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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-27360
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EXTENDED STAY AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3996573
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
450 E. LAS OLAS BOULEVARD, 33301
FT. LAUDERDALE, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 713-1600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.01 PER SHARE
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$1,192,133,000 AT FEBRUARY 26, 1997 (BASED ON THE CLOSING SALE PRICE ON THE
NASDAQ NATIONAL MARKET ON FEBRUARY 26, 1997, AS REPORTED BY THE WALL STREET
JOURNAL. AT FEBRUARY 26, 1997, THE REGISTRANT HAD ISSUED AND OUTSTANDING AN
AGGREGATE OF 79,866,355 SHARES OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 12, 1997, DESCRIBED IN PART
III HEREOF, ARE INCORPORATED BY REFERENCE IN THIS REPORT.
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PART I
ITEM 1. BUSINESS
Extended Stay America, Inc., a Delaware corporation (the "Company"),
develops, owns, and manages 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. 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-operated 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 Company's goal is to become a national provider of 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 extended stay concept.
Through December 31, 1996, the Company had developed and opened 30 extended
stay lodging facilities, acquired 10 others, and had 50 facilities under
construction. The Company plans to begin construction of approximately 80
extended stay lodging facilities during 1997 and to continue an active
development program thereafter. The Company's plans call for the average
facility to have approximately 120 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. 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. ("Viacom"), a diversified
media and entertainment company. Mr. Huizenga, who is the Chairman of the
Board of Directors of the Company, is the Chairman and Co-Chief Executive
Officer of Republic Industries, Inc. ("Republic"), a diversified company with
operations in the automotive, solid waste, electronic security and out-of-home
media industries, and the Chairman of the Board of Directors of Florida
Panthers Holdings, Inc. ("FPHI") which owns the Florida Panthers Hockey Club.
Mr. Huizenga was formerly Vice-Chairman of Viacom 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 extended stay
facilities. The Company plans to rapidly develop new 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.
The Company's strategy is to identify regions of the country that contain
the demographic factors necessary to support one or more 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 30 extended stay facilities developed and opened by the Company, the
average development cost was approximately $4.7 million with an average of 124
rooms. The cost to develop a facility varies significantly
<PAGE>
by geographic location. For the 50 facilities that were under construction as
of December 31, 1996, the estimated average cost is approximately $5.1 million
with an average of approximately 118 rooms. The cost of the facilities under
construction is expected to vary from a low of approximately $3.6 million to a
high of $7.0 million with the number of rooms ranging from a low of 95 to a
high of 147.
Sites for development will be 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; Signal Hill,
California; San Rafael, California; and Dallas, Texas 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 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 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. As of
December 31, 1996, the Company's existing facilities offered extended
stay accommodations for $159 to $299 per week. Room rates at the
Company's facilities vary significantly depending upon market factors
affecting such locations. These rates contrast with average weekly
rates for 1995 of approximately $545 for traditional extended stay
hotels.
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-operated laundromat, and telephone service with
voice mail messaging.
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 lower relative
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.
2
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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 district manager
who is typically responsible for five to ten facilities, depending on
geographic location. The district 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 district 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's current operating subsidiaries are (i) ESA Management, Inc.
("ESA Management") (which is the surviving entity of a statutory merger
between ESA Management, ESA Development, Inc., and ESA Properties, Inc.), (ii)
ESA West, Inc., (iii) ESA International, Inc., ("ESA International"), and (iv)
Extended Stay Canada, Inc. ("ESA Canada"). Except for ESA Canada, all of the
operating subsidiaries are wholly-owned subsidiaries of ESA. ESA Canada is a
Canadian corporation and is wholly-owned by ESA International. ESA Management
develops properties and provides management services for all of the lodging
facilities owned by the Company and its subsidiaries. In addition, each
Company lodging facility is owned by a separate single-purpose subsidiary of
ESA Management.
3
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LODGING FACILITIES
As of December 31, 1996, the Company had 40 extended stay lodging facilities
in operation and 50 facilities under construction in a total of 30 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 126
Marietta, Georgia................................. August 1995 121
Norcross, Georgia................................. January 1996 199
Norcross, Georgia................................. February 1996 133
Riverdale, Georgia................................ February 1996 147
Columbia, South Carolina.......................... April 1996 120
Downers Grove, Illinois........................... May 1996 154
Lenexa, Kansas.................................... May 1996 59
Lawrenceville, Georgia............................ June 1996 129
Chattanooga, Tennessee............................ July 1996 120
Las Vegas, Nevada................................. July 1996 125
Las Vegas, Nevada................................. July 1996 211
Las Vegas, Nevada................................. July 1996 177
Las Vegas, Nevada................................. July 1996 122
Sharonville, Ohio................................. July 1996 130
Maryland Heights, Missouri........................ August 1996 150
Chesapeake, Virginia.............................. August 1996 132
North Charleston, South Carolina.................. August 1996 126
Virginia Beach, Virginia.......................... September 1996 120
Lexington, Kentucky............................... September 1996 126
Little Rock, Arkansas............................. September 1996 120
Greensboro, North Carolina........................ September 1996 129
Brentwood, Tennessee.............................. September 1996 120
Winston-Salem, North Carolina..................... September 1996 111
Louisville, Kentucky.............................. October 1996 120
Rolling Meadows, Illinois......................... October 1996 125
Lakewood, Colorado................................ November 1996 120
Greece, New York.................................. November 1996 125
Bakersfield, California........................... November 1996 120
Albany, New York.................................. November 1996 134
Naperville, Illinois.............................. November 1996 125
Itasca, Illinois.................................. November 1996 125
Springdale, Ohio.................................. November 1996 126
Hazelwood, Missouri............................... November 1996 122
Merrillville, Indiana............................. November 1996 105
Burr Ridge, Illinois.............................. November 1996 119
Henrietta, New York............................... December 1996 127
Newport News, Virginia............................ December 1996 120
Dewitt, New York.................................. December 1996 121
Greenville, South Carolina........................ December 1996 109
</TABLE>
4
<PAGE>
The following table sets forth certain information regarding the Company's
lodging facilities that are under construction, all of which are expected to
open in 1997.
<TABLE>
<CAPTION>
PLANNED NUMBER
LOCATION OF ROOMS
-------- --------------
<S> <C>
Montgomery, Alabama........................................ 120
Mobile, Alabama............................................ 114
Scottsdale, Arizona........................................ 120
Tuscon, Arizona............................................ 120
Fresno, California......................................... 120
Rancho Cordova, California................................. 132
Ontario, California........................................ 127
Sacramento, California..................................... 120
Santa Rosa, California..................................... 114
Lakewood, Colorado......................................... 147
Gainesville, Florida....................................... 120
Jacksonville, Florida...................................... 122
Columbus, Georgia.......................................... 108
Duluth, Georgia............................................ 119
Boise, Idaho............................................... 107
Elmhurst, Illinois......................................... 117
Gurnee, Illinois........................................... 101
Overland Park, Kansas...................................... 120
Bossier City, Louisiana.................................... 120
Sulphur, Louisiana......................................... 120
Linthicum, Maryland........................................ 122
Madison Heights, Michigan.................................. 122
Ann Arbor, Michigan........................................ 112
Auburn Hills, Michigan..................................... 133
Novi, Michigan............................................. 125
Farmington Hills, Michigan................................. 113
St. Peters, Missouri....................................... 122
Kansas City, Missouri...................................... 109
Kansas City, Missouri...................................... 119
Independence Missouri...................................... 120
Fayetteville, North Carolina............................... 120
Morrisville, North Carolina................................ 120
Edison, New Jersey......................................... 134
Amherst, New York.......................................... 119
Akron, Ohio................................................ 95
Holland, Ohio.............................................. 125
Columbus, Ohio............................................. 119
Tulsa, Oklahoma............................................ 120
Carnegie, Pennsylvania..................................... 116
Columbia, South Carolina................................... 120
Knoxville, Tennessee....................................... 96
Nashville, Tennessee....................................... 114
Memphis, Tennessee......................................... 126
El Paso, Texas............................................. 120
Overlook, Utah............................................. 134
Richmond, Virginia......................................... 108
Tukwila, Washington........................................ 96
Everett, Washington........................................ 104
Wauwatosa, Wisconsin....................................... 122
Waukesha, Wisconsin........................................ 122
</TABLE>
5
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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 120 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 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 for the five-year
period ending in 1995.
6
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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.
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. 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 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 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
7
<PAGE>
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.
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 the 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 December 31, 1996, the Company and its subsidiaries employed
approximately 800 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.
RECENT DEVELOPMENTS
During 1996, the Company acquired ten extended stay properties in six
separate transactions (each such transaction is referred to herein as an
"Acquisition") as summarized below. Each of the Acquisitions was accounted for
using the purchase method of accounting.
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 199-room extended stay lodging facility
in Norcross, Georgia. In consideration for such Acquisition, the Company
issued an aggregate of 587,258 shares of its common stock, par value $.01
per share ("Common Stock").
8
<PAGE>
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 133-room extended stay
lodging facility in Norcross, Georgia and a 147-room extended stay lodging
facility in Riverdale, Georgia. In consideration for such Acquisition, the
Company issued 857,216 shares of Common Stock and paid an additional
$75,000 in cash.
On May 10, 1996, the Company acquired substantially all of the assets of
American Apartmen-Tels Investors II, L.P. ("AATI"), which owned and
operated a 59-room extended stay lodging facility in Lenexa, Kansas, for a
purchase price of approximately $3.3 million in cash. This Acquisition
includes adjacent land on which the Company intends to build a new 60-room
extended stay lodging facility.
On June 25, 1996, the Company acquired substantially all of the assets of
Apartment Inn Partners/Gwinnett, L.P., a Georgia limited partnership
("Gwinnett"). Gwinnett owned and operated a 129-room extended stay lodging
facility in Lawrenceville, Georgia. The facility was operated as The
Apartment Inn and rights for the use of that name and certain other rights
were controlled by Apartment/Inn. In consideration for such Acquisition,
the Company issued 344,200 shares of Common Stock and paid an additional
$23,000 in cash.
On July 9, 1996, the Company acquired substantially all of the assets of
Melrose Suites, Inc., St. Louis Manor, Inc., Boulder Manor, Inc., and
Nicolle Manor, which owned extended stay lodging facilities in Las Vegas,
Nevada (collectively, the "M & M Facilities"), that have 177 rooms, 125
rooms, 211 rooms, and 122 rooms, respectively. Each of the M & M Facilities
was managed by M & M Development, with which the Company has entered into a
two-year consulting agreement for a fee of $120,000 per year. In
consideration for the M & M Facilities, in addition to assuming liability
under certain leases for personal property, the Company issued 2,470,000
shares of Common Stock and paid an additional $500,000 in cash.
On July 29, 1996, the Company acquired a traditional lodging facility
owned by Kipling Hospitality Enterprise Corporation ("KHEC"), which was a
147-room traditional lodging facility located in Lakewood, Colorado, which
the Company is remodeling to convert to the extended stay format. In
consideration for this Acquisition, the Company issued 200,000 shares of
Common Stock and paid an additional $25,000 in cash.
On May 9, 1996, the Board of Directors of the Company declared a stock
dividend of one additional share of Common Stock for each share issued as of
the close of business on July 5, 1996, which was distributed on July 19, 1996,
thereby effecting a 2-for-1 stock split (the "1996 Stock Dividend"). All
references in this report to Common Stock, including prices per share, have
been adjusted to give effect to the 1996 Stock Dividend and to a 210-for-1
stock dividend effected in October 1995 in anticipation of the Company's
initial public offfering of Common Stock.
On June 5, 1996, the Company completed an additional offering of 19,550,000
shares of Common Stock at a price to the public of $15.50 per share (the "1996
Offering"). The net proceeds to the Company from the 1996 Offering were
approximately $289 million after deduction of the underwriting discounts and
commissions and other offering expenses.
On January 16, 1997, the Company, ESA Merger Sub, Inc., a wholly-owned
subsidiary of the Company ("Merger Sub"), and Studio Plus Hotels, Inc., a
Virginia corporation whose common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol "SPHI" ("Studio
Plus"), entered into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which Studio Plus will be merged with and into Merger Sub (the
"Merger"). The Merger Agreement provides that Merger Sub will be the surviving
corporation and that upon consummation of the Merger (i) each share of Studio
Plus common stock, par value $.01 per share (the "Studio Plus Common Stock"),
will be converted into the right to receive 1.2272 shares of Common Stock and
(ii) all outstanding options to purchase Studio Plus Common Stock from Studio
Plus will be converted into options to purchase Common Stock. As of December
31, 1996, Studio Plus owned and operated 35 mid-price extended stay lodging
facilities, had 11 of such facilities under construction, and options to
purchase 28 additional sites for development.
9
<PAGE>
Consummation of the Merger is subject to (i) the approval of the Merger
Agreement by the stockholders of the Company and the stockholders of Studio
Plus, (ii) the Company's ability to account for the Merger as a pooling of
interests, (iii) the appointment to the Board of Directors of the Company of
Mr. Norwood Cowgill, Jr., the Chairman of the Board and Chief Executive
Officer of Studio Plus, and (iv) other customary closing conditions. The
Merger Agreement may be terminated prior to its consummation by any of the
parties if the Merger is not consummated on or before August 31, 1997. The
Merger Agreement also may be terminated prior to its consummation for a number
of other reasons, including the following: (i) by mutual written consent of
the Company and Studio Plus; (ii) by either the Company or Studio Plus if the
necessary stockholder approvals are not received; (iii) by Studio Plus if its
Board of Directors determines in good faith that their fiduciary duties
require them to terminate the Merger Agreement by reason of any proposal or
offer with respect to a merger, consolidation, reorganization, exchange, plan
of liquidation, or similar transaction involving Studio Plus or its
subsidiaries, other than the Merger (an "Alternative Proposal"); or (iv) by
the Company if the Board of Directors of Studio Plus shall have (a) withdrawn,
or modified in a manner materially adverse to the Company, its approval of the
Merger Agreement, (b) recommended an Alternative Proposal, or (c) adopted
resolutions to accept or implement an Alternative Proposal. If the Merger
Agreement is terminated pursuant to clause (iii) or (iv) above, Studio Plus
must pay the Company a fee of $7,500,000.
On February 6, 1997, the Company issued 11,500,000 shares of Common Stock to
a number of institutional investors in a private placement transaction (the
"Private Placement"). The purchase price in the Private Placement was $17.625
per share, for an aggregate amount of approximately $202.7 million. Net
proceeds received by the Company from the Private Placement were approximately
$198.2 million. The shares of Common Stock issued in the Private Placement
were not registered under the Securities Act at the time of issuance and
constitute "restricted securities" within the meaning of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The Company has
registered under the Securities Act all of the shares of Common Stock issued
in the Private Placement so that the holders of such shares may make resales
in the public market of those shares.
On February 20, 1997, the Company announced its intention to develop and
launch the Crossland Economy Studios brand of budget extended stay lodging
facilities. The Company opened the first Crossland Economy Studios lodging
facility on January 2, 1997. The Company expects to open three additional
Crossland Economy Studios facilities during 1997 and at least 30 additional
Crossland Economy Studios per year beginning in 1998. Three of the Company's
extended stay lodging facilities under construction as of December 31, 1996
were Crossland Economy Studios. Crossland Economy Studios will be priced to
compete in the budget segment of the extended stay lodging market. Upon
completion of the Merger, the Company's Crossland Economy Studios, Extended
Stay America Efficiency Studios, and StudioPLUS brands of lodging facilities
will compete in the budget, economy, and mid-price segments, respectively, of
the extended stay lodging market.
ITEM 2. PROPERTIES
In addition to its lodging facilities described above (see "Business-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 its regional offices are located in Spartanburg, South
Carolina; Park Ridge, Illinois; Bellevue, Washington; Morristown, New Jersey;
Signal Hill, California; San Rafael, California; and Dallas, Texas. The
Company generally rents its office space on a short-term basis, although it
has a five-year lease for its corporate headquarters in Ft. Lauderdale,
Florida which expires in December 2002. 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded in the Nasdaq National Market tier of The Nasdaq
Stock Market ("Nasdaq"), under the symbol "STAY". On December 31, 1996, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$20.125 per share. At December 31, 1996, there were approximately 298 record
holders of the Common Stock. The table below sets forth the high and low sales
prices of shares of Common Stock on the Nasdaq National Market as reported by
Nasdaq for the periods indicated.
MARKET INFORMATION
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
-------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1995
4th Quarter (1).................................... $ 14.00 $ 10.12
Year Ended December 31, 1996
1st Quarter........................................ 15.62 10.00
2nd Quarter........................................ 17.50 11.00
3rd Quarter........................................ 20.75 12.87
4th Quarter........................................ 23.00 18.25
</TABLE>
- --------
(1) The price range of Common Stock for this period begins on December 14,
1995.
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 mortgage facilities 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
historical 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 years ended December 31, 1995 and 1996 have been audited by
Coopers & Lybrand L.L.P., independent accountants whose report thereon appears
elsewhere herein. 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. The Adjusted amounts give pro forma effect to the
acquisitions of lodging facilities from Welcome in August 1995, Apartment/Inn
in January 1996, Hometown Inn in February 1996, Gwinnett in June 1996, and the
M&M Facilities and KHEC in July 1996 (collectively, the "Significant Purchase
Acquisitions") as if they had occurred as of January 9, 1995 (the date of
inception of the Company) and to the Company operating as a publicly held
entity as of such date. The Adjusted data is unaudited but, in the opinion of
management of the Company, all necessary pro forma adjustments for the
Significant Purchase Acquisitions have been made. The unaudited adjusted
operating statement data is not necessarily indicative of what the actual
results of operations of the Company would have been had the Significant
Purchase Acquisitions been completed as of January 9, 1995 (the date of
inception of the Company), nor does it purport to represent the results of
operations for any future periods. These selected financial data should be
read in conjunction with the historical financial statements and related notes
thereto of the Company contained elsewhere herein and the historical financial
statements and related notes thereto for Welcome incorporated by reference
into this Annual Report on Form 10-K (the "1996 10-K").
11
<PAGE>
THE COMPANY
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996
----------------------------- -----------------------------
ACTUAL ADJUSTED(1) ACTUAL ADJUSTED(1)
----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
OPERATING STATEMENT DA-
TA:
Revenue................. $ 878 $14,165 $ 15,745 $20,958
Operating expenses...... 2,887 10,119 19,574 22,104
Depreciation and amorti-
zation................. 147 2,194 2,803 2,869
Income (loss) from oper-
ations................. (2,156) 1,852 (6,632) (4,015)
Interest income......... 849 805 11,538 11,538
Income taxes............ 1,036 1,470 3,009
Net income (loss)....... $ (1,307) $ 1,621 $ 3,436 $ 4,514
======== ======= ======== =======
Net income (loss) per
share (2).............. $ (0.05) $ 0.05 $ 0.06 $ 0.07
======== ======= ======== =======
Weighted average number
of shares of common
stock and equivalents
outstanding (2)........ 25,304 30,520 59,724 61,584
======== ======= ======== =======
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
ACTUAL ACTUAL
------ ------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $123,358 $189,647
Total assets............ 149,616 522,595
Long-term debt.......... 0 0
Stockholders' equity.... 147,223 495,502
</TABLE>
WELCOME INN AMERICA 89-1, L.P.
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1995 THROUGH
-------------------- AUGUST 18,
1992 1993 1994 1995
----- ----- ------ ------------
<S> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue.................................... $ 866 $ 999 $1,079 $ 713
Operating expenses......................... 502 557 562 367
Depreciation and amortization.............. 160 139 141 96
Income from operations..................... 204 303 376 250
Interest expense........................... (399) (382) (360) (272)
Net income (loss).......................... $(195) $ (79) $ 16 $ (22)
===== ===== ====== =====
</TABLE>
- --------
(1) The Adjusted amounts give pro forma effect of the Significant Purchase
Acquisitions as if they had occurred as of January 9, 1995 (the date of
inception of the Company) and to the Company operating as a publicly held
entity as of such date. The acquisition of AATI has been excluded from
Significant Purchase Acquisitions because the purchase price and the
unaudited results of operations for the period, 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 Commission. See
notes to the Company's consolidated financial statements contained
elsewhere herein and the historical financial statements of the
Significant Purchase Acquisitions incorporated by reference into the 1996
10-K.
(2) See notes 2 and 5 to the Company's consolidated financial statements
contained elsewhere herein.
12
<PAGE>
ITEM 7. 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. 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.
Through December 31, 1995 the Company commenced construction on nine
additional facilities which were completed in 1996.
During 1996 the Company commenced construction on 70 additional facilities,
completed 29 facilities, and acquired 9 additional operating facilities. As of
December 31, 1996 the Company had 40 operating extended stay lodging
facilities, 50 facilities under construction, and options to purchase 106
sites for development. 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 1997. There can be no assurances,
however, that the Company will complete the acquisition of the sites under
option or, if acquired, commence construction during 1997 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.
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 began the year ended December 31, 1996 with two operating
facilities, completed development of 29 and acquired 9 additional operating
facilities during the year. During the period owned by the Company, these
properties realized average occupancy of 65% and average weekly room rates of
$233 during the year ended December 31, 1996. The decline in average occupancy
for 1996 compared to 1995 reflects the lower occupancy typically experienced
during the pre-stabilization periods for the 29 facilities which commenced
operations during the year. The increase in average weekly room rate for 1996
compared to 1995 reflects primarily the geographic dispersion of properties
opened and the standard weekly rates in those markets. In addition, average
weekly room rates were positively influenced by the Olympic Games in Atlanta
during the quarter ended September 30, 1996. Future occupancy and room rates
may be impacted by a number of factors including the number and geographic
location of new facilities, as well as the season in which such properties
commence operations. There can be no assurance that the foregoing occupancy
and room rates can be maintained. Occupancy rates are determined by dividing
the guest rooms occupied on a daily basis by the total number of guest rooms.
Average weekly room rates are determined by dividing room revenue by the
number of rooms occupied on a daily basis for the applicable period and
multiplying by seven. The average weekly room rates vary from standard room
rates due primarily to (i) stays of less than one week, which are charged at a
higher nightly rate, (ii) higher weekly rates for a limited number of rooms
which are larger than the standard rooms, and (iii) additional charges for
more than one person per room.
The Company recognized total room revenues of $817,000 and other operating
revenues, consisting of telephone and vending revenues which vary based on
occupancy, of $43,000 during 1995. The Company also realized management fees
of $18,000 in 1995 from its management of the Marietta facility prior to its
acquisition of that facility. Total room revenues for the year ended December
31, 1996 were $15,280,000 and other operating revenues were $465,000. 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 $332,000 or 37.8% of total operating
revenues for 1995 and $6,929,000 or 44.0% of total operating revenues for
13
<PAGE>
the year ended December 31, 1996. The increase in property operating expenses
as a percentage of total revenue for 1996 as compared to 1995 is a result of
lower occupancies and revenue for the 29 properties that commenced operation
during 1996.
The provision for depreciation and amortization for the lodging facilities
for the period ended December 31, 1995 was $127,000 and the provision for the
year ended December 31, 1996 was $2,598,000. These provisions reflect a pro-
rata allocation of the annual depreciation and amortization charge for the
period for which the properties were in operation.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of lodging facilities.
Expenses of $2,555,000 for the year ended December 31, 1995, and $12,645,000
for the year ended December 31, 1996 consist primarily of personnel expenses,
professional and consulting fees, and related travel expenses including costs
that are not directly related to a site that will be developed by the Company.
The increase in corporate operating and property management expenses for the
year ended December 31, 1996 as compared with the year ended December 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.
Depreciation and amortization in the amount of $20,000 for the year ended
December 31, 1995, and $205,000 for the year ended December 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.
The Company realized $849,000 of interest income during the year ended
December 31, 1995 and $11,538,000 during the year ended December 31, 1996
which was primarily attributable to the short-term investment of funds
received from offerings of the Company's Common Stock in August 1995, December
1995 and June 1996.
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
Chief Executive Officer and Chairman 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 of
Common Stock. In December 1995, the Company completed (i) an initial public
offering of 10,120,000 shares of Common Stock, and (ii) a concurrent offering
to the Company's then existing shareholders of 4,135,650 shares of Common
Stock from which it received net proceeds of approximately $85 million. In
June 1996, the Company completed an additional offering of 19,550,000 shares
of Common Stock from which it received net proceeds of approximately $289
million.
In consideration for the ten existing facilities acquired by the Company
during the year ended December 31, 1996, the Company issued Common Stock
valued at approximately $55.3 million and paid cash, including the payment of
related expenses, of approximately $4.3 million. In addition, approximately
$211.8 million was used to acquire land and develop and furnish the 79 sites
under construction during 1996. This compares with the issuance of Common
Stock valued at approximately $1.7 million and cash payments of $2.3 million,
including payment of related expenses during 1995 in consideration for the one
existing facility acquired by the Company during 1995, and the expenditure of
approximately $13.2 million to acquire land and develop and furnish the 10
sites under construction during 1995. Approximately $9.4 million, net of
amounts transferred to property and equipment, was used for site deposits and
preacquisition costs during the year ended December 31, 1996, compared to
approximately $2.4 million used for such costs in the comparable prior year
period.
14
<PAGE>
During 1996, the Company repaid outstanding indebtedness of $630,000 under a
note issued in 1995 in connection with the purchase of land for development.
This note was due January 2, 1996, and was repaid from the Company's cash
balances.
The Company had cash balances of approximately $123.4 million as of December
31, 1995 and $189.6 million as of December 31, 1996. Substantially all of the
cash balances as of December 31, 1995 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. Substantially
all of the cash balances as of December 31, 1996 were invested, utilizing
domestic commercial banks and other financial institutions, in short-term
commercial paper and other securities having credit ratings of A1/P1 or
equivalent. The market value of the securities held approximates the carrying
amount. In October 1995, the Company executed a credit facility agreement
providing up to $200 million in mortgage financing for completed facilities,
subject to certain conditions and limitations. On May 17, 1996, the Company
entered into an additional credit facility agreement which provides up to $300
million in mortgage financing, subject to certain conditions and limitations,
for completed facilities. On May 24, 1996, the Company reduced the size of the
original mortgage facility from $200 million to $100 million. As a result of
these transactions, the Company has two credit facility agreements which
provide for a total of $400 million in mortgage financing. No advances had
been made under either facility as of December 31, 1996. The Company made
payments for deferred loan costs in connection with its mortgage facilities
totaling $1.7 million and $3.9 million, respectively, during 1995 and 1996. In
addition, the Company issued 1,501,080 shares of Common Stock valued at $3.6
million in connection with the credit facility executed in October 1995.
The Company had commitments to construct additional extended stay properties
totaling approximately $280 million at December 31, 1996. The Company expects
to finance the construction and development of its lodging facilities
principally with its cash balances, issuances of equity or debt securities,
and loans under mortgage facilities. In the future, the Company 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 first and fourth
quarters of each calendar year. 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.
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.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. A number of important
factors could cause the Company's actual results for future periods to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company. These 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 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 general economic conditions as they may impact the
overall lodging industry.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXTENDED STAY AMERICA, INC.
Report of Independent Accountants......................................... 17
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. 18
Consolidated Statements of Operations for the year ended December 31, 1996
and the period from January 9, 1995 (inception) through December 31,
1995..................................................................... 19
Consolidated Statements of Shareholders' Equity for the year ended Decem-
ber 31, 1996 and the period from January 9, 1995 (inception) through De-
cember 31, 1995.......................................................... 20
Consolidated Statements of Cash Flows for the year ended December 31, 1996
and the period from January 9, 1995 (inception) through December 31,
1995..................................................................... 21
Notes to Consolidated Financial Statements................................ 22
</TABLE>
The financial statements for Welcome Inn America 89-1, L.P. are incorporated
herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Extended
Stay America, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1996 and 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 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 consolidated financial position of Extended Stay
America, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996 and 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
February 6, 1997
17
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $189,647 $123,358
Accounts receivable................................ 1,027 290
Supply inventories................................. 2,922 93
Prepaid expenses................................... 796 316
Deferred income taxes.............................. 1,000
Other current assets............................... 377 67
-------- --------
Total current assets............................. 195,769 124,124
Property and equipment, net.......................... 306,067 18,205
Site deposits and preacquisition costs............... 10,318 1,931
Deferred loan costs.................................. 9,158 5,293
Other assets......................................... 1,283 63
-------- --------
$522,595 $149,616
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 9,770 $ 668
Accrued salaries and related expenses.............. 1,156 271
Due to related parties............................. 204 133
Other accrued expenses............................. 2,051 72
Accrued retainage.................................. 11,371 607
Deferred revenue................................... 179 12
Note payable....................................... 630
-------- --------
Total current liabilities........................ 24,731 2,393
-------- --------
Deferred income taxes................................ 2,362
-------- --------
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, 68,290,984 and 44,261,710 shares
issued and outstanding............................ 683 443
Additional paid-in capital......................... 492,690 148,087
Retained earnings (accumulated deficit)............ 2,129 (1,307)
-------- --------
Total shareholders' equity....................... 495,502 147,223
-------- --------
$522,595 $149,616
======== ========
</TABLE>
See notes to the consolidated financial statements
18
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Room revenue....................................... $15,280 $ 817
Other revenue...................................... 465 61
------- -------
Total revenue.................................... 15,745 878
------- -------
Costs and expenses:
Property operating expenses........................ 6,929 332
Corporate operating and property
management expenses............................... 12,645 2,555
Depreciation and amortization...................... 2,803 147
------- -------
Total costs and expenses......................... 22,377 3,034
------- -------
Loss from operations................................. (6,632) (2,156)
Interest income...................................... 11,538 849
------- -------
Net income (loss) before income taxes................ 4,906 (1,307)
Provision for income taxes........................... 1,470
------- -------
Net income (loss).................................... $ 3,436 $(1,307)
======= =======
Net income (loss) per common share................... $ 0.06 $ (0.05)
======= =======
Weighted average common and equivalent shares
outstanding......................................... 59,724 25,304
======= =======
</TABLE>
See notes to the consolidated financial statements
19
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES STOCK CAPITAL DEFICIT) EQUITY
---------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock, net of
issuance costs......... 22,130,855 $222 $148,308 $148,530
Retroactive effect of
two-for-one stock split
on July 19, 1996--Note
2...................... 22,130,855 221 (221)
Net loss................ $(1,307) (1,307)
---------- ---- -------- ------- --------
Balance, December 31,
1995................... 44,261,710 443 148,087 (1,307) 147,223
Acquisitions of extended
stay facilities--
Note 5................. 4,458,674 45 55,198 55,243
Issuance of common
stock, net of
issuance costs......... 19,550,000 195 289,249 289,444
Stock options exercised,
including tax benefit
of $108................ 20,600 156 156
Net income.............. 3,436 3,436
---------- ---- -------- ------- --------
Balance, December 31,
1996................... 68,290,984 $683 $492,690 $ 2,129 $495,502
========== ==== ======== ======= ========
</TABLE>
See notes to the consolidated financial statements
20
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 3,436 $ (1,307)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 2,803 147
Write-off of site deposits and preacquisition
costs........................................... 1,475 289
Deferred income taxes............................ 1,470
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable............................ (737) (46)
Supply inventories............................. (2,454) (93)
Prepaid expenses............................... (480) (319)
Other current assets........................... (310) (26)
Accounts payable............................... 407 66
Accrued salaries and related expenses.......... 885 271
Due to related parties......................... 71 133
Deferred revenue............................... 167 12
Other accrued expenses......................... 1,979 72
--------- --------
Net cash provided by (used in) operating
activities.................................. 8,712 (801)
--------- --------
Cash flows from investing activities:
Acquisitions of extended stay properties........... (4,271) (2,342)
Additions to property and equipment................ (211,765) (13,230)
Payments for site deposits and preacquisition
costs............................................. (9,407) (2,388)
Payments for other assets.......................... (1,251) (65)
--------- --------
Net cash used in investing activities........ (226,694) (18,025)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 288,840 143,882
Additions to deferred loan costs................... (3,885) (1,698)
Proceeds from related party loans.................. 6,135
Payments of related party loans.................... (6,135)
Payment of note payable............................ (630)
Other.............................................. (54)
--------- --------
Net cash provided by financing activities.... 284,271 142,184
--------- --------
Increase in cash and cash equivalents................ 66,289 123,358
Cash and cash equivalents at beginning of period..... 123,358
--------- --------
Cash and cash equivalents at end of period........... $ 189,647 $123,358
========= ========
Noncash investing and financing transactions:
Issuances of common stock for acquisitions of
extended stay properties.......................... $ 55,272 $ 1,700
========= ========
Capitalized or deferred items included in accounts
payable and accrued liabilities................... $ 17,671 $ 1,212
========= ========
Issuances of common stock for notes receivable from
shareholders...................................... $ $ 28,050
========= ========
Issuance of common stock for deferred loan costs... $ $ 3,574
========= ========
Note payable for the purchase of property site..... $ $ 630
========= ========
</TABLE>
See notes to the consolidated financial statements
21
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Extended Stay America, Inc. (the "Company") was organized on January 9,
1995, as a Delaware corporation to develop, own, and manage extended stay
lodging facilities which are designed to appeal to value-conscious guests.
Operation of the Company's first extended stay facility commenced on August 1,
1995. At the end of fiscal 1996 and 1995, the Company operated 40 properties
and 2 properties, respectively, in the continental United States. In addition,
the Company had 50 facilities under construction and options to purchase
parcels of real estate in 106 locations at December 31, 1996.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
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
the respective balance sheet date.
As of December 31, 1996, the Company had invested approximately $181 million
in short-term commercial paper and other securities. In addition, the Company
invests excess funds in an overnight sweep account with a commercial bank
which invests in short-term, interest-bearing reverse repurchase agreements.
Due to the short-term nature of these investments, the Company did not take
possession of the securities, which were instead held by the respective
financial institutions. The market value of the securities held pursuant to
the agreements approximates the carrying amount. Deposits in excess of
$100,000 are not insured by the Federal Deposit Insurance Corporation.
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 of the assets are as follows:
<TABLE>
<S> <C>
Building and improvements.......................................... 40 years
Furniture, fixtures and equipment.................................. 3-7 years
</TABLE>
22
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE 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 of the site is not consummated, the costs are charged to
corporate operating expenses.
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.
Pre-Opening Costs
The Company capitalizes compensation and other training-related costs
incurred prior to the opening of a property. Included in other assets as of
December 31, 1996 and 1995 are costs of $282,000 and $8,000, net of
accumulated amortization of $70,000 and $6,000, respectively, which are being
amortized over a period of twelve months.
Organization Costs
Organization costs of $219,000 and $41,000 are included in other assets, net
of accumulated amortization of $25,881 and $10,000, as of December 31, 1996
and 1995, respectively, and are being amortized over sixty months using the
straight-line method.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition
Room revenue and other income are recognized when earned.
Business Segment
The Company operates principally in one business segment which is to
develop, own, and manage extended stay lodging facilities.
Net Income (Loss) Per Common Share
The net income per common share amount in the statement of operations for
the year ended December 31, 1996 has been computed in accordance with
Accounting Principles Board Opinion (APB) No. 15. For the period ended
December 31, 1995, the net loss per common share amount in the statement of
operations has been computed in accordance with a Staff Accounting Bulletin
(SAB) of the Securities and Exchange Commission and APB No. 15. 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
23
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 initial public offering price, including loss years where the impact of
the incremental shares is antidilutive. 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 period 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. On May 9, 1996, the
Board of Directors of the Company declared a 2-for-1 stock split effected in
the form of a stock dividend payable on July 19, 1996. Accordingly, all share
and per share amounts have been adjusted retroactively to reflect these
events.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements, including land under
current development............................. $ 99,085 $ 9,074
Buildings and improvements....................... 136,398 5,350
Furniture, fixtures and equipment................ 34,560 1,197
Construction in progress......................... 38,878 2,715
-------- -------
308,921 18,336
Less accumulated depreciation.................... 2,854 131
-------- -------
Total property and equipment..................... $306,067 $18,205
======== =======
</TABLE>
The Company had commitments to construct additional extended stay properties
totaling approximately $280 million at December 31, 1996.
For the period ended December 31, 1995, the Company incurred interest of
$98,000, all of which was capitalized and included in the cost of buildings
and improvements. No interest expense was capitalized during 1996.
NOTE 4--OPTIONS TO PURCHASE PROPERTY SITES
As of December 31, 1996, the Company had options to purchase parcels of real
estate in 106 locations in 31 states. The Company had paid approximately $3.3
million in connection with these options as of December 31, 1996. 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 approximately $4 million which was paid
for by the issuance of 714,000 shares of the Company's common stock (the
"Common Stock") valued at $1.7 million and payment of approximately $2.3
million in cash.
During 1996, the Company acquired ten (10) extended stay facilities from a
number of unrelated sellers (the "Acquisitions") for approximately $59.6
million, which was paid for by the issuance of approximately 4.5 million
shares of Common Stock valued at approximately $55.3 million and approximately
$4.3 million in cash. As a part of the Acquisitions, the Company assumed and
subsequently retired liabilities aggregating approximately $470,000 under
certain leases for personal property.
24
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of the properties are included in
the consolidated statements of operations from the date of acquisition.
The following unaudited pro forma condensed statements of operations of the
Company are presented as if the acquisitions of the above extended stay
properties and the issuance of shares to acquire and to fund the cash portion
of the purchase prices had occurred on January 9, 1995 (the date of inception
of the Company). These statements also reflect estimated incremental expenses
to operate as a publicly held company as if the Company were publicly held on
the date of inception. These pro forma condensed statements of operations are
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
JANUARY 9, 1995 PRO FORMA FOR THE
(INCEPTION) THROUGH YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total revenue......................... $14,165 $20,958
Total costs and expenses.............. 12,313 24,973
------- -------
Income (loss) from operations......... 1,852 (4,015)
Interest income....................... 805 11,538
------- -------
Income before income taxes............ 2,657 7,523
Provision for income taxes............ 1,036 3,009
------- -------
Net income............................ $ 1,621 $ 4,514
======= =======
Net income per common share........... $ 0.05 $ 0.07
======= =======
Weighted average number of common and
equivalent shares outstanding during
the period........................... 30,520 61,584
======= =======
</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 was
collateralized by a deed of trust on the property. The note bore interest at a
rate of three percent per year and was paid on January 2, 1996.
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.
25
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--STOCK OPTION PLANS
The Company has three stock option plans (collectively, the "Plans"),
including the 1995 and 1996 Employee Stock Option Plans (the "Employee Plans")
and the 1995 Stock Option Plan for Non-Employee Directors (the "Directors'
Plan"). The Plans provide for grants to certain officers, directors and key
employees of stock options to purchase shares of Common Stock of the Company.
Options granted under the plans expire ten years from the date of grant.
Options granted under the Employee Plans vest ratably over a four year period
and options granted under the Directors' Plan vest six months from the date of
grant.
A summary of the status of the Plans as of December 31, 1996 and 1995 and
changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------- --------------------
NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE
--------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 2,425,002 $ 2.38- 6.50
Granted........................ 3,555,762 10.50-22.38 2,425,002 $2.38-6.50
Exercised...................... (20,600) 2.38
Forfeited...................... (148,296) 2.38-14.44
--------- ------------ --------- ----------
Outstanding at end of year..... 5,811,868 $ 2.38-22.38 2,425,002 $2.38-6.50
========= =========
Options exercisable at year-
end........................... 1,002,771 $ 2.38-22.38
Available for future grants.... 3,001,652 1,409,118
Total shares reserved for
issuance as of December 31.... 8,813,520 3,834,120
Weighted average fair value of
options granted during the
year.......................... $5.24 $1.67
============ ==========
</TABLE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for the Plans. Accordingly, no compensation cost has been
recognized for options granted under the Plans. Had compensation cost for the
Plans been determined based on the fair value at the date of grant for awards
under the Plans consistent with the method of SFAS 123, the Company's net
income and net income per share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss)................ $3,436 $ 198 $(1,307) $(1,632)
Net income (loss) per share...... $ 0.06 $0.00 $ (0.05) $ (0.06)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes multiple option-pricing model with the following assumptions
used for grants in 1996 and 1995: dividend yield of 0%, expected volatility of
33.47%, risk-free interest rate of 6% and expected life of 5.5 years.
The following table summarizes information about the Company's stock options
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED OUTSTANDING WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
DECEMBER CONTRACTUAL EXERCISE DECEMBER EXERCISE
31, 1996 YEARS PRICE 31, 1996 PRICE
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 2.38- 2.38.......... 1,356,266 8.60 $ 2.38 337,557 $ 2.38
$ 6.50- 6.50.......... 980,844 8.90 6.50 365,214 6.50
$10.50-10.50.......... 1,242,382 9.21 10.50 300,000 10.50
$11.00-13.31.......... 682,896 9.29 12.73 0 0.00
$13.38-13.38.......... 912,812 9.01 13.38 0 0.00
$14.00-22.38.......... 636,668 9.65 17.01 0 0.00
--------- ---- ------ --------- ------
$ 2.38-22.38.......... 5,811,868 9.04 $ 9.36 1,002,771 $ 6.31
========= ==== ====== ========= ======
</TABLE>
26
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--MORTGAGE FACILITIES
On October 31, 1995 the Company executed a mortgage facility with DLJ
Mortgage Capital, Inc. (an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, one of the representatives of the underwriters of the
Company's Common Stock offerings) (the " DLJ Mortgage Facility") providing for
up to $100 million in mortgage financing (which was reduced by the company
from $200 million in connection with the establishment of the CSFB mortgage
facility described below) to be used to finance, subject to certain
conditions, on a long-term basis, newly constructed extended stay lodging
facilities. Draws under the DLJ 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 DLJ Mortgage Facility provides for the following fees to be paid by the
Company: (1) a commitment fee of $1,600,000 which was paid pursuant to the
execution of the facility; (2) a drawdown fee of 1% of the funds loaned under
the facility; and (3) a fee paid by the issuance of 1,501,080 shares of Common
Stock of the Company at the time the facility was executed. These fees, which
include the estimated fair market value of the Common Stock issued to the
lender, will be amortized over the life of the 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 1,000,860 shares of Common Stock at
a price of $2.38 per share upon the execution of the facility.
All amounts borrowed under the DLJ 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
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 under the facility are made.
Advances under the 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 made under the DLJ Mortgage Facility 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 facility provides that the Company must maintain a
tangible net worth of not less than $40,000,000 and amounts due under the
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 also has a mortgage facility (the "CSFB Mortgage Facility") from
CS First Boston Mortgage Capital Corporation (an affiliate of CS First Boston
Corporation, one of the representatives of the underwriters of the Company's
June 1996 Common Stock offering) which provides up to $300 million in mortgage
financing, subject to certain conditions and limitations, for completed
facilities.
27
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the CSFB 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 seven years and three months from the
date that the first such loan is funded or May 2004. 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 CSFB Mortgage Facility will
be collateralized 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 CSFB Mortgage Facility is subject to, among other things,
market capitalization of the Company of at least $300 million, maintenance of
certain debt service coverage ratios, 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 CSFB Mortgage Facility also contains certain
affirmative and negative covenants similar to those contained in the DLJ
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 CSFB 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 prior to May 1999, without having financed at least $100 million of
such debt under the CSFB Mortgage Facility, the lender may terminate its
obligation to fund additional facilities under the CSFB Mortgage Facility.
All or any portion of the amounts outstanding under the CSFB Mortgage
Facility will become due and payable, at the option of the lender, if an event
of default occurs, including, among other things, (i) a declared 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
pay-out 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) Mr. H. Wayne Huizenga or Mr.
George D. Johnson, Jr. cease to be Board members to the extent that they are
living and have not been judicially incompetent.
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 facilities.
NOTE 10--RELATED PARTY TRANSACTIONS
During 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. In
1995, 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.
28
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, the Company acquired a property site for approximately $562,000
in cash from a partnership in which certain shareholders are partners.
In 1996, the Company entered into a 10-year lease for a suite at Pro Player
Stadium (formerly Joe Robbie Stadium) for a base rental of $115,000 per year,
subject to certain additional charges and periodic escalation, and a 3-year
lease for a suite at Homestead Motor Sports Complex for a base rental of
approximately $53,000 per year, subject to certain additional charges. The
Chairman of the Company's Board of Directors owns Pro Player Stadium and has
an approximate 50% interest in Homestead Motor Sports Complex.
During 1996 and 1995, the Company incurred charges of approximately $
983,000 and $412,000 from a company controlled by the Chief Executive Officer
of the Company for the use of airplanes, including approximately $204,000 and
$133,000 in amounts due to related parties as of December 31, 1996 and 1995,
respectively.
A director of the Company is a partner of a law firm which charged the
Company fees of approximately $54,000 and $126,000 during 1996 and 1995,
respectively. Substantially all of such charges were incurred in connection
with the Company's organization, offerings of Common Stock, mortgage
facilities and acquisition of extended stay facilities.
NOTE 11--INCOME TAXES
Income tax expense consists of deferred taxes of (in thousands):
<TABLE>
<S> <C>
Year ended December 31, 1996:
U.S. Federal....................................................... $1,203
State and local.................................................... 267
------
$1,470
======
</TABLE>
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 was no current
or deferred federal or state income tax expense in the initial period.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35 percent to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Computed "expected" tax rate.................................. 35.0 % (35.0)%
Increase (reduction) in income taxes resulting from:
Change in valuation allowance............................... (9.2) 34.7
State and local income taxes, net of federal benefit........ 4.9
Other....................................................... (.7) .3
---- -----
Annual effective income tax rate.............................. 30.0 % 0.0 %
==== =====
</TABLE>
29
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 (in thousands) are presented below:
<TABLE>
<CAPTION>
1996 1995
------- ----
<S> <C> <C>
Deferred tax assets:
Start up expenses capitalized for tax...................... $242
Net operating loss carryforward............................ $ 986 155
Other...................................................... 14 78
------- ----
Total gross deferred tax asset........................... 1,000 475
Less valuation allowance................................... (453)
------- ----
Deferred tax asset......................................... 1,000 22
Deferred tax liability:
Fixed assets, due to differences in depreciation methods
and basis.................................................. (2,362) (22)
------- ----
$(1,362) $
======= ====
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,300,000, which are available
to offset future federal taxable income, if any, through 2011.
The valuation allowance for deferred tax assets as of January 1, 1996 was
$453,000 which was established in the Company's initial period. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion of the deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the period in which those
temporary differences become deductible. Management considered the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowance at December 31, 1996. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
NOTE 12--PUBLIC OFFERINGS
On December 19, 1995, the Company closed an initial public offering of
10,120,000 shares of its Common Stock at a public offering price of $ 6.50 per
share and a concurrent offering to existing shareholders of 4,135,650 shares
of Common Stock at an offering price of $ 6.05 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 million, net of offering expenses.
On June 5, 1996, the Company closed a public offering of 19,550,000 shares
of its Common Stock at a public offering price of $15.50 per share. The
proceeds to the Company of such offering was approximately $289 million, net
of offering expenses.
30
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 13--QUARTERLY RESULTS (UNAUDITED)
The following is a summary of quarterly operations for the years ended
December 31, 1996 and 1995 (in thousands except per share data):
<TABLE>
<CAPTION>
1996
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue.............................. $ 1,171 $ 2,332 $ 5,410 $ 6,832
Operating (loss)........................... (1,879) (1,709) (1,223) (1,821)
Net income (loss).......................... (429) 415 2,293 1,157
Net income (loss) per share................ $ (0.01) $ 0.01 $ 0.03 $ 0.02
<CAPTION>
1995
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue.............................. $ 0 $ 10 $ 295 $ 573
Operating loss............................. (249) (514) (625) (768)
Net loss................................... (249) (514) (491) (53)
Net loss per share......................... $ (0.01) $ (0.02) $ (0.02) $ (0.00)
</TABLE>
NOTE 14--SUBSEQUENT EVENTS
On January 16, 1997, the Company and ESA Merger Sub, Inc. ("Merger Sub"), a
newly formed subsidiary of the Company, and Studio Plus Hotels, Inc. ("Studio
Plus"), announced that they had entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Studio Plus will be merged with and
into Merger Sub (the "Merger"). The Merger Agreement provides that upon the
consummation of the Merger, each share of Studio Plus Common Stock will be
converted into the right to receive 1.2272 shares of Common Stock of the
Company. Consummation of the Merger is subject to a number of conditions,
including the approval of the stockholders of both Studio Plus and the
Company. If approved, the Merger will be accounted for as a pooling of
interests.
In January 1997, the Company adopted the 1997 Employee Stock Option Plan
(the "1997 Plan"). The 1997 Plan provides for grants to certain officers,
directors and key employees of stock options to purchase shares of Common
Stock of the Company. Options may be granted with respect to a total of not
more than 6,000,000 shares of Common Stock under the 1997 Plan, subject to
antidilution and other adjustment provision. Such options expire ten years
from the date of grant and vest over a four-year period. The 1997 Plan is
subject to the approval of the shareholders of the Company.
On February 6, 1997, the Company completed a private placement of 11.5
million shares of its Common Stock at a purchase price of $17.625 per share,
for an aggregate amount of approximately $203 million. Net proceeds received
by the Company from the private placement were approximately $198 million.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information appearing under the caption "Election of Directors" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held
May 12, 1997 (the "Proxy Statement"), is incorporated herein by reference.
EXECUTIVE OFFICERS
Set forth below are the names of the executive officers of the Company and
its subsidiaries, their ages at December 31, 1996, the positions they hold
with the Company or its subsidiaries, and summaries of their business
experience. Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
H. Wayne Huizenga*...... 59 Chairman of the Board of Directors
George D. Johnson, Jr.*. 54 President, Chief Executive Officer, and Director
Robert A. Brannon....... 46 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Richard A. Fadel, Jr.... 38 Vice President--Operations of ESA Management, Inc.
Michael R. Beck......... 35 Vice President--Real Estate of ESA Management, Inc.
Corry W. Oakes.......... 30 Vice President--Construction of ESA Management, Inc.
Gregory R. Moxley....... 41 Vice President--Finance and Controller
Michael M. Wilson....... 57 Vice President--Marketing of ESA Management, Inc.
Shawn R. Ruben.......... 30 Vice President--Development of ESA Management, Inc.
Robert W. Levis......... 33 Vice President--Corporate Development of ESA
Management, Inc.
Harold E. Wright........ 53 Senior Vice President--Real Estate of ESA
Management, Inc.
</TABLE>
- --------
*Member of Executive Committee of the Board of Directors
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 Co-Chief Executive Officer of Republic
and Chairman of the Board of Directors of FPHI. Mr. Huizenga served until 1995
as Vice-Chairman of Viacom, 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
stockholder 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, the Miami Dolphins, a National Football League franchise, and Pro
Player Stadium in South Florida.
32
<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 formerly served as a director of Viacom and
currently serves on the board of directors of Republic, FPHI, and Duke Power
Company. He 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.
Richard A. Fadel, Jr. has been Vice President--Operations of ESA Management
since June 1996. Mr. Fadel is responsible for staffing and managing the
operations of the Company's extended stay facilities. Mr. Fadel served as Zone
Vice President of Operations for the Blockbuster Entertainment Group from
August 1993 through June 1996, where he was responsible for the operations of
over 500 stores. Prior to joining Blockbuster, Mr. Fadel was employed by WJB
Video, where he served as Director of Operations from April 1992 through
August 1993 and as Regional Manager of Operations from December 1990 through
April 1992. Prior to joining WJB Video, Mr. Fadel held retail management
positions with The Limited, Inc. and Peebles Department Stores, Inc. from 1981
through 1990.
Michael R. Beck has been Vice President--Real Estate of ESA Management from
January 1997, of ESA Properties from January 1996 through December 1996, and
of the Company from September 1995 through December 1995. 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.
33
<PAGE>
Gregory R. Moxley has been Controller of the Company since October 1995 and
Vice President--Finance of the Company since 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 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.
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 Senior Vice President--Real Estate of ESA
Management since January 1997 and was President of ESA Development, a wholly-
owned subsidiary of the Company, from June 1995 through December 1996. 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.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Reference is made to the information set forth in Part II, Item 8 of this
Report, which information is incorporated herein by reference.
(A)(2) 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.
(A)(3) EXHIBITS
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
<TABLE>
<C> <S>
10.3 Amended and Restated 1995 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, between ESA
Development, Inc. and Harold E. Wright
10.6 1995 Stock Option Plan for Non-Employee Directors of the Company
10.10 Amended and Restated 1996 Employee Stock Option Plan of the Company
10.11 Employment Agreement dated March 18, 1996 between ESA Development,
Inc. and Harold E. Wright
</TABLE>
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1996. The Company filed a report on Form 8-K dated January 16, 1997 (as
amended by Form 8-K/A dated January 16, 1997) relating to the Merger Agreement
and a report on Form 8-K dated February 5, 1997 relating to the Private
Placement.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Agreement to Purchase Hotel and related agreements dated
January 24, 1996 between the Company and John W. Baker and
Apartment/Inn, L.P. (incorporated by reference to Exhibit
2.2 to the Company's Registration Statement on Form S-1,
Registration No. 333-102)
2.2 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. (incorporated
by reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-1, Registration No. 333-102)
2.3 Agreement to Purchase Hotel dated May 1, 1996 and related
agreements among ESA Properties, Inc., Kipling Hospitality
Enterprise Corporation, and J. Craig McBride (incorporated
by reference to Exhibit 2.4 to the Company's Report on Form
10-Q for the quarter ended March 31, 1996)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
2.4 Agreement to Purchase Hotel dated as of June 24, 1996 and
related agreements among the Company, ESA 0996, Inc.,
Apartment Inn Partners/Gwinnett, L.P., and Rosa Dziewienski
Pajonk (incorporated by reference to Exhibit 2.5 to the
Company's Registration Statement on Form S-1, Registration
No. 333-102)
2.5 Agreements to Purchase Hotels dated as of June 25, 1996 and
related agreements between the Company and ESA Properties,
Inc. and Boulder Manor, Inc., Melrose Suites, Inc.,
St. Louis Manor, Inc., and Michael J. Mona, Jr. and Dean
O'Bannon (incorporated by reference to Exhibit 2.6 to the
Company's Registration Statement on Form S-1, Registration
No. 333-102)
2.6 Agreement and Plan of Merger dated as of January 16, 1997 by
and among the Company, Merger Sub, and Studio Plus
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated January 16, 1997)
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration
No. 33-98452)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
4.1 Specimen certificate representing shares of Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration
No. 33-98452)
10.1 Form of Subscription Agreement and related Demand Note and
Stockholders Agreement between the Company and approximately
30 investors entered into in August 1995 (incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
10.2 Mortgage Facility, dated October 31, 1995, between the
Company and DLJ Mortgage Capital, Inc. (incorporated by
reference to Exhibit 10.2(b) to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
10.3 Amended and Restated 1995 Employee Stock Option Plan of the
Company (incorporated by reference to Exhibit 10.3 to the
Company's Report on Form 10-Q for the quarter ended March
31, 1996)
10.4 Employment Agreement dated as of June 1, 1995 between ESA
Development, Inc. and Harold E. Wright (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
10.5 Stock Option Agreement dated as of June 1, 1995 between ESA
Development, Inc. and Harold E. Wright (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
10.6 1995 Stock Option Plan for Non-Employee Directors of the
Company (incorporated by reference to Exhibit 10.6 to the
Company's Report on Form 10-Q for the quarter ended March
31, 1996)
10.7 Contract to Buy and Sell Real Property, dated April 20,
1995, between the Company and North Town Associates, L.P.
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1, Registration No. 33-
98452)
10.8 Aircraft Dry Lease dated June 12, 1995 between Wyoming
Associates, Inc. and the Company (incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on
Form S-1, Registration No. 33-98452)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
10.9 Aircraft Dry Lease dated June 12, 1995 between Wyoming
Associates, Inc. and the Company (incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on
Form S-1, Registration No. 33-98452)
10.10 Amended and Restated 1996 Employee Stock Option Plan of the
Company (incorporated by reference to Exhibit 10.10 to the
Company's Report on Form 10-Q for the quarter ended March
31, 1996)
10.11 Employment Agreement dated as of March 18, 1996 between ESA
Development, Inc. and Harold E. Wright (incorporated by
reference to Exhibit 10.11 to the Company's Report on Form
10-Q for the quarter ended March 31, 1996)
10.12 Aircraft Dry Lease dated April 5, 1996 between Morgan Corp.
and the Company (incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1,
Registration No. 333-03373)
10.13 Homestead Motorsports Complex Executive Suite License
Agreement dated February 14, 1996 among The Homestead
Motorsports Joint Venture, Miami Motorsports Joint Venture,
and the Company (incorporated by reference to Exhibit 10.13
to the Company's Report on Form 10-Q for the quarter ended
March 31, 1996)
10.14 Joe Robbie Stadium Executive Suite License Agreement dated
March 18, 1996 between Robbie Stadium Corporation and the
Company (incorporated by reference to Exhibit 10.14 to the
Company's Report on Form 10-Q for the quarter ended March
31, 1996)
10.15 Credit Facility Agreement dated May 24, 1996 between the
Company and CS First Boston Mortgage Capital Corporation
(incorporated by reference to Exhibit 10.15(b) to the
Company's Registration Statement on Form S-1, Registration
No. 333-03373)
10.16 Aircraft Dry Lease dated December 28, 1996 between Wyoming
Associates, Inc. and the Company
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 Financial Statements of Welcome Inn America 89-1, L.P.
</TABLE>
37
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON MARCH 3, 1997.
Extended Stay America, Inc.
/s/ George D. Johnson, Jr.
By: _________________________________
George D. Johnson, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 3, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
PRINCIPAL EXECUTIVE OFFICER:
<S> <C>
/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
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>
38
<PAGE>
AIRCRAFT DRY LEASE
This Lease of aircraft is made, effective as of December 28, 1996, by and
between Wyoming Associates, 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 "Lessor") and ESA
Management, Inc., a corporation incorporated under the laws of the State of
Delaware, with principal offices at 450 East Las Olas Boulevard, Suite 1100, Ft.
Lauderdale, Florida 33301 (hereinafter referred to as "Lessee").
RECITALS
The parties recite that:
A. Lessor owns a 1985 Canadair Challenger Model 601-1A aircraft, Serial
No. 3042, and currently registered as N900CC (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 Four Thousand Dollars and No/100 ($4,000.00) 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, South Carolina on December 28,
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
<PAGE>
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 December 28, 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.
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 $10,500,000.00
(No Deductible While
In Motion or Not in Motion)
2
<PAGE>
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 $100,000,000.00
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 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 and 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
3
<PAGE>
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 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.
4
<PAGE>
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 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.
5
<PAGE>
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 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.
6
<PAGE>
SECTION FIFTEEN
TRUTH IN LEASING STATEMENT
THE AIRCRAFT, A 1985 CANADAIR CHALLENGER MODEL 601-1A MANUFACTURER'S SERIAL
NO. 3042, CURRENTLY REGISTERED WITH THE FEDERAL AVIATION ADMINISTRATION AS
N900CC, 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,
ESA MANAGEMENT, INC., 450 EAST LAS OLAS BOULEVARD, SUITE 1100, FT. LAUDERDALE,
FLORIDA 33301, 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.
1, THE UNDERSIGNED, ROBERT A. BRANNON, AS VICE PRESIDENT OF ESA MANAGEMENT,
INC., 450 EAST LAS OLAS BOULEVARD, SUITE 1100, FT. LAUDERDALE, FLORIDA 33301,
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.
WYOMING ASSOCIATES, INC.
____________________________________ _____________________________________
Dan C. Breeden, Jr., Vice President Date and Time of Execution
ESA MANAGEMENT, INC.
____________________________________ _____________________________________
Robert A. Brannon, Vice President Date and Time of Execution
7
<PAGE>
INSTRUCTIONS FOR COMPLIANCE WITH "TRUTH IN LEASING"
REQUIREMENTS
1. Mail a copy of the lease agreement to the following address via
certified mail, return receipt requested, immediately upon execution of
the agreement (14 C.F.R. requires that the copy be sent within twenty-
four hours after it is signed):
Federal Aviation Administration
Aircraft Registration Branch
ATTN: Technical Section
P.O. Box 25724
Oklahoma City, Oklahoma 73125
2. Telephone the nearest Flight Standards District Office at least
forty-eight hours prior to the first flight under this lease agreement.
3. Carry a copy of the lease agreement in the aircraft at all times.
8
<PAGE>
EXHIBIT 11.1
EXTENDED STAY AMERICA INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
PRIMARY:
Average shares outstanding.................................. 58,081 25,304
Net effect of dilutive stock options-based on the treasury
stock method using the average market price................ 1,643
------- -------
Total..................................................... 59,724 25,304
======= =======
Net income (loss)............................................. $ 3,436 $(1,307)
======= =======
Net income (loss) per share................................... $ 0.06 $ (0.05)
======= =======
FULLY DILUTED:
Average shares outstanding.................................. 58,081 25,304
Net effect of dilutive stock options-based on the treasury
stock method using the greater of ending or average market
price...................................................... 1,979
------- -------
Total..................................................... 60,060 25,304
======= =======
Net income (loss)............................................. $ 3,436 $(1,307)
======= =======
Net income (loss) per share................................... $ 0.06 $ (0.05)
======= =======
</TABLE>
- --------
(A) The net loss per common share has been computed in accordance with a Staff
Accounting Bulletin (SAB) of the Securities and Exchange Commission and
Accounting Principles Board Opinion (APB) No. 15. 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 period presented.
<PAGE>
EXHIBIT 21.1
EXTENDED STAY AMERICA, INC.
SUBSIDIARIES OF THE COMPANY
ESA Management, Inc., Delaware
ESA West, Inc., Nevada
ESA International, Inc., Delaware
Extended Stay Canada, Inc.
ESA C 1, Inc., Delaware
ESA-Norcross Inc., Georgia
ESA 0100, INC., South Carolina
ESA 0102, INC., Georgia
ESA 0115, INC., South Carolina
ESA 0121, INC., Tennessee
ESA 0124, INC., Alabama
ESA 0125, INC., Tennessee
ESA 0127, INC., North Carolina
ESA 0131, INC., South Carolina
ESA 0132, INC., South Carolina
ESA 0140, INC., Virginia
ESA 0145, INC., Arkansas
ESA 0150, INC., Delaware
ESA 0155, INC., Alabama
ESA 0161, INC., North Carolina
ESA 0163, INC., Tennessee
ESA 0172, INC., Missouri
ESA 0175, INC., Virginia
ESA 0180, INC., South Carolina
ESA 0201, INC., North Carolina
ESA 0280, INC., North Carolina
ESA 0291, INC., Virginia
ESA 0295, INC., Kentucky
ESA 0296, INC., Kentucky
ESA 0305, INC., Tennessee
ESA 0315, INC., Tennessee
ESA 0325, INC., Kentucky
ESA 0331, INC., Mississippi
ESA 0362, INC., Utah
ESA 0370, INC., North Carolina
ESA 0379, INC., Utah
ESA 0381, INC., Florida
ESA 0410, INC., Virginia
ESA 0450, INC., Tennessee
ESA 0480, INC., Virginia
ESA 0486, INC., Delaware
<PAGE>
ESA 0501, INC., New York
ESA 0503, INC., New York
ESA 0504, INC., New York
Carnegie ESA 0507, INC., Pennsylvania
ESA 0510, INC., Illinois
ESA 0521, INC., Kansas
ESA 0522, INC., Missouri
ESA 0525, INC., Illinois
ESA 0526, INC., Indiana
ESA 0530, INC., Illinois
ESA 0532, INC., Illinois
ESA 0541, INC., Illinois
ESA 0552, INC., Michigan
ESA 0553, INC., Ohio
ESA 0554, INC., Illinois
ESA 0555, INC., Ohio
ESA 0557, INC., Wisconsin
ESA 0561, INC., Missouri
ESA 0562, INC., Missouri
ESA 0564, INC., Ohio
ESA 0565, INC., Ohio
ESA 0574, INC., New Jersey
ESA 0590, INC., Ohio
ESA 0600, INC., Michigan
ESA 0629, INC., Kentucky
ESA 0640, INC., Illinois
ESA 0658, INC., Maryland
ESA 0660, INC., Illinois
ESA 0670, INC., Michigan
ESA 0675, INC., Michigan
ESA 0680, INC., Michigan
ESA 0691, INC., Missouri
ESA 0700, INC., Missouri
ESA 0745, INC., Minnesota
ESA 0765, INC., New York
ESA 0780, INC., Michigan
ESA 0785, INC., Wisconsin
ESA 0788, INC., Georgia
ESA 0806, INC., Washington
ESA 0815, INC., Washington
ESA 0828, INC., Idaho
ESA 0858, INC., Nevada
ESA 0859, INC., Nevada
ESA 0860, INC., Nevada
ESA 0861, INC., Nevada
ESA 0876, INC., Oklahoma
ESA 0884, INC., Florida
ESA 0886, INC., Texas
ESA 0901, INC., Colorado
ESA 0903, INC., Delaware
ESA 0911, INC., Delaware
ESA 0919, INC., California
<PAGE>
ESA 0936, INC., Delaware
ESA 0939, INC., Delaware
ESA 0942, INC., Arizona
ESA 0976, INC., Delaware
ESA 0977, INC., Arizona
ESA 0985, INC., Louisiana
ESA 0986, INC., Louisiana
ESA 0990, INC., Georgia
ESA 0992, INC., Georgia
ESA 0993, INC., Georgia
ESA 0994, INC., Colorado
ESA 0995, INC., Kansas
ESA 0996, INC., Georgia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Extended Stay America, Inc. on Form S-3 (No. 333-21625) and on Form S-8
(No. 333-10255) of our report dated February 6, 1997 on our audits of the
consolidated financial statements of Extended Stay America, Inc., and the
incorporation by reference in this Annual Report on Form 10-K of our report
dated October 16, 1995, on our audits of the financial statements of Welcome
Inn America 89-1, L.P.
Coopers & Lybrand L.L.P.
Spartanburg, South Carolina
March 4, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 189,647
<SECURITIES> 0
<RECEIVABLES> 1,027
<ALLOWANCES> 0
<INVENTORY> 2,922
<CURRENT-ASSETS> 195,769
<PP&E> 308,921
<DEPRECIATION> 2,854
<TOTAL-ASSETS> 522,595
<CURRENT-LIABILITIES> 24,731
<BONDS> 0
<COMMON> 683
0
0
<OTHER-SE> 494,819
<TOTAL-LIABILITY-AND-EQUITY> 522,595
<SALES> 0
<TOTAL-REVENUES> 15,745
<CGS> 0
<TOTAL-COSTS> 22,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,906
<INCOME-TAX> 1,470
<INCOME-CONTINUING> 3,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,436
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
<PAGE>
EXHIBIT 99.1
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
<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.
<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.
<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 oper-
ating 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 activi-
ties.................................. 1,653 29,519 174,678
--------- ----------- --------
Cash flows from investing activities:
Expenditures for buildings and im-
provements........................... (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 part-
ners................................. 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) financ-
ing 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, in-
terest paid........................... $ 450,799 $ 473,268 $192,524
========= =========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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.
