<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-27360
----------------
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:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
----------------
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
$1,137,231,872 AT FEBRUARY 13, 1998 (BASED ON THE CLOSING SALE PRICE ON THE
NEW YORK STOCK EXCHANGE, INC. ("NYSE") ON FEBRUARY 13, 1998, AS REPORTED BY
THE WALL STREET JOURNAL). AT FEBRUARY 13, 1998, THE REGISTRANT HAD ISSUED AND
OUTSTANDING AN AGGREGATE OF 95,715,062 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 21, 1998, DESCRIBED IN PART
III HEREOF, ARE INCORPORATED BY REFERENCE IN THIS REPORT.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
Extended Stay America, Inc., a Delaware corporation, develops, owns, and
operates extended stay lodging facilities which provide an affordable and
attractive lodging alternative at a variety of price points for value-
conscious guests. The Company's facilities are designed to offer a superior
product at lower rates than most other lodging providers within their
respective price segments. They feature fully furnished rooms which are
generally rented on a weekly basis to guests such as business travelers,
professionals on temporary work assignment, persons between domestic
situations, and persons relocating or purchasing a home, with most guests
staying for multiple weeks. On April 11, 1997, Extended Stay America, Inc.
("ESA") and ESA Merger Sub, Inc., a wholly-owned subsidiary of ESA ("Merger
Sub"), completed a merger (the "Merger") with Studio Plus Hotels, Inc.
("SPH"). The Merger was accounted for as a pooling of interests and ESA's
business development and historical financial statements have been restated to
include the operations and accounts of SPH, which is now a wholly-owned
subsidiary of ESA. Unless the context suggests otherwise, references in this
Annual Report on Form 10-K to the "Company" mean ESA and its subsidiaries
(including SPH).
The Company believes that extended stay properties generally have higher
operating margins, lower occupancy break-even thresholds, and higher returns
on capital than traditional hotels, primarily as a result of the typically
longer length of stay, lower guest turnover, and lower operating expenses. In
addition, the Company believes the extended stay market is one of the most
rapidly growing and underserved segments of the U.S. lodging industry, with
demand for extended stay lodging significantly exceeding the current and
anticipated near-term supply of dedicated extended stay rooms. For 1996,
industry statistics indicate that there were approximately 160 million room
nights for paid accommodations of six nights or longer related to non-
convention business travel, of which approximately 124 million room nights
were accommodated at traditional hotels. This indicates potential demand for
over 400,000 extended stay lodging rooms on an annual basis. Of the 3.4
million rooms available in the lodging industry in 1996, extended stay hotel
chains had only approximately 60,000 rooms. For 1997, there were 3.6 million
rooms available in the lodging industry, of which approximately 86,000 rooms
were at extended stay hotel chains. Of the 29,000 rooms added at extended stay
hotel chains in 1997, approximately 11,700 were constructed by the Company. Of
the 86,000 total extended stay rooms, approximately 43,000 rooms operated in
the upscale segment of the extended stay market (with weekly room rates
generally exceeding $500) and approximately 19,000 rooms were operated by the
Company (with weekly room rates below $500). As a result, management believes
that there exists strong growth opportunities in the mid-price, economy, and
budget segments of the extended stay market.
The Company's goal is to be a national provider of extended stay lodging and
believes that the first companies to do so will benefit from establishing a
brand name and customer awareness. The Company intends to achieve its 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 customer awareness of the
Company's extended stay products. Through December 31, 1997, the Company had
developed and opened 174 extended stay lodging facilities, acquired 11 others,
and had 84 such facilities under construction. The Company plans to begin
construction of approximately 120 economy extended stay lodging facilities
during 1998 and to continue an active development program thereafter. Since
1995, the Company has raised approximately $800 million of equity to finance
its growth strategy and, as a result of its rapid development plan, has become
the largest extended stay hotel chain in the mid-priced and economy sectors.
The Company owns and operates three brands in the extended stay lodging
category--StudioPLUSTM hotels ("StudioPlus"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland Economy StudiosSM ("Crossland"), each
designed to appeal to different price points below $500 per week. All three
brands offer the same core components: a living/sleeping area; a fully-
equipped kitchen or kitchenette; and a bathroom. EXTENDED STAY rooms are
designed to compete in the economy category. Crossland rooms are typically
smaller than EXTENDED STAY rooms and are targeted for the budget category, and
StudioPLUS facilities serve the mid-price category and generally feature
larger guest rooms, an exercise room, and a swimming pool.
<PAGE>
The Company's strategy is to maximize value to customers by providing a
superior, newly-constructed product at each price point while maintaining high
operating margins. The Company attempts to achieve this goal at each of its
StudioPLUS, EXTENDED STAY, and Crossland facilities through the following:
Create Brand Awareness. The Company believes that guests value a
recognizable brand when selecting lodging accommodations. By positioning
its brands as the first nationwide extended stay providers in their
targeted price segments, the Company believes its brands will have a
distinct advantage over their local and regional competitors. The Company
believes that its evolving national presence and high customer satisfaction
ratings, coupled with selective advertising and promotion, will establish
StudioPLUS, EXTENDED STAY, and Crossland as desirable and well recognized
brands.
Provide a Superior Product at a Lower Price. The Company's facilities are
designed to offer a superior product at lower rates than most other lodging
providers within their respective price segments. Each of the Company's
brands is targeted to a different price point: StudioPLUS--$299 to $399 per
week (daily equivalent--$43 to $57); EXTENDED STAY--$199 to $299 per week
(daily equivalent--$29 to $43); and Crossland--$159 to $199 per week (daily
equivalent--$23 to $29). Room rates at the Company's facilities vary
significantly depending upon market factors affecting such locations. These
rates contrast with average daily rates in 1997 of $68, $52, and $43 for
the mid-price, economy, and budget segments, respectively, of the
traditional lodging industry.
Achieve Operating Efficiencies. The Company believes that the design and
price level of its facilities attract guest stays of several weeks, which
provide for a more stable revenue stream and which, coupled with low labor-
cost amenities, should lead to reduced administrative and operational costs
and higher operating margins. In addition, the Company uses sophisticated
control and information systems which enable it to manage, on a Company-
wide basis, individual facility-specific factors such as pricing, payroll,
and occupancy levels.
Optimize Low Cost Amenities. The Company seeks to provide the level of
amenities needed to offer quality accommodations while maintaining high
operating margins. 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 kitchen or kitchenette, weekly housekeeping, color
television with cable or satellite hook-up, coin-operated laundromat, and
telephone service with voice mail messaging, and, at many StudioPLUS
facilities, an exercise room and swimming pool. To help maintain
affordability of room rates, labor intensive services such as daily
cleaning, room service and restaurants are not provided.
Employ a Standardized Concept. The Company has developed standardized
plans and specifications for its facilities which provide for lower
construction and purchasing costs and establish uniform quality and
operational standards. The Company also benefits from the experience of
various members of the Company's management team in rapidly developing and
operating numerous commercial properties to a uniform set of design
standards on a cost-effective basis.
INDUSTRY OVERVIEW
TRADITIONAL LODGING INDUSTRY
The U.S. lodging industry is estimated to have generated approximately $62
billion in annual room revenues in 1997 and had approximately 3.6 million
rooms at the end of 1997. 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.
2
<PAGE>
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 since benefited from an improved supply and demand
balance, as evidenced by the compound annual growth of 5% in revenue per
available room from 1991 through 1997.
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 1997: budget ($43), economy ($52), mid-price
($68), upscale ($88), and luxury ($129).
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.
The Company believes that the extended stay market, in which the Company
participates, is a further segmentation of the traditional lodging industry
similar to the all-suites segment.
EXTENDED STAY MARKET
The Company believes that the extended stay market is one of the most
rapidly growing and underserved segments of the U.S. lodging industry, with
demand for extended stay lodging significantly exceeding the current supply of
dedicated extended stay rooms. For 1996, industry statistics indicate that
there were approximately 160 million room nights for paid accommodations of
six nights or longer related to non-convention business travel, of which
approximately 124 million room nights were accommodated at traditional hotels.
This indicates potential demand for over 400,000 extended stay lodging rooms
on an annual basis. Of the 3.4 million rooms available in the lodging industry
in 1996, extended stay hotel chains had only approximately 57,000 rooms. For
1997, there were 3.6 million rooms available in the lodging industry, of which
approximately 86,000 rooms were at extended stay hotel chains. Of the 29,000
rooms added at extended stay hotel chains in 1997, approximately 11,700 were
constructed by the Company. Of the 86,000 total extended stay rooms,
approximately 43,000 rooms operated in the upscale segment of the extended
stay market (with weekly room rates generally exceeding $500) and
approximately 19,000 rooms were operated by the Company (with weekly room
rates below $500). As a result, management believes that there exists strong
growth opportunities in the mid-price, economy, and budget segments of the
extended stay market.
The Company believes that the continuing significant demand/supply imbalance
and the longer length of stay have allowed occupancy rates for extended stay
hotels to significantly exceed occupancy rates in the overall U.S. lodging
industry. As shown below, average occupancy rates for extended stay hotel
chains have exceeded such rates in the overall U.S. lodging industry for each
of the previous five years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Average Occupancy Rates:
Extended Stay Hotel Chains(1)................... 79.2% 80.9% 80.3% 78.7% 75.7%
All U.S. Lodging Industry(2).................... 63.5 64.8 65.1 65.1 64.5%
</TABLE>
3
<PAGE>
- --------
(1) Occupancy rates were provided by Smith Travel Research. Includes Homestead
Village(R), Villager Lodge(R), StudioPLUS, Lexington Hotel Suites(R),
Hawthorn Suites(R), Homewood Suites(R), Residence Inn(R), Summerfield
Suites(R), EXTENDED STAYAMERICA Efficiency Studios, Suburban Lodge,
Candlewood, and Sierra Suites.
(2) Occupancy rates were provided by Smith Travel Research.
The Company believes the decline in occupancy rates for extended stay hotel
chains since 1995 is in part the result of an increase in the proportion of
newly-opened hotels, which generally experience lower occupancies during their
pre-stabilization period. Available room nights for extended stay hotels
increased by 2.8 million in 1996 and 7.2 million in 1997, or 19.1% and 41.6%,
respectively, to a total of 24.4 million. Occupied room nights for extended
stay hotels increased by 1.9 million in 1996 and 4.9 million in 1997, or 16.7%
and 36.2%, respectively, to a total of 18.5 million, indicating that a
significant amount of the new construction has been absorbed. During 1996 and
1997, the Company increased its available room nights by approximately 841,000
and 3.2 million, or 155.7% and 232%, respectively, and increased its occupied
room nights by approximately 555,000 and 2.4 million, or 123.2% and 233.8%,
respectively.
PROPERTY DEVELOPMENT
The Company's goal is to become a national provider of extended stay
facilities through a rapid development program. The Company believes that the
first companies to do so will benefit from establishing a brand name and
customer awareness. 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 expand nationally into regions of the country
that contain the demographic factors necessary to support one or more of its
facilities. The Company targets sites which 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.
The Company executes its development strategy thorough five regional offices
located in Signal Hill, California; Park Ridge, Illinois; Morristown, New
Jersey; Spartanburg, South Carolina; and Dallas, Texas. From these regional
offices, the Company's approximately 40 real estate professionals and
approximately 50 construction professionals perform site selection,
entitlement, and construction activities pursuant to management's established
criteria and procedures. As discussed below, the Company generally expects a
period of at least twenty-two months to identify a site and complete
construction of a facility. The Company seeks to minimize its capital outlays
throughout this process prior to the commencement of construction.
The site selection process includes an assessment of the attributes of a
market area based on the Company's development standards, identification of
sites for development within a qualified market area, and negotiation of an
option to purchase qualified sites. Although the time required to complete the
selection process in a market varies significantly based on local market
conditions, the Company expects a period of approximately six months will be
required to assess a market and obtain an option to purchase a site in a
qualified market.
After obtaining an option to purchase a site, the Company's legal,
environmental, and business due diligence begins. During this period, the
Company's real estate and construction professionals evaluate whether the site
is financially suitable for development, obtain necessary approvals and
permits, and negotiate construction contracts with third party general
contractors. The Company expects that this process will generally be completed
within eight months, however this time period can vary significantly by market
area due to local regulations and restrictions.
4
<PAGE>
The site selection and due diligence processes are reviewed periodically by
senior management of the Company and commencement of construction is formally
approved based on a detailed review of the demographic, physical, and
financial qualifications of each site. Upon approval of a site for development
by senior management of the Company, the site is purchased, the construction
contract is executed, and construction generally is commenced immediately. The
Company uses a number of general contractors with selection of a contractor
for a specific site dependent upon the geographic area, the negotiated
construction costs, and the financial and physical capacities of the
contractors. The construction process is regularly inspected by the Company's
construction professionals to monitor both the quality and timeliness of
completion of construction. Although the construction period varies
significantly based on local construction requirements and weather conditions,
the Company expects that construction will generally be completed within eight
months of commencement.
The Company's development status as of December 31, 1997 was as follows:
<TABLE>
<CAPTION>
STUDIOPLUS EXTENDED STAY CROSSLAND TOTAL
---------------- ----------------- ---------------- -----------------
PROPERTIES ROOMS PROPERTIES ROOMS PROPERTIES ROOMS PROPERTIES ROOMS
---------- ----- ---------- ------ ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating............... 65 4,904 114 13,676 6 719 185 19,299
Under Construction...... 21 1,702 47 5,139 16 2,112 84 8,953
Sites Under Option...... 44 -- 67 -- 35 -- 146 --
</TABLE>
The design plans for the Company's lodging facilities call for a newly-
constructed apartment style complex consisting of two to four story buildings
with laundromat and office areas, utilizing interior and exterior corridor
building designs, depending primarily on local zoning and weather factors. All
three of the Company's brands offer the same core components: a
living/sleeping area; a fully-equipped kitchen or kitchenette with a
refrigerator, stovetop, microwave, and sink; and a bathroom. EXTENDED STAY
lodging facilities are currently designed to have an average of 100 guest
rooms with approximately 300 square feet of living space per room. Crossland
lodging facilities are currently designed to have an average of 120 guest
rooms with approximately 225 square feet of living space per room, although
approximately 30% of each Crossland facility's rooms are expected to be
premium 300 square foot rooms designed for double occupancy. StudioPLUS
lodging facilities are currently designed to have an average of 80 guest rooms
with either approximately 310 or 425 square feet of living space per room.
StudioPLUS facilities also generally have a fully-equipped exercise room and a
swimming pool.
For the 152 properties opened by the Company during the period from January
1, 1996 through December 31, 1997, the average development cost was
approximately $4.8 million with an average of 107 rooms. The cost to develop a
property varies significantly by geographic location due to differences in
land and labor costs, and by brand. Similarly, the average weekly rate charged
at the properties and the resultant cash flow from the properties will vary
significantly but generally are expected to be in proportion to the
development costs.
PROPERTY OPERATIONS
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
2-10 persons (many of whom are part-time employees). The office at each of the
Company's facilities are generally open daily as follows: Crossland--from 8:00
a.m. to 7:00 p.m.; EXTENDED STAY--from 7:00 a.m. to 11:00 p.m.; and
StudioPLUS--from 9:00 a.m. to 6:00 p.m., although an employee normally is on
duty at all facilities 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 typically is 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 district mangers report to a regional
5
<PAGE>
director who is responsible for the supervision of 8-10 district managers. The
regional directors report to the Vice President of Operations who is
responsible for implementing all operational and strategic policies for the
Company's brands. 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 corporate offices use sophisticated information
systems to support the district managers and regional directors.
MARKETING STRATEGY
The Company believes that guests value a recognizable brand when selecting
lodging accommodations. To date, the Company has created brand awareness
primarily by increasing the number of hotels through a rapid national
development program, typically selecting sites that are in highly-visible
locations. In addition, the Company has approximately 30 district sales
representatives that call on local and national corporate customers to promote
the Company's brands. The Company has also established a toll free reservation
number (1-800-EXT-STAY) and a web site (www.extstay.com) with information
regarding the Company's locations and to facilitate reservations for rooms.
The Company expects that by building awareness for both the extended stay
concept as well as its various brands, it can increase demand for its
products.
LODGING FACILITIES
As of December 31, 1997, the Company had 185 extended stay lodging
facilities in operation (65 StudioPLUS, 114 EXTENDED STAY, and 6 Crossland)
and 84 facilities under construction (21 StudioPLUS, 47 EXTENDED STAY, and 16
Crossland) in a total of 37 states. The following table sets forth certain
information regarding the Company's lodging facilities that were operating or
under construction as of that date.
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
ALABAMA
Birmingham............................ StudioPLUS March 1996 71
Birmingham............................ StudioPLUS May 1996 71
Huntsville............................ EXTENDED STAY July 1997 108
Mobile................................ EXTENDED STAY May 1997 114
Montgomery............................ StudioPLUS February 1996 71
Montgomery............................ EXTENDED STAY August 1997 120
ARIZONA
Mesa.................................. EXTENDED STAY December 1997 104
Phoenix............................... EXTENDED STAY Under Construction 104
Phoenix............................... EXTENDED STAY Under Construction 101
Phoenix............................... EXTENDED STAY Under Construction 101
Phoenix............................... Crossland Under Construction 133
Scottsdale............................ EXTENDED STAY June 1997 120
Tucson................................ EXTENDED STAY April 1997 120
Tucson................................ Crossland Under Construction 117
ARKANSAS
Little Rock........................... EXTENDED STAY September 1996 120
Little Rock........................... StudioPLUS November 1997 84
CALIFORNIA
Arcadia............................... EXTENDED STAY Under Construction 122
Bakersfield........................... EXTENDED STAY November 1996 120
Fremont............................... EXTENDED STAY Under Construction 119
Fresno................................ EXTENDED STAY July 1997 120
Huntington Beach...................... EXTENDED STAY Under Construction 104
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
Lake Forest........................... EXTENDED STAY September 1997 119
La Mirada............................. EXTENDED STAY Under Construction 104
Livermore............................. EXTENDED STAY Under Construction 122
Long Beach............................ EXTENDED STAY November 1997 134
Milpitas.............................. EXTENDED STAY Under Construction 146
Ontario............................... EXTENDED STAY May 1997 127
Pleasant Hill......................... EXTENDED STAY August 1997 122
Rancho Cordova........................ EXTENDED STAY June 1997 132
Sacramento............................ EXTENDED STAY March 1997 120
Sacramento............................ EXTENDED STAY August 1997 120
Sacramento............................ EXTENDED Under Construction 122
Santa Barbara......................... EXTENDED STAY Under Construction 104
Santa Rosa............................ EXTENDED STAY June 1997 114
Torrance.............................. EXTENDED STAY December 1997 122
COLORADO
Colorado Springs...................... EXTENDED STAY Under Construction 104
Englewood............................. StudioPLUS Under Construction 71
Glendale.............................. Crossland Under Construction 129
Lakewood.............................. EXTENDED STAY November 1996 120
Lakewood.............................. EXTENDED STAY January 1997 147
FLORIDA
Clearwater............................ EXTENDED STAY Under Construction 104
Daytona Beach......................... StudioPLUS Under Construction 72
Deerfield Beach....................... EXTENDED STAY December 1997 104
Fort Lauderdale....................... EXTENDED STAY Under Construction 108
Fort Lauderdale....................... StudioPLUS Under Construction 72
Gainesville........................... EXTENDED STAY July 1997 120
Jacksonville.......................... EXTENDED STAY May 1997 122
Orlando............................... EXTENDED STAY November 1997 119
Orlando............................... StudioPLUS Under Construction 83
Pensacola............................. EXTENDED STAY September 1997 101
South Jacksonville.................... StudioPLUS Under Construction 72
Tallahassee........................... StudioPLUS Under Construction 58
Temple Terrace........................ EXTENDED STAY August 1997 101
GEORGIA
Alpharetta............................ StudioPLUS July 1997 91
Alpharetta............................ EXTENDED STAY Under Construction 101
Atlanta............................... StudioPLUS December 1997 97
Atlanta............................... EXTENDED STAY Under Construction 104
Columbus.............................. EXTENDED STAY January 1997 108
Duluth................................ EXTENDED STAY September 1997 119
Kennesaw.............................. StudioPLUS December 1997 84
Lawrenceville......................... EXTENDED STAY June 1996 121
Macon................................. StudioPLUS Under Construction 72
Marietta.............................. EXTENDED STAY August 1995 121
Marietta.............................. EXTENDED STAY Under Construction 113
Morrow................................ EXTENDED STAY Under Construction 104
Norcross.............................. EXTENDED STAY January 1996 199
Norcross.............................. EXTENDED STAY February 1996 133
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
Norcross.............................. StudioPLUS March 1997 72
Riverdale............................. EXTENDED STAY February 1996 147
IDAHO
Boise................................. EXTENDED STAY January 1997 107
ILLINOIS
Buffalo Grove......................... EXTENDED STAY Under Construction 122
Burr Ridge............................ EXTENDED STAY November 1996 119
Des Plaines........................... EXTENDED STAY Under Construction 122
Downers Grove......................... EXTENDED STAY May 1996 154
Elmhurst.............................. EXTENDED STAY August 1997 117
Gurnee................................ EXTENDED STAY January 1997 101
Itasca................................ EXTENDED STAY November 1996 125
Lombard............................... StudioPLUS Under Construction 97
Naperville............................ EXTENDED STAY November 1996 125
Rockford.............................. EXTENDED STAY September 1997 104
Rockford.............................. StudioPLUS November 1997 72
Rolling Meadows....................... EXTENDED STAY October 1996 125
Waukegan.............................. Crossland November 1997 121
INDIANA
Evansville............................ StudioPLUS February 1997 71
Fort Wayne............................ StudioPLUS December 1996 71
Fort Wayne............................ EXTENDED STAY September 1997 101
Indianapolis.......................... StudioPLUS August 1990 71
Indianapolis.......................... StudioPLUS March 1991 71
Merrillville.......................... EXTENDED STAY November 1996 105
Mishawaka............................. StudioPLUS September 1997 72
IOWA
Des Moines............................ StudioPLUS December 1997 85
KANSAS
Lenexa................................ EXTENDED STAY May 1996 59
Overland Park......................... EXTENDED STAY September 1997 119
Wichita............................... StudioPLUS December 1997 72
KENTUCKY
Covington............................. EXTENDED STAY December 1997 105
Florence.............................. StudioPLUS September 1996 71
Florence.............................. EXTENDED STAY October 1997 101
Lexington............................. StudioPLUS July 1986 59
Lexington............................. StudioPLUS August 1987 71
Lexington............................. EXTENDED STAY September 1996 126
Louisville............................ StudioPLUS December 1988 75
Louisville............................ StudioPLUS April 1989 65
Louisville............................ EXTENDED STAY October 1996 120
LOUISIANA
Baton Rouge........................... Crossland Under Construction 129
Bossier City.......................... Crossland September 1997 117
Metairie.............................. EXTENDED STAY Under Construction 102
Sulphur............................... Crossland August 1997 117
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
MARYLAND
Columbia.............................. EXTENDED STAY October 1997 104
Columbia.............................. StudioPLUS December 1997 94
Landover.............................. Crossland Under Construction 133
Linthicum............................. EXTENDED STAY June 1997 122
MASSACHUSETTS
Danvers............................... EXTENDED STAY Under Construction 104
MICHIGAN
Ann Arbor............................. EXTENDED STAY May 1997 112
Ann Arbor............................. StudioPLUS December 1997 70
Auburn Hills.......................... EXTENDED STAY February 1997 133
Farmington Hills...................... EXTENDED STAY June 1997 113
Livonia............................... Crossland Under Construction 127
Madison Heights....................... EXTENDED STAY May 1997 122
Novi.................................. EXTENDED STAY January 1997 125
Sterling Heights...................... EXTENDED STAY November 1997 116
Warren................................ StudioPLUS November 1997 58
MINNESOTA
Bloomington........................... EXTENDED STAY Under Construction 104
Eagan................................. EXTENDED STAY September 1997 104
Eden Prairie.......................... EXTENDED STAY Under Construction 104
Maple Grove........................... EXTENDED STAY Under Construction 104
MISSISSIPPI
Jackson............................... EXTENDED STAY October 1997 108
Ridgeland............................. StudioPLUS November 1996 71
MISSOURI
Earth City............................ StudioPLUS June 1997 72
Hazelwood............................. StudioPLUS June 1992 71
Hazelwood............................. EXTENDED STAY November 1996 122
Independence.......................... Crossland January 1997 120
Kansas City........................... EXTENDED STAY January 1997 109
Kansas City........................... EXTENDED STAY June 1997 119
Maryland Heights...................... EXTENDED STAY August 1996 150
St. Louis............................. StudioPLUS November 1994 71
St. Peters............................ EXTENDED STAY July 1997 122
South Springfield..................... EXTENDED STAY October 1997 110
NEBRASKA
Omaha................................. StudioPLUS December 1997 85
NEVADA
Las Vegas............................. EXTENDED STAY July 1996 123
Las Vegas............................. EXTENDED STAY July 1996 211
Las Vegas............................. EXTENDED STAY July 1996 177
Las Vegas............................. EXTENDED STAY July 1996 123
NEW JERSEY
Cherry Hill........................... EXTENDED STAY Under Construction 77
Edison................................ EXTENDED STAY August 1997 134
Mount Laurel.......................... EXTENDED STAY Under Construction 77
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
South Brunswick....................... EXTENDED STAY Under Construction 133
NEW MEXICO
Albuquerque........................... Crossland Under Construction 129
Rio Rancho............................ EXTENDED STAY Under Construction 101
NEW YORK
Albany................................ EXTENDED STAY November 1996 134
Amherst............................... EXTENDED STAY September 1997 119
East Syracuse......................... EXTENDED STAY December 1996 121
Rochester............................. EXTENDED STAY November 1996 125
Rochester............................. EXTENDED STAY December 1996 127
NORTH CAROLINA
Asheville............................. EXTENDED STAY Under Construction 101
Cary.................................. StudioPLUS September 1996 71
Cary.................................. StudioPLUS Under Construction 82
Cary.................................. EXTENDED STAY Under Construction 122
Charlotte............................. StudioPLUS May 1995 71
Charlotte............................. StudioPLUS March 1996 71
Charlotte............................. EXTENDED STAY Under Construction 101
Charlotte............................. EXTENDED STAY Under Construction 113
Durham (ground lease)................. StudioPLUS December 1996 71
Durham................................ EXTENDED STAY October 1997 120
Durham................................ StudioPLUS Under Construction 84
Durham................................ Crossland Under Construction 133
Fayetteville.......................... EXTENDED STAY July 1997 120
Greensboro............................ StudioPLUS December 1995 71
Greensboro............................ EXTENDED STAY September 1996 129
Morrisville........................... EXTENDED STAY September 1997 120
Pineville............................. EXTENDED STAY Under Construction 107
Raleigh............................... StudioPLUS December 1996 71
Raleigh............................... EXTENDED STAY December 1997 104
Wilmington............................ EXTENDED STAY Under Construction 104
Winston-Salem......................... EXTENDED STAY September 1996 111
Winston-Salem......................... Crossland Under Construction 133
OHIO
Blue Ash.............................. StudioPLUS December 1991 71
Columbus.............................. StudioPLUS August 1989 71
Columbus.............................. EXTENDED STAY June 1997 119
Copley................................ StudioPLUS November 1996 71
Copley................................ EXTENDED STAY February 1997 95
Dayton................................ StudioPLUS November 1989 70
Dublin................................ StudioPLUS May 1990 71
Dublin................................ EXTENDED STAY Under Construction 104
Fairborn.............................. StudioPLUS January 1997 71
Fairfield............................. StudioPLUS June 1989 71
Holland............................... EXTENDED STAY January 1997 125
Middleburg Heights.................... StudioPLUS November 1997 70
North Olmsted......................... StudioPLUS September 1997 91
Sharonville........................... EXTENDED STAY July 1996 130
Springdale............................ StudioPLUS November 1988 71
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
Springdale............................ EXTENDED STAY November 1996 126
Toledo................................ StudioPLUS June 1997 72
Westlake.............................. StudioPLUS November 1997 72
OKLAHOMA
Tulsa................................. EXTENDED STAY April 1997 120
Tulsa................................. StudioPLUS June 1997 72
Oklahoma City......................... EXTENDED STAY September 1997 101
Oklahoma City......................... StudioPLUS Under Construction 70
OREGON
Gresham............................... EXTENDED STAY Under Construction 104
Salem................................. Crossland Under Construction 129
Springfield........................... Crossland November 1997 127
PENNSYLVANIA
Bensalem.............................. EXTENDED STAY Under Construction 101
Carnegie.............................. EXTENDED STAY June 1997 116
Philadelphia.......................... EXTENDED STAY Under Construction 145
Philadelphia.......................... StudioPLUS Under Construction 82
Pittsburgh............................ StudioPLUS Under Construction 84
SOUTH CAROLINA
Charleston............................ StudioPLUS September 1996 71
Columbia.............................. StudioPLUS December 1995 71
Columbia.............................. EXTENDED STAY April 1996 120
Columbia.............................. EXTENDED STAY May 1997 120
Greenville............................ StudioPLUS February 1995 71
Greenville............................ EXTENDED STAY December 1996 109
Mt. Pleasant.......................... EXTENDED STAY Under Construction 101
North Charleston...................... EXTENDED STAY August 1996 126
Spartanburg........................... EXTENDED STAY August 1995 126
TENNESSEE
Brentwood............................. StudioPLUS December 1990 71
Brentwood............................. EXTENDED STAY September 1996 120
Chattanooga........................... EXTENDED STAY July 1996 120
Cordova............................... StudioPLUS December 1996 71
Knoxville............................. StudioPLUS September 1990 71
Knoxville............................. EXTENDED STAY May 1997 96
Memphis............................... StudioPLUS October 1990 71
Memphis............................... EXTENDED STAY January 1997 126
Nashville............................. StudioPLUS September 1993 71
Nashville............................. EXTENDED STAY February 1997 114
Nashville............................. Crossland October 1997 117
TEXAS
Arlington............................. StudioPLUS September 1997 137
Austin................................ StudioPLUS Under Construction 84
Corpus Christi........................ StudioPLUS Under Construction 72
Dallas................................ StudioPLUS September 1997 97
El Paso............................... EXTENDED STAY December 1997 120
El Paso............................... StudioPLUS October 1997 72
Farmers Branch........................ StudioPLUS Under Construction 82
Fort Worth............................ StudioPLUS Under Construction 72
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR NUMBER
CITY BRAND ACQUIRED OF ROOMS
---- ------------- ------------------ --------
<S> <C> <C> <C>
Houston............................... StudioPLUS September 1997 85
Houston............................... StudioPLUS December 1997 97
Houston............................... StudioPLUS December 1997 84
Houston............................... Crossland Under Construction 145
Houston............................... Crossland Under Construction 145
Irving................................ StudioPLUS Under Construction 116
Irving................................ Crossland Under Construction 139
North Fort Worth...................... StudioPLUS Under Construction 84
Plano................................. StudioPLUS December 1997 72
San Antonio........................... StudioPLUS Under Construction 84
Spring................................ Crossland Under Construction 141
UTAH
Midvale............................... EXTENDED STAY September 1997 134
Sandy................................. EXTENDED STAY Under Construction 122
West Valley City...................... EXTENDED STAY August 1997 122
VIRGINIA
Chesapeake............................ EXTENDED STAY August 1996 132
Glenn Allen........................... StudioPLUS July 1997 91
Lounden............................... EXTENDED Under Construction 101
Newport News.......................... EXTENDED STAY December 1996 120
Newport News.......................... StudioPLUS July 1997 72
Richmond.............................. EXTENDED STAY December 1997 108
Roanoke............................... EXTENDED STAY Under Construction 90
Virginia Beach........................ EXTENDED STAY September 1996 120
WASHINGTON
Bellevue.............................. EXTENDED STAY Under Construction 148
Everett............................... EXTENDED STAY April 1997 104
Fife.................................. EXTENDED STAY October 1997 104
Kent.................................. Crossland Under Construction 133
Kent.................................. EXTENDED STAY Under Construction 120
Lynnwood.............................. EXTENDED STAY Under Construction 109
Renton................................ StudioPLUS Under Construction 109
Spokane............................... Crossland Under Construction 117
Tacoma................................ EXTENDED STAY Under Construction 109
Tukwilla.............................. EXTENDED STAY January 1997 96
Vancouver............................. EXTENDED STAY September 1997 116
WISCONSIN
Appleton.............................. EXTENDED STAY June 1997 107
Waukesha.............................. EXTENDED STAY August 1997 122
Wauwatosa............................. EXTENDED STAY June 1997 122
</TABLE>
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 and limited service hotels. The
Company's facilities compete with a number of competitors, including budget,
economy, and mid-price segment hotels and other companies focusing on the
extended stay market. All of the Company's existing facilities are located in
developed areas that include competing lodging facilities. In
12
<PAGE>
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 major lodging
companies have announced their intent to aggressively develop extended stay
lodging properties which may compete with the Company's properties. Numerous
other extended stay lodging facilities exist, many 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. 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 Phase I environmental site assessments ("Phase I
Surveys") on its existing properties and intends to obtain Phase I Surveys
prior to the purchase of any future properties. The Phase I Surveys are
intended to identify potential environmental contamination and regulatory
compliance concerns. Phase I Surveys generally include historical reviews of
the properties, reviews of certain public records, preliminary investigations
of the sites and surrounding properties and the preparation and issuance of
written reports. Phase I Surveys generally do not include invasive procedures,
such as soil sampling or ground water analysis.
The Phase I Surveys have not revealed any environmental liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations, or liquidity,
nor is the Company aware of any such liability or concern. Nevertheless, it is
possible that Phase I Surveys will not reveal all environmental liabilities or
compliance concerns or that there will be material environmental liabilities
or compliance concerns of which the Company will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, or (ii) the current
environmental condition of the Company's existing and future properties will
not be affected by the condition of the neighboring properties (such as the
presence of leaking underground storage tanks) or by third parties unrelated
to the Company.
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
13
<PAGE>
requirements. An increase in the minimum wage rate, employee benefit costs, or
other costs associated with employees could adversely affect the Company. Both
at the federal and state level from time to time, there are proposals under
consideration to increase the minimum wage.
Under the Americans With Disabilities Act ("ADA"), all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA
requirements in the designs for its facilities, no assurance can be given that
a material ADA claim will not be asserted against the Company, which could
result in a judicial order requiring compliance, and the expenditure of
substantial sums to achieve compliance, an imposition of fines, or an award of
damages to private litigants. These and other initiatives could adversely
affect the Company as well as the lodging industry in general.
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that its insurance coverage is adequate, if the Company were held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and
adversely affected.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries employed
approximately 2,900 persons, of which approximately 1,400 were part-time
employees. 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.
ITEM 2. PROPERTIES
In addition to its lodging facilities described above (see "Item 1.
Business--Lodging Facilities"), the Company also maintains a corporate
headquarters and five regional offices. The Company's principal executive
offices are located in Ft. Lauderdale, Florida and its regional offices are
located in Signal Hill, California; Park Ridge, Illinois; Morristown, New
Jersey; Spartanburg, South Carolina; 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. 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
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $0.01 per share ("Common Stock") began
trading on the NYSE on June 30, 1997, under the symbol "ESA." Prior thereto, the
Common Stock was traded in the National Market tier of The Nasdaq Stock Market
("Nasdaq") under the symbol "STAY." All references in this report to Common
Stock, including prices per share, have been adjusted to give effect to 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 declared by the Board of Directors
of the Company in May 1996 and distributed on July 19, 1996, thereby effecting a
2-for-1 stock split. On December 31, 1997, the last reported sale price of the
Common Stock on the NYSE was $12.4375 per share. At December 31, 1997, there
were approximately 490 record holders of the Common Stock. The table below sets
forth the high and low sales prices of shares of Common Stock on the NYSE and
Nasdaq as reported by the NYSE and Nasdaq for the periods indicated.
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 Credit Agreement contains, and future financing agreements may
contain, a maximum debt to capitalization ratio 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.
MARKET INFORMATION
<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
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
Year Ended December 31, 1997
1st Quarter............................................... 20.75 14.75
2nd Quarter............................................... 17.50 11.75
3rd Quarter............................................... 16.62 13.00
4th Quarter............................................... 16.00 10.62
</TABLE>
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
consolidated financial statements of the Company. The consolidated financial
statements of the Company for the years ended December 31, 1993, 1994, 1995,
1996, and 1997 have been audited by Coopers & Lybrand L.L.P., independent
accountants, whose report for the years ended December 31, 1995, 1996, and
1997 appears elsewhere herein. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto contained elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................... $10,309 $12,152 $ 16,768 $ 38,809 $ 130,800
Property operating
expenses................. 4,458 5,256 6,706 16,560 60,391
Corporate operating and
property management
expenses................. 792 881 4,669 16,867 29,951
Merger, financing and
other charges............ -- -- -- -- 19,895
Depreciation and
amortization............. 1,313 1,472 2,059 6,139 21,331
Income (loss) from
operations............... 3,746 4,543 3,334 (757) (768)
Interest income (expense),
net(1)................... (2,498) (2,532) (507) 13,744 9,242
Provision for income
taxes(2)................. -- -- 1,217 5,231 5,838
Net income from continuing
operations............... $ 1,050 $ 1,653 $ 1,468 $ 7,756 $ 2,636
======= ======= ======== ========= ==========
Net income from continuing
operations per share(3):
Basic................... $ 0.05 $ 0.11 $ 0.03
======== ========= ==========
Diluted................. $ 0.05 $ 0.10 $ 0.03
======== ========= ==========
Weighted average shares
outstanding(3):
Basic................... 30,381 71,933 94,233
======== ========= ==========
Diluted................. 31,434 73,935 95,744
======== ========= ==========
OPERATING DATA:
Average occupancy
rates(4)................. 83% 85% 83% 73% 73%
Average weekly rate....... $ 202 $ 222 $ 250 $ 261 $ 263
Operating facilities (at
period end).............. 17 18 24 75 185
Weighted average rooms
available(5)............. 1,142 1,201 1,479 3,783 12,558
Rooms (at period end)..... 1,192 1,263 1,794 7,611 19,299
Facilities under
construction (at period
end)..................... 1 2 16 61 84
Rooms under construction
(at period end).......... 71 144 1,780 6,864 8,953
OTHER FINANCIAL DATA:
Cash flows provided by
(used in)
Operating activities.... $ 2,498 $ 3,160 $ 4,186 $ 20,828 $ 50,263
Investing activities.... (2,692) (5,891) (35,330) (279,259) (609,064)
Financing activities.... 380 2,327 156,601 356,841 337,689
EBITDA(6)................. 5,059 6,015 5,393 5,382 20,563
Adjusted EBITDA(7)........ 5,059 6,015 5,393 5,382 40,458
Capital expenditures...... 2,729 5,794 33,722 277,531 607,640
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents. $ 861 $ 457 $125,915 $ 224,325 $ 3,213
Total assets.............. 30,313 36,222 213,445 668,435 1,070,891
Long-term debt............ 28,831 32,306 4,000 -- 135,000
Stockholders' equity
(deficit)................ (1,611) (1,247) 199,322 628,714 834,659
</TABLE>
16
<PAGE>
- --------
(1) Excludes interest of $153,000, $256,000, $329,000, and $1,731,000 for
1994, 1995, 1996, and 1997, respectively, capitalized during the
construction of the Company's facilities under Statement of Financial
Accounting Standards ("SFAS") Statement No. 34 "Capitalization of Interest
Cost."
(2) Historical financial information prior to SPH's initial public offering
does not include a provision for income taxes because SPH's predecessor
entities were S corporations or partnerships not subject to income taxes.
See the Company's consolidated financial statements contained elsewhere
herein.
(3) Net income per share for the year ended December 31, 1995 is presented on
a pro forma basis as if all of the Company's income for the period was
subject to income taxes. See note 10 to the Company's consolidated
financial statements contained elsewhere herein.
(4) Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to the Company's rapid
expansion, its overall average occupancy rate has been negatively impacted
by the lower occupancy typically experienced during the pre-stabilization
period for newly opened facilities. This negative impact on occupancy is
expected to diminish as the ratio of new property openings during a period
to total properties in operation at the end of that period decreases.
(5) Weighted average rooms available is calculated by dividing total room
nights available during the year by 365.
(6) EBITDA represents earnings before interest, income taxes, depreciation,
and amortization. EBITDA is provided because it is a measure commonly used
in the lodging industry. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered an alternative to net income as a measure of performance or
to cash flow as a measure of liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
(7) Adjusted EBITDA means EBITDA before $19.9 million of one-time pre-tax
charges consisting of (i) $9.7 million of merger expenses and costs
associated with the integration of SPH's operations following the Merger,
(ii) the write-off of $9.7 million of debt issuance costs associated with
terminating two mortgage loan facilities upon execution of the Company's
$500 million senior secured revolving credit facility (the "Credit
Facility"), and (iii) a $500,000 charge in connection with listing of the
Company's Common Stock on the NYSE. Management believes that these charges
are non-recurring in nature and will not affect the Company's future
results of operations.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Extended Stay America, Inc. was organized on January 9, 1995 as a Delaware
corporation to develop, own, and manage extended stay lodging facilities.
Studio Plus Hotels, Inc. was formed in December 1994 and acquired (through
merger and exchange of SPH common stock for partnership interests immediately
prior to completion of the SPH initial public offering in June 1995) all of
the assets of Studio Plus, Inc. and the SPH Predecessor Entities, which owned
and operated StudioPLUS(TM) extended stay facilities since 1986. The
acquisition of the interests of the controlling stockholder or partner and
affiliates of the SPH Predecessor Entities was accounted for as if it were a
pooling of interests.
On April 11, 1997, ESA, Merger Sub, and SPH consummated a merger pursuant to
which SPH was merged with and into Merger Sub and the 12,557,786 shares of SPH
common stock that were outstanding on the closing date were converted into
15,410,915 shares of ESA's Common Stock and options to purchase 1,072,565
shares of SPH common stock were converted into options to purchase 1,316,252
shares of Common Stock. As a result of the Merger, SPH became a wholly-owned
subsidiary of ESA. The accompanying consolidated financial statements of the
Company give effect to the Merger, which has been accounted for as a pooling
of interests.
The Company owns and operates three brands in the extended stay lodging
market--StudioPLUS(TM) hotels, EXTENDED STAYAMERICA Efficiency Studios, and
Crossland Economy StudiosSM, each designed to appeal to different price points
below $500 per week. All three brands offer the same core components: a
living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom.
EXTENDED STAY rooms are designed to compete in the economy category. Crossland
rooms are typically smaller than EXTENDED STAY rooms and are targeted for the
budget category, while StudioPLUS facilities serve the mid-price category and
generally feature larger guest rooms, an exercise room, and a swimming pool.
The following is a summary of the Company's selected development and
operational results for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Facilities Open (at Period End)......................... 185 75 24
Total Facilities Developed.................................... 110 41 5
Total Facilities Acquired..................................... -- 10 1
Average Occupancy Rate........................................ 73% 73% 83%
Average Weekly Room Rate...................................... $263 $261 $250
</TABLE>
Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to the Company's rapid
expansion, its overall average occupancy rate has been negatively impacted by
the lower occupancy typically experienced during the pre-stabilization period
for newly-opened facilities. This negative impact on occupancy is expected to
diminish as the ratio of new property openings during a period to total
properties in operation at the end of that period decreases. 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 rooms that are larger than the standard rooms,
and (iii) additional charges for more than one person per room. 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 facilities commence operations. There can be no assurance that the
foregoing occupancy and room rates can be maintained.
The following is a summary of the Company's development status as of
December 31, 1997, by brand. The Company expects to complete the construction
of the facilities currently under construction generally within the
18
<PAGE>
next twelve months and to commence construction on the majority of the sites
under option at various dates in the future. There can be no assurance,
however, that the Company will acquire the sites under option or complete
construction within time periods historically experienced by the Company. The
Company's ability to complete development of sites under construction and
under option may be materially impacted by various factors including zoning,
permitting, and environmental issues, as well as weather-induced construction
delays.
<TABLE>
<CAPTION>
EXTENDED
CROSSLAND STAY STUDIOPLUS TOTAL
--------- -------- ---------- -----
<S> <C> <C> <C> <C>
Operating Facilities........................ 6 114 65 185
Facilities Under Construction............... 16 47 21 84
Sites Under Option.......................... 35 67 44 146
</TABLE>
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Property Operations
The following is a summary of the properties operated during the specified
periods and the related average occupancy rates and weekly room rates:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
AVERAGE AVERAGE
AVERAGE WEEKLY AVERAGE WEEKLY
FACILITIES OCCUPANCY ROOM FACILITIES OCCUPANCY ROOM
OPEN RATE RATE OPEN RATE RATE
---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Crossland............ 6 65% $183 -- -- --
EXTENDED STAY........ 114 72 251 40 65% $233
StudioPLUS........... 65 78 302 35 81 284
--- --- ---- --- --- ----
Total............ 185 73% $263 75 73% $261
=== === ==== === === ====
</TABLE>
Because newly-opened properties typically experience lower occupancies
during their pre-stabilization period, average occupancy rates are impacted by
the ratio of newly-opened properties to total properties. A total of 110
properties commenced operations in 1997 compared to 41 properties which were
opened in 1996. The average occupancy rate in 1997 for the 24 properties that
were owned and operated by the Company as of January 1, 1996 was 83%. For the
EXTENDED STAY brand, occupancy rates increased for 1997 as compared to 1996
primarily due to a decrease in the ratio of newly-opened properties to total
properties for that brand. Occupancy rates decreased for the StudioPLUS brand
primarily due to an increase in the ratio of newly-opened properties to total
properties for that brand.
The increase in overall average weekly room rates for 1997 compared to 1996
reflects the geographic dispersion of properties opened during 1997 and the
higher standard weekly room rates in certain of those markets, in addition to
increases in rates charged in previously opened properties. These increases
were partially offset by an increase in the percentage of total facilities (as
of the end of the year) represented by lower priced EXTENDED STAY and
Crossland facilities from 53% for 1996 to 65% for 1997. The Company expects
that its average weekly room rate will continue to be impacted as EXTENDED
STAY and Crossland facilities increase as a percentage of the Company's total
facilities. The average weekly room rate for the 24 properties that were owned
and operated throughout both periods increased by 2% in 1997.
The Company recognized total revenue for 1997 and 1996 of $130.8 million and
$38.8 million, respectively, an increase of $92.0 million. Approximately $91.2
million of the increased revenue was attributable to properties opened or
acquired during 1997 and 1996, and approximately $757,000 was attributable to
an increase in revenue for the 24 properties that were owned and operated
throughout both periods.
19
<PAGE>
Property operating expenses, consisting of all expenses directly allocable
to the operation of the facilities but excluding any allocation of corporate
operating and property management expenses and depreciation, were $60.4
million (46% of total revenue) for 1997, compared to $16.6 million (43% of
total revenue) for 1996. The increase in property operating expenses as a
percentage of total revenue for 1997 as compared to 1996 was primarily a
result of the lower occupancies and revenue during the pre-stabilization
period for the 110 properties that commenced operations during 1997. As a
result of the foregoing, the Company realized property operating margins of
54% and 57% for 1997 and 1996, respectively.
The provision for depreciation and amortization for the lodging facilities
of $19.9 million and $5.6 million for 1997 and 1996, respectively, was
provided using the straight-line method over the estimated useful lives of the
assets. These provisions reflect a pro rata allocation of the annual
depreciation and amortization charge for the periods for which the facilities
were in operation. The increase in depreciation and amortization for 1997 as
compared to 1996 is a result of the full year of operation in 1997 for the 51
properties opened or acquired in 1996 and partial periods of operation in 1997
for the 110 properties opened in 1997.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of the lodging
facilities. These expenses 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 Company incurred corporate operating and property management expenses of
$30.0 million (23% of total revenue) and $16.9 million (43% of total revenue)
in 1997 and 1996, respectively. The increase in the amount of these expenses
for 1997 as compared to 1996 reflects the impact of additional personnel and
related expenses in connection with the Company's increased level of operating
facilities and site development. Management expects these expenses to increase
in total amount but to continue to decline as a percentage of revenue with the
development of additional facilities in the future.
Depreciation and amortization in the amount of $1.4 million for 1997 and
$495,000 for 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 office furniture and
equipment.
The Company realized $9.2 million and $13.7 million of interest income
during 1997 and 1996, respectively, which was primarily attributable to the
investment of funds received from offerings of common stock. The decrease in
interest income for 1997 as compared to 1996 was due to the decrease in the
average cash and cash equivalent balances resulting from investments in
property and equipment during 1997. The Company incurred interest charges of
$1.7 million and $332,000 during 1997 and 1996, respectively, substantially
all of which was capitalized and included in the cost of buildings and
improvements.
The Company recognized income tax expense of $5.8 million or 69% of income
before taxes for 1997 and $5.2 million or 40% of income before taxes for 1996.
Income tax expense differs from the federal income tax rate of 35% primarily
due to state and local income taxes and, for 1997, due to permanent tax
differences relating to merger expenses and tax exempt income. Management
expects that the annualized effective income tax rate for 1998 will be
approximately 40%.
Merger, Financing, and Other Charges
During 1997, the Company recorded merger, financing, and other charges
totaling $19.9 million. These pre-tax charges consisted of (i) $9.7 million of
merger expenses and costs associated with the integration of SPH's operations
following the Merger, (ii) the write-off of $9.7 million of deferred costs
associated with two mortgage loan facilities, which were terminated upon
execution of the Credit Facility, and (iii) a charge of $500,000 in connection
with moving the listing of the Company's Common Stock to the NYSE from the
National Market tier of the Nasdaq Stock Market. Management believes that
these charges are non-recurring in nature and will not affect the future
results of operations.
20
<PAGE>
1996 COMPARED TO 1995
Property Operations
The following is a summary of the properties operated during the specified
periods and the related average occupancy rates and weekly room rates:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
AVERAGE AVERAGE
AVERAGE WEEKLY AVERAGE WEEKLY
FACILITIES OCCUPANCY ROOM FACILITIES OCCUPANCY ROOM
OPEN RATE RATE OPEN RATE RATE
---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Crossland............ -- -- -- -- -- --
EXTENDED STAY........ 40 65% $233 2 83% $198
StudioPLUS........... 35 81 284 22 84 254
--- --- ---- --- --- ----
Total............ 75 73% $261 24 83% $250
=== === ==== === === ====
</TABLE>
The decline in average occupancy rate for 1996 compared to 1995 reflects,
primarily, the lower occupancy typically experienced during the pre-
stabilization periods for the 41 properties that were opened during 1996
compared to 5 properties that were opened in 1995. The average occupancy rate
in 1996 for the 18 properties that were owned and operated by the Company as
of January 1, 1995 was 82%. The increase in overall average weekly room rates
for 1996 compared to 1995 reflects the geographic dispersion of properties
opened or acquired during 1996 and the higher standard weekly room rates in
certain of those markets, along with increases in rates charged in previously
opened properties, partially offset by an increase in the percentage of total
facilities (as of the end of the year) represented by lower priced EXTENDED
STAY facilities from 8% for 1995 to 53% for 1996. The average weekly room rate
for the 18 properties that were in operation throughout both periods increased
by 9% in 1996.
The Company recognized total revenue for 1996 and 1995 of $38.8 million and
$16.8 million, respectively, an increase of $22.0 million. Approximately $21.0
million of the increased revenue is attributable to properties opened or
acquired during 1996 and 1995, and approximately $1.0 million is attributable
to the 18 properties that were owned and operated throughout both periods.
Property operating expenses were $16.6 million (43% of total revenue) for
1996 and $6.7 million (40% of total revenue) for 1995. The increase in
property operating expenses as a percentage of total revenue for 1996 as
compared to 1995 is primarily a result of lower occupancies and revenue during
the pre-stabilization period for the 41 properties that were opened during
1996. As a result of the foregoing, the Company realized property operating
margins of 57% and 60% for 1996 and 1995, respectively.
The provision for depreciation and amortization for the lodging facilities
for 1996 was $5.6 million and the provision for 1995 was $1.9 million. These
provisions reflect a pro rata allocation of the annual depreciation and
amortization charge for the periods for which the properties were in
operation. The increase in depreciation and amortization for 1996 as compared
to 1995 is a result of the full year of operation in 1996 for the 6 properties
opened or acquired in 1995 and partial periods of operation in 1996 for the 51
properties opened or acquired in 1996.
Corporate Operations
Corporate operating and property management expenses were $16.9 million (43%
of total revenue) and $4.7 million (28% of total revenue) for 1996 and 1995,
respectively. The increase in corporate operating and property management
expenses for 1996 as compared to 1995 reflects the impact of additional
personnel and related expenses in connection with the Company's increased
level of operating properties and site development.
Depreciation and amortization in the amount of $495,000 for 1996, and
$132,000 for 1995 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 office furniture and
equipment.
21
<PAGE>
The Company realized $13.7 million and $1.0 million of interest income
during 1996 and 1995, respectively, which was primarily attributable to the
investment of funds received from offerings of common stock. The Company
incurred interest charges of $332,000 and $1.7 million during 1996 and 1995,
respectively, of which $329,000 and $256,000, respectively, was capitalized
and included in the cost of buildings and improvements.
The Company recognized income tax expense of $5.2 million or 40% of income
before taxes for 1996 and $1.2 million or 45% of income before taxes for 1995.
Income tax differs from the federal income tax rate of 35% primarily due to
state and local income taxes and, for 1995, permanent tax differences relating
to items arising from the organization of SPH.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $3.2 million and $224.3 million
as of December 31, 1997 and December 31, 1996, respectively. At December 31,
1996, the Company had invested, utilizing domestic commercial banks and other
financial institutions, approximately $216 million in short-term commercial
paper and other securities having credit ratings of A1/Pl or equivalent. The
Company did not have such investments as of December 31, 1997. In addition,
during these periods the Company invested excess funds in an overnight sweep
account with a commercial bank which invested 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 financial institution. 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. During 1996 SPH temporarily invested proceeds from an offering of
its common stock in investments with maturities greater than 90 days.
Accordingly, these investments in a mutual fund (primarily in municipal bonds)
and in United States Government obligations have been classified as
investments available-for-sale in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". In 1996, purchases of such investments available-for-sale
aggregated $38.8 million and proceeds from the sale or maturity of such
investments aggregated $39.3 million.
In 1997, 1996, and 1995, the Company generated cash from operating
activities of $50.3 million, $20.8 million and $4.2 million, respectively.
The Company used $607.6 million, $273.3 million, and $31.4 million to
acquire land and develop and furnish a total of 194, 102, and 21 sites,
respectively, in the years ended December 31, 1997, 1996, and 1995. The
Company acquired ten existing extended stay facilities in 1996 and one
existing extended stay facility in 1995. These acquisitions were paid for by
the issuance of Common Stock valued at $55.2 million and $1.7 million and the
payment of $4.3 million and $2.3 million in cash in 1996 and 1995,
respectively. During 1997, the Company made payments of $9.2 million for costs
associated with the Merger.
The Company received net proceeds from exercise of Company stock options and
common stock offerings totaling $202.1 million, $365.6 million, and $192.2
million in the years ended December 31, 1997, 1996, and 1995, respectively.
In conjunction with the organization of SPH in 1995, SPH purchased third
party interests for cash of $1.5 million, assumed $39.9 million of debt in the
form of various mortgage notes and notes payable to stockholders and partners
(subsequently retired with the proceeds of the SPH initial public offering),
and purchased minority stockholders' interest and assumed a deficit capital
balance in exchange for $5.0 million of SPH common stock.
In May 1995, SPH entered into a $30 million revolving credit agreement (the
"SPH Line of Credit") to fund future development and construction of
additional hotels and for working capital. In February 1996, SPH increased the
SPH Line of Credit to $50 million, maturing in 1998. During 1996, SPH received
proceeds of $27.0 million and made payments of $31.6 million on the SPH Line
of Credit. The SPH Line of Credit was terminated upon consummation of the
Merger.
Effective September 26, 1997, the Company executed an agreement with various
banks establishing the Credit Facility, to be used for general corporate
purposes, including the construction and acquisition of extended stay hotel
properties. The Credit Facility matures on December 31, 2002.
22
<PAGE>
Upon execution of the agreement establishing the Credit Facility, the
Company terminated two mortgage loan facilities, which provided for an
aggregate of $400 million in available mortgage loans. Accordingly, the
Company recorded a pre-tax charge of $9.7 million in 1997, which represented
the write-off of debt issuance costs associated with the mortgage facilities.
The Company is currently negotiating to amend the Credit Facility to provide
the Company with a $350 million revolving credit facility and $350 million of
term loan facilities (the "Amended Credit Facility"). The Company expects that
at least $100 million of the new term loan facilities will be drawn on the
effective date of the Amended Credit Facility (the "Effective Date"). Of the
remaining $250 million, $50 million may be borrowed until July 31, 1998 and up
to $200 million may be borrowed until September 1, 1998, declining by 25% each
month after the Effective Date. In addition, the Amended Credit Facility will
permit, but not make available, amounts not borrowed above to be borrowed at
any time after the Effective Date and also permit, but not make available, an
additional $100 million after January 1, 1999. Amounts borrowed under the
Amended Credit Facility would mature beginning December 31, 2002.
Availability under the Credit Facility (and the Amended Credit Facility), is
dependent upon the Company satisfying certain financial ratios of debt and
interest compared to property-level EBITDA for qualifying properties, less
corporate operating expenses. In no event, however, is availability under the
Credit Facility (and the Amended Credit Facility) less than $200 million at
any time.
Under the Credit Facility (and the Amended Credit Facility), the Company is
required to repay indebtedness outstanding with the net cash proceeds from
certain sales of assets, from issuances of debt or equity by the Company, and
from insurance recovery events (subject to certain reinvestment rights). The
Company is also required to repay indebtedness outstanding under the Credit
Facility (and the Amended Credit Facility), annually in an amount equal to 50%
of the Company's excess cash flow as defined in the Credit Facility.
Amounts drawn under the Credit Facility (and the Amended Credit Facility),
bear interest, at the Company's option, at either a prime rate or a Eurodollar
Rate (as defined in the Credit Facility), plus an applicable margin. The
applicable margin for the Credit Facility (and the revolving loans and certain
of the term loans under the Amended Credit Facility) is an annual rate which
fluctuates based on the Company's ratio of total debt to total EBITDA and
which is between 1.375% and 0% for prime rate loans and 2.375% and 1% for
Eurodollar Rate loans. If at least $200 million of gross cash proceeds are
received by the Company on or before September 25, 1998 from the issuance of
certain debt instruments (including the Notes described below) or Common
Stock, the applicable margin will be between .875% and 0% for prime rate loans
and between 1.875% and 1% for Eurodollar Rate loans. The applicable margin for
the remaining term loans under the Amended Credit Facility will be 1.75% for
prime rate loans and 2.75% for Eurodollar Rate loans.
The Company's obligations under the Credit Facility are (and if established,
its obligation under the Amended Credit Facility would be) guaranteed by each
of the Company's subsidiaries and secured by a first priority lien on the
stock of the Company's subsidiaries and substantially all of the assets of the
Company and its subsidiaries (other than mortgages on the real property of the
Company's and its subsidiaries).
The Credit Facility contains (and, if established, the Amended Credit
Facility would contain) a number of covenants that limit, among other things,
the ability of the Company and its subsidiaries to incur debt, make
investments, pay dividends, prepay other indebtedness, engage in transactions
with affiliates, enter into sale-leaseback transactions, create liens, make
capital expenditures, acquire or dispose of assets, or engage in mergers or
acquisitions. In addition, the Credit Facility contains affirmative covenants
that require, among other things, maintenance of corporate existence,
compliance with laws, maintenance of properties and insurance, and the
delivery of financial and other information. The Company is also required to
comply with certain financial covenants, including a maximum leverage ratio,
minimum interest coverage ratio, and maximum debt to capitalization ratio. The
Credit Facility includes customary events of default, including, without
limitation, a cross-default to other indebtedness, undischarged judgments,
bankruptcy, and a change of control.
23
<PAGE>
The Company is currently in the process of seeking to raise approximately
$200 of gross proceeds in an offering of senior subordinated notes (the
"Notes"). The Notes are expected to mature in 2008, pay interest semiannually
in cash, be redeemable by the Company after five years from the date of their
issuance, be unsecured, and be subordinated to the Credit Facility (and, if
established, the Amended Credit Facility). The Company intends to use a
portion of the proceeds from the offering of the Notes to reduce revolving
loans under the Credit Facility (or the Amended Credit Facility) and to use
the remainder to expand its business by developing additional extended stay
lodging facilities and for other general corporate purposes.
The Company expects to continue to rapidly expand its operations. The
Company had commitments to complete construction of additional extended stay
properties with a total cost of approximately $440 million at December 31,
1997 and expects to make capital expenditures totalling at least $600 million
in 1998. The Company believes that the net proceeds from the Note offering,
together with cash on hand, cash flow from operations, and borrowings expected
to be available under the Amended Credit Facility, will provide sufficient
funds for the Company to expand its business as presently planned and to fund
its operating expenses at least through early 1999. Thereafter, the Company
expects it will require additional funding to continue its expansion as
currently planned. The timing and amount of financing needed will depend on a
number of factors, including the number of properties the Company constructs
or acquires, the timing of such development, and the cash flow generated by
its properties. In the event that the capital markets provide favorable
opportunities, the Company's plans or assumptions change or prove to be
inaccurate, or the foregoing sources of funds prove to be insufficient to fund
the Company's growth and operations (or if the Credit Facility is not amended
as contemplated), or if the Company consummates acquisitions, the Company may
seek additional capital sooner than currently anticipated. Sources of
financing may include public or private debt or equity financing. There can be
no assurance that such additional financing will be available to the Company
or, if available, that it can be obtained on acceptable terms or within the
limitations contained in the Company's financing arrangements. Failure to
obtain such financing could result in the delay or abandonment of some or all
of the Company's development and expansion plans and expenditures and could
have a material adverse effect on the Company.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Based on its recent
assessment, management of the Company does not anticipate that any significant
modification or replacement of the Company's software will be necessary for
its computer systems to properly utilize dates beyond December 31, 1999 or
that the Company will incur significant operating expenses to make any such
computer system improvements. The Company is not able to determine, however,
whether any of its suppliers, lenders, or service providers will need to make
any such software modifications or replacements or whether the failure to make
such software corrections will have an effect on the Company's operations or
financial condition.
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 during any of the periods presented. There can be no assurance,
however, that inflation will not affect future operating or construction
costs.
24
<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute "forward-
looking statements." Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
Company's limited operating history and uncertainty as to the Company's future
profitability; the ability to meet construction and development schedules and
budgets; the ability to develop and implement operational and financial
systems to manage rapidly growing operations; the uncertainty as to the
consumer demand for 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; the ability of the Company to operate within the limitations
imposed by financing arrangements; and general economic conditions as they may
impact the overall lodging industry. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligations to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
Report of Independent Accountants......................................... 27
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. 28
Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995........................................................... 29
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995........................................ 30
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995..................................................... 31
Notes to Consolidated Financial Statements................................ 32
</TABLE>
26
<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 as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Spartanburg, South Carolina
February 13, 1998
27
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
------ -------------------
1997 1996
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 3,213 $224,325
Accounts receivable...................................... 3,651 1,665
Prepaid expenses......................................... 3,869 796
Deferred income taxes.................................... 6,895 1,143
Other current assets..................................... 1,430 1,580
---------- --------
Total current assets................................... 19,058 229,509
Property and equipment, net................................ 1,042,177 428,749
Deferred loan costs........................................ 8,167 9,519
Other assets............................................... 1,489 658
---------- --------
$1,070,891 $668,435
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 51,309 $ 14,827
Accrued retainage........................................ 19,951 11,371
Accrued property taxes................................... 3,417 783
Accrued salaries and related expenses.................... 2,018 1,694
Other accrued expenses................................... 6,144 3,063
---------- --------
Total current liabilities.............................. 82,839 31,738
---------- --------
Deferred income taxes...................................... 18,393 7,983
---------- --------
Long-term debt............................................. 135,000
---------- --------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding............
Common stock, $.01 par value, 500,000,000 shares
authorized, 95,604,208, and 83,666,383 shares issued and
outstanding, respectively............................... 956 837
Additional paid-in capital............................... 823,060 619,870
Retained earnings........................................ 10,643 8,007
---------- --------
Total stockholders' equity............................. 834,659 628,714
---------- --------
$1,070,891 $668,435
========== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Room revenue..................................... $126,095 $37,480 $16,126
Other revenue.................................... 4,705 1,329 642
-------- ------- -------
Total revenue.................................. 130,800 38,809 16,768
-------- ------- -------
Costs and expenses:
Property operating expenses...................... 60,391 16,560 6,706
Corporate operating and property management
expenses........................................ 29,951 16,867 4,669
Merger, financing and other charges.............. 19,895
Depreciation and amortization.................... 21,331 6,139 2,059
-------- ------- -------
Total costs and expenses....................... 131,568 39,566 13,434
-------- ------- -------
Income (loss) from operations...................... (768) (757) 3,334
Interest income (expense), net..................... 9,242 13,744 (507)
-------- ------- -------
Income before third party investor's interest,
income taxes and extraordinary loss............... 8,474 12,987 2,827
Third party investor's interest.................... (142)
-------- ------- -------
Income before income taxes and extraordinary loss.. 8,474 12,987 2,685
Provision for income taxes......................... 5,838 5,231 1,217
-------- ------- -------
Income before extraordinary loss................... 2,636 7,756 1,468
Extraordinary loss, net of income tax benefit...... (185)
-------- ------- -------
Net income......................................... $ 2,636 $ 7,756 $ 1,283
======== ======= =======
Net income per share:
Basic............................................ $ 0.03 $ 0.11
======== =======
Diluted.......................................... $ 0.03 $ 0.10
======== =======
Pro forma income data:
Income before extraordinary loss................. $ 1,468
Pro forma adjustment for income taxes............ 176
-------
Pro forma income before extraordinary loss....... 1,644
Extraordinary loss............................... (185)
-------
Pro forma net income............................. $ 1,459
=======
Pro forma net income per share--basic and
diluted:
Income before extraordinary loss................. $ 0.05
Extraordinary loss............................... --
-------
Net income....................................... $ 0.05
=======
Weighted average shares:
Basic............................................ 94,233 71,933 30,381
Effect of dilutive options....................... 1,511 2,002 1,053
-------- ------- -------
Diluted.......................................... 95,744 73,935 31,434
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(ACCUMULATED TOTAL
ADDITIONAL DEFICIT) PARTNER'S STOCKHOLDERS'
COMMON TREASURY PAID-IN RETAINED (DEFICIT) (DEFICIT)
STOCK STOCK CAPITAL EARNINGS CAPITAL EQUITY
------ -------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1,
1995................... $210 $ (75) $ 128 $(1,209) $(302) $ (1,248)
Cash dividends.......... (1,748) (1,748)
Partner's draws......... (546) (546)
Reclassification in
connection with
S corporation and
partnership
termination............ (210) 75 (1,631) 1,251 515
Purchase of minority
stockholders' interest. 3,955 674 333 4,962
Issuances of common
stock, net of issuance
costs.................. 284 196,335 196,619
Retroactive effect of
three-for-two stock
split on July 9, 1996.. 32 (32)
Retroactive effect of
two-for-one stock split
on July 19, 1996....... 221 (221)
Net income.............. 1,283 1,283
---- ----- -------- ------- ----- --------
Balance as of December
31, 1995............... 537 198,534 251 199,322
Issuances of common
stock for acquisitions
of extended stay
facilities............. 45 55,198 55,243
Issuances of common
stock, net of issuance
costs.................. 255 365,972 366,227
Stock options exercised,
including tax benefit
of $108................ 166 166
Net income.............. 7,756 7,756
---- ----- -------- ------- ----- --------
Balance as of December
31, 1996............... 837 619,870 8,007 628,714
Issuance of common
stock, net of issuance
costs.................. 115 197,978 198,093
Stock options exercised,
including tax benefit
of $1,174.............. 4 5,212 5,216
Net income.............. 2,636 2,636
---- ----- -------- ------- ----- --------
Balance as of December
31, 1997............... $956 $ $823,060 $10,643 $ $834,659
==== ===== ======== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 2,636 $ 7,756 $ 1,283
Adjustments to reconcile net income to net
cash provided by operating activities:
Third party investor interest............... 142
Depreciation and amortization............... 21,331 6,139 2,059
Write-off of site deposits and
preacquisition costs....................... 2,731 1,475 289
Bad debt expense............................ 623 97 48
Merger expenses............................. 485
Write-off of deferred loan costs............ 9,667
Deferred income taxes....................... 5,832 2,574 140
Extraordinary loss.......................... 185
Other, net.................................. (469) (72)
Changes in operating assets and liabilities:
Accounts receivable....................... (2,609) (1,099) (212)
Prepaid expenses.......................... (3,073) (480) (319)
Other current assets...................... (954) (28) (165)
Accounts payable.......................... 7,542 643 233
Accrued property taxes.................... 2,634
Accrued salaries and related expenses..... 324 885 271
Other accrued expenses.................... 3,094 3,335 304
--------- --------- --------
Net cash provided by operating
activities.............................. 50,263 20,828 4,186
--------- --------- --------
Cash flows from investing activities:
Additions to property and equipment........... (607,649) (273,260) (31,380)
Acquisitions of extended stay properties...... (4,271) (2,342)
Purchase of investments available-for-sale.... (38,829)
Proceeds from sale/maturity of investments
available-for-sale........................... 39,298
Purchase of third party interest.............. (1,500)
Other assets.................................. (1,415) (2,197) (108)
--------- --------- --------
Net cash used in investing activities.... (609,064) (279,259) (35,330)
--------- --------- --------
Cash flows from financing activities:
Proceeds from exercise of Company stock
options and issuances of common stock........ 202,135 365,636 192,208
Proceeds from long-term debt.................. 143,869 27,000 6,916
Principal payments on long-term debt.......... (31,630) (36,811)
Additions to deferred loan and other costs.... (8,315) (4,165) (2,034)
Proceeds from related party loans............. 7,863
Payments of related party loans............... (9,246)
Distributions to owners....................... (2,295)
--------- --------- --------
Net cash provided by financing
activities.............................. 337,689 356,841 156,601
--------- --------- --------
Increase (decrease) in cash and cash
equivalents................................... (221,112) 98,410 125,457
Cash and cash equivalents at beginning of
period........................................ 224,325 125,915 458
--------- --------- --------
Cash and cash equivalents at end of period..... $ 3,213 $ 224,325 $125,915
========= ========= ========
Noncash investing and financing transactions:
Issuances of common stock for acquisitions of
extended stay properties..................... $ $ 55,243 $ 1,700
========= ========= ========
Capitalized or deferred items included in
accounts payable and accrued liabilities..... $ 49,308 $ 17,671 $ 1,212
========= ========= ========
Issuance of common stock for notes receivable
from stockholders............................ $ $ $ 28,050
========= ========= ========
Issuance of common stock for deferred loan
costs........................................ $ $ $ 3,574
========= ========= ========
Note payable for the purchase of property
site......................................... $ $ $ 630
========= ========= ========
Purchase of minority stockholders' interest
for stock and assumption of deficit capital
balance...................................... $ $ $ 4,963
========= ========= ========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes................................ $ 1,340 $ 2,267 $ 1,182
========= ========= ========
Interest expense, net of amounts
capitalized................................ $ $ 3 $ 1,517
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED IN ALL TABLES EXCEPT PER SHARE DATA)
NOTE 1--ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Extended Stay America, Inc. ("ESA") was organized on January 9, 1995, as a
Delaware corporation to develop, own, and manage extended stay lodging
facilities.
Studio Plus Hotels, Inc. ("SPH") was formed on December 19, 1994, to
acquire, through merger and exchange of partnership interests all of the
assets of Studio Plus, Inc. and the corporation and partnerships
(collectively, the "SPH Predecessor Entities") which owned and operated
StudioPLUS extended stay hotels. On June 26, 1995, SPH completed an initial
public offering (the "SPH IPO"). Prior to the completion of the SPH IPO, SPH
acquired, through merger and exchange of SPH common stock for partnership
interests, the assets of the SPH Predecessor Entities which owned and operated
all of the StudioPLUS extended stay hotel properties then in operation or
under development (the "Corporate Organization"). The acquisition of the
interests of the controlling stockholder or partner and affiliates of the SPH
Predecessor Entities was accounted for as if it were a pooling of interests.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), a wholly-owned
subsidiary of ESA, and SPH consummated a merger (the "Merger") pursuant to
which SPH was merged with and into Merger Sub and the 12,557,786 shares of SPH
common stock issued and outstanding on such date were converted into the right
to receive 15,410,915 shares of common stock, par value $.01 per share, of ESA
("Common Stock") and options to purchase 1,072,565 shares of SPH common stock
were converted into options to purchase 1,316,252 shares of Common Stock. In
connection with the Merger, the Company recorded a pre-tax charge of $9.7
million representing merger expenses and costs associated with the integration
of SPH operations following the Merger. The Merger was accounted for using the
pooling of interests method of accounting. The accompanying consolidated
financial statements of ESA and SPH (together the "Company") give effect to
the Merger as if it had been consummated as of the beginning of the periods
presented.
All per share data and numbers of shares of Common Stock for all periods
presented included in the consolidated financial statements and notes thereto
have been adjusted to reflect stock splits as more fully described in Note 8--
Stockholders' Equity.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying 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. At December 31, 1997, approximately $8.9
million of outstanding checks were included in accounts payable.
32
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company had invested approximately $216 million in
short-term commercial paper and other securities. The Company did not have
such investments as of December 31, 1997. In addition, during these periods
the Company invested excess funds in an overnight sweep account with a
commercial bank which invested 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 financial institution. 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.
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 using the straight-line method over the estimated
useful lives of the assets. Maintenance and repairs are charged to operations
as incurred; major renewals and improvements are capitalized. The gain or loss
on the disposition of property and equipment is recorded in the year of
disposition.
The estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Building and improvements...................................... 40 years
Furniture, fixtures and equipment.............................. 3-10 years
</TABLE>
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 included in property and equipment. 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 are amortized over the life of the respective loans.
Pre-Opening Costs
The Company capitalizes compensation and other training-related costs
incurred prior to the opening of a property and amortizes such costs over a
period of twelve months. Pre-opening costs of $3,210,000 and $1,901,000 as of
December 31, 1997, and 1996, respectively, are included in other current
assets, net of accumulated amortization of $1,997,000 and $893,000,
respectively.
Organization Costs
Organization costs are amortized over sixty months using the straight-line
method. As of December 31, 1997 and 1996, costs of $568,000 and $245,000,
respectively, reduced by accumulated amortization of $84,000 and $26,000,
respectively, are included in other assets.
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 for 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 the related 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.
33
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Room revenue and other revenue 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.
New Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" and No. 131 "Disclosures About Segments of an Enterprise and Related
Information". Analysis of these new standards by the Company indicates that
the standards will not have a material impact on the financial information to
be provided by the Company. The standards are effective for financial
statements for fiscal years beginning after December 15, 1997.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current presentation.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---------- --------
<S> <C> <C>
Land and improvements, including land under current
development........................................ $ 287,857 $134,707
Buildings and improvements.......................... 454,946 204,001
Furniture, fixtures, equipment and supplies......... 125,537 55,318
Construction in progress............................ 206,025 47,126
---------- --------
1,074,365 441,152
Less: Accumulated depreciation...................... 32,188 12,403
---------- --------
Total property and equipment........................ $1,042,177 $428,749
========== ========
</TABLE>
The Company had commitments to complete construction of additional extended
stay properties with a total cost of approximately $440 million at December
31, 1997.
For the years ended December 31, 1997, 1996 and 1995 the Company incurred
interest of $1,731,000, $332,000, and $1,773,000, respectively, of which
$1,731,000, $329,000, and $256,000, respectively, was capitalized and included
in the cost of buildings and improvements.
NOTE 4--OPTIONS TO PURCHASE PROPERTY SITES
As of December 31, 1997, the Company had options to purchase parcels of real
estate in 146 locations in 34 states. The Company had paid approximately $4.8
million in connection with these options as of December 31, 1997. 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 property and equipment.
34
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PURCHASE ACQUISITIONS OF EXTENDED STAY PROPERTIES
On August 18, 1995, the Company acquired an existing extended stay property
for approximately $4.0 million which was paid for by the issuance of 714,000
shares of Common Stock valued at $1.7 million and approximately $2.3 million
in cash. During 1996, the Company acquired ten (10) extended stay facilities
from a number of unrelated sellers (together with the 1995 acquisition, the
"Acquisitions") for approximately $59.5 million, which was paid for by the
issuance of approximately 4.5 million shares of Common Stock valued at
approximately $55.2 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.
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 income from the date of acquisition.
The following unaudited pro forma condensed statements of income of the
Company are presented as if the Company had completed the Acquisitions,
excluding one of the acquisitions which did not meet certain materiality
standards (the "Significant Acquisitions") on January 1, 1995. This pro forma
information is based in part upon the consolidated statements of income of
each of the Significant Acquisitions. In management's opinion, all adjustments
necessary to reflect the effects of these transactions have been made. These
pro forma condensed consolidated statements of income 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 1, 1995, nor do
they purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA FOR
THE
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Total revenue.................................................. $44,022 $30,055
Total costs and expenses....................................... 42,162 23,040
------- -------
Income from operations......................................... 1,860 7,015
Interest income (expense)...................................... 13,744 (551)
------- -------
Income before income taxes..................................... 15,604 6,464
Provision for income taxes..................................... 6,277 2,586
------- -------
Net income..................................................... $ 9,327 $ 3,878
======= =======
Net income per share:
Basic........................................................ $ 0.13 $ 0.11
======= =======
Diluted...................................................... $ 0.12 $ 0.11
======= =======
Weighted average shares:
Basic........................................................ 74,448 35,597
======= =======
Diluted...................................................... 76,450 36,650
======= =======
</TABLE>
NOTE 6--LONG-TERM DEBT
Effective September 26, 1997, the Company executed an agreement with various
banks establishing a revolving credit facility (the "Credit Facility") to be
used for general corporate purposes, including the construction and
acquisition of extended stay hotel properties.
35
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Availability under the Credit Facility is dependent upon the Company
satisfying certain financial ratios of debt and interest compared to property-
level earnings before interest, taxes, depreciation, and amortization ("EBITDA
for qualifying properties, less corporate operating expenses. In no event,
however, is availability under the Credit Facility less than $200 million at
any time.
Under the Credit Facility the Company is required to repay indebtedness
outstanding with the net cash proceeds from certain sales of assets, from
issuances of debt or equity by the Company, and from insurance recovery events
(subject to certain reinvestment rights). The Company is also required to
repay indebtedness outstanding under the Credit Facility annually in an amount
equal to 50% of the Company's excess cash flow as defined in the Credit
Facility.
Amounts drawn under the Credit Facility bear interest, at the Company's
option, at either a prime rate or a Eurodollar Rate (as defined in the Credit
Facility), plus an applicable margin. The applicable margin is an annual rate
which fluctuates based on the Company's ratio of total debt to total EBITDA
and which is between 1.375% and 0% for prime rate loans and 2.375% and 1% for
Eurodollar Rate loans. If at least $200 million of gross cash proceeds are
received by the Company on or before September 25, 1998 from the issuance of
certain debt instruments or Common Stock, the applicable margin will be
between .875% and 0% for prime rate loans and between 1.875% and 1% for
Eurodollar Rate loans.
The Company's obligations under the Credit Facility are guaranteed by each
of the Company's subsidiaries and secured by a first priority lien on the
stock of the Company's subsidiaries and substantially all of the assets of the
Company and its subsidiaries (other than mortgages on the real property of the
Company and its subsidiaries).
The Credit Facility contains a number of covenants that limit, among other
things, the ability of the Company and its subsidiaries to incur debt, make
investments, pay dividends, prepay other indebtedness, engage in transactions
with affiliates, enter into sale-leaseback transactions, create liens, make
capital expenditures, acquire or dispose of assets, or engage in mergers or
acquisitions. In addition, the Credit Facility contains affirmative covenants
that require, among other things, maintenance of corporate existence,
compliance with laws, maintenance of properties and insurance, and the
delivery of financial and other information. The Company is also required to
comply with certain financial covenants, including a maximum leverage ratio,
minimum interest coverage ratio, and maximum debt to capitalization ratio. The
Credit Facility includes customary events of default, including, without
limitation, a cross-default to other indebtedness, undischarged judgments,
bankruptcy, and a change of control.
Upon execution of the agreement establishing the Credit Facility, the
Company terminated two mortgage loan facilities, which provided for an
aggregate of $400 million in mortgage loans. Accordingly, the Company recorded
a pre-tax charge of $9.7 million in 1997, which represented the write-off of
debt issuance costs associated with the mortgage facilities.
At December 31, 1997, $135 million was outstanding under the Credit Facility
with a weighted average interest rate of 7.28%. The Company believes that
there is no material difference in the carrying amount (including the terms
and conditions outlined above) and the estimated fair value of the Credit
Facility.
In May 1995, SPH entered into a $30 million revolving credit agreement (the
"SPH Line of Credit") to fund future development and construction of
additional hotels and for working capital. In February 1996, SPH increased the
SPH Line of Credit to $50 million, maturing in 1998. At December 31, 1996,
there were no outstanding borrowings under the SPH Line of Credit. The SPH
Line of Credit was terminated upon consummation of the Merger.
36
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current income taxes:
U.S. federal....................................... $ 6 $2,137 $ 929
State and local.................................... -- 520 148
------ ------ ------
6 2,657 1,077
------ ------ ------
Deferred income taxes:
U.S. federal....................................... 5,137 2,069 55
State and local.................................... 695 505 85
------ ------ ------
5,832 2,574 140
------ ------ ------
Total income tax expense............................. $5,838 $5,231 $1,217
====== ====== ======
</TABLE>
Prior to the Corporate Organization, a portion of SPH operations were
conducted through S corporations and partnerships. Accordingly, the deferred
tax provision for the year ended December 31, 1995, includes approximately
$540,000 relating to recognition of a net deferred tax liability representing
temporary differences existing on the date of the Corporate Organization.
Prior to the Corporate Organization, income taxes on earnings were paid by the
stockholders and partners of the SPH Predecessor Entities.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35.0% to pretax income as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Computed "expected" tax rate.......................... 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
benefit............................................ 4.8 4.9 3.7
Effect of termination of S corporation and
partnership items.................................. 20.0
S corporation and partnership for which no current
income taxes were provided......................... (14.9)
Tax exempt income................................... (5.0)
Merger expenses..................................... 32.1
Other............................................... 2.0 0.4 1.5
---- ---- -----
Annual effective income tax rate...................... 68.9% 40.3% 45.3%
==== ==== =====
</TABLE>
37
<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, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward..................... $ 4,029 $ 986
Other............................................... 2,866 157
-------- -------
Total deferred tax assets......................... 6,895 1,143
Deferred tax liability:
Property and equipment.............................. (18,393) (7,983)
-------- -------
$(11,498) $(6,840)
======== =======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $10,200,000, which will expire
between 2011 and 2013 if not utilized to offset future federal taxable income.
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. 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 8--STOCKHOLDERS' EQUITY
On June 26, 1995, SPH completed an initial public offering of 5,347,500
shares of its common stock at $10.00 per share (number of shares and price per
share have not been adjusted for the Merger) and received net cash proceeds of
$48.1 million. SPH also issued an aggregate of 2,322,750 shares (number of
shares have not been adjusted for the Merger) of common stock and paid $1.5
million in cash to the partners and stockholders of the SPH Predecessor
Entities in connection with the Corporate Organization. The acquisition of the
interests of the controlling stockholder or partner and affiliates of the SPH
Predecessor Entities has been accounted for as if it were a pooling of
interests, with no increase in the carrying value for the interests acquired.
The acquisition of the third party investors' interests has been accounted for
as a purchase which resulted in an increase of $10,475,000 to the carrying
value of the underlying assets acquired.
On October 19, 1995, the Board of Directors of ESA declared a 210-for-1
stock split effected in the form of a stock dividend.
On December 19, 1995, ESA 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 ESA of such offerings were approximately $85.0 million, net of
offering expenses.
In April, 1996, SPH closed a public offering of 4,855,347 shares of common
stock, and 319,653 shares sold by selling stockholders at $16.83 per share
(number of shares and price per share have not been adjusted for the
38
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Merger). Net cash proceeds to SPH were approximately $76.8 million, which
excluded any proceeds received by the selling stockholders.
On May 9, 1996, the Board of Directors of ESA declared a 2-for-1 stock split
effected in the form of a stock dividend.
On June 5, 1996, ESA 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
ESA of such offering were approximately $289.0 million, net of offering
expenses.
On July 19, 1996, a three-for-two split of SPH common stock was effected in
the form of a stock dividend.
On February 6, 1997, the Company sold 11.5 million shares of Common Stock in
a private placement transaction resulting in net proceeds of approximately
$198.1 million.
On April 11, 1997, the Company's stockholders approved an Amendment of the
Restated Certificate of Incorporation increasing the number of authorized
shares of Common Stock, par value $.01, from 200 million to 500 million
shares.
On June 9, 1997, the Company announced that its Board of Directors had
approved a plan to have the Common Stock listed on the New York Stock
Exchange, Inc. ("NYSE") and to move trading in the Common Stock from the
Nasdaq National Market ("Nasdaq") to the NYSE. The Common Stock began trading
on the NYSE on June 30, 1997. The Company recorded a pre-tax charge of
$500,000 in connection with listing of the Common Stock on the NYSE, which is
included in merger, financing and other charges.
Shares of preferred stock may be issued from time to time, in one or more
series, as authorized by the Board of Directors. Prior to issuance of shares
of each series, the Board will designate for each such series, the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms
or conditions of redemption, as are permitted by law. No shares of preferred
stock are outstanding and the Company has no present plans to issue any shares
of preferred stock.
NOTE 9--STOCK OPTION PLANS
ESA has four stock option plans including the 1995, 1996 and 1997 Employee
Stock Option Plans (the "Employee Plans") and the 1995 Stock Option Plan for
Non-Employee Directors (the "Directors' Plan"). The Employee Plans and the
Directors' Plan provide for grants to certain officers, directors and key
employees of stock options to purchase shares of Common Stock. Options granted
under the Employee Plans and the Directors' Plan 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.
SPH had two stock option plans, the 1995 Stock Incentive Plan and the 1995
Non-Employee Directors' Stock Incentive Plan (collectively, the "SPH Plans").
Two types of options, incentive stock options and nonqualified stock options,
were granted under the SPH Plans. All options granted under the SPH Plans were
granted at an exercise price equal to the market price of the SPH common stock
on the date of grant and may not be exercised more than 10 years after the
date granted. Options granted under the SPH Plans to purchase 1,072,565 shares
of SPH common stock were converted into options to purchase 1,316,252 shares
of Common Stock (with a corresponding adjustment to the exercise price) upon
completion of the Merger. Because the Merger effected a "change of control" of
SPH, each of these options became immediately exercisable.
39
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Employee Plans, the Directors' Plan, and
options granted under the SPH Plans (collectively the "Plans") as of December
31, 1997, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
NUMBER OF PRICE PER NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 7,128 $2.38-22.38 3,267 $2.38-12.49
Granted................. 5,125 11.28-20.5 4,030 10.50-22.38 3,267 $2.38-12.49
Exercised............... (402) 2.38-14.94 (21) 2.38
Forfeited............... (1,319) 2.38-20.63 (148) 2.38-14.44
------ ----------- ------ ----------- ----- -----------
Outstanding at end of
year................... 10,532 $2.38-22.38 7,128 $2.38-22.38 3,267 $2.38-12.49
Options exercisable at
year-end............... 3,489 2.38-22.38 1,489 $2.38-12.81
Available for future
grants................. 5,183 3,240 1,409
Total shares reserved
for issuance as of
December 31............ 15,715 10,368 4,676
Weighted average fair
value of options
granted during the
year................... $ 6.93 $ 5.55 $ 1.95
</TABLE>
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation." As permitted by SFAS No. 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
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- --------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............. $2,636 $(8,788) $7,756 $3,482 $1,459 $ 316
Net income (loss) per share:
Basic....................... $ 0.03 $ (0.09) $ 0.11 $ 0.05 $ 0.05 $0.01
Diluted..................... $ 0.03 $ (0.09) $ 0.10 $ 0.05 $ 0.05 $0.01
</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 1997, 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.
40
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the Company's stock options
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED OUTSTANDING WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 2.38- 2.38............ 1,142 7.64 $ 2.38 529 $ 2.38
$ 6.50- 8.15............ 1,577 8.45 7.16 1,181 7.38
$10.50-12.43............ 1,335 4.48 10.95 1,072 10.80
$12.49-13.38............ 1,321 8.08 13.23 351 13.20
$13.47-14.44............ 1,277 9.32 13.93 19 14.31
$14.56-18.38............ 1,124 9.00 15.74 259 16.45
$18.50-18.50............ 2,503 8.99 18.50 0 0.00
$18.88-22.38............ 253 8.94 20.27 78 20.40
------ ---- ------ ----- ------
$ 2.38-22.38............ 10,532 8.12 $12.63 3,489 $ 9.26
====== ==== ====== ===== ======
</TABLE>
NOTE 10--NET INCOME PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128
requires the Company to change its method of computing, presenting and
disclosing earnings per share ("EPS") information. Accordingly, all prior
period dates presented have been restated to conform to the provisions of SFAS
No. 128.
For the years ended December 31, 1997 and 1996, the computation of diluted
EPS does not include approximately 3,180,000 and 165,000 weighted average
shares, respectively, of Common Stock represented by outstanding options
because the exercise price of the options was greater than the average market
price of Common Stock during the period. In addition, on January 8, 1998,
options to purchase approximately 2.9 million shares of Common Stock were
granted under the Employee Plans at $11.375 per share.
Historical information prior to the SPH IPO in June 1995 does not include a
provision for income taxes on income of the SPH Predecessor Entities, which
were S corporations or partnerships not subject to income taxes. Accordingly,
EPS for the year ended December 31, 1995 are presented on a pro forma basis as
if all of the Company's income for the period was subject to income taxes.
NOTE 11--RELATED PARTY TRANSACTIONS
In 1996, the Company entered into a 10-year lease for a suite at Pro Player
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 had an approximate 50% ownership
interest (which was subsequently reduced to approximately 10%) in Homestead
Motor Sports Complex.
During 1997, 1996 and 1995, the Company incurred charges of approximately
$1,682,000, $983,000 and $412,000 from a company controlled by the Chief
Executive Officer of the Company for the use of airplanes.
A director of the Company is a partner of a law firm which charged the
Company fees of approximately $6,000, $54,000 and $126,000 during 1997, 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.
41
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Chief Executive Officer of the Company serves as chairman of the board
of a company from which the Company leases office space. The lease, which
expires December 31, 1998, provides for monthly payments of approximately
$6,400 plus certain additional charges, and is renewable annually. During
1997, the Company incurred charges of approximately $91,000 related to this
agreement.
Two members of the Company's Board of Directors also serve on the board of
directors of a company which performs employment related services for the
Company. During 1997 and 1996, the Company incurred charges of approximately
$126,000 and $23,000, respectively, for such services.
Borrowings from partners, officers, and stockholders during 1995 aggregated
to $7,863,000 and principal repayments aggregated to $9,246,000. The Company
incurred interest charges of $256,000 in 1995 on stockholder debt.
During 1995, the Company acquired a property site for approximately $562,000
from a partnership in which certain stockholders are partners.
NOTE 12--QUARTERLY RESULTS (UNAUDITED)
The following is a summary of quarterly operations for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $19,763 $ 29,028 $38,773 $43,236
Operating income (loss)..................... 117 (14,521) 7,961 5,675
Net income (loss)........................... 2,470 ( 9,093) 5,644 3,615
Net income (loss) per share:
Basic..................................... $ 0.03 $ (0.10) $ 0.06 $ 0.04
Diluted................................... $ 0.03 $ (0.10) $ 0.06 $ 0.04
<CAPTION>
1996
----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $ 5,594 $ 8,035 $11,923 $13,257
Operating income (loss)..................... (1,050) (188) 826 (345)
Net income.................................. 258 1,656 3,619 2,223
Net income per share:
Basic..................................... $ 0.00 $ 0.02 $ 0.04 $ 0.03
Diluted................................... $ 0.00 $ 0.02 $ 0.04 $ 0.03
</TABLE>
NOTE 13--COMMITMENTS AND CONTINGENCIES
The Company is not a party to any significant 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.
NOTE 14--SUBSEQUENT EVENTS
The Company has entered into a commitment letter (the "Commitment Letter")
with Morgan Stanley Senior Funding, Inc. ("MSSF"), with respect to which the
Company has requested and expects to receive the consent of the various
lenders under the Credit Facility (the "Consent Letter"), to amend and restate
the Credit Facility to provide for the provisions summarized below (the
"Amended Credit Facility").
42
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Amended Credit Facility will provide for the conversion of $150 million
of the amounts available under the Credit Facility into a term loan (the
"Converted Term Loan"), with the $350 million balance of the amounts available
under the Credit Facility remaining as a revolving facility (the "Revolving
Facility" and together with the Converted Term Loan, the "Converted
Facilities"). With respect to the Converted Term Loan, at least $100 million
will be drawn on the effective date of the Amended Credit Facility with the
balance drawn no later than July 31, 1998. The interest rates and maturity
dates of the Converted Facilities will remain the same as in the Credit
Facility.
The Amended Credit Facility will also provide for up to $300 million in
additional term loans (the "New Term Loans"). Subject to the terms and
conditions set forth in the Commitment Letter (including the negotiation of a
definitive amended and restated credit agreement), MSSF has agreed to provide
up to $200 million of the New Term Loans to be used for general corporate
purposes, including the construction and acquisition of extended stay hotel
properties, provided, however, that the amount of such committed New Term
Loans ("Committed Loans") will be reduced by 25% on each monthly anniversary
of the effective date of the Amended Credit Facility (the "Effective Date").
The initial amount of Committed Loans will be determined on the Effective
Date and may be borrowed on or after the Effective Date and prior to September
1, 1998. New Term Loans in excess of Committed Loans may be borrowed at any
time after the Effective Date provided that the total New Term Loans cannot
exceed $200 million before January 1, 1999. Further, to the extent that the
New Term Loans exceed $200 million, at least $275 million must be outstanding
under the Revolving Facility on the date the New Term Loans are incurred.
Committed Loans will bear interest, at the Company's option, at either a
prime rate plus 1.75% or the Eurodollar Plus Rate (as defined in the Credit
Facility) plus 2.75%. New Term Loans that are not Committed Loans will bear
interest at rates to be agreed upon.
The New Term Loans will mature on December 31, 2003, subject to maximum
principal amortization of 1% the initially funded amounts in each of the years
1999 through 2002 and payment of the balance due in four equal quarterly
payments in 2003.
The obligations of the Company and its subsidiaries under the New Term Loans
will be secured on a pari passu basis by way of a perfected first priority
security interest in the assets securing the existing Credit Facility. All
mandatory or voluntary prepayments under the Amended Credit Facility will be
applied first on a pro rata basis to the Converted Term Loan and the New Term
Loans and after such loans have been repaid to the Revolving Facility.
Availability under the Converted Facilities and the New Term Loans, as well as
the covenants and events of default, will remain on substantially the same
basis as under the Credit Facility.
The Company is currently in the process of seeking to raise approximately
$200 of gross proceeds in an offering of senior subordinated notes (the
"Notes"). The Notes are expected to mature in 2008, pay interest semiannually
in cash, be redeemable by the Company after five years from the date of their
issuance, be unsecured, and be subordinated to the Credit Facility (and if
established, the Amended Credit Facility). The Company intends to use a
portion of the proceeds from the offering of the Notes to reduce revolving
loans under the Credit Facility (or the Amended Credit Facility) and to use
the remainder to expand its business by developing additional extended stay
lodging facilities and for other general corporate purposes.
43
<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 to ESA's
Board of Directors" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 21, 1998 (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, 1997, 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
---- --- --------
<C> <C> <S>
H. Wayne Huizenga*...... 60 Chairman of the Board of Directors
George D. Johnson, Jr.*. 55 President, Chief Executive Officer, and
Director
Robert A. Brannon....... 47 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Jay S. Witzel........... 50 President and Chief Operating Officer of ESA
Management
</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 has been Chairman of
the Board of Directors of Republic Industries, Inc. ("Republic"), a
diversified company with operations in the automotive and solid waste
industries, since August 1995. Mr. Huizenga served as Chief Executive Officer
of Republic from August 1995 until October 1996 and has served as Co-Chief
Executive Officer of Republic since October 1996. Since September 1996, Mr.
Huizenga has been Chairman of the Board of Florida Panthers Holdings, Inc.
("FPHI"), a sports, entertainment, and leisure company which owns and operates
the Florida Panthers professional sports franchise and certain resort and
other facilities. Mr. Huizenga served as the Vice Chairman of Viacom, Inc.
("Viacom"), a diversified media and entertainment company, from September 1994
until October 1995. Mr. Huizenga also served as the Chairman of the Board of
Blockbuster Entertainment Group, a division of Viacom, from September 1994
until October 1995. From April 1987 through September 1994, Mr. Huizenga
served as the Chairman of the Board and Chief Executive Officer of Blockbuster
Entertainment Corporation ("Blockbuster"), during which time he helped build
Blockbuster from a 19-store chain into the world's largest video and music
retailer. In September 1994, Blockbuster merged into Viacom. In 1971, Mr.
Huizenga co-founded Waste Management, Inc. ("WMX"), which he helped build into
the world's largest integrated environmental services company, and he served
in various capacities, including the President, the Chief Operating Officer
and a director from its inception until 1984. Mr. Huizenga also owns or
controls the Miami Dolphins and Florida Marlins professional sports
franchises, as well as Pro Player Stadium, in South Florida.
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
44
<PAGE>
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. Mr. Johnson is currently the Chairman of the Board of
Directors of RTO Inc. ("RTO"), which operates 267 rental-purchase stores in 16
states. RTO expects to consummate a merger with Alrenco, Inc. ("Alrenco"), a
publicly-traded operator of rental-purchase stores, shortly after that merger
is approved by the stockholders of RTO and Alrenco at a meeting scheduled for
February 26, 1998. Upon consummation of that merger, Mr. Johnson will become
Chairman of the Board of Directors of Alrenco. Mr. Johnson also is the
managing general partner of American Storage Limited Partnership, a chain of
25 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 Energy Corporation. 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.
Jay S. Witzel has been President and Chief Operating Officer of ESA
Management, Inc. since August 1997. ESA Management, Inc. is a wholly-owned
subsidiary of the Company which develops properties and provides management
services for all of the lodging facilities owned by the Company and its
subsidiaries. In this position, Mr. Witzel is responsible for all aspects of
operations and marketing of the Company's brands. Mr. Witzel has over 20 years
of experience in managing operations within the hospitality industry. Most
recently, Mr. Witzel served as President and Chief Operating Officer of
Radisson Hospitality Worldwide, a chain of over 350 hotels. Mr. Witzel began
his career in the hospitality industry in 1971 with Hyatt Hotels Corporation
and served in progressively more responsible positions with Hyatt and other
organizations before joining Radisson in 1987 as Vice-President-Operations.
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.
45
<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>
10.2 Amended and Restated 1995 Stock Option Plan of the Company
10.5 1995 Stock Option Plan for Non-Employee Directors of the
Company
10.8 Amended and Restated 1996 Employee Stock Option Plan of
the Company
10.9(a) Employment Agreement dated as of March 18, 1996, between
ESA Development, Inc. and Harold E. Wright
10.9(b) Confidential Separation and Release Agreement dated as of
July 1, 1997 between ESA Management, Inc. and Harold E.
Wright
10.15 1997 Stock Option Plan of the Company
</TABLE>
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1997.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of January 16, 1997 by
and among the Company, Merger Sub, and Studio Plus (incorpo-
rated by reference to Exhibit 2.1 to the Company's Current Re-
port on Form 8-K dated January 16, 1997)
3.1(a) Restated Certificate of Incorporation of the Company (incorpo-
rated by reference to the corresponding exhibit to the
Company's Registration Statement on Form S-1, Registration No.
33-98452)
3.1(b) Certificate of Amendment of Restated Certificate of Incorpora-
tion of the Company dated June 4, 1997
3.1(c) Conformed copy of Certificate of Incorporation of the Company,
as amended
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration State-
ment on Form S-1, Registration No. 33-98452)
4.1 Specimen certificate representing shares of Common Stock (in-
corporated by reference to Exhibit 4.1 to the Company's Regis-
tration Statement on Form S-1, Registration No. 33-98452)
10.1 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)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.2 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)
10.3 Employment Agreement dated as of June 1, 1995 between ESA De-
velopment, Inc. and Harold E. Wright (incorporated by refer-
ence to Exhibit 10.4 to the Company's Registration Statement
on Form S-1, Registration No. 33-98452)
10.4 Stock Option Agreement dated as of June 1, 1995 between ESA
Development, Inc. and Harold E. Wright (incorporated by refer-
ence to Exhibit 10.5 to the Company's Registration Statement
on Form S-1, Registration No. 33-98452)
10.5 1995 Stock Option Plan for Non-Employee Directors of the Com-
pany (incorporated by reference to Exhibit 10.6 to the
Company's Report on Form 10-Q for the quarter ended March 31,
1996)
10.6 Aircraft Dry Lease dated June 12, 1995 between Wyoming Associ-
ates, Inc. and the Company (incorporated by reference to Ex-
hibit 10.8 to the Company's Registration Statement on Form S-
1, Registration No. 33-98452)
10.7 Aircraft Dry Lease dated June 12, 1995 between Wyoming Associ-
ates, Inc. and the Company (incorporated by reference to Ex-
hibit 10.9 to the Company's Registration Statement on Form S-
1, Registration No. 33-98452)
10.8 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)
10.9(a) Employment Agreement dated as of March 18, 1996 between ESA
Development, Inc. and Harold E. Wright (incorporated by refer-
ence to Exhibit 10.11 to the Company's Report on Form 10-Q for
the quarter ended March 31, 1996)
10.9(b) Confidential Separation Agreement and General Release dated as
of June 1, 1997 between ESA Management, Inc. and Harold E.
Wright (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended June 30,
1997)
10.10 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)
10.11 Homestead Motorsports Complex Executive Suite License Agree-
ment dated February 14, 1996 among The Homestead Motorsports
Joint Venture, Miami Motorsports Joint Venture, and the Com-
pany (incorporated by reference to Exhibit 10.13 to the
Company's Report on Form 10-Q for the quarter ended March 31,
1996)
10.12 Joe Robbie Stadium Executive Suite License Agreement dated
March 18, 1996 between Robbie Stadium Corporation and the Com-
pany (incorporated by reference to Exhibit 10.14 to the
Company's Report on Form 10-Q for the quarter ended March 31,
1996)
10.13 Credit Facility Agreement dated May 24, 1996 between the Com-
pany and CS First Boston Mortgage Capital Corporation (incor-
porated by reference to Exhibit 10.15(b) to the Company's Reg-
istration Statement on Form S-1, Registration No. 333-03373)
10.14 Aircraft Dry Lease dated December 28, 1996 between Wyoming As-
sociates, Inc. and the Company (incorporated by reference to
Exhibit 10.16 to the Company's Report on Form 10-K for the
year ended December 31, 1996)
10.15 1997 Stock Option Plan of the Company (incorporated by refer-
ence to Exhibit 10.2 to the Company's Report on Form 10-Q for
the quarter ended June 30, 1997)
10.18 Credit Agreement dated as September 26, 1997 by and among the
Company and Morgan Stanley Senior Funding, Inc., as Syndica-
tion Agent and Arranger, The Industrial Bank of Japan, Limit-
ed, as Administrative Agent, and various banks (incorporated
by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended September 30, 1997)
10.19 Sublease Agreement dated as of February 1997 by and between
Johnson Development Associates and ESA Management, Inc.
21.1 List of Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
</TABLE>
47
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF 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 FEBRUARY 19,
1998.
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 FEBRUARY 19, 1998.
<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
___________________________________________
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>
48
<PAGE>
EXHIBIT 3.1(b)
CERTIFICATE OF AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION OF
EXTENDED STAY AMERICA, INC.
Pursuant to Section 242 of the
General Corporation Law of the
State of Delaware
Extended Stay America, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Company"), does hereby certify as follows:
1. The Restated Certificate of Incorporation of the Company is hereby
amended by changing Article FOURTH thereof so that, as amended, the first
paragraph of Article FOURTH of the Restated Certificate of Incorporation of the
Company shall read in its entirety as follows:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 510,000,000 of which (i)
500,000,000 shares, par value $.01 per share, are to be of a class designated
Common Stock ("Common Stock") and (ii) 10,000,000 shares, par value $.01 per
share, are to be of a class designated Preferred Stock ("Preferred Stock")."
2. That such amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Company having adopted resolutions
setting forth such amendment and declaring its advisability, and the holders of
a majority of the outstanding stock of the Company having approved and adopted
resolutions providing for such amendment.
IN WITNESS WHEREOF, Extended Stay America, Inc. has caused this
Certificate to be signed by its Senior Vice President and attested to by its
Assistant Secretary, on this 19th day of May, 1997.
EXTENDED STAY AMERICA, INC.
/s/ Robert A. Brannon
By: ___________________________________
Robert A. Brannon
Senior Vice President
ATTEST:
/s/ Gregory R. Moxley
__________________________________
Gregory R. Moxley
Assistant Secretary
<PAGE>
EXHIBIT 3.1(c)
(Conformed copy giving effect to all
amendments since the date of this
Amended and Restated Certificate of
Incorporation)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EXTENDED STAY AMERICA, INC.
(Original Certificate of Incorporation filed October 20, 1995)
Extended Stay America, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The corporation's name is Extended Stay America, Inc. The date of
filing of the corporation's original certificate of incorporation with the
Delaware Secretary of State was January 9, 1995. The date of filing of the
corporation's first amendment to its certificate of incorporation was July 12,
1995.
2. Pursuant to and in accordance with the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware, this Restated
Certificate of Incorporation further amends the provisions of the certificate of
incorporation of the corporation and has been duly adopted by written consent of
the holders of all of the outstanding stock entitled to vote thereon.
3. The text of the corporation's certificate of incorporation, as
heretofore amended or supplemented, is hereby restated and further amended to
read in its entirety as follows:
FIRST: The name of the Corporation is: EXTENDED STAY AMERICA, INC.
(the "Corporation").
SECOND: The registered office of the Corporation in the State of
Delaware is located at Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name and address of its registered
agent is The Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, Wilmington, Delaware 19801.
THIRD: The purpose of the Corporation is to engage, directly or
indirectly, in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware, either alone or with
others through wholly or partially owned subsidiaries, as a partner (limited or
general) in any partnership, as a joint venturer in any joint venture, or
otherwise.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 510,000,000 of which (i)
500,000,000 shares, par
<PAGE>
value $.01 per share, are to be of a class designated Common Stock ("Common
Stock") and (ii) 10,000,000 shares, par value $.01 per share, are to be of a
class designated Preferred Stock ("Preferred Stock")."
4.1 Common Stock Provisions.
4.1.1 Dividend Rights. Subject to the provisions of applicable law
and the preferences of the Preferred Stock, the holders of the Common Stock
shall be entitled to receive dividends at such times and in such amounts as
may be determined by the Board of Directors.
4.1.2 Voting Rights. The holders of Common Stock shall have one vote
for each share on each matter submitted to a vote or consent of the
stockholders of the Corporation.
4.1.3 Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and the preferential amounts to which the
holders of the Preferred Stock shall be entitled, the holders of the Common
Stock shall be entitled to share ratably in the remaining assets of the
Corporation.
4.2 Preferred Stock Provisions.
4.2.1 The Preferred Stock may be issued from time to time in one or
more series. Subject to limitations prescribed by law and the provisions of
this Restated Certificate of Incorporation or any amendment hereto, authority is
expressly granted to the Board of Directors to authorize the issue of one or
more series of Preferred Stock without any vote or other action by the
stockholders of the Corporation, and to fix by a Preferred Stock Designation the
voting powers, designations, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations and restrictions
thereof to the full extent now or hereafter permitted by law, including but not
limited to the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate (or method of determining such rate) on the
shares of that series, the conditions and dates upon which such
dividends shall be payable, whether such dividends shall be
cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series to the dividends payable on any other class or series of stock
of the Corporation;
2
<PAGE>
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights;
(d) Whether or not the shares of that series shall be convertible into
or exchangeable for shares of any other class or classes or of any
other series of any class or classes of stock of the Corporation, or
convertible into or exchangeable for other securities of the
Corporation or securities of any other corporation, partnership or
other person or entity, and, if so, the times, prices, rates,
adjustments, and other terms and conditions of such conversion or
exchange;
(e) Whether or not the shares of that series shall be redeemable, in
whole or in part, at the option of the Corporation or at the option of
the holder thereof or upon the happening of a specified event, and, if
so, the times, prices and other terms and conditions of such
redemption;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount
of such sinking fund;
(g) The rights of the shares of that series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, with respect
to payment of amounts payable in such event on shares of that series
to amounts payable in such event on shares of any other class or
series of stock of the Corporation; and
(h) Any other relative rights, preferences and limitations of that
series.
4.2.2 All shares of any one series of Preferred Stock shall be
identical except as to dates of issue and the dates from which dividends on
shares of the series issued on different dates shall cumulate (if cumulative).
4.2.3 If upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the assets available for distribution to
holders of shares of Preferred Stock of all series shall be insufficient to pay
such holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
4.3 Other Provisions.
3
<PAGE>
4.3.1 The Board of Directors shall have authority to authorize the
issuance, from time to time without any vote or other action by the stockholders
of the Corporation, of any or all shares of stock of the Corporation of any
class at any time authorized, and any securities convertible into or
exchangeable for any such shares, in each case to such persons and for such
consideration and on such terms as the Board of Directors from time to time in
its discretion lawfully may determine; provided, however, that the consideration
for the issuance of shares of stock of the Corporation having par value shall
not be less than such par value. Shares so issued, for which the consideration
has been paid to the Corporation, shall be fully paid stock, and the holders of
such stock shall not be liable to any further call or assessments thereon.
4.3.2 No holder of stock of any class or series of the Corporation,
nor of any security convertible into or exchangeable for stock of any class or
series of the Corporation, nor of any warrant, option or right to purchase,
subscribe for or otherwise acquire stock of any class or series of the
Corporation, whether now or hereafter authorized, shall, as such holder, have
any preemptive right whatsoever to purchase, subscribe for or otherwise acquire
stock of any class or series of the Corporation, or any security convertible
into or exchangeable for, or any warrant, option or right to purchase, subscribe
for or otherwise acquire, stock of any class or series of the Corporation,
whether now or hereafter authorized. Nothing in this Section 4.3.2 shall be
deemed to eliminate or limit the ability of the Corporation to grant by contract
a preemptive right to purchase, subscribe for or otherwise acquire stock of any
class or series of the Corporation or any security convertible into or
exchangeable for, or any warrant, option or right to purchase, subscribe for or
otherwise acquire, stock of any class or series of the Corporation, whether now
or hereafter authorized.
4.3.3 The Board of Directors may set a record date, in the manner and
for the purposes authorized in the bylaws of the Corporation, with respect to
shares of stock of the Corporation of any class or series.
FIFTH:
5.1 From and after the date of the closing of the initial public
offering of the Common Stock, no action required to be taken or which may be
taken at any annual or special meeting of stockholders of the Corporation may be
taken without a meeting, and the power of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied. Meetings
of stockholders may be held within or outside the State of Delaware, as the
bylaws may provide.
5.2 Special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board or by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors.
5.3 At a meeting of the stockholders of the Corporation, only such
business shall be conducted which has been properly brought before the meeting.
To be properly brought before a meeting of the stockholders, business must be
(i) specified in the notice of meeting (or any supplement thereto) given by, or
at the direction of, the Board of Directors or (ii) otherwise
4
<PAGE>
properly brought before the meeting by or at the direction of the Board of
Directors or by a stockholder. For business to be properly brought before a
meeting by a stockholder, the stockholder must have given timely notice of the
business to the Corporate Secretary of the Corporation. To be timely, a
stockholder's notice must be in writing delivered to or mailed, postage prepaid,
and received by the Corporate Secretary not less than 60 days nor more than 120
days prior to the meeting; provided, however, that if less than 65 days' notice
or prior public disclosure of the date of the meeting is given to stockholders,
notice by the stockholder to be timely must be received by the Corporate
Secretary not later than the close of business on the seventh day following the
day on which notice of the date of the meeting was mailed or public disclosure
was made. For each matter the stockholder proposes to bring before the meeting,
the notice to the Corporate Secretary shall include (i) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting the business at the meeting, (ii) the name and address, as they
appear on the Corporation's books, of the stockholder proposing the business,
(iii) the class and number of shares of the Corporation which are beneficially
owned by the stockholder and (iv) any material interest of the stockholder in
such business. Notwithstanding anything in the Corporation's bylaws to the
contrary, no business shall be conducted at the meeting except in accordance
with the procedures set forth in this Section 5.3. The chairman of a meeting
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting in accordance with the provisions of
this Section 5.3. If the chairman determines that business was not properly
brought before the meeting in accordance with the provisions of this Section
5.3, the business shall not be transacted.
5.4 Notwithstanding any other provisions of this Restated Certificate
of Incorporation or any provision of law which might permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any particular
class or series of the capital stock of the Corporation required by law, this
Restated Certificate of Incorporation or any amendment hereto or any Preferred
Stock Designation, the affirmative vote of the holders of at least 66-2/3% of
the voting power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote on all matters submitted to the stockholders of the
Corporation generally (the "Voting Stock") shall be required to alter, amend,
repeal, or adopt any provision inconsistent with this Article FIFTH.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its Stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or Stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the Stockholders or class of Stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors,
5
<PAGE>
and/or of the Stockholders or class of Stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the Stockholders or class of
Stockholders, of this Corporation, as the case may be, and also on this
Corporation.
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH:
8.1 The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. The number of the directors
of the Corporation shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors of the
Corporation, except that the minimum number of directors shall be fixed at no
less than 3 and the maximum number of directors shall be fixed at no more than
15.
8.2 Nominations for election to the Board of Directors of the
Corporation at a meeting of stockholders may be made by the Board of Directors,
on behalf of the Board of Directors by any nominating committee appointed by the
Board of Directors, or by any stockholder of the Corporation entitled to vote
for the election of directors at the meeting. Nominations, other than those
made by or on behalf of the Board of Directors, shall be made by notice in
writing delivered to or mailed, postage prepaid, and received by the Corporate
Secretary not less than 60 nor more than 120 days prior to any meeting of
stockholders called for the election of directors; provided, however, that if
less than 65 days notice or prior public disclosure of the date of the meeting
is given to stockholders, the nomination must be received by the Corporate
Secretary not later than the close of business on the seventh day following the
day on which notice of the date of the meeting was mailed or public disclosure
was made. The notice shall set forth: (i) the name and address, as they appear
on the Corporation's books, of the stockholder who intends to make the
nomination; (ii) the name, age, business address and, if known, residence
address of each nominee; (iii) the principal occupation or employment of each
nominee; (iv) the class and number of shares of stock of the Corporation which
are beneficially owned by each nominee and by the nominating stockholder; (v)
any other information concerning the nominee that must be disclosed of nominees
in a proxy solicitation pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended; and (vi) the executed consent of each nominee to being
named in the proxy statement for such proxy solicitation as a nominee, and to
serve as a director of the Corporation, if elected. The chairman of the meeting
of stockholders may, if the facts warrant, determine that a nomination was not
made in accordance with the foregoing procedures, and if the chairman should so
determine, the chairman shall so declare to the meeting and the defective
nomination shall be disregarded.
8.3 Newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the affirmative vote of a majority of the directors then in office, even though
less than a quorum, or by the sole remaining director, as the
6
<PAGE>
case may be. A director shall hold office until the first annual meeting of
stockholders next succeeding their election and until such director's successor
shall have been elected and qualified. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
8.4 Notwithstanding the foregoing Sections 8.1, 8.2 and 8.3 of this
Article EIGHTH, whenever the holders of any one or more classes or series of
Preferred Stock issued by the Corporation shall have the right, voting
separately by class or series, to elect directors at an annual or special
meeting of stockholders, (i) the election, filling of vacancies and other
features of such directorships shall be governed by the terms of this Restated
Certificate of Incorporation or the Preferred Stock Designation applicable to
such class or series of Preferred Stock, (ii) the then authorized number of
directors of the Corporation shall be increased by the number of additional
directors to be elected, and (iii) the directors so elected shall serve a term
which shall expire at the annual meeting of stockholders next succeeding their
election or as otherwise specified by the terms of this Restated Certificate of
Incorporation or the Preferred Stock Designation applicable to such class or
series.
8.5 Unless and except to the extent that the bylaws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
8.6 Notwithstanding any other provisions of this Restated Certificate
of Incorporation or any provisions of law which might permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any particular
class or series of the capital stock of the Corporation required by law, this
Restated Certificate of Incorporation or any amendment hereto or any Preferred
Stock Designation, the affirmative vote of the holders of at least 66-2/3% of
the voting power of all of the then outstanding shares of Voting Stock, voting
together as a single class, shall be required to alter, amend, repeal, or adopt
any provision inconsistent with, this Article EIGHTH.
8.7 In furtherance, and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(a) to adopt, amend or repeal the bylaws of the Corporation,
subject to such restrictions upon the exercise of such power as may be imposed
by this Restated Certificate of Incorporation or any amendment hereto;
(b) to authorize and cause to be executed mortgages and liens
upon the whole or any part of the real and personal property of the Corporation,
without any action of or by the stockholders of the Corporation, except as
otherwise provided by statute; and
(c) to set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose or to
abolish any such reserve in the manner in which it was created.
7
<PAGE>
The Corporation may in its bylaws confer powers upon its Board of
Directors in addition to the foregoing, and in addition to the powers and
authorities expressly conferred upon it by statute.
8.8 The Board of Directors shall have power from time to time to fix
and to determine and vary the amount of the working capital of the Corporation
and to direct and determine the use and disposition of any surplus or net
profits over and above the capital as determined pursuant to, and subject to,
the provisions of the General Corporation Law of Delaware; and in its discretion
the Board of Directors may use and apply any such surplus or accumulated profits
in purchasing or acquiring bonds, debentures, notes, or other obligations or
securities of the Corporation or shares of its own Stock of any class so far as
may be permitted by law, to such extent and in such manner and upon such terms
as the Board of Directors shall deem expedient, but any such bonds, debentures,
notes, obligations, securities or stock so purchased or acquired (together with
any stock or securities acquired in satisfaction of a debt or otherwise), may be
resold. Nothing, however, shall be held to limit the general power of the
Corporation to apply any other funds or assets to the purchase or acquisition or
retirement of its stock, bonds, debentures, notes or other obligations or
securities.
8.9 The Board of Directors, subject to the applicable provisions of
the General Corporation Law of Delaware, may from time to time determine whether
and to what extent, and at what times and places and under what conditions and
regulations the accounts and books of the Corporation or any of them shall be
open to the inspection of the stockholders; and no stockholder shall have any
right to inspect any account, book or document of the Corporation, except as
conferred by law or as authorized by the Board of Directors or by resolutions of
the Stockholders.
8.10 The books of the Corporation may be kept within or without the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors. Elections of directors need not be by written ballot
unless the Bylaws of the Corporation shall so provide.
8.11 The Board of Directors may determine, from time to time, the
amount of compensation which shall be paid to its members. The Board of
Directors shall also have power, in its discretion, to provide for and to pay
directors rendering unusual or exceptional services to the Corporation special
compensation appropriate to the value of such services as determined by the
Board of Directors from time to time.
NINTH:
9.1 No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such director as a director. Notwithstanding the foregoing sentence, a
director shall be liable to the extent provided by applicable law (i) for breach
of the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware
General Corporation
8
<PAGE>
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. No amendment to or repeal of this Section 9.1 shall apply to
or have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions prior to such amendment
or repeal.
9.2 The Corporation shall indemnify, to the fullest extent authorized
or permitted and in the manner provided by law, any person made, or threatened
to be made, a party to any action, suit, or proceeding (whether civil, criminal,
or otherwise) by reason of the fact that he or she or a person of whom he or she
is the legal representative is or was a director or officer of the Corporation
or by reason of the fact that such director or officer, at the request of the
Corporation, is or was serving any other corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise, in any capacity.
Nothing contained herein shall affect any rights to indemnification to which
employees and agents other than directors and officers may be entitled by law,
and the Corporation may indemnify such employees and agents to the fullest
extent and in the manner permitted by law. The rights to indemnification set
forth in this Section 9.2 shall not be exclusive of any other rights to which
any person may be entitled under any statute, provision of this Restated
Certificate of Incorporation, bylaw, agreement, contract, vote of stockholders
or disinterested directors, or otherwise. The Corporation also is authorized to
enter into contracts of indemnification.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation in
the manner now or hereafter prescribed by statute, and all rights conferred upon
Stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, Extended Stay America, Inc., has caused its
corporate seal to be hereunto affixed and this Restated Certificate of
Incorporation to be signed by its Chairman and attested by its Corporate
Secretary this 20th day of October, 1995.
EXTENDED STAY AMERICA, INC.
------------------------------------
Robert A. Brannon
Senior Vice President
Attest:
- ----------------------------
Gregory R. Moxley
Assistant Secretary
9
<PAGE>
STATE OF SOUTH CAROLINA )
) SUBLEASE AGREEMENT
COUNTY OF SPARTANBURG )
This Sublease Agreement is made as of the ____ day of February, 1997 by
and between Johnson Development Associates, Inc., a South Carolina Corporation
herein referred to as "Sublessor" and ESA Management, Inc. hereinafter referred
to as "Sublessee".
Bell Hill, LLC is the successor in interest to Bell Hill Associates,
hereinafter referred to as "Landlord". On January 30, 1990, Landlord did lease a
portion of the third floor of the Bell Office Building III at 961 East Main
Street, Spartanburg, SC to WJB Video Limited Partnership as evidenced by copy of
said lease which is attached hereto with four amendments and made a part hereof
and referenced hereafter as "Lease Agreement".
Subsequently, WJB Video Limited Partnership through its affiliated
company, Blockbuster Video, Inc. did reduce its presence in Bell Hill and is
desirous of subleasing all of the space that it occupied on the third floor in
accordance with the above referenced Lease Agreement. That space is hereafter
defined as "Premises".
A Sublease Agreement (the "WJB Sublease Agreement") was entered into
between WJB Video Limited Partnership and Johnson Development Associates, Inc.
on August 30, 1996 wherein Johnson Development obligated itself to sublease all
of the third floor not presently occupied by it. Such a sub-Sublease is
anticipated under the provision of Section 5A of the WJB Sublease Agreement.
NOW THEREFORE, Johnson Development Associates, Inc. as Sublessor and ESA
Management, Inc. do hereby agree as follows:
1. The Sublessor hereby subleases to Sublessee the Premises
described in attached Exhibit "A" upon the conditions and terms set forth
hereafter.
2. The term of this sublease shall commence October 21, 1996 and
shall continue in full force and effect until December 31, 1997. Sublessee shall
have the option of extending this sublease for an additional twelve (12) month
period each year, throughout the term of the WJB Sublease Agreement, on the same
terms and conditions provided for herein, by sending written notice to Sublessor
no later than October 1st of each succeeding year. By way of example, if
Sublessee wishes to extend the term of this sublease to December 31, 1998, it
must provide written notice to Sublessor no later than October 1, 1998.
3. (a) Sublessee shall pay to Sublessor a base monthly rent
calculated by multiplying $9.55 per rentable square foot of the Premises. Said
amount is set forth in attached Schedule A. In addition to the base monthly
rent, Sublessee shall pay, as additional rent, its prorata share of any and all
common area charges as defined under the Lease Agreement. Such amount shall be
paid monthly.
(b) It is understood that this sublease is a triple net
sublease and that Sublessee's prorata share of any and all cost that would be
payable by Johnson Development Associates, Inc. as Sublessor and/or WJB Video
Limited Partnership for the Premises shall be borne by Sublessee as of the
commencement date.
-1-
<PAGE>
(c) All rent, both base and the prorata contribution to CAM, shall be
due and payable on or before the first day of each month in advance to Sublessor
at the address stated below. Rent for any period less one month shall be
apportioned based on the number of days in that month.
(d) In the event of late payment, Sublessor shall be entitled to a late
charge of two percent (2%) of the amount of the monthly rent if not received by
Sublessor on or before the fifth day of each month.
4. Sublessee shall use the Premises solely for general office use and
for no other purpose.
5. Sublessee shall not, by operation of law or otherwise, transfer,
sign, sublet, enter into license agreement, mortgage or hypothecate this
sublease or Sublessee's interest in the Premises without first procuring the
prior written consent of Bell Hill, LLC, WJB Video Limited Partnership and
Johnson Development Associates, Inc. which consent shall not be unreasonably
withheld or delayed. The attempted transfer, assignment, etc. without such
permission shall be void and shall confer no rights upon any third person. In
the event of a permitted sublease or assignment, the Sublessee shall not be
relieved from any covenant or obligation for the balance of the sublease term.
Acceptance of rent by Sublessor from any third party or entity shall not be
deemed a waiver by Sublessor of any provision hereof. Sublessee agrees to
reimburse Sublessor for any reasonable fees incurred in conjunction with the
processing and documentation of any such transfer, assignment, subletting,
licensing, changing ownership, mortgage or hypothecation of this sublease.
Sublessee shall have the absolute right to sublet, assign or otherwise transfer
its interest in this sublease to any parent or operating subsidiary of
Sublessee, or subsidiary of the parent of Sublessee, or to a corporation with
which Sublessee may merge or consolidate, or to any entity controlled by George
Dean Johnson, Jr., without the approval of Sublessor, WJB Video Limited
Partnership or Bell Hill, LLC. This sublease shall contain no provision
restricting or referring in any manner to a change in control or change in
shareholders, directors, management or organization of Sublessee, or to the
issuance, sale, purchase or disposition of the shares of Sublessee.
6. Sublessee agrees to take the Premises in "as is" condition.
Sublessee has inspected and is fully familiar with the condition of the
Premises and Sublessee's taking of possession shall constitute acknowledgment
that the Premises are in good condition and without need of repair. Sublessor
makes no representations or warranties with regard to any equipment or fixtures.
7. Except as otherwise specifically provided for herein, Sublessee
agrees to be bound by the terms of Paragraph 9, 10, 11, 12, 13, 14, 15, 16 of
the Lease Agreement. Further, it makes the covenants and representations stated
in Paragraph 17, 20, 24 of the Lease Agreement.
8. The default provisions of Paragraph 18 and 19 shall be in full force
and effect.
9. All notices provided for under this Sublease Agreement, under the
Johnson Development Sublease Agreement, and the original Lease Agreement shall
be in writing and sent by Express Courier Service or by Registered or Certified
Mail, Return Receipt Requested to Johnson Development Associates, Inc., P.O. Box
3524, 961 East Main Street, Spartanburg, SC 29304, Attn: A. Foster Chapman, and
to WJB Video, LP, c/o Viacom Realty Corporation, 1515 Broadway, New York, NY
10036-5794, Attn: Mr. David H. Williamson, with a copy to Viacom, Inc., 1515
Broadway, New York, NY 10036-5794, Attn: General Council, as to Sublessee,
Extended Stay America, Inc., 450 East Las Olas Blvd., Suite 1100, Ft.
Lauderdale, FL 33301 Attn: Development Counsel.
10. All of the terms and conditions of the referenced and attached
documents are fully incorporated herein except as may be expounded upon herein
and the parties shall be bound to such previous documents.
-2-
<PAGE>
11. In the case any one or more of the provisions contained in this
Sublease shall for any reason be held invalid, illegal, or unenforceable, such
unenforceability shall not effect any other provision of this Sublease, the
Sublease shall be construed as if such provision had not been contained herein.
12. Sublessee represents and warrants that this Sublease has been
duly authorized and the party signing on behalf of Sublessee is so authorized to
execute this Sublease.
13. Sublease may not be modified or amended except by written
agreement signed by the parties hereto.
14. This agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute one in
the same instrument.
In witness whereof, the parties have hereunto set their hands and seals
on the date and year first stated above.
SUBLESSOR
Johnson Development Associates, Inc.
By: /s/ A. Foster Chapman
---------------------------------
A. Foster Chapman, President
SUBLESSEE
ESA Management, Inc.
By: /s/ Shawn R. Ruben
---------------------------------
Its: Shawn R. Ruben
---------------------------------
Vice President - Development
This Sublease Agreement is hereby consented to by:
BELL HILL, LLC
By: /s/ George Dean Johnson, Jr.
-----------------------------------
George Dean Johnson, Jr., President
WJB VIDEO LIMITED PARTNERSHIP
By: Blockbuster Video, Inc., General Partner
By: (not required)
-----------------------------------
David H. Williamson, Vice President - Real Estate
-3-
<PAGE>
SCHEDULE "A"
RENTAL AMOUNT
Rental Calculations
- -------------------
<TABLE>
<CAPTION>
Base Square Common Adjusted *Rent/ *Total Annual
Rent Foot Area Factor Rentable Area Sq. Ft. Rental Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Storage 2,590 1.1642 3,015 9.55 = 28,795
Extended Stay 5,362 1.1642 6,243 9.55 = 59,620
Johnson Development 5,400.5 1.1642 6,287 9.55 = 60,040
-------- ------ --------
13,352.5 15,545 $148,455
* Does not include CAM charges
------------------------------
Best Estimate with CAM Contribution
- -----------------------------------
<CAPTION>
Adjusted CAM
Rentable Area Est. Per Sq. Ft. CAM
---------------- -------------------- -----------
<S> <C> <C> <C>
American Storage 3,015 x 4.87 = 14,683
Extended Stay 6,243 x 4.87 = 30,403
Johnson Development 6,287 x 4.87 = 30,618
------
75,704
Rental Obligation
- -----------------
<CAPTION>
Base CAM
Rental Contribution Total Monthly
------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C>
American Storage 28,795 + 14,683 43,478 3,623
Extended Stay 59,620 + 30,403 90,023 7,502
Johnson Development 60,040 + 30,618 90,658 7,555
-----
Monthly Total: 18,680
------
<CAPTION>
Rental Obligation After Application of Blockbuster Credit of $2,833.33/Month
- ----------------------------------------------------------------------------
Adjusted
% Credit Monthly Obligation
----------------------- ----------- --------------
<S> <C> <C> <C> <C>
American Storage 3,623 19.40 - 549 + 3,623 = 3,074
Extended Stay 7,502 40.16 - 1,138 + 7,502 = 6,364
Johnson Development 7,555 40.44 - 1,146 + 7,555 = 6,409
------ ------ -------
18,680 100.00 $15,847
</TABLE>
<PAGE>
EXHIBIT 21.1
EXTENDED STAY AMERICA, INC.
Subsidiaries of the Company
EAS Management, Inc., Delaware
EAS West, Inc., Nevada
ESA International, Inc.,Delaware
Studio Plus Hotels, Inc., Delaware
Studio Plus Properties, Inc., Virginia
ESA 0100, INC., South Carolina
ESA 0102, INC., Georgia
ESA 0106, INC., North Carolina
ESA 0115, INC., South Carolina
ESA 0121, INC., Tennessee
ESA 0123, INC., Alabama
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 0153, INC., Illinois
ESA 0155, INC., Alabama
ESA 0161, INC., North Carolina
ESA 0163, INC., Tennessee
ESA 0172, INC., Missouri
ESA 0174, INC., Florida
ESA 0175, INC., Virginia
ESA 0180, INC., South Carolina
ESA 0186, INC., North Carolina
ESA 0201, INC., North Carolina
ESA 0206, INC., North Carolina
ESA 0223, INC., South Carolina
ESA 0231, INC., North Carolina
ESA 0232, INC., North Carolina
ESA 0247, INC., Indiana
ESA 0280, INC., North Carolina
ESA 0291, INC., Virginia
ESA 0295, INC., Kentucky
ESA 0302, INC., Florida
ESA 0303, INC., Florida
ESA 0305, INC., Tennessee
ESA 0309, INC., Delaware
ESA 0311, INC., Colorado
ESA 0315, INC., Tennessee
ESA 0316, INC., Arizona
ESA 0317, INC., Arizona
<PAGE>
ESA 0325, INC., Kentucky
ESA 0328, INC., Florida
ESA 0331, INC., Mississippi
ESA 0335, INC., Oregon
ESA 0341, INC., Washington
ESA 0352, INC., Utah
ESA 0355, INC., Delaware
ESA 0356, INC., Delaware
ESA 0361, INC., Delaware
ESA 0362, INC., Utah
ESA 0370, INC., North Carolina
ESA 0371, INC., North Carolina
ESA 0373, INC., Georgia
ESA 0379, INC., Utah
ESA 0381, INC., Florida
ESA 0382, INC., Georgia
ESA 0396, INC., Delaware
ESA 0399, INC., Delaware
ESA 0410, INC., Virginia
ESA 0413, INC., New Mexico
ESA 0417, INC., North Carolina
ESA 0418, INC., Washington
ESA 0450, INC., Tennessee
Extended Stay 0453, INC.Pennsylvania
ESA 0455, INC., New Jersey
ESA 0478, INC., Virginia
ESA 0479, INC., New Jersey
ESA 0480, INC., Virginia
ESA 0486, INC., Delaware
ESA 0494, INC., Delaware
ESA 0501, INC., New York
ESA 0503, INC., New York
ESA 0504, INC., New York
Extended Stay 0507, INC.Pennsylvania
ESA 0510, INC., Illinois
ESA 0521, INC., Kansas
ESA 0522, INC., Missouri
ESA 0525, INC., Illinois
ESA 0526, INC., Indiana
ESA 0527, INC., Michigan
ESA 0530, INC., Illinois
ESA 0532, INC., Illinois
ESA 0541, INC., Illinois
Extended Stay 0547, INC.Pennsylvania
ESA 0552, INC., Michigan
ESA 0553, INC., Ohio
ESA 0554, INC., New York
ESA 0555, INC., Ohio
ESA 0557, INC., Wisconsin
<PAGE>
ESA 0561, INC., Missouri
ESA 0562, INC., Missouri
ESA 0564, INC., Ohio
ESA 0565, INC., Ohio
ESA 0574, INC., New Jersey
ESA 0576, INC., Massachusetts
ESA 0590, INC., Ohio
ESA 0600, INC., Michigan
ESA 0629, INC., Kentucky
ESA 0640, INC., Illinois
ESA 0646, INC., New Jersey
ESA 0658, INC., Maryland
ESA 0659, INC., Kentucky
ESA 0660, INC., Illinois
ESA 0670, INC., Michigan
ESA 0675, INC., Michigan
ESA 0677, INC., Illinois
ESA 0679, INC., Wisconsin
ESA 0680, INC., Michigan
ESA 0681, INC., Ohio
ESA 0691, INC., Missouri
ESA 0699, INC., Maryland
ESA 0700, INC., Missouri
ESA 0701, INC., Missouri
ESA 0733, INC., Minnesota
ESA 0734, INC., Minnesota
ESA 0737, INC., Minnesota
ESA 0745, INC., Minnesota
ESA 0752, INC., Illinois
ESA 0753, INC., Illinois
ESA 0765, INC., New York
ESA 0767, INC., Maryland
ESA 0780, INC., Michigan
ESA 0785, INC., Wisconsin
ESA 0788, INC., Georgia
ESA 0789, INC., Florida
ESA 0802, INC., Washington
ESA 0805, INC., Washington
ESA 0806, INC., Washington
ESA 0810, INC., Washington
ESA 0815, INC., Washington
ESA 0817, INC., Washington
ESA 0824, INC., Washington
ESA 0828, INC., Idaho
ESA 0831, INC., Washington
ESA 0838, INC., Oregon
ESA 0851, INC., Arizona
ESA 0857, INC., Delaware
ESA 0858, INC., Nevada
<PAGE>
ESA 0859, INC., Nevada
ESA 0860, INC., Nevada
ESA 0861, INC., Nevada
ESA 0869, INC., Florida
ESA 0876, INC., Oklahoma
ESA 0877, INC., Oklahoma
ESA 0884, INC., Florida
ESA 0885, INC., Colorado
ESA 0886, INC., Texas
ESA 0898, INC., Delaware
ESA 0901, INC., Colorado
ESA 0902, INC., Arizona
ESA 0903, INC., Delaware
ESA 0911, INC., Delaware
ESA 0916, INC., Delaware
ESA 0919, INC., Delaware
ESA 0931, INC., Delaware
ESA 0932, INC., Delaware
ESA 0936, INC., Delaware
ESA 0939, INC., Delaware
ESA 0942, INC., Arizona
ESA 0976, INC., Delaware
ESA 0977, INC., Arizona
ESA 0979, INC., Arizona
ESA 0981, INC., Delaware
ESA 0985, INC., Louisiana
ESA 0986, INC., Louisiana
ESA 0990, INC., Georgia
ESA 0991, INC., Georgia
ESA 0992, INC., Georgia
ESA 0993, INC., Georgia
ESA 0994, INC., Colorado
ESA 0995, INC., Kansas
ESA 0996, INC., Georgia
ESA 1500, INC., North Carolina
ESA 1501, INC., Georgia
ESA 1502, INC., Georgia
ESA 1514, INC., North Caroina
ESA 2503, INC., Maryland
ESA 4012, INC., Illinois
ESA 6000, INC., Louisiana
ESA 6002, INC., Louisiana
ESA 6005, INC., Texas
ESA 6012, INC., Texas
ESA 6028, INC., Texas
ESA 6029, INC., Texas
ESA 6037, INC., Texas
ESA 6074, INC., Texas
ESA 7003, INC., Oregon
<PAGE>
ESA 7010, INC., Washington
ESA 7512, INC., New Mexico
ESA 8515, INC., Arizona
ESA 0296, INC., Kentucky
ESA C1, INC., Delaware
ESA 0414, INC., Arizona
ESA 0706, INC., Missouri
ESA 0795, INC., Florida
ESA 6022, INC., Texas
ESA 6027, INC., Texas
ESA 6036, INC., Texas
ESA 6057, INC., Texas
ESA 6072, INC., Texas
ESA 7508, INC., Colorado
ESA 7513, INC., Colorado
ESA 7519, INC., New Mexico
<PAGE>
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. 333-100), on Form S-3 (No.
333-21625), on Form S-3 (No. 333-32345), on Form S-8 (No. 333-10255), on Form
S-8 (No. 333-25639), and on Form S-8 (No. 333-43427) of our report dated
February 13, 1998 on our audits of the consolidated financial statements of
Extended Stay America, Inc. as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996, and 1995, which report is included in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Spartanburg, South Carolina
February 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 3,213 224,325 0
<SECURITIES> 0 0 0
<RECEIVABLES> 3,651 1,665 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 19,058 229,509 0
<PP&E> 1,074,365 441,152 0
<DEPRECIATION> 32,188 12,403 0
<TOTAL-ASSETS> 1,070,891 668,435 0
<CURRENT-LIABILITIES> 82,839 31,738 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 956 837 0
<OTHER-SE> 833,703 627,877 0
<TOTAL-LIABILITY-AND-EQUITY> 1,070,891 668,435 0
<SALES> 0 0 0
<TOTAL-REVENUES> 130,800 38,809 16,768
<CGS> 0 0 0
<TOTAL-COSTS> 60,391 16,560 6,706
<OTHER-EXPENSES> 71,177 23,006 6,728
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 507
<INCOME-PRETAX> 8,474 12,987 2,685
<INCOME-TAX> 5,838 5,231 1,217
<INCOME-CONTINUING> 2,636 7,756 1,468
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 (185)
<CHANGES> 0 0 0
<NET-INCOME> 2,636 7,756 1,283
<EPS-PRIMARY> 0.03 0.11 0
<EPS-DILUTED> 0.03 0.10 0
</TABLE>
