the
shareholder approval requirement would be avoided if a majority of the
Company's directors then in office approve either the business combination or
the transaction which results in the person becoming an interested
shareholder. Such provisions also may have the effect of preventing changes in
management of the Company. It is possible that such provisions could make it
more difficult to accomplish transactions that shareholders may otherwise deem
to be in their best interests.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank (Chicago).
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1996, the Company had 22,853,092 shares of Common Stock
outstanding, 7,850,062 of which were freely tradable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. The remaining
15,003,030 outstanding shares of Common Stock originally subscribed for and
purchased by the initial shareholders of the Company (the "Initial
Shareholders") were issued and sold by the Company in private transactions
("Restricted Shares") and may not be sold unless registered under the
Securities Act (which registration is described below) or sold in accordance
with an exemption therefrom, such as Rule 144 or Rule 144A thereunder. The
Initial Shareholders have agreed that they will not sell any shares of Common
Stock prior to June 11, 1996, without the consent of DLJ, subject to certain
exceptions, including pursuant to a foreclosure by a lender on a loan for
which shares of Common Stock have been pledged as collateral. In addition, the
holders of approximately 13.3 million shares of Common Stock (including all
shares beneficially owned by the Company's directors and executive officers)
have agreed that they will not sell any shares of Common Stock for a period of
90 days from the date of this Prospectus without the consent of DLJ, subject
to similar exceptions.
In general, under Rule 144 as currently in effect, a holder of Restricted
Shares who beneficially owns shares that were not acquired from the Company or
an affiliate of the Company within the previous two years would be entitled to
sell in the public market within any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of Common Stock or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities
and Exchange Commission. The Initial Shareholders will be able to sell shares
of Common Stock acquired pursuant to the Subscription Agreements in accordance
with such provision on and after August 18, 1997. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice, and the availability of current public information about the Company.
A person who is deemed not to have been an affiliate of the Company at any
time during the three months immediately preceding a sale and who beneficially
owns shares that were not acquired from the Company or an affiliate of the
Company within the past three years is entitled to sell such shares under Rule
144(k) without regard to the foregoing limitations. Rule 144A under the
Securities Act permits the immediate sale by the holders of Restricted Shares
issued prior to completion of this offering of all or a portion of their
shares to certain "qualified institutional buyers" as defined in Rule 144A.
The Company has registered under the Securities Act all of the 15,003,000
shares of Common Stock owned by the Initial Shareholders so that such Initial
Shareholders may make resales in the public market of their Common Stock upon
expiration of their lock-up agreements described above. The Company also has
registered under the Securities Act 4,000,000 shares of Common Stock which may
be issued from time-to-time in connection with potential future acquisitions
of various businesses and resales of such shares by the recipients thereof,
and the Company has issued an aggregate of 722,237 of such shares of Common
Stock and expects to issue approximately 116,000 shares of Common Stock in
connection with the proposed acquisition of the KHEC Facility. See "Recent
Developments." The Company also intends to register under the Securities Act
all shares reserved for issuance under the 1995 Plan, the 1996 Plan, and the
Directors' Plan. All shares purchased in the future under such plans will be
available for resale in the public market without restriction, except that
affiliates must comply with the provisions of Rule 144 other than the holding
period requirement. Shares registered pursuant to any of these registration
statements could be sold in the public market.
41
<PAGE>
UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement, the underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation, Allen & Company
Incorporated, CS First Boston Corporation, and Smith Barney Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company an aggregate of 5,000,000 shares of Common Stock. The number
of shares of Common Stock that each Underwriter has agreed to purchase is set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Allen & Company Incorporated.......................................
CS First Boston Corporation........................................
Smith Barney Inc...................................................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered in this offering are subject to approval of certain legal matters by
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all the shares of Common Stock offered in this offering
(other than the shares of the Common Stock covered by the over-allotment
option described below) if any are taken.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain liabilities, including
liabilities under the Securities Act.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock in this offering to the public at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may
reallow, discounts not in excess of $ per share to any other Underwriter
and certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
750,000 additional shares of Common Stock, at the offering price set forth on
the cover page of this Prospectus, less underwriting discounts and
commissions, solely to cover over-allotments. To the extent that the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
offered in this offering.
DLJ, one of the Representatives, and certain of its affiliates own 1,219,457
shares of Common Stock which represented 5.3% of the Company's Common Stock as
of March 31, 1996. For a description of the mortgage facility provided to the
Company by an affiliate of DLJ, see "Financing."
An affiliate of CS First Boston Corporation, one of the Representatives, has
committed to provide to the Company a mortgage facility of up to $300 million,
subject to certain conditions. For a description of the Proposed Mortgage
Facility, see "Financing."
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<PAGE>
Pursuant to regulations promulgated by the Securities and Exchange
Commission (the "Commission"), market makers in the Common Stock who are
Underwriters or prospective underwriters ("passive market makers") may,
subject to certain limitations, make bids for or purchases of shares of Common
Stock until the earlier of the time of commencement (the "Commencement Date")
of offers or sales of the Common Stock contemplated by this Prospectus or the
time at which a stabilizing bid for such shares is made. In general, on and
after the date two days prior to the Commencement Date (1) such market maker's
net daily purchases of the Common Stock may not exceed 30% of the average
daily trading volume in such stock for the two full consecutive calendar
months immediately preceding the filing date of the registration statement of
which this Prospectus forms a part, (2) such market maker may not effect
transactions in, or display bids for, the Common Stock at a price that exceeds
the highest bid for the Common Stock by persons who are not passive market
makers and (3) bids made by passive market makers must be identified as such.
Subject to certain exceptions, the Company and certain shareholders
(including all of its directors and executive officers) have agreed not to
offer, sell, contract to sell, or otherwise dispose of any shares of Common
Stock or any securities convertible or exchangeable into any shares of Common
Stock prior to the expiration of 90 days from the date of this Prospectus,
without the prior written consent of DLJ. See "Shares Eligible for Future
Sale."
At the request of the Company, up to 250,000 shares of Common Stock offered
in this offering have been reserved for sale to certain individuals, including
employees of the Company and other entities with whom directors of the Company
are affiliated, and members of their families. The price of such shares to
such persons will be the public offering price set forth on the cover of this
Prospectus. The number of shares available to the general public will be
reduced to the extent those persons purchase reserved shares. Any shares not
so purchased will be offered in this offering at the public offering price set
forth on the cover of this Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the validity of the shares of
Common Stock offered hereby will be passed upon for the Company by Bell, Boyd
& Lloyd, Chicago, Illinois, and for the Underwriters by Sidley & Austin,
Chicago, Illinois.
EXPERTS
The consolidated balance sheet of Extended Stay America, Inc. and
subsidiaries as of December 31, 1995 and the related consolidated statements
of operations, shareholders' equity and cash flows for the period from January
9, 1995 (inception) through December 31, 1995, the statements of operations,
partners' deficit, and cash flows of Welcome Inn America 89-1, L.P. for each
of the two years in the period ended December 31, 1994 and the period from
January 1, 1995 through August 18, 1995, the balance sheets of Apartment/Inn,
L.P. as of December 31, 1994 and 1995 and the related statements of operations
and partners' deficit and cash flows for each of the two years in the period
ended December 31, 1995, the combined balance sheets of Hometown Inn I, LTD
and Hometown Inn II, LTD as of December 31, 1994 and 1995 and the related
combined statements of operations and partners' capital and cash flows for
each of the three years in the period ended December 31, 1995, and the 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, included in this Prospectus, have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
43
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Reports,
registration statements, proxy statements, and other information filed by the
Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, New York, New York 10048. Copies of such materials
can be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to
the Common Stock offered hereby. As used herein, the term "Registration
Statement" means the initial Registration Statement and any and all amendments
thereto. This Prospectus omits certain information contained in said
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto. Statements herein concerning the contents of
any contract or other document are not necessarily complete and in each
instance reference is made to such contract or other document filed with the
Commission as an exhibit to the Registration Statement, or otherwise, each
such statement being qualified by and subject to such reference in all
respects.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PRO FORMA FINANCIAL STATEMENTS OF EXTENDED STAY AMERICA, INC. AND
SUBSIDIARIES
Pro Forma Consolidated Statement of Operations for the period from
January 9, 1995 (inception) through December 31, 1995 (unaudited) and
the three months ended March 31, 1996 (unaudited)....................... F-2
Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited).... F-4
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................ F-5
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996
(unaudited)............................................................. F-6
Consolidated Statements of Operations for the period from January 9, 1995
(inception) through December 31, 1995, for the period from January 9,
1995 (inception) through March 31, 1995 (unaudited) and for the three
months ended March 31, 1996 (unaudited) ................................ F-7
Consolidated Statements of Shareholders' Equity for the period from
January 9, 1995 (inception) through December 31, 1995 and for the three
months ended March 31, 1996 (unaudited) ................................ F-8
Consolidated Statements of Cash Flows for the period from January 9, 1995
(inception) through December 31, 1995, for the period from January 9,
1995 (inception) through March 31, 1995 (unaudited) and for the three
months ended March 31, 1996 (unaudited)................................. F-9
Notes to Consolidated Financial Statements............................... F-10
WELCOME INN AMERICA 89-1, L.P.
Report of Independent Accountants........................................ F-17
Statements of Operations for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 through August 18, 1995......... F-18
Statements of Partners' Deficit for the years ended December 31, 1993 and
1994 and for the period from January 1, 1995 through August 18, 1995.... F-19
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 through August 18, 1995......... F-20
Notes to Financial Statements............................................ F-21
APARTMENT/INN, L.P.
Report of Independent Accountants........................................ F-22
Balance Sheets as of December 31, 1994 and 1995.......................... F-23
Statements of Operations and Partners' Deficit for the two years ended
December 31, 1994 and 1995.............................................. F-24
Statements of Cash Flows for the two years ended December 31, 1994 and
1995.................................................................... F-25
Notes to Financial Statements............................................ F-26
HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD
Report of Independent Accountants........................................ F-28
Combined Balance Sheets as of December 31, 1994 and 1995................. F-29
Combined Statement of Operations and Partners' Capital for the three
years ended December 31, 1993, 1994, and 1995........................... F-30
Combined Statement of Cash Flows for the three years ended December 31,
1993, 1994, and 1995.................................................... F-31
Notes to Combined Financial Statements................................... F-32
KIPLING HOSPITALITY ENTERPRISE CORPORATION
Report of Independent Accountants........................................ F-34
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-35
Statements of Operations and Retained Earnings for the year ended
December 31, 1995 and the three months ended March 31, 1995 and 1996
(unaudited)............................................................. F-36
Statements of Cash Flows for the year ended December 31, 1995 and for the
three months ended March 31, 1995 and 1996 (unaudited).................. F-37
Notes to Financial Statements............................................ F-38
</TABLE>
F-1
<PAGE>
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
acquisition of the KHEC Facility and the related issuances of shares of common
stock had occurred on January 9, 1995 (the date of inception of the Company).
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, and
KHEC. 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 January 9,
1995, 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 ACQUISITION ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $ 817,133 $4,726,203 $ (108,616)(1) $5,434,720 $1,255,118 $(27,509)(1) $6,662,329
Management fees........ 17,775 (17,775)(2)
Other revenue.......... 42,977 215,409 (5,035)(1) 253,351 69,501 (1,523)(1) 321,329
----------- ---------- ---------- ---------- ---------- -------- ----------
Total revenue........ 877,885 4,941,612 (131,426) 5,688,071 1,324,619 (29,032) 6,983,658
----------- ---------- ---------- ---------- ---------- -------- ----------
Costs and expenses:
Property operating
expenses.............. 332,523 2,066,850 (49,037)(1) 2,332,561 757,768 (16,609)(1) 3,073,720
(17,775)(2)
Corporate operating
and property
management expenses... 2,042,039 302,452 800,000 (3) 3,144,491 111,362 (58,093)(2) 3,196,592
(1,168)(1)
Site selection costs... 512,529 512,529 512,529
Depreciation and
amortization.......... 146,726 514,085 220,703 (4) 881,514 89,018 70,982 (4) 1,041,514
----------- ---------- ---------- ---------- ---------- -------- ----------
Total costs and
expenses............ 3,033,817 2,883,387 953,891 6,871,095 958,148 (4,888) 7,824,355
----------- ---------- ---------- ---------- ---------- -------- ----------
Income (loss) from
operations.......... (2,155,932) 2,058,225 (1,085,317) (1,183,024) 366,471 (24,144) (840,697)
Interest income
(expense).............. 848,510 (836,797) 836,797 (5) 848,510 (119,011) 75,011 (5) 804,510
----------- ---------- ---------- ---------- ---------- -------- ----------
Net income (loss)...... $(1,307,422) $1,221,428 $ (248,520) $ (334,514) $ 247,460 $ 50,867 $ (36,187)
=========== ========== ========== ========== ========== ======== ==========
Net loss per common
share(6).............. $ (0.10) $ (0.02) $ (0.00)
=========== ========== ==========
Weighted average
number of common and
equivalent shares
outstanding during
the period(6)......... 12,652,110 13,589,464 13,834,129
=========== ========== ==========
</TABLE>
F-2
<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 ACQUISITION ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Room revenue........... $1,137,841 $458,068 $ $1,595,909 $231,426 $ $ 1,827,335
Other revenue.......... 32,988 15,966 48,954 13,297 62,251
---------- -------- -------- ---------- -------- ------- -----------
Total revenue........ 1,170,829 474,034 1,644,863 244,723 1,889,586
---------- -------- -------- ---------- -------- ------- -----------
Costs and expenses:
Property operating
expenses.............. 442,540 152,804 595,344 167,465 762,809
Corporate operating
and property
management expenses... 1,580,655 38,961 1,619,616 18,047 (11,260)(2) 1,626,403
Site selection costs... 823,733 823,733 823,733
Depreciation and
amortization.......... 203,343 49,399 6,038 (4) 258,780 18,132 21,868 (4) 298,780
---------- -------- -------- ---------- -------- ------- -----------
Total costs and
expenses............ 3,050,271 241,164 6,038 3,297,473 203,644 10,608 3,511,725
---------- -------- -------- ---------- -------- ------- -----------
Income (loss) from
operations.......... (1,879,442) 232,870 (6,038) (1,652,610) 41,079 (10,608) (1,622,139)
Interest income
(expense).............. 1,450,132 1,450,132 (31,836) 6,836 (5) 1,425,132
---------- -------- -------- ---------- -------- ------- -----------
Net income (loss)...... $ (429,310) $232,870 $ (6,038) $ (202,478) $ 9,243 $(3,772) $ (197,007)
========== ======== ======== ========== ======== ======= ===========
Net loss per common
share(6).............. $ (0.02) $ (0.01) $ (0.01)
========== ========== ===========
Weighted average
number of common
shares outstanding
during the period(6).. 22,467,393 22,853,092 22,969,438
========== ========== ===========
</TABLE>
- ---------------------
(1) To eliminate the estimated revenues and expenses for the Acquired
Facilities, the Marietta Facility and the KHEC Facility 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, and the KHEC Facility for any
period prior to acquisition.
(5) To eliminate non-continuing interest expense paid by the Acquired
Facilities, the Marietta Facility and the KHEC Facility prior to
acquisition, net of interest income earned by the Company on the amount of
cash used in the acquisitions.
(6) See notes 2 and 5 to the Company's consolidated financial statements.
F-3
<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 this
offering had been completed and the proposed acquisition of the KHEC Facility
had occurred on March 31, 1996. Such pro forma information is based upon the
consolidated balance sheet of the Company and the balance sheet of KHEC 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>
PROPOSED
ACTUAL ACQUISITION ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $104,010,918 $ 40,136 $ (2,040,136)(1) $226,010,918
124,000,000 (2)
Refundable deposits... 621,654 621,654
Supply inventories.... 291,266 40,338 (40,338)(1) 291,266
Prepaid expenses...... 366,142 366,142
Other current assets.. 56,768 26,569 (26,569)(1) 56,768
------------ ---------- ------------ ------------
Total current
assets............. 105,346,748 107,043 121,892,957 227,346,748
------------ ---------- ------------ ------------
Property and equipment,
net.................... 51,658,313 1,454,178 3,570,822 (1) 56,683,313
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............ 156,741 156,741
------------ ---------- ------------ ------------
$166,369,727 $1,569,548 $125,455,452 $293,394,727
============ ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 925,504 $ 15,730 $ (15,730)(1) $ 925,504
Accrued salaries and
related expenses..... 67,855 15,537 (15,537)(1) 67,855
Due to related
parties.............. 71,845 113,486 (113,486)(1) 71,845
Other accrued
expenses............. 440,612 46,881 (46,881)(1) 440,612
Deferred revenue...... 330,856 9,499 (9,499)(1) 330,856
Current maturities of
long-term debt....... 64,454 (64,454)(1)
------------ ---------- ------------ ------------
Total current
liabilities........ 1,836,672 265,587 (265,587) 1,836,672
------------ ---------- ------------ ------------
Long-term debt.......... 1,105,358 (1,105,358)(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
27,969,438 shares
issued and
outstanding for
Actual and Pro Forma,
respectively......... 228,531 174,000 (172,837)(1) 279,694
50,000 (2)
Additional paid in
capital.............. 166,041,256 30,270 2,993,567 (1) 293,015,093
123,950,000 (2)
Due from affiliated
companies and prepaid
services............. (521,395) 521,395 (1)
Accumulated
(deficit)/retained
earnings............. (1,736,732) 515,728 (515,728)(1) (1,736,732)
------------ ---------- ------------ ------------
Total shareholders'
equity............. 164,533,055 198,603 126,826,397 291,558,055
------------ ---------- ------------ ------------
$166,369,727 $1,569,548 $125,455,452 $293,394,727
============ ========== ============ ============
</TABLE>
- ---------------------
(1) To reflect the purchase adjustments relating to the proposed acquisition
of the KHEC Facility assuming the acquisition is completed through the
issuance of 116,346 shares 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 property to an extended stay lodging facility.
(2) To reflect the estimated net proceeds of this offering.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of Extended Stay
America, Inc. and subsidiaries (the "Company") as of December 31, 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period from January 9, 1995 (inception) through December 31,
1995. These consolidated 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 consolidated financial position of Extended Stay
America, Inc. and subsidiaries as of December 31, 1995 and the consolidated
results of their operations and their cash flows for the period from January
9, 1995 (inception) through December 31, 1995 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
January 26, 1996
F-5
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
ASSETS ------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents (including securities
purchased under agreements to resell of
$122,904,142 at December 31, 1995).............. $123,357,510 $104,010,918
Refundable deposits.............................. 344,064 621,654
Supply inventories............................... 92,817 291,266
Prepaid expenses................................. 318,541 366,142
Other current assets............................. 20,758 56,768
------------ ------------
Total current assets........................... 124,133,690 105,346,748
------------ ------------
Property and equipment, net........................ 18,205,537 51,658,313
Site deposits and preacquisition costs............. 1,931,215 3,913,811
Deferred loan costs................................ 5,293,119 5,294,114
Other assets....................................... 55,088 156,741
------------ ------------
$149,618,649 $166,369,727
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable................................. $ 670,708 $ 925,504
Accrued salaries and related expenses............ 271,230 67,855
Due to related parties........................... 133,149 71,845
Other accrued expenses........................... 691,117 440,612
Deferred revenue................................. 330,856
Note payable..................................... 630,200
------------ ------------
Total current liabilities...................... 2,396,404 1,836,672
------------ ------------
Commitments
Shareholders' Equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued and
outstanding.....................................
Common stock, $.01 par value, 200,000,000 shares
authorized, 22,130,855 and 22,853,092 shares
issued and outstanding, respectively............ 221,309 228,531
Additional paid in capital....................... 148,308,358 166,041,256
Accumulated deficit.............................. (1,307,422) (1,736,732)
------------ ------------
Total shareholders' equity..................... 147,222,245 164,533,055
------------ ------------
$149,618,649 $166,369,727
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
JANUARY 9, JANUARY 9,
1995 1995 FOR THE
(INCEPTION) (INCEPTION) THREE MONTHS
THROUGH THROUGH ENDED
DECEMBER MARCH 31, MARCH 31,
31, 1995 1995 1996
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue:
Room revenue........................... $ 817,133 $ $1,137,841
Management fees........................ 17,775
Other revenue.......................... 42,977 32,988
----------- ----------
Total revenue........................ 877,885 1,170,829
----------- ----------
Costs and expenses:
Property operating expenses............ 332,523 442,540
Corporate operating and property
management expenses (including
$386,000 to related parties for the
period ending December 31, 1995)...... 2,042,039 195,823 1,580,655
Site selection costs................... 512,529 52,778 823,733
Depreciation and amortization.......... 146,726 203,343
----------- ---------- ----------
Total costs and expenses............. 3,033,817 248,601 3,050,271
----------- ---------- ----------
Loss from operations................. (2,155,932) (248,601) (1,879,442)
Interest income.......................... 848,510 1,450,132
----------- ---------- ----------
Net loss............................. $(1,307,422) $ (248,601) $ (429,310)
=========== ========== ==========
Net loss per common share............ $ (0.10) $ (0.02) $ (0.02)
=========== ========== ==========
Weighted average number of common and
equivalent shares outstanding during
the period.......................... 12,652,110 11,489,017 22,467,393
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION)
THROUGH DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT
<S> <C> <C> <C> <C>
Issuance of common stock, net of
issuance costs of $5,709,337... 22,130,855 $221,309 $148,308,358
Net loss........................ $(1,307,422)
---------- -------- ------------ -----------
Balances, December 31, 1995..... 22,130,855 221,309 148,308,358 (1,307,422)
Issuance of common stock
(unaudited).................... 722,237 7,222 17,845,642
Additional payouts of initial
public offering costs
(unaudited).................... (112,744)
Net loss (unaudited)............ (429,310)
---------- -------- ------------ -----------
Balances, March 31, 1996
(unaudited).................... 22,853,092 $228,531 $166,041,256 $(1,736,732)
========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
JANUARY 9, 1995 PERIOD FROM
(INCEPTION) JANUARY 9, 1995
THROUGH (INCEPTION) FOR THE THREE
DECEMBER 31, THROUGH MARCH 31, MONTHS ENDED
1995 1995 MARCH 31, 1996
--------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $ (1,307,422) $(248,601) $ (429,310)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization.............. 146,726 203,343
Write-off of site deposits
and preacquisition costs.. 288,655 187,418
Change in:
Refundable deposits....... (45,516) (3,371) (117,590)
Supply inventories........ (92,817) (24,930)
Prepaid expenses.......... (318,541) (5,345) (51,154)
Other current assets...... (26,284) (36,010)
Accounts payable.......... 65,504 205,361
Accrued expenses.......... 355,397 89,537 224,915
Due to related parties.... 133,149 54,857 (133,149)
Deferred revenue.......... 330,856
------------ --------- ------------
Net cash (used in)
provided by operating
activities.............. (801,149) (112,923) 359,750
------------ --------- ------------
Cash flows from investing
activities:
Acquisition of extended stay
properties.................. (2,342,346) (355,579)
Additions to property and
equipment................... (13,230,022) (281,301) (15,356,090)
Payments for site deposits
and preacquisition costs.... (2,579,667) (120,086) (2,738,578)
Refunds of deposits on
property sites.............. 191,666 240,000
Payments for other assets.... (65,436) (60,746)
------------ --------- ------------
Net cash used in
investing activities.... (18,025,805) (401,387) (18,270,993)
------------ --------- ------------
Cash flows from financing
activities:
Proceeds from issuance of
common stock................ 143,882,880
Additions to deferred loan
costs....................... (1,698,416) (21,698)
Additions to prepaid
registration costs.......... (52,035)
Proceeds from related party
loans....................... 6,135,462 521,031
Payments on related party
loans....................... (6,135,462)
Payment of note payable...... (630,200)
Payments of initial public
offering costs.............. (731,416)
------------ --------- ------------
Net cash provided by
(used in) financing
activities.............. 142,184,464 521,031 (1,435,349)
------------ --------- ------------
Increase (decrease) in
cash.................... 123,357,510 6,721 (19,346,592)
Cash and cash equivalents at
beginning of period.......... 123,357,510
------------ --------- ------------
Cash and cash equivalents at
end of period................ $123,357,510 $ 6,721 $104,010,918
============ ========= ============
Noncash investing and
financing transactions:
Issuance of common stock for
acquisition of extended stay
properties.................. $ 1,700,000 $ 17,852,864
============ ============
Capitalized or deferred items
included in accounts payable
and accrued liabilities..... $ 1,212,154 $ 454,178 $ 654,639
============ ========= ============
Note payable for purchase of
property site............... $ 630,200
============
Issuance of common stock for
deferred loan costs......... $ 3,574,000
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Extended Stay America, Inc. (the "Company") was incorporated on January 9,
1995 as a Delaware corporation to develop, own, and operate extended stay
lodging facilities designed to appeal to value-conscious guests. Operations of
the Company's first extended stay facility commenced on August 1, 1995. The
Company acquired a second extended stay facility on August 18, 1995 (Note 5).
The Company's current operating subsidiaries are ESA Development, Inc. and ESA
Properties, Inc., which acquire and develop properties, and ESA Management,
Inc., which provides management services for all of the lodging facilities
owned by the Company and its subsidiaries. The Company expects that each
lodging facility will be owned by a separate single-purpose subsidiary formed
for such purpose.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
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 disclosure 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.
Concentration of Credit Risk. The Company maintained deposits totaling
$123,357,510 at December 31, 1995, with one bank. Deposits in excess of
$100,000 are not insured by the Federal Deposit Insurance Corporation.
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.
The Company invests excess funds in an overnight sweep account with
NationsBank which invests in short-term, interest-bearing reverse repurchase
agreements. On December 31, 1995, the Company had invested $122,904,142 in
U.S. Government securities under agreements to resell. Due to the short-term
nature of these investments, the Company did not take possession of the
securities, which were instead held by the bank. The market value of the
securities held pursuant to the agreements approximates the carrying amount.
Supply Inventories. Supply inventories consist principally of linen,
cleaning and other room supplies and are stated at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Property and Equipment. Property and equipment is stated at cost. The
Company capitalizes interest, salaries and related costs for site selection,
design and construction supervision.
Depreciation is computed by the straight-line method 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>
Buildings and improvements...................................... 40 years
Furniture, fixtures and equipment............................... 3-7 years
</TABLE>
For the period from January 9, 1995 through December 31, 1995 the Company
incurred interest of $98,217 all of which was capitalized and included in the
cost of buildings and improvements.
F-10
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preacquisition Costs. The Company incurs costs related to the acquisition of
property sites. These costs are capitalized when it is probable that a site
will be acquired. These costs are reclassified to property and equipment upon
acquisition. In the event the acquisition is not consummated, the costs are
charged to site selection costs. All other site selection costs are expensed
as incurred.
Deferred Loan Costs. The Company has incurred costs in obtaining financing.
These costs have been deferred and will be amortized over the life of the
respective loans using the effective yield method.
Preopening Costs. The Company capitalizes compensation and other training-
related costs incurred prior to the opening of a property. Included in other
current assets at December 31, 1995 are costs of $7,736, net of accumulated
amortization of $5,526, which are being amortized over a period of twelve
months.
Organization Costs. Organization costs at December 31, 1995 of $41,388 are
included in other assets, net of accumulated amortization of $10,348, and are
being amortized over sixty months using the straight-line method.
Income Taxes. Income taxes for the Company are determined in accordance with
SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the use of a liability method in which deferred income taxes are provided for
temporary differences between the financial reporting and income tax basis of
assets and liabilities using the income tax rates, under existing legislation,
expected to be in effect at the date such temporary differences are expected
to reverse.
Revenue Recognition. Room revenue and other income are recognized when
earned. Management fees of $17,775 were recognized as earned and represent
fees charged to Welcome Inn America 89-1, L.P. for the management of its
extended stay property for the period May 1, 1995 through August 18, 1995
prior to the acquisition of such property by the Company (Note 5).
Business Segment. The Company operates principally in one business segment
which is to develop, own, and operate extended stay lodging facilities.
Net Loss Per Common Share. The net loss per common share amount in the
statement of operations for the three months ended March 31, 1996 has been
computed in accordance with Accounting Principles Board Opinion (APB) No. 15.
The net loss per common share amount for the year ended December 31, 1995 and
for the three months ended March 31, 1995 has been computed in accordance with
a Staff Accounting Bulletin (SAB) of the Securities and Exchange Commission.
According to the SAB, equity securities, including stock, warrants, options
and other potentially dilutive securities, issued within a twelve-month period
prior to an initial public offering of common stock must be treated as common
stock equivalents when computing earnings per share for all periods presented
if the issue price of the common stock or the exercise price of the warrants,
options or other potentially dilutive securities is substantially less than
the proposed initial public offering price, including loss years where the
impact of the incremental shares is anti-dilutive. As permitted by the SAB,
the treasury stock method has been used in determining the weighted average
number of shares of common stock outstanding during the periods presented.
On October 19, 1995, the Board of Directors of the Company declared a 210-
for-1 stock split effected in the form of a dividend. Accordingly, all shares
and per share amounts have been adjusted retroactively to reflect this event.
Unaudited Interim Financial Statements. The unaudited interim financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and 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.
F-11
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31, 1995
<S> <C>
Land and improvements, including land under current
development................................................ $ 9,074,172
Buildings and improvements.................................. 5,350,107
Furniture, fixtures and equipment........................... 1,197,481
Construction in progress.................................... 2,714,629
-----------
18,336,389
Less accumulated depreciation............................... 130,852
-----------
Total property and equipment............................ $18,205,537
===========
</TABLE>
The Company had commitments to construct additional extended stay properties
totaling approximately $23,000,000 at December 31, 1995.
NOTE 4--OPTIONS TO PURCHASE PROPERTY SITES
As of December 31, 1995, the Company had options to purchase parcels of real
estate at 32 locations in 14 states. The Company has paid $710,000 in
connection with these options. If for any reason the Company does not acquire
these parcels, the amounts paid in connection with the options are generally
refundable. These amounts are included in site deposits and preacquisition
costs.
NOTE 5--ACQUISITION OF EXTENDED STAY PROPERTIES
On August 18, 1995 the Company acquired an existing extended stay property
from Welcome Inn America 89-1, L.P. for $4,042,346 which was paid for by the
issuance of 357,000 shares of common stock valued at $1,700,000 and payment of
$2,342,346 in cash.
On January 26, 1996, the Company acquired an existing extended stay property
from Apartment/Inn, L.P. for approximately $8,324,000 which was paid for by
the issuance of 293,629 shares of common stock plus the payment of related
expenses of approximately $106,000 in cash.
On February 23, 1996, the Company acquired two existing extended stay
properties from Hometown Inn I, LTD and Hometown Inn II, LTD for approximately
$9,603,000 which was paid for by the issuance of 428,608 shares of common
stock and $75,000 in cash plus the payment of related expenses of $175,000 in
cash. (Unaudited)
These acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the properties are
included in the Consolidated Statement of Operations from the dates of
acquisition.
F-12
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma condensed statements of operations of the
Company have been updated to include all acquisitions occurring through March
31, 1996, as discussed above, and the issuance of shares to acquire and to
fund the cash portion of the purchase prices as if the acquisitions had
occurred on January 9, 1995 (the date of inception of the Company).
Accordingly, the unaudited pro forma statement of operations for the period
January 9, 1995 through December 31, 1995 differs from the statement included
in the Company's 1995 annual report to shareholders. This statement also
reflects estimated incremental expenses to operate as a publicly held company
as if the Company were publicly held on the date of inception. This pro forma
condensed statement of operations is not necessarily indicative of what actual
results of operations of the Company would have been assuming such
transactions had been completed as of January 9, 1995, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE
JANUARY 9, 1995 JANUARY 9, 1995 THREE MONTHS
(INCEPTION) THROUGH (INCEPTION) THROUGH ENDED
DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue:
Room revenue.......... $ 5,434,720 $1,128,223 $1,595,909
Other revenue......... 253,351 57,791 48,954
----------- ---------- ----------
Total revenue....... 5,688,071 1,186,014 1,644,863
----------- ---------- ----------
Costs and expenses:
Property operating
expenses............. 2,332,561 522,856 595,344
Corporate operating
and property
management expenses.. 3,144,491 473,658 1,619,616
Site selection costs.. 512,529 52,778 823,733
Depreciation and
amortization......... 881,514 213,486 258,780
----------- ---------- ----------
Total costs and
expenses........... 6,871,095 1,262,778 3,297,473
----------- ---------- ----------
Loss from
operations......... (1,183,024) (76,763) (1,652,610)
Interest income....... 848,510 1,450,132
----------- ---------- ----------
Net loss............ $ (334,514) $ (76,763) $ (202,478)
=========== ========== ==========
Net loss per common
share and
equivalent......... $ (0.02) $ (0.01) $ (0.01)
=========== ========== ==========
Weighted average
number of common
and equivalent
shares outstanding
during the period.. 13,589,464 12,493,366 22,853,092
=========== ========== ==========
</TABLE>
NOTE 6--NOTE PAYABLE
In conjunction with the acquisition of a property site, the Company issued a
note payable to the seller in the amount of $630,200. The note bore interest
at a rate of three percent per year and was paid on January 2, 1996. The note
was collateralized by a deed of trust on the property.
NOTE 7--PREFERRED STOCK
Shares of preferred stock may be issued from time to time, in one or more
series, as authorized by the Board of Directors. Prior to issuance of shares
of each series, the Board will designate for each such series, the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms
or conditions of redemption, as are permitted by law. No shares of preferred
stock are outstanding and the Company has no present plans to issue any shares
of preferred stock.
NOTE 8--STOCK OPTION PLANS
The Company has adopted the 1995 Employee Stock Option Plan to attract and
retain employees and consultants. Under the plan, options may be granted with
respect to a total of not more than 1,677,060 shares of common stock, subject
to antidilution and other adjustment provisions. No options may be granted
under the plan after August 18, 2005. The options vest over a four-year
period.
During the period January 9, 1995 through December 31, 1995, the
compensation committee granted, under the plan, 1,132,501 ten-year options to
purchase common stock at exercise prices per share ranging from $4.76
F-13
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to $13.00. The option price is equal to the fair market value of the stock on
the date of grant, as determined by the Board of Directors. No options to
purchase common stock under the plan are currently exercisable.
During the period January 1, 1996 through March 31, 1996, the compensation
committee granted under the 1995 plan 544,372 additional options to purchase
common stock at exercise prices per share ranging from $21.00 to $30.25.
(Unaudited)
Pursuant to an agreement with an officer of ESA Development, Inc. ("ESA
Development"), such officer was granted options in June 1995 to purchase a
total of 1,437.5 shares of ESA Development common stock. In March 1996, the
agreement and options were terminated. (Unaudited)
The Company has adopted the 1995 Stock Option Plan for Non-Employee
Directors. Under the plan, options may be granted with respect to a total of
not more than 240,000 shares of common stock of the Company subject to the
antidilution and other adjustment provisions. Each option shall be for a term
of ten years and shall become exercisable six months after the date of its
grant. Options to purchase an aggregate of 80,000 shares of the Company's
common stock were granted to non-employee directors of the Company effective
upon the Company's initial public offering of its common stock on December 13,
1995 at an exercise price per share of $13.00 (the initial public offering
price). Pursuant to the plan, subsequent non-employee directors of the Company
will be granted a one-time option to purchase 20,000 shares of the Company's
common stock upon their initial election to the Board of Directors of the
Company at a price equal to the fair market value of the stock on the date of
grant. During the four-year period following the initial election of a non-
employee director to the Board of Directors, an additional option covering
5,000 shares of common stock of the Company shall be granted to such non-
employee director on each anniversary of such non-employee director's initial
option grant, provided that not more than four such additional options shall
be granted to any one non-employee director. No options may be granted under
the plan after November 17, 2005. As of December 31, 1995, no options to
purchase common stock under the plan were exercisable.
Effective January 24, 1996, the Company has adopted (subject to shareholder
approval) the 1996 Employee Stock Option Plan to attract and retain employees
and consultants. Under the plan, options may be granted with respect to a
total of not more than 2,500,000 shares of common stock, subject to
antidilution and other adjustment provisions. No options may be granted under
the plan after January 24, 2006. The options vest over a four-year period.
During the period January 1, 1996 through March 31, 1996, the compensation
committee granted under the 1996 plan 679,385 options to purchase common stock
at exercise prices per share ranging from $21.00 to $25.88 under this plan.
(Unaudited)
NOTE 9--MORTGAGE FACILITY
On October 31, 1995, the Company executed a mortgage facility (the "Mortgage
Facility") for up to $200 million to be used to finance, on a long-term basis,
newly constructed extended stay lodging facilities. The Mortgage Facility
provides that after the first $100 million of borrowings, the availability of
the next $60 million is contingent upon (1) the Company's operating facilities
meeting certain debt coverage ratios, and (2) the successful completion of an
initial public offering of the Company's common stock which was completed on
December 19, 1995. An additional $40 million will become available at the
option of the Company, subject to the Company having at least 10 facilities
which meet certain debt coverage ratios. Draws under the Mortgage Facility
will be made on an individual property basis in amounts ranging from 50% to
75% of construction costs, depending on the operating results of the
individual property. The Mortgage Facility provides for the following fees to
be paid by the Company: (1) a commitment fee, $1,600,000 of which was paid
pursuant to the execution of the Mortgage Facility $400,000 of which will be
paid if the availability under the Mortgage Facility is increased; (2) a
drawdown fee of 1% of the funds loaned under the Mortgage Facility; and (3) a
fee paid by the issuance of 750,540 shares of common stock of the Company at
the time the Mortgage Facility was executed. These fees, which include the
estimated fair market value of the common stock issued to the lender, will be
F-14
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized over the life of the Mortgage Facility using the effective yield
method, thus increasing the effective interest rate above the stated interest
rate discussed below. Additionally, the lender was provided the right, which it
has exercised, to purchase 500,430 shares of common stock at a price of $4.76
per share upon the execution of the Mortgage Facility. The Mortgage Facility
also provides for additional fees in the event of termination or nonusage of
amounts in excess of $100 million of up to 2.0% of the portion of the facility
so terminated or unused. All amounts borrowed under the Mortgage Facility will
be fully guaranteed by the Company and will be collateralized by, among other
things, first mortgages on the properties financed and assignment of leases,
rents and security deposits related to each property. The amounts drawn under
the Mortgage Facility will bear interest at a base rate equal to the ten-year
U.S. Treasury securities rate plus 4.0% at the times the loans are made.
Advances under the Mortgage Facility will be provided on an interest only basis
for a pre-stabilization period and will be amortized based on a 25-year
schedule thereafter with a final maturity on the December 31 following the
tenth anniversary of the date that the loan begins to amortize.
Prepayment of mortgage loans may be made subject to specified penalties
provided certain conditions are met. Such prepayments may be made without
penalty within five years of their respective final maturity dates. The
Mortgage Facility provides that the Company must maintain a tangible net worth
of not less than $40,000,000 and amounts due under the Mortgage Facility may at
any time become immediately due and payable if the current members of the Board
of Directors cease to constitute a majority of the board. The Company must
place $22,500,000 in an escrow account in the name of the lender prior to
obtaining the first loan and an additional $22,500,000 once the loan amount
exceeds $33,750,000. Funds deposited in the escrow account will be classified
as noncurrent and will be used to acquire and construct extended stay lodging
facilities. The loan also requires the Company to fund certain other escrow
accounts. The Company's dividends cannot exceed 50% of the excess of its net
income for any period over its cumulative losses not previously applied in
computing the limitation.
The Company believes that there is no material difference in the carrying
amount (including the terms and conditions outlined above) and estimated fair
value of the Company's Mortgage Facility.
NOTE 10--RELATED PARTY TRANSACTIONS
During the period ended December 31, 1995, the Company borrowed under an
informal revolving loan agreement from shareholders and their affiliates, which
was paid on August 18, 1995. The maximum amount outstanding during the period
was approximately $4,476,000. Interest payments of approximately $92,000 were
made on the loans from shareholders and their affiliates, all of which were
capitalized and included in the cost of buildings and improvements.
The Company leases office space on a month-to-month basis from a company on
whose board the Chief Executive Officer of the Company serves. The Company
recognized rent expense of $18,000 through December 31, 1995 related to this
lease. In addition, the Company leases office space on a month-to-month basis
from a company owned by the Chairman of the Board of the Company. The Company
recognized rent expense of $15,000 through December 31, 1995 related to this
lease.
During 1995, the Company incurred charges of approximately $412,000 from a
company controlled by a shareholder for the use of airplanes, including
$133,000 in amounts due to related parties at December 31, 1995. Approximately
$70,000 of such charges were incurred in connection with the Company's initial
public offering and approximately $342,000 is included in corporate operating
and property management expenses. Approximately $126,000 in charges were
incurred from a law firm, one of the partners of which is a director of the
Company. Substantially all of such charges were incurred in connection with the
Company's organization, initial public offering and obtaining the Mortgage
Facility.
The Company acquired a property site for approximately $562,000 in cash from
a partnership in which certain shareholders are partners during 1995.
F-15
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--INCOME TAXES
The Company adopted SFAS 109 upon inception. Under the provisions of SFAS
109, there was no income tax expense on the net loss for the period ended
December 31, 1995. Accordingly, there is no current nor deferred federal or
state income tax expense in the initial period.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Start up expenses capitalized for tax......................... $242,000
Net operating loss carryforward............................... 155,000
Other......................................................... 78,000
--------
Total gross deferred tax asset.............................. 475,000
Less valuation allowance........................................ (453,000)
--------
Net deferred tax asset...................................... 22,000
--------
Deferred tax liability:
Fixed assets, due to differences in depreciation.............. (22,000)
--------
Net deferred tax liability.................................. $ -0-
========
</TABLE>
A valuation allowance of $453,000 was established in the Company's initial
period. The Company believes the reversal of existing taxable temporary
differences will be sufficient to recognize the remaining deferred tax assets.
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $450,000, which are available to
offset future federal taxable income, if any, through 2010.
No income taxes were paid during the period January 9, 1995 through December
31, 1995.
NOTE 12--INITIAL PUBLIC OFFERING
On December 19, 1995, the Company closed an initial public offering of
5,060,000 shares of its common stock at a public offering price of $13.00 per
share and a concurrent offering to existing shareholders of 2,067,825 shares
of common stock at an offering price of $12.09 per share, being the initial
public offering price per share less the underwriting discounts and
commissions. The proceeds to the Company of such offerings were approximately
$85,275,000, net of estimated offering expenses.
NOTE 13--EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement No.
121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This statement requires the Company to
identify properties for which it has committed to an exit plan or which may be
otherwise impaired. The fixed assets for such properties must be written down
to fair market value. The Company anticipates that the adoption of SFAS 121,
required for fiscal years beginning after December 15, 1995, will not result
in a reduction of net fixed assets or an increase in expenses in the fiscal
year 1996 statement of operations.
The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation", effective for fiscal years beginning after December
15, 1995. Under SFAS 123, companies are encouraged but not required to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value accounting rules.
Companies that choose not to record compensation expense under the new rules
will be required to disclose pro forma net income and earnings per share under
the new method. The Company has not yet determined the financial statement
impact of SFAS 123 and has elected not to recognize the impact of this
pronouncement in its fiscal 1995 statement of operations, but will disclose as
required in the fiscal 1996 financial statements on a comparative basis the
effect of SFAS 123 on net income and earnings per share.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying statements of operations, partners' deficit
and cash flows of Welcome Inn America 89-1, L.P. for each of the two years
ended December 31, 1994 and the period from January 1, 1995 through August 18,
1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Welcome Inn America 89-1, L.P.
operations and its cash flows for each of the two years in the period ended
December 31, 1994 and the period from January 1, 1995 through August 18, 1995
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
October 16, 1995
F-17
<PAGE>
WELCOME INN AMERICA 89-1, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995
-------------------- THROUGH
1993 1994 AUGUST 18, 1995
<S> <C> <C> <C>
Revenue:
Room revenue............................. $927,593 $1,009,872 $670,954
Other, net............................... 71,778 69,415 41,883
-------- ---------- --------
Total revenue.......................... 999,371 1,079,287 712,837
-------- ---------- --------
Costs and expenses:
Property operating expenses.............. 452,951 495,182 322,337
Property management fees to partners..... 104,051 66,564 44,880
Depreciation and amortization............ 138,987 141,362 95,546
-------- ---------- --------
Total costs and expenses............... 695,989 703,108 462,763
-------- ---------- --------
Income from operations................. 303,382 376,179 250,074
Interest expense:
Bank..................................... 185,518 211,607 184,226
Partners................................. 196,788 149,032 87,926
-------- ---------- --------
Total interest expense................. 382,306 360,639 272,152
-------- ---------- --------
Net income (loss)...................... $(78,924) $ 15,540 $(22,078)
======== ========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
WELCOME INN AMERICA 89-1, L.P.
STATEMENTS OF PARTNERS' DEFICIT
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1994
AND THE PERIOD FROM JANUARY 1, 1995 THROUGH AUGUST 18, 1995
<TABLE>
<S> <C>
Balance, January 1, 1993............................................ $(611,817)
Net loss............................................................ (78,924)
---------
Balance, December 31, 1993.......................................... (690,741)
Net income.......................................................... 15,540
---------
Balance, December 31, 1994.......................................... (675,201)
Net loss............................................................ (22,078)
---------
Balance, August 18, 1995............................................ $(697,279)
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
WELCOME INN AMERICA 89-1, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED DECEMBER PERIOD FROM
31, JANUARY 1, 1995
---------------------- THROUGH
1993 1994 AUGUST 18, 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ (78,924) $ 15,540 $(22,078)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation......................... 126,110 127,456 86,760
Amortization......................... 12,877 13,906 8,786
Change in:
Accounts receivable................. 106 (7,115) 117
Other current assets................ (496) (2,851) 5,672
Accounts payable.................... 3,737 (3,801) 43,481
Accrued expenses.................... 8,361 (1,483) (17,350)
Accrued interest.................... (68,493) (112,629) 79,628
Accrued salaries.................... (1,625) 496 (10,338)
--------- ----------- --------
Net cash provided by operating
activities............................ 1,653 29,519 174,678
--------- ----------- --------
Cash flows from investing activities:
Expenditures for buildings and
improvements......................... (30,547) (660)
Purchases of furniture, fixtures and
equipment............................ (5,052) (31,921)
--------- ----------- --------
Net cash used in investing activities.. (35,599) (660) (31,921)
--------- ----------- --------
Cash flows from financing activities:
Proceeds from long-term debt.......... 2,500,000
Proceeds from notes payable to
partners............................. 260,000
Principal payments on long-term debt.. (209,333) (1,874,667) (96,000)
Principal payments on notes payable to
partners............................. (693,781)
Additions to deferred loan costs...... (18,000)
--------- ----------- --------
Net cash provided by (used in)
financing activities.................. 32,667 (68,448) (96,000)
--------- ----------- --------
Net increase (decrease) in cash........ (1,279) (39,589) 46,757
Cash at beginning of periods........... 123,676 122,397 82,808
--------- ----------- --------
Cash at end of periods................. $ 122,397 $ 82,808 $129,565
========= =========== ========
Supplemental cash flow disclosure,
interest paid......................... $ 450,799 $ 473,268 $192,524
========= =========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
WELCOME INN AMERICA 89-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Welcome Inn America 89-1, L.P. (the "Partnership") is a Georgia limited
partnership that operates an extended stay facility (formerly known as the
"Welcome Inn") in Marietta, Georgia.
On August 18, 1995, the Partnership's extended stay facility was acquired by
Extended Stay America, Inc. (the "Company"). In order to present comparable
results of operations and cash flows of the Partnership, the accompanying
financial statements represent the historical results of operations and cash
flows of the Partnership through August 18, 1995, immediately prior to the
acquisition by the Company. Accordingly, any gain or loss on the sale of
assets to the Company has not been recognized in the accompanying financial
statements.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment. Property and equipment is stated at cost.
Depreciation is computed by the straight-line method 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>
Buildings and improvements....................................... 40 years
Furniture, fixtures and equipment................................ 7 years
</TABLE>
Deferred Loan Costs. The Partnership has incurred costs in obtaining
financing. These costs have been deferred and are being amortized over the
life of the respective loans using the effective yield method.
Income Taxes. Any income taxes related to income earned by the Partnership
are paid by the partners.
Revenue Recognition. Room revenue and other income are recognized when
earned.
NOTE 3--LONG-TERM DEBT
Interest expense related to long-term debt consisting of mortgages held by
various banks and partners. Certain notes have variable rates of interest tied
to various commonly used indices.
The following is a summary of long-term debt on which interest expense was
incurred:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Note payable to a bank paid in August 1995............ $2,416,000
Note payable to a bank paid in 1994................... $1,790,667
Note payable to a partner, bearing interest at twelve
percent per year...................................... 1,716,191 1,022,410
---------- ----------
$3,506,858 $3,438,410
========== ==========
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS
Management fees and interest charged by partners are as follows:
<TABLE>
<CAPTION>
MANAGEMENT INTEREST
FEES EXPENSE
<S> <C> <C>
1993.................................................... $104,051 $196,788
1994.................................................... 66,564 149,032
Period from January 1, 1995 to August 18, 1995.......... 44,880 87,926
</TABLE>
Management fees in 1993 included a one time bonus payment to a partner of
approximately $42,000.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying balance sheets of Apartment/Inn, L.P. as of
December 31, 1994 and 1995, and the related statements of operations and
partners' deficit and cash flows for each of the two years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Apartment/Inn, L.P. at
December 31, 1994 and 1995 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
January 26, 1996
F-22
<PAGE>
APARTMENT/INN, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 379,272 $ 73,407
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$10,933 in 1994 and $14,627 in 1995................ 19,268 25,448
Related parties..................................... 16,568 68,826
Refundable property taxes............................. 20,062
Other current assets.................................. 3,937 3,142
---------- ----------
Total current assets.............................. 419,045 190,885
---------- ----------
Property and equipment, net............................. 2,855,407 2,718,312
Other assets............................................ 13,845 9,502
---------- ----------
$3,288,297 $2,918,699
========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 27,982 $ 18,292
Accrued salaries...................................... 4,023 5,216
Accrued interest...................................... 26,800 26,800
Other accrued expenses................................ 28,552 17,272
Current maturities of long-term debt.................. 224,773 163,475
---------- ----------
Total current liabilities......................... 312,130 231,055
---------- ----------
Long-term debt.......................................... 3,230,201 3,022,197
---------- ----------
Total liabilities..................................... 3,542,331 3,253,252
---------- ----------
Partners' deficit....................................... (254,034) (334,553)
---------- ----------
$3,288,297 $2,918,699
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
APARTMENT/INN, L.P.
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1994 1995
<S> <C> <C>
Revenue:
Room revenue......................................... $1,696,763 $1,820,680
Other, net........................................... 77,735 76,909
---------- ----------
Total revenue...................................... 1,774,498 1,897,589
---------- ----------
Costs and expenses:
Property operating expenses.......................... 745,434 755,176
Property management fees to partners................. 106,059 113,215
Depreciation and amortization........................ 202,568 173,936
---------- ----------
Total costs and expenses........................... 1,054,061 1,042,327
---------- ----------
Income from operations............................... 720,437 855,262
Interest expense....................................... 418,758 394,413
---------- ----------
Net income........................................... 301,679 460,849
Partners' deficit, beginning of year................... (467,793) (254,034)
Distributions........................................ (87,920) (541,368)
---------- ----------
Partners' deficit, end of year......................... $ (254,034) $ (334,553)
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
APARTMENT/INN, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
------------------
1994 1995
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $301,679 $460,849
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................. 163,775 169,593
Amortization............................................. 38,793 4,343
Change in:
Accounts receivable..................................... (4,433) (58,438)
Refundable property taxes............................... (20,062)
Other current assets.................................... 10,755 795
Accounts payable........................................ 11,621 (9,690)
Accrued expenses........................................ 11,109 (11,280)
Accrued salaries........................................ 55 1,193
-------- --------
Net cash provided by operating activities.............. 533,354 537,303
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (29,333) (32,498)
-------- --------
Net cash used in investing activities.................. (29,333) (32,498)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt...................... (130,778) (269,302)
Payments of deferred loan costs........................... (5,234)
Distributions to partners................................. (87,920) (541,368)
-------- --------
Net cash used in financing activities.................. (223,932) (810,670)
-------- --------
Net increase (decrease) in cash............................ 280,089 (305,865)
-------- --------
Cash at beginning of periods............................... 99,183 379,272
-------- --------
Cash at end of periods..................................... $379,272 $ 73,407
======== ========
Supplemental cash flow disclosure, interest paid........... $418,758 $394,413
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
APARTMENT/INN, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Apartment/Inn, L.P. (the "Partnership") is a Georgia limited partnership that
operates an extended stay facility (known as the "Apartment Inn") in Norcross,
Georgia. On January 26, 1996, the Partnership's extended stay facility was
acquired by Extended Stay America, Inc.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 disclosure 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.
Property and Equipment. Property and equipment is stated at cost.
Depreciation is computed by the straight-line method 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>
Buildings and improvements....................................... 40 years
Furniture, fixtures and equipment................................ 7 years
</TABLE>
Deferred Loan Costs. The Partnership has incurred costs in obtaining
financing. These costs have been deferred and are being amortized over the life
of the respective loans using the effective yield method. Deferred loan costs
are included in other assets.
Income Taxes. Any income taxes related to income earned by the Partnership
are paid by the partners.
Revenue Recognition. Room revenue and other income are recognized when
earned.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Land............................................... $ 635,639 $ 635,639
Building and improvements.......................... 2,492,855 2,509,540
Furniture and fixtures............................. 671,287 687,100
---------- ----------
3,799,781 3,832,279
Less accumulated depreciation...................... 944,374 1,113,967
---------- ----------
$2,855,407 $2,718,312
========== ==========
</TABLE>
F-26
<PAGE>
APARTMENT/INN, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following as of December
31: 1994 1995
<S> <C> <C>
Mortgage loan, principal and interest payable $44,529
monthly with a final balloon payment due June 1997,
interest at 12%....................................... $3,322,879 $3,137,376
Mortgage loan, principal and interest payable $6,000
monthly through August 1996, interest at 18%.......... 111,462 45,145
Other.................................................. 20,633 3,151
---------- ----------
3,454,974 3,185,672
Less current maturities................................ (224,773) (163,475)
---------- ----------
Long term debt, net of current maturities.............. $3,230,201 $3,022,197
========== ==========
</TABLE>
The mortgage loans are collateralized by substantially all of the
Partnership's property and equipment. Aggregate maturities of long term debt
are as follows: 1996--$163,475; 1997--$3,022,197.
The Partnership believes that there is no material difference in the
carrying amount and estimated fair value of the Partnership's long-term debt,
since all of it matures on or prior to June 1997.
NOTE 5--RELATED PARTY TRANSACTIONS
Management fees charged by and room revenue charged to a company controlled
by a partner are as follows:
<TABLE>
<CAPTION>
MANAGEMENT ROOM
FEES REVENUE
<S> <C> <C>
1994................................................... $106,059 $ --
1995................................................... 113,215 45,607
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying combined balance sheets of Hometown Inn I,
LTD and Hometown Inn II, LTD (the "Partnerships") as of December 31, 1994 and
1995, and the related combined statements of operations and partners' capital
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Hometown Inn I,
LTD and Hometown Inn II, LTD at December 31, 1994 and 1995 and the combined
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
February 23, 1996
F-28
<PAGE>
HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 177,079 $ 362,357
Accounts receivable, net of allowance for doubtful
accounts of $3,813 in 1994 and $7,686 in 1995.......... 3,751 32,260
Supply inventories...................................... 26,660 26,660
Advance to affiliate.................................... 91,938
Other current assets.................................... 2,913
---------- ----------
Total current assets.................................. 207,490 516,128
Property and equipment, net............................... 4,966,202 4,964,094
Other assets.............................................. 7,000 17,733
---------- ----------
$5,180,692 $5,497,955
========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 15,801 $ 29,912
Accrued expenses........................................ 75,304 60,274
Deposits................................................ 19,660 161,970
Advances from affiliates................................ 159,120 204,120
Current maturities of long-term debt.................... 117,903 185,949
---------- ----------
Total current liabilities............................. 387,788 642,225
Long-term debt............................................ 1,483,324 1,529,874
---------- ----------
Total liabilities..................................... 1,871,112 2,172,099
Partners' capital......................................... 3,309,580 3,325,856
---------- ----------
$5,180,692 $5,497,955
========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-29
<PAGE>
HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
<S> <C> <C> <C>
Revenue:
Room revenue............................. $1,802,707 $2,123,589 $2,234,569
Other, net............................... 84,679 99,719 96,617
---------- ---------- ----------
Total revenue.......................... 1,887,386 2,223,308 2,331,186
---------- ---------- ----------
Costs and expenses:
Property operating expenses.............. 1,074,103 1,143,716 989,337
Property management fees to related
party................................... 105,600 105,600 144,357
Depreciation and amortization............ 229,142 232,632 244,603
---------- ---------- ----------
Total costs and expenses............... 1,408,845 1,481,948 1,378,297
---------- ---------- ----------
Income from operations..................... 478,541 741,360 952,889
Interest expense........................... 131,848 137,532 170,232
---------- ---------- ----------
Net income............................. 346,693 603,828 782,657
Partners' capital, beginning of year....... 3,538,770 3,455,553 3,309,580
Distributions............................ (429,910) (749,801) (766,381)
---------- ---------- ----------
Partners' capital, end of year............. $3,455,553 $3,309,580 $3,325,856
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-30
<PAGE>
HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-------------------------------
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 346,693 $ 603,828 $ 782,657
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 229,142 232,632 243,056
Amortization.............................. 1,547
Change in:
Accounts receivable..................... 9,271 37,488 (28,509)
Other assets............................ (1,377) 1,377 (2,913)
Accounts payable........................ 944 (26,506) 14,111
Deposits................................ 3,927 8,833 142,310
Accrued expenses........................ (10,763) 11,346 (15,030)
--------- --------- ---------
Net cash provided by operating activities... 577,837 868,998 1,137,229
--------- --------- ---------
Cash flows from investing activities,
purchases of property and equipment.......... (34,818) (41,384) (240,948)
--------- --------- ---------
Cash flows from financing activities:
Payments of deferred loan costs............. (12,280)
Advances to affiliates...................... (91,938)
Advances from affiliates.................... 73,650 85,470 45,000
Principle payments on long-term debt........ (97,549) (130,956) (130,404)
Proceeds from issuance of long-term debt.... 245,000
Distributions to partners................... (429,910) (749,801) (766,381)
--------- --------- ---------
Net cash used in financing activities. (453,809) (795,287) (711,003)
--------- --------- ---------
Net increase in cash.......................... 89,210 32,327 185,278
Cash at beginning of periods.................. 55,542 144,752 177,079
--------- --------- ---------
Cash at end of periods........................ $ 144,752 $ 177,079 $ 362,357
========= ========= =========
Supplemental cash flow disclosure, interest
paid......................................... $ 125,141 $ 136,809 $ 170,227
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-31
<PAGE>
HOMETOWN INN I, LTD, HOMETOWN INN II, LTD
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation. The combined financial statements include the assets,
liabilities, capital and results of operations of two limited partnerships,
Hometown Inn I, LTD and Hometown Inn II, LTD. Where referred to herein, the
"Partnerships" include the two entities listed above. All significant
intercompany accounts and transactions have been eliminated.
Description of Business. The Partnerships operate two extended stay
facilities in Norcross, Georgia and Riverdale, Georgia. On February 23, 1996,
the Partnerships' extended stay facilities were acquired by 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.
Concentration of Credit Risk. The Partnerships maintained deposits totalling
$362,357 at December 31, 1995 with one bank. Deposits in excess of $100,000
are not insured by the Federal Deposit Insurance Corporation.
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 by the straight-line method 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 estimated useful lives on the assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements...................................... 40 years
Furniture, fixtures and equipment............................... 5-7 years
</TABLE>
Deferred Loan Costs. The Partnerships have incurred costs in obtaining
financing. These costs have been deferred and are being amortized over the
life of the respective loan using the effective yield method. Deferred loan
costs are included in other assets.
Income Taxes. Any income taxes related to income earned by the Partnerships
are paid by the partners.
Revenue Recognition. Room revenue and other income are recognized when
earned. Prepayments and deposits are recorded as unearned revenue.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Land............................................ $ 646,007 $ 646,007
Building and improvements....................... 4,893,161 4,893,161
Furniture and fixtures.......................... 785,355 1,006,213
----------- -----------
6,324,523 6,545,381
Less accumulated depreciation................... (1,358,321) (1,581,287)
----------- -----------
$ 4,966,202 $ 4,964,094
=========== ===========
</TABLE>
F-32
<PAGE>
HOMETOWN INN I, LTD, HOMETOWN INN II, LTD
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1994 1995
Long-term debt consists of the following as of December
31:
<S> <C> <C>
Mortgage loan, principal and interest payable monthly at
approximately $23,000 through January 1997, interest at
prime plus 1%........................................... $1,601,227 $1,483,325
Mortgage loan principal and interest payable monthly at
approximately $5,300 through August 2000, interest at
11%..................................................... 232,498
---------- ----------
1,601,227 1,715,823
Less current maturities.................................. 117,903 185,949
---------- ----------
Long-term debt, net of current maturities................ $1,483,324 $1,529,874
========== ==========
</TABLE>
The mortgage loans are collateralized by substantially all of the
Partnerships' property and equipment. Aggregate maturities of long term debt
are as follows: 1996--$185,949; 1997--$1,382,719; 1998--$50,217; 1999--
$56,028; 2000--$40,910.
The Partnerships believe that there is no material difference in the
carrying amount and estimated fair value of the long-term debt.
4. RELATED PARTY TRANSACTIONS:
Management fees are charged by a related entity controlled by the partners
and advances are made to and taken by the related entity from the Partnerships
as follows:
<TABLE>
<CAPTION>
MANAGEMENT ADVANCES TO ADVANCES FROM
FEES RELATED ENTITY RELATED ENTITY
<S> <C> <C> <C>
1993............................. $105,600 $ $ 73,650
1994............................. 105,600 159,120
1995............................. 144,357 91,938 204,120
</TABLE>
F-33
<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
F-34
<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
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
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.
F-35
<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.
F-36
<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.
F-37
<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.
F-38
<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>
F-39
<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.
F-40
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OF-
FERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Recent Developments....................................................... 11
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 19
Management................................................................ 26
Certain Transactions...................................................... 34
Principal Shareholders.................................................... 35
Financing................................................................. 36
Description of Capital Stock.............................................. 39
Shares Eligible for Future Sale........................................... 41
Underwriting.............................................................. 42
Legal Matters............................................................. 43
Experts................................................................... 43
Available Information..................................................... 44
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
LOGO
COMMON STOCK
--------------
PROSPECTUS
--------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY
INCORPORATED
CS FIRST BOSTON
SMITH BARNEY INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance, and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimates except the SEC registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 52,544
NASD filing fee................................................. 15,738
Blue Sky fees and expenses...................................... 35,000
Printing and engraving expenses................................. 150,000
Transfer Agent fees and expenses................................ 5,000
Legal fees and expenses......................................... 90,000
Accounting fees and expenses.................................... 75,000
Miscellaneous................................................... 76,718
--------
Total....................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware authorizes the
Company to indemnify its directors and officers under specified circumstances.
The Restated Certificate of Incorporation and Bylaws of the Company provide
that the Company shall indemnify, to the extent permitted by Delaware law, its
directors and officers (and may indemnify its employees and agents) against
liabilities (including expenses, judgments, and settlements) incurred by them
in connection with any actual or threatened action, suit, or proceeding to
which they are or may become parties and which arises out of their status as
directors, officers, or employees.
The Company's Restated Certificate of Incorporation and Bylaws eliminate, to
the fullest extent permitted by Delaware law, liability of a director to the
Company or its stockholders for monetary damages for a breach of such
director's fiduciary duty of care except for liability where a director (a)
breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or stock
repurchase, or (d) obtains in improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his responsibilities under any other law, including the federal securities
laws.
The directors and officers of the Company are insured within the limits and
subject to the limitations of the policies, against certain expenses in
connection with the defense of actions, suits, or proceedings and certain
liabilities which might be imposed as a result of such actions, suits, or
proceedings, to which they are parties by reason of being or having been such
directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In January 1995, the Company issued 1,677,060 shares of Common Stock to its
initial stockholder for a $2,000 contribution to the capital of the Company.
Such securities were issued without registration under the Securities Act, in
reliance upon the exemption in Section 4(2) of the Securities Act.
In August 1995, pursuant to subscription agreements, the Company issued to
approximately 30 accredited investors 11,718,000 shares of Common Stock in
exchange for a $55,800,000 contribution to the capital of the Company made in
August and October of 1995. The above-referenced shares were issued without
registration under the Securities Act, in reliance upon the exemption in
Section 4(2) of the Securities Act.
II-1
<PAGE>
In August 1995, pursuant to a Contribution Agreement dated August 18, 1995
between the Company and Welcome Inn America 89-1, L.P. the Company issued
357,000 shares of Common Stock in exchange for certain assets and real
property. The above-referenced shares were issued without registration under
the Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.
Pursuant to a commitment agreement dated August 31, 1995, the Company issued
shares of Common Stock to DLJ and one of its affiliates as described under
"Financing." The above-referenced shares were issued without registration under
the Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement.
2.1* Contribution Agreement, dated August 18, 1995, between
the Company and Welcome Inn America 89-1, L.P.
2.2** Agreement to Purchase Hotel and related agreements dated
January 24, 1996 between the Company and John W. Baker
and Apartment/Inn, L.P.
2.3** Agreement to Purchase Hotel and related agreements dated
February 23, 1996 among ESA 0992, Inc., ESA 0993, Inc.,
Hometown Inn I, LTD, and Hometown Inn II, LTD.
2.4*** Agreement to Purchase Hotel dated May 1, 1996 and re-
lated agreements among ESA Properties, Inc., Kipling
Hospitality Enterprise Corporation, and J. Craig McBride
3.1* Restated Certificate of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Specimen certificate representing shares of Common Stock
5.1 Opinion of Bell, Boyd & Lloyd as to the legality of the
Common Stock
10.1* Form of Subscription Agreement and related Demand Note
and Stockholders Agreement between the Company and ap-
proximately 30 investors entered into in August 1995
10.2(a)* Commitment for Mortgage Facility between the Company and
DLJ Mortgage Capital, Inc. ("DLJMC")
10.2(b)* Mortgage Facility, dated October 31, 1995, between the
Company and DLJMC
10.3*** Amended and Restated 1995 Employee Stock Option Plan of
the Company
10.4* Employment Agreement, dated as of June 1, 1995, between
ESA Development, Inc. and Harold E. Wright
10.5* Stock Option Agreement, dated as of June 1, 1995, be-
tween ESA Development, Inc. and Harold E. Wright
10.6*** 1995 Stock Option Plan for Non-Employee Directors of the
Company
10.7* Contract to Buy and Sell Real Property, dated April 20,
1995, between the Company and North Town Associates,
L.P.
10.8* Aircraft Dry Lease, dated June 12, 1995, between Wyoming
Associates, Inc. and the Company
10.9* Aircraft Dry Lease, dated June 12, 1995, between Wyoming
Associates, Inc. and the Company
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
10.10*** Amended and Restated 1996 Employee Stock Option Plan of
the Company
10.11*** Employment Agreement, dated as of March 18, 1996, be-
tween ESA Development, and Harold E. Wright
10.12 Aircraft Dry Lease, dated April 5, 1996, between Morgan
Corp. and the Company
10.13*** Homestead Motorsports Complex Executive Suite License
Agreement dated February 14, 1996 among The Homestead
Motorsports Joint Venture, Miami Motorsports Joint Ven-
ture, and the Company
10.14*** Joe Robbie Stadium Executive Suite License Agreement
dated March 18, 1996 between Robbie Stadium Corporation
and the Company
10.15*** Commitment letter for mortgage facility between the
Company and CS First Boston Mortgage Capital Corporation
11.1*** Revised Statement re: Computation of Per Share Loss
21.1 List of subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P. (included in Part II
of this registration statement)
23.2 Consent of Bell, Boyd & Lloyd (included in Exhibit 5.1)
24.1* Powers of Attorney (included on the signature page of
this registration statement)
27.1 Financial Data Schedule (for EDGAR filings only)
</TABLE>
- ---------------------
*Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1, Registration No. 33-98452.
**Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1, Registration No. 333-102.
***Incorporated by reference to the corresponding exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 1996.
+This information appears only in the manually signed copy of this
Registration Statement.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because they are not required under the related instructions, are not
applicable, or the information has been provided in the consolidated financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions described under Item 14 above or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action,
suit, or proceeding) is asserted against the Company by such director,
officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FT. LAUDERDALE, STATE
OF FLORIDA, ON MAY 8TH, 1996.
Extended Stay America, Inc.
/s/ Robert A. Brannon
By:__________________________________
Robert A. Brannon
Senior Vice President and Chief
Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints George D. Johnson
Jr., Robert A. Brannon, and Gregory R. Moxley, and each of them severally,
acting alone and without the other, his or her true and lawful attorney-in-
fact with authority to execute in the name of each such person and to file
with the Securities and Exchange Commission, together with any exhibits
thereto and other documents therewith, any and all amendments (including post-
effective amendments) to this registration statement necessary or advisable to
enable the registrant to comply with the Securities Act of 1933, as amended,
and any rules, regulations, and requirements of the Securities and Exchange
Commission in respect thereof, which amendments may make such other changes in
the registration statement as the aforesaid attorney-in-fact executing the
same deems appropriate and any additional registration statements filed
pursuant to Rule 462(b) under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MAY 8TH, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ George D. Johnson, Jr. President and Chief Executive Officer
___________________________________________
George D. Johnson, Jr.
PRINCIPAL FINANCIAL OFFICER:
/s/ Robert A. Brannon Senior Vice President, Chief Financial
___________________________________________ Officer, Secretary, and Treasurer
Robert A. Brannon
PRINCIPAL ACCOUNTING OFFICER:
/s/ Gregory R. Moxley Vice President--Finance and Controller
___________________________________________
Gregory R. Moxley
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
A MAJORITY OF THE DIRECTORS:
/s/ H. Wayne Huizenga Director
___________________________________________
H. Wayne Huizenga
/s/ Donald F. Flynn Director
___________________________________________
Donald F. Flynn
/s/ George D. Johnson, Jr. Director
___________________________________________
George D. Johnson, Jr.
/s/ Stewart H. Johnson Director
___________________________________________
Stewart H. Johnson
/s/ John J. Melk Director
___________________________________________
John J. Melk
/s/ Peer Pedersen Director
___________________________________________
Peer Pedersen
</TABLE>
II-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated January 26, 1996 on our audit of the consolidated financial
statements of Extended Stay America, Inc., our report dated January 26, 1996
on our audits of the financial statements of Apartment/Inn, L.P., our report
dated February 23, 1996 on our audits of the combined financial statements of
Hometown Inn I, LTD and Hometown Inn II, LTD, our report dated October 16,
1995 on our audits of the financial statements of Welcome Inn America 89-1,
L.P. and our report dated May 4, 1996 on our audit of the financial statements
of Kipling Hospitality Enterprise Corporation. We also consent to the
references to our firm under the captions "Experts" and "Selected Financial
Data."
Coopers & Lybrand L.L.P.
Spartanburg, South Carolina
May 8, 1996
II-7
<PAGE>
EXHIBIT 1.1
DRAFT 5/3/96
5,000,000 Shares
EXTENDED STAY AMERICA, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
May __, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY INCORPORATED
CS FIRST BOSTON CORPORATION
SMITH BARNEY INC.
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Extended Stay America, Inc., a Delaware corporation (the "Company")
proposes to issue and sell 5,000,000 shares of its Common Stock, par value $.01
per share (the "Firm Shares") to the several underwriters named in Schedule I
hereto (the "Underwriters"). The Company also proposes to issue and sell to
the several Underwriters not more than 750,000 additional shares of its Common
Stock, par value $.01 per share (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are herein collectively called the Shares. The shares of
common stock of the Company, par value $.01 per share, to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the Common Stock.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-1 including a prospectus relating to
the Shares, which may be amended. The
<PAGE>
registration statement as amended at the time when it becomes effective,
including a registration statement (if any) filed pursuant to Rule 462(b) under
the Act increasing the size of the offering registered under the Act and
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rule 430A or Rule 434 under the Act, is hereinafter
referred to as the Registration Statement; and the prospectus (including any
prospectus subject to completion meeting the requirements of Rule 434(b) under
the Act provided by the Company with any term sheet meeting the requirements of
Rule 434(b) as the prospectus provided to meet the requirements of Section 10(a)
of the Act) in the form first used to confirm sales of Shares is hereinafter
referred as the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the representations
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to issue and sell, and each Underwriter agrees,
severally and not jointly, to purchase from the Company at a price per share of
$_____ (the "Purchase Price") the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 750,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company within 30 days after the date of this Agreement. You
shall give any such notice on behalf of the Underwriters and such notice shall
specify the aggregate number of Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof. The date specified
in any such notice shall be a business day (i) no earlier than the Closing Date
(as hereinafter defined), (ii) no later than ten business days after such notice
has been given and (iii) no earlier than two business days after such notice has
been given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
The Company hereby agrees to use all reasonable efforts to deliver not
later than the date hereof an agreement (a "lockup
2
<PAGE>
agreement") executed by (i) each of the directors and officers of the Company,
and (ii) each stockholder listed on Annex I hereto, pursuant to which each such
person agrees, not to offer, sell, contract to sell, grant any option to
purchase, or otherwise dispose of any Common Stock or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock, except to the Underwriters pursuant to this
Agreement, for a period of 90 days after the date of the Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's existing stock option plans, (ii) the
Company may issue shares of its common stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and (iii)
the Company may issue shares of its common stock as consideration for
acquisitions provided that such shares are subject to restrictions on
disposition during such 90-day period equivalent to those in the lockup
agreements referred to in the first sentence of this paragraph.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment for
the Firm Shares shall be made at 10:00 A.M., New York City time, on the third
business day unless otherwise permitted by the Commission pursuant to Rule 15c6-
1 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission thereunder (collectively called the "Exchange
Act") (such day being referred to as the "Closing Date") following the date of
the public offering, at such place as you shall designate. The Closing Date
and the location of delivery of and the form of payment for the Firm Shares may
be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at such place as you shall designate
at 10:00 A.M., New York City time, on the date specified in the applicable
exercise notice given by you pursuant to Section 2 (an "Option Closing Date").
Any such Option Closing Date and the location of delivery of and the form of
payment for such Additional Shares may be varied by agreement between you and
the Company.
Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in
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writing not later than two full business days prior to the Closing Date or an
Option Closing Date, as the case may be. Such certificates shall be made
available to you for inspection not later than 9:30 A.M., New York City time, on
the business day next preceding the Closing Date or the applicable Option
Closing Date, as the case may be. Certificates in definitive form evidencing
the Shares shall be delivered to you on the Closing Date or the applicable
Option Closing Date, as the case may be, with any transfer taxes thereon duly
paid by the Company, for the respective accounts of the several Underwriters,
against payment of the Purchase Price therefor by wire transfer of immediately
available funds to an account designated by the Company.
5. Agreements of the Company. The Company agrees with you:
(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) when the Registration Statement has become
effective and when any post-effective amendment to it becomes effective,
(ii) of any request by the Commission for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, and
(iv) of the happening of any event during the period referred to in
paragraph (e) below which makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
(c) To furnish to you, without charge, three signed copies of the
Registration Statement as first filed with the Commission and of each
amendment to it, including all exhibits, and to furnish to you and each
Underwriter designated by you such number of conformed copies of the
Registration Statement as so filed and of each amendment to it, without
exhibits, as you may reasonably request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time
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when it becomes effective, or to make any amendment or supplement to the
Prospectus (including the issuance or filing of any term sheet within the
meaning of Rule 434) of which you shall not previously have been advised
or to which you shall reasonably object; and to prepare and file with the
Commission, promptly upon your reasonable request, any amendment to the
Registration Statement or supplement to the Prospectus (including the
issuance or filing of any term sheet within the meaning of Rule 434) which
may be necessary or advisable in connection with the distribution of the
Shares by you, and to use its best efforts to cause the same to become
promptly effective.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as in the opinion of counsel
for the Underwriters a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish to each
Underwriter and dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer
may reasonably request; provided, that in the event that an Underwriter is
required to deliver a Prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issuance of the
Prospectus, upon the request of such Underwriter but at its expense, the
Company will prepare and deliver to such Underwriter as many copies as it
may request of a Prospectus (as amended or supplemented) complying with
Section 10(a)(3) of the Act.
(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the reasonable opinion of counsel for the
Underwriters it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if it
is necessary to amend or supplement the Prospectus to comply with any law,
forthwith to prepare and file with the Commission an appropriate amendment
or supplement to the Prospectus so that the statements in the Prospectus,
as so amended or supplemented, will not in the light of the circumstances
when it is so delivered, be misleading, or so that the Prospectus will
comply with law, and to furnish to each Underwriter and to such dealers as
you shall specify, such number of copies thereof as such Underwriter or
dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by
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dealers under the state securities or Blue Sky laws of such jurisdictions
as you may request, to continue such qualification in effect so long as
required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to
effect such registration or qualification; provided, however, that the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not so qualified or required to file such consent.
(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at
least twelve months after the effective date of the Registration Statement
(but in no event commencing later than 90 days after such date) which
shall satisfy the provisions of Section 11(a) of the Act, and to advise
you in writing when such statement has been so made available.
(i) During the period of five years after the date of this Agreement,
(i) to mail as soon as reasonably practicable after the end of each fiscal
year to the record holders of its Common Stock a financial report of the
Company and its subsidiaries on a consolidated basis (and a similar
financial report of all unconsolidated subsidiaries, if any), all such
financial reports to include a consolidated balance sheet, a consolidated
statement of operations, a consolidated statement of cash flows and a
consolidated statement of shareholders' equity as of the end of and for
such fiscal year, together with comparable information as of the end of
and for the preceding year, certified by independent certified public
accountants, and (ii) to make generally available as soon as practicable
after the end of each quarterly period (except for the last quarterly
period of each fiscal year) to such holders, a consolidated balance sheet,
a consolidated statement of operations and a consolidated statement of
cash flows (and similar financial reports of all unconsolidated
subsidiaries, if any) as of the end of and for such period, and for the
period from the beginning of such year to the close of such quarterly
period, together with comparable information for the corresponding periods
of the preceding year.
(j) During the period referred to in paragraph (i), to furnish to you
as soon as available a copy of each report or other publicly available
information of the Company mailed to the holders of Common Stock or filed
with the Commission and such other publicly available information
concerning the Company and its subsidiaries as you may reasonably request.
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(k) Except to the extent provided in subsection (e) of this Section
5, to pay all costs, expenses, fees and taxes incident to (i) the
preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in paragraph (e), (ii) the
printing and delivery of the Prospectus and all amendments or supplements
to it during the period specified in paragraph (e), (iii) the printing and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriters relating to such printing and delivery), (iv) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states (including in each case
the reasonable fees and disbursements of counsel for the Underwriters
relating to such registration or qualification and memoranda relating
thereto), (v) filings and clearance with the National Association of
Securities Dealers, Inc. in connection with the offering, (vi) the listing
of the Shares on the National Association of Securities Dealers Automated
Quotation system ("Nasdaq") National Market and (vii) furnishing such
copies of the Registration Statement, the Prospectus and all amendments
and supplements thereto as may be requested for use in connection with the
offering or sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold.
(l) To use all reasonable efforts to maintain the inclusion of the
Common Stock in the Nasdaq National Market (or on a national securities
exchange) for a period of five years after the effective date of the
Registration Statement.
(m) To use all reasonable efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case
may be, and to satisfy all conditions precedent to the delivery of the
Shares.
6. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for
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such purpose are pending before or threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Act and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and warranties
set forth in this paragraph (b) do not apply to statements or omissions in
the Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) Any term sheet and prospectus subject to completion provided by
the Company to the Underwriters for use in connection with the offering
and sale of the Shares pursuant to Rule 434 under the Act together are not
materially different from the prospectus included in the Registration
Statement (exclusive of any information deemed a part thereof by virtue of
Rule 434(d)).
(d) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Act, and each Registration Statement
filed pursuant to Rule 462(b) under the Act, if any, complied when so
filed in all material respects with the Act; and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(e) The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as it is currently being conducted
and to own, lease and operate its properties, and each is duly qualified
and is in good standing as a foreign corporation authorized to do business
in each jurisdiction in which the nature of its business or its ownership
or leasing of
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property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(f) All of the outstanding shares of capital stock of, or other
ownership interests in, each of the Company's subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable, and
are owned by the Company, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature.
(g) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights; and the Shares have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(h) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained
in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of
any obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company and its subsidiaries, taken as a whole, to which the Company or
any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby (i) will not require
any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body (except
as such may be required under the securities or Blue Sky laws of the
various states), (ii) will not conflict with or constitute a breach of any
of the terms or provisions of, or a default under, (x) the charter or by-
laws of the Company or any of its subsidiaries or (y) any agreement,
indenture or other instrument to which it or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their respective
property is bound, and (iii) will not violate or conflict with any laws,
administrative
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regulations or rulings or court decrees applicable to the Company, any of
its subsidiaries or their respective property, except for such failures to
obtain consents, approvals, authorizations or orders, and such conflicts,
breaches, defaults and violations referred to in clauses (i), (ii)(y) and
(iii) which would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole, and would not adversely affect the
Company's ability to perform its obligations under this Agreement.
(k) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or
any of its subsidiaries is a party or of which any of their respective
property is the subject, and, to the best of the Company's knowledge, no
such proceedings are threatened or contemplated. No contract or document
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement
is not so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), nor any federal or state law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal or state
wages and hours laws, nor any provisions of the Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, which in
each case might result in any material adverse change in the business,
prospects, financial condition or results of operation of the Company and
its subsidiaries, taken as a whole.
(m) The Company and each of its subsidiaries has such material
permits, licenses, franchises and authorizations of governmental or
regulatory authorities ("permits"), including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease and
operate its respective properties and to conduct its business; the Company
and each of its subsidiaries has fulfilled and performed all of its
material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except as
described in the Prospectus, such permits contain no restrictions that are
materially burdensome to the Company or any of its subsidiaries.
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(n) Except as otherwise set forth in the Prospectus or such as are
not material to the business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole, the
Company and each of its subsidiaries has good and marketable title, free
and clear of all liens, claims, encumbrances and restrictions except liens
for taxes not yet due and payable, to all property and assets described in
the Registration Statement as being owned by it. All leases to which the
Company or any of its subsidiaries is a party are valid and binding and no
default has occurred or is continuing thereunder, which might result in
any material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries
taken as a whole, and the Company and its subsidiaries enjoy peaceful and
undisturbed possession under all such leases to which any of them is a
party as lessee with such exceptions as do not materially interfere with
the use made by the Company or such subsidiary.
(o) The Company and each of its subsidiaries maintains reasonably
adequate insurance.
(p) Coopers & Lybrand L.L.P. are independent public accountants with
respect to the Company, Welcome Inn 89-1, L.P. ("Welcome"), Apartment/Inn,
L.P. ("Apartment/Inn"), Hometown Inn I, LTD and Hometown Inn II, LTD
("Hometown") and Kipling Hospitality Enterprises Corporation ("KHEC") as
required by the Act.
(q) The financial statements, together with related notes forming
part of the Registration Statement and the Prospectus (and any amendment
or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the
Company and its subsidiaries, of Welcome, Apartment/Inn, Hometown, KHEC
and of the Company and its subsidiaries on a pro forma basis, in each case
on the basis stated in the Registration Statement at the respective dates
or for the respective periods to which they apply; such statements and
related notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) is, in all
material respects, accurately presented and, to the extent derived from
the books and records of the Company, prepared on a basis consistent with
such financial statements and the books and records of the Company.
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(r) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(s) Except as otherwise set forth in the Prospectus no holder of any
security of the Company has any right to require registration of shares of
Common Stock or any other security of the Company.
(t) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(u) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, the
Company or any subsidiary thereof except as otherwise disclosed in the
Registration Statement.
(v) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
(w) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(x) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than
those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other
than those being contested in good faith and for which adequate reserves
have been provided.
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7. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and judgments
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use therein; provided
that, insofar as this indemnity agreement relates to any untrue statement or
omission, or any alleged untrue statement or omission, made in a preliminary
prospectus, but cured in the Prospectus, it shall not inure to the benefit of an
Underwriter (or to the benefit of any person who controls such Underwriter) if
it is established that a copy of the Prospectus (as then amended or supplemented
if then so amended or supplemented) was not delivered by such Underwriter to the
person asserting the claim arising from such untrue statement or omission, or
such alleged untrue statement or omission, at or prior to the time required by
the Act (but only if the Company had previously furnished copies thereof to the
Underwriters), and delivery thereof would have constituted a defense to the
claim asserted by such person.
(b) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against the Company, such
Underwriter shall promptly notify the Company in writing and the Company shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all reasonable fees and
expenses. Any Underwriter or any such controlling person shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Underwriter or such controlling person unless (i) the employment of such
counsel shall have been specifically authorized in writing by the Company, (ii)
the Company shall have failed to assume the defense and employ counsel or (iii)
the named parties to any such action (including any impleaded parties) include
both such Underwriter or such controlling person and the Company and such
Underwriter or such
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controlling person shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to assume the defense of such action on behalf of such Underwriter or such
controlling person, it being understood, however, that the Company shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all such Underwriters and controlling persons, which firm shall be designated in
writing by Donaldson, Lufkin & Jenrette Securities Corporation and that all such
reasonable fees and expenses shall be reimbursed promptly upon presentation for
payment). The Company shall not be liable for any settlement of any such
action effected without its written consent but if settled with the written
consent of the Company, the Company agrees to indemnify and hold harmless any
Underwriter and any such controlling person from and against any loss or
liability by reason of such settlement. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and any person controlling the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter but only with reference
to information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus. In case any action shall be
brought against the Company, any of its directors, any such officer or any
person controlling the Company based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Company (except that if the Company shall have assumed the
defense thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any person controlling the Company
shall have the rights and duties given to the Underwriter, by Section 7(b)
hereof.
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(d) If the indemnification provided for in this Section 7 is unavailable
to an indemnified party in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities and judgments in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares and also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or judgments, as
well as, but only if a court deems appropriate, any other relevant equitable
considerations. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 7(d) are several in proportion to the respective number of Shares
purchased by each of the Underwriters hereunder and not joint.
8. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm
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Shares under this Agreement are subject to the satisfaction of each of the
following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and in the case of a Registration Statement filed under
Rule 462(b) of the Act, not later than 10:00 p.m.), New York City time, on
the date of this Agreement or at such later date and time as you may
approve in writing, and at the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus there shall not have been any change, or any development
involving a prospective material adverse change, in the capital stock or
in the long-term debt of the Company from that set forth in the
Registration Statement and Prospectus, (iii) the Company and its
subsidiaries shall have no liability or obligation, direct or contingent,
which is material to the Company and its subsidiaries, taken as a whole,
other than those reflected in the Registration Statement and the
Prospectus and (iv) on the Closing Date you shall have received a
certificate dated the Closing Date, signed by George D. Johnson, Jr. and
Robert A. Brannon, in their capacities as the President and Chief
Executive Officer and Chief Financial Officer of the Company, confirming
the matters set forth in paragraphs (a), (b), (c), (i), and (j) of this
Section 8.
(d) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Bell, Boyd & Lloyd, counsel for the Company, to the effect that:
(i) the Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its
16
<PAGE>
jurisdiction of incorporation and has the corporate power and
authority required to carry on its business as it is currently being
conducted and to own, lease and operate its properties;
(ii) the Company and each of its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iii) all of the outstanding shares of capital stock of, or
other ownership interests in, each of the Company's subsidiaries have
been duly and validly authorized and issued and are fully paid and
non-assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of
any nature;
(iv) all the outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(v) the Shares have been duly authorized, and when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will have been validly issued and will be fully paid
and non-assessable, and the issuance of such Shares is not subject to
any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company;
(vii) the authorized capital stock of the Company, including
the Common Stock, conforms as to legal matters to the description
thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under
the Act, no stop order suspending its effectiveness has been issued
and no proceedings for that purpose are, to the knowledge of such
counsel, pending before or contemplated by the Commission;
(ix) the statements under the captions "Management", "Certain
Transactions", "Financing", "Description of Capital Stock" and
"Shares Eligible for
17
<PAGE>
Future Sale" in the Prospectus and Items 14 and 15 of Part II of the
Registration Statement insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings;
(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of
such counsel's knowledge after due inquiry, neither the Company nor
any of its subsidiaries is in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of
the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which it or any
of its subsidiaries or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other
governmental body (except as such may be required under the Act or
other securities or Blue Sky laws) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a
default under, the charter or by-laws of the Company or any of its
subsidiaries, or any agreement, indenture or other instrument of
which such counsel has knowledge to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective properties are bound, or violate or
conflict with any laws, administrative regulations or rulings or
court decrees applicable to the Company or any of its subsidiaries or
their respective properties;
(xii) after due inquiry, such counsel does not know of any
legal or governmental proceeding pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of
their respective property is subject which is required to be
described in the Registration Statement or the Prospectus and is not
so described, or of any contract or other document which is required
to be described in the Registration Statement or the Prospectus or is
18
<PAGE>
required to be filed as an exhibit to the Registration Statement
which is not described or filed as required;
(xiii) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xiv) to the best of such counsel's knowledge, after due
inquiry, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security
of the Company;
(xv) to the best of such counsel's knowledge, after due
inquiry, except as otherwise set forth in the Registration Statement
or such as are not material to the business, prospects, financial
condition or results of operation of the Company and its
subsidiaries, taken as a whole, the Company and each of its
subsidiaries has good and marketable title, free and clear of all
liens, claims, encumbrances and restrictions except liens for taxes
not yet due and payable, to all property and assets described in the
Registration Statement as being owned by it; and
(xvi) (1) the Registration Statement (including any
Registration Statement and under Rule 462(b) of the Act, if any) and
the Prospectus and any supplement or amendment thereto (except for
financial statements and statistical data as to which no opinion need
be expressed) comply as to form in all material respects with the
Act, and (2) such counsel believes that (except for financial
statements and statistical data, as aforesaid) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and that the Prospectus, as amended or
supplemented, if applicable (except for financial statements and
statistical data, as aforesaid) does not contain any untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In giving such opinion such counsel may rely as to factual matters on
information in certificates of officers of the Company and public officials and,
with respect to the matters covered in clause (xvi), such counsel may state that
their opinion and belief are based upon their participation in the preparation
of
19
<PAGE>
the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
The opinion of Bell, Boyd & Lloyd described in paragraph (d) and the
opinion of Johnson, Smith, Hibbard Wildman Law Firm, L.L.P. described in
paragraph (e) shall be rendered to you at the request of the Company and shall
so state therein.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Johnson, Smith, Hibbard, Wildman Law Firm, L.L.P., local counsel
to the Company, to the effect that to such counsel's knowledge the Company
and each of its subsidiaries has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"),
(except where the failure to have such permits, individually and in the
aggregate, would not have a material adverse effect on the Company and its
subsidiaries taken as a whole), as are necessary to own their respective
properties and to conduct their respective businesses as now being
conducted.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Sidley & Austin, counsel for the Underwriters, as to the
matters referred to in clauses (v), (vi), (viii), (ix) (but only with
respect to the statements under the caption "Description of Capital Stock"
and adding an opinion in such form with respect to the opinion under the
caption "Underwriting") and (xvi) of the foregoing paragraph (d). In
giving such opinion such counsel may rely as to factual matters on
information in certificates of officers of the Company and public
officials and, with respect to the matters covered by clause (xvi) such
counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.
(g) You shall have received a letter on and as of the Closing Date,
in form and substance satisfactory to you, from Coopers & Lybrand L.L.P.,
independent public accountants, with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus and substantially in the form and substance of the
letter delivered to you by Coopers & Lybrand L.L.P. on the date of this
Agreement.
20
<PAGE>
(h) The Company shall have delivered to you the agreements specified
in Section 2 hereof.
(i) The Company shall not have failed at or prior to the Closing
Date to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company at or prior to
the Closing Date.
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such Additional
Shares and other matters related to the issuance of such Additional Shares.
9. Effective Date of Agreement and Termination. This Agreement shall
become effective upon the later of (a) execution of this Agreement and (b) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date by
you by written notice to the Company if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, of the
Company or any of its subsidiaries or the earnings, affairs, or business
prospects of the Company or any of its subsidiaries, whether or not arising in
the ordinary course of business, which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (ii) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions or
in the financial markets of the United States or elsewhere that, in your
judgment, is material and adverse and would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (iii) the suspension or material limitation of trading in
securities on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market or limitation on prices for securities on any such
exchange or National Market, (iv) the declaration of a banking moratorium by
either federal or New York State authorities or (v) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
21
<PAGE>
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it or they have agreed to
purchase hereunder on such date and the aggregate number of Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters, as the case may be, agreed but failed or refused to purchase is
not more than one-tenth of the total number of Shares to be purchased on such
date by all Underwriters, each non-defaulting Underwriter shall be obligated
severally, in the proportion which the number of Firm Shares set forth opposite
its name in Schedule I bears to the total number of Firm Shares which all the
non-defaulting Underwriters with respect to such Closing Date or Option Closing
Date, as the case may be, have agreed to purchase, or in such other proportion
as you may specify, to purchase the Firm Shares or Additional Shares, as the
case may be, which such defaulting Underwriter or Underwriters, as the case may
be, agreed but failed or refused to purchase on such date; provided that in no
event shall the number of Firm Shares or Additional Shares, as the case may be,
which any Underwriter has agreed to purchase pursuant to Section 2 hereof be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Firm Shares or Additional Shares, as the case may be, without the
written consent of such Underwriter. If on the Closing Date or on an Option
Closing Date, as the case may be, any Underwriter or Underwriters shall fail or
refuse to purchase Firm Shares, or Additional Shares, as the case may be, and
the aggregate number of Firm Shares or Additional Shares, as the case may be,
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date by all Underwriters and
arrangements satisfactory to you and the Company for purchase of such Shares are
not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter and the Company.
In any such case which does not result in termination of this Agreement, either
you or the Company shall have the right to postpone the Closing Date or the
applicable Option Closing Date, as the case may be, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
10. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to Extended
Stay America, Inc., 500 East Broward Avenue, Suite 950, Ft. Lauderdale, Florida
33394, with a copy to John T. McCarthy, Bell, Boyd & Lloyd, 70 W. Madison
Street, Chicago, Illinois 60602, and (b) if to any Underwriter or to you, to
you c/o Donaldson, Lufkin & Jenrette Securities
22
<PAGE>
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter or by or on
behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of any
failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement or pursuant to the provisions of
Section 9(i) of this Agreement, the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, any
controlling persons referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include a purchaser of any of the
Shares from any of the several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
23
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
EXTENDED STAY AMERICA, INC.
By: _______________________
George D. Johnson, Jr.
President and CEO
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALLEN & COMPANY INCORPORATED
CS FIRST BOSTON CORPORATION
SMITH BARNEY INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Jeffrey Klein
Managing Director
24
<PAGE>
SCHEDULE I
----------
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Allen & Company Incorporated
CS First Boston Corporation
Smith Barney Inc.
----------------
Total 5,000,000
================
25
<PAGE>
ANNEX I
-------
Names of Stockholders Delivering Lockup Agreements
--------------------------------------------------
26
<PAGE>
[LETTERHEAD OF BELL, BOYD & LLOYD]
May 7, 1996
Extended Stay America, Inc.
500 E. Broward Boulevard
Ft. Lauderdale, Florida 33394
Ladies and Gentlemen:
REGISTRATION STATEMENT ON FORM S-1
We have represented Extended Stay America, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of a registration statement
on Form S-1 (the "Registration Statement"), filed under the Securities Act of
1933, as amended, for the purpose of registering 5,750,000 shares of common
stock, $.01 par value (the "Common Stock"), of the Company (the "Shares") to be
sold by the Company to a group of underwriters pursuant to an underwriting
agreement (the "Underwriting Agreement"), which Shares include 750,000 shares of
Common Stock which may be issued by the Company pursuant to an over-allotment
option granted to the underwriters. In this connection, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate and other records, certificates and other papers as we
deemed it necessary to examine for the purpose of this opinion, including the
Registration Statement, the form of Underwriting Agreement and pertinent
resolutions of the board of directors of the Company.
Based upon such examination, it is our opinion that the Shares are legally
authorized and, upon issuance and delivery thereof to the underwriters in
accordance with the terms of the Underwriting Agreement and the receipt by the
Company of the purchase price therefor, will be legally issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references made to us in the Prospectus forming a part of
the Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ Bell, Boyd & Lloyd
<PAGE>
EXHIBIT 10.12
AIRCRAFT DRY LEASE
This Lease of aircraft is made, effective as of April 5, 1996, by and
between Morgan Corp., a corporation incorporated under the laws of the State of
South Carolina, with principal offices at 1800 East Main Street, Duncan, South
Carolina 29334 hereinafter referred to as "Lessor") and Extended Stay America,
Inc., a corporation incorporated under the laws of the State of South Carolina,
with principal offices at 961 East Main Street, Spartanburg, South Carolina
29302 (hereinafter referred to as "Lessee").
RECITALS
The parties recite that:
A. Lessor owns a 1987 Beechcraft Baron Model 58 aircraft, Serial No. TH-
1519, and currently registered as N358CC (hereinafter referred to as the
"Aircraft"). The Aircraft is available for use by a qualified Lessee; and
B. Lessee desires to lease the Aircraft under such terms and conditions as
are mutually satisfactory to the parties.
The parties agree as follows:
SECTION ONE
LEASE OF AIRCRAFT
For Two Hundred Dollars and No/100 ($ 200.00) per flight hour, Lessor
agrees to lease the Aircraft to Lessee without crew. Said amount shall include
and fully cover Lessee's responsibility for the cost of maintenance and
insurance for the Aircraft. The Aircraft shall be delivered to Lessee at
Spartanburg Downtown Airport in Spartanburg,
<PAGE>
South Carolina on April 5, 1996, at which time Lessee shall inspect the Aircraft
to the extent deemed necessary. Lessee shall have ten (10) flight hours
following delivery of the aircraft in which to notify Lessor in writing of any
defects in the Aircraft or its equipment or accessories. If, at the end of such
period, Lessor has not received such notification, it shall be conclusively
presumed between the parties that Lessee has fully inspected the Aircraft having
knowledge that it is in good condition and repair and that Lessee is satisfied
with and has accepted the Aircraft in such condition and repair.
SECTION TWO
TERM
This Lease shall commence on April 5, 1996 and continue for one year after
said date. Thereafter, this Lease shall be automatically renewed on a month to
month basis, unless sooner terminated by either party as hereinafter provided.
Either party may at any time terminate this Lease upon thirty (30) days written
notice to the other party, delivered personally or by certified mail, return
receipt requested, at the address for said other party as set forth above.
SECTION THREE
COMMERCIAL OPERATION RESTRICTION
Neither Lessee nor Lessor will make the Aircraft available for hire within
the meaning of the Federal Aviation Regulations. The Aircraft is to be operated
strictly in accordance with 14 C.F.R. Part 91.
2
<PAGE>
SECTION FOUR
INSURANCE
At all times during the term of this Lease, Lessor shall cause to be
carried and maintained, at Lessee's cost and expense, as set forth in Section
One, physical damage insurance with respect to the Aircraft in the amount set
forth below:
Aircraft Physical Damage $ 420,000.00
(No Deductible While --------------
In Motion or Not In Motion)
At all times during the term of this Lease, Lessor shall also cause to
be carried and maintained, at Lessee's cost and expense, as set forth in Section
One, third party aircraft liability insurance, passenger legal liability
insurance, property damage liability insurance, and medical expense insurance in
the amounts set forth below:
Combined Liability Coverage for
Bodily Injury and Property Damage
Including Passengers -
Each Occurrence $50,000,000.00
Medical Expense Coverage - --------------
Each Person $ 5,000.00
--------
Lessee shall also bear the cost of paying any deductible amount on any
policy of insurance in the event of a claim or loss.
Any policies of insurance carried in accordance with this Lease: (i) shall
name Lessor as an additional insured; and (ii) shall contain a waiver by the
underwriter thereof of any right of subrogation against Lessor. Each liability
policy shall be primary without right of contribution from any other insurance
which is carried by Lessee or Lessor and shall expressly provide that all of the
provisions thereof, except the limits of liability, shall operate in the same
manner as if there were a separate policy covering
3
<PAGE>
each insured.
Lessor shall submit this Lease for approval to the insurance carrier for
each policy of insurance on the Aircraft. Lessor shall arrange for a Certificate
of Insurance evidencing appropriate coverage as to the Aircraft and the
satisfaction of the requirements set forth above to be given by its insurance
carriers to Lessee.
SECTION FIVE
RESTRICTIONS ON USE
Lessee may operate the Aircraft only for the purposes and within the
geographical limits set forth in the insurance policy or policies obtained in
compliance with Section Four of this Lease. The Aircraft shall be operated at
all times in accordance with the flight manual and all manufacturer's suggested
operating procedures. Furthermore, Lessee shall not use the Aircraft in
violation of any foreign, federal, state, territorial, or municipal law or
regulation and shall be solely responsible for any fines, penalties, or
forfeitures occasioned by any violation by Lessee. If such fines or penalties
are imposed on Lessor and paid by Lessor, Lessee shall reimburse Lessor for the
amount thereof within thirty (30) days of receipt by Lessee of written demand
from Lessor. Lessee will not base the Aircraft, or permit it to be based,
outside the limits of the United States of America, without the written consent
of Lessor.
The Aircraft shall be flown only by certificated and qualified pilots and
shall be maintained only by certificated and qualified mechanics. In the event
the insurance on the Aircraft would be invalidated because Lessee is unable to
obtain certificated and qualified pilots and mechanics, Lessee shall not operate
the Aircraft until such time as certificated and qualified pilots and mechanics
are obtained and insurance on the
4
<PAGE>
Aircraft is made valid.
Lessee will not directly or indirectly create, incur, assume or suffer to
exist any lien on or with respect to the Aircraft. Lessee will promptly, at its
own expense, take such action as may be necessary to discharge any lien not
excepted above if the same shall arise at any time.
SECTION SIX
INSPECTION BY LESSOR
Lessee agrees to permit Lessor or any authorized agent to inspect the
Aircraft at any reasonable time and to furnish any information in respect to the
Aircraft and its use that Lessor may reasonably request.
SECTION SEVEN
ALTERATIONS
Except in accordance with other written agreements entered into subsequent
to the date of this Lease between Lessee and Lessor regarding maintenance of the
Aircraft, Lessee shall not have the right to alter, modify, or make additions or
improvements to the Aircraft without the written permission of Lessor. All such
alterations, modifications, additions, and improvements as are so made shall
become the property of Lessor and shall be subject to all of the terms of this
Lease.
SECTION EIGHT
TITLE
The registration of and title to the Aircraft shall be in the name of the
Lessor, and the Aircraft, at all times during the term of this Lease or any
extension, shall bear
5
<PAGE>
United States registration markings. All responsibility and obligations in
regard to the operation of the Aircraft as above owned, registered, and marked
shall be borne by Lessee during the term of this Lease.
SECTION NINE
PAYMENT OF TAXES
Lessee shall pay all taxes associated with Lessee's use of the Aircraft on
Lessee's own business, including landing fees, fuel taxes, and any other taxes
or fees which may be assessed against a specific flight by Lessee.
SECTION TEN
ASSIGNMENT
Lessee shall not assign this Lease or any interest in the Aircraft, or
sublet the Aircraft, without prior written consent of Lessor. Subject to the
foregoing, this Lease inures to the benefit of, and is binding on, the heirs,
legal representatives, successors, and assigns of the parties.
SECTION ELEVEN
ACCIDENT AND CLAIM
Lessee shall immediately notify Lessor of each accident involving the
Aircraft, which notification shall specify the time, place, and nature of the
accident or damage, the names and addresses of parties involved, persons
injured, witnesses, and owners of properties damaged, and such other information
as may be known. Lessee shall advise Lessor of all correspondence, papers,
notices, and documents whatsoever received by
6
<PAGE>
Lessee in connection with any claim or demand involving or relating to the
Aircraft or its operation, and shall aid in any investigation instituted by
Lessor and in the recovery of damages from third persons liable therefore.
SECTION TWELVE
RETURN OF AIRCRAFT TO LESSOR
On the termination of this Lease by expiration or otherwise, Lessee shall
return the Aircraft to Lessor at Spartanburg Downtown Airport in Spartanburg,
South Carolina, in as good operating condition and appearance as when received,
ordinary wear, tear and deterioration excepted, and shall indemnify Lessor
against any claim for loss or damage occurring prior to the actual physical
delivery of the Aircraft to Lessor.
SECTION THIRTEEN
MODIFICATION OF AGREEMENT
This Lease constitutes the entire understanding between the parties, and
any change or modification must be in writing and signed by both parties.
SECTION FOURTEEN
GOVERNING LAW
This Lease is entered into under, and is to be construed in accordance
with, the laws of the State of South Carolina.
7
<PAGE>
SECTION FIFTEEN
TRUTH IN LEASING STATEMENT
THE AIRCRAFT, A 1987 BEECHCRAFT BARON MODEL 58, MANUFACTURER'S SERIAL NO.
TH-1519, CURRENTLY REGISTERED WITH THE FEDERAL AVIATION ADMINISTRATION AS
N358CC, HAS BEEN MAINTAINED AND INSPECTED UNDER FAR PART 91 DURING THE 12 MONTH
PERIOD PRECEDING THE DATE OF THIS LEASE.
THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER FAR PART 91 FOR
OPERATIONS TO BE CONDUCTED UNDER THIS LEASE. DURING THE DURATION OF THIS LEASE,
EXTENDED STAY AMERICA, INC., 961 EAST MAIN STREET, SPARTANBURG, SOUTH CAROLINA
29302, IS CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER
THIS LEASE.
AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT
FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT
STANDARDS DISTRICT OFFICE.
THE "INSTRUCTIONS FOR COMPLIANCE WITH TRUTH IN LEASING REQUIREMENTS"
ATTACHED HERETO ARE INCORPORATED HEREIN BY REFERENCE.
I, THE UNDERSIGNED ROBERT A. BRANNON , AS CHIEF FINANCIAL OFFICER OF
EXTENDED STAY AMERICA, INC., 961 EAST MAIN STREET, SPARTANBURG S.C. 29302,
CERTIFY THAT I AM RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT AND THAT I
UNDERSTAND MY RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION
REGULATIONS.
IN WITNESS WHEREOF, the parties have executed this Lease.
MORGAN CORP.
/s/ Stewart H. Johnson 4/5/96
- ------------------------------- -------------------------------
Stewart H. Johnson, President Date and Time of Execution
EXTENDED STAY AMERICA, INC.
/s/ Robert A. Brannon 4/5/96
- ------------------------------- -------------------------------
Robert A. Brannon, C.F.O. Date and Time of Execution
8
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
---------------------------
Corporations (State of Incorporation)
- -------------------------------------
Extended Stay America, Inc. (Delaware)
ESA Development, Inc.
(formerly ESA Midwest, Inc.) (Delaware)
ESA Management, Inc. (Delaware)
ESA Properties, Inc.
(formerly ESA Acquisitions, Inc., and
formerly ESA Southeast, Inc.) (Delaware)
ESA-Norcross Inc. (Georgia)
ESA 0100, Inc. (South Carolina)
ESA 0115, Inc. (South Carolina)
ESA 0140, Inc. (Virginia)
ESA 0145, Inc. (Arkansas)
ESA 0175, Inc. (Virginia)
ESA 0180, Inc. (South Carolina)
ESA 0280, Inc. (North Carolina)
ESA 0295, Inc. (Kentucky)
ESA 0305, Inc. (Tennessee)
ESA 0325, Inc. (Kentucky)
ESA 0370, Inc. (North Carolina)
ESA 0480, Inc. (Virginia)
<PAGE>
ESA 0501, Inc. (New York)
ESA 0510, Inc. (Illinois)
ESA 0525, Inc. (Illinois)
ESA 0530, Inc. (Illinois)
ESA 0555, Inc. (Ohio)
ESA 0565, Inc. (Ohio)
ESA 0675, Inc. (Michigan)
ESA 0680, Inc. (Michigan)
ESA 0765, Inc. (New York)
ESA 0992, Inc. (Georgia)
ESA 0993, Inc. (Georgia)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-09-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 123,357,510 104,010,918
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 92,817 291,266
<CURRENT-ASSETS> 124,133,690 105,346,748
<PP&E> 18,336,389 51,986,606
<DEPRECIATION> 130,852 328,293
<TOTAL-ASSETS> 149,618,649 166,369,727
<CURRENT-LIABILITIES> 2,396,404 1,836,672
<BONDS> 0 0
0 0
0 0
<COMMON> 221,309 228,531
<OTHER-SE> 147,000,936 164,304,524
<TOTAL-LIABILITY-AND-EQUITY> 149,618,649 166,369,727
<SALES> 0 0
<TOTAL-REVENUES> 877,885 1,170,829
<CGS> 0 0
<TOTAL-COSTS> 3,033,817 3,050,271
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,307,422) (429,310)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,307,422) (429,310)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,307,422) (429,310)
<EPS-PRIMARY> (.10) (.02)
<EPS-DILUTED> (.10) (.02)
</TABLE>