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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
____________
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________ to ______________
Commission file number 0-21509
HOMEGATE HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-0511313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Congress Avenue, Suite 2600
Austin, Texas 78701
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (512) 477-6400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
(Title of Class)
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 the 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. [X]
The aggregate fair market value of the voting stock held by non-affiliates
of the registrant as of March 29, 1997 was approximately $30,396,310. As of
March 29, 1997, there were 10,725,000 outstanding shares of Common Stock of the
Company.
Portions of the registrant's Proxy Statement to be furnished to
stockholders in connection with its 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
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PART I
Item 1. BUSINESS
Homegate Hospitality, Inc.'s (together with its predecessors, the
"Company") goal is to become a national provider of high quality extended-stay
hotels in strategically selected markets located throughout North America. The
Company is rapidly developing a chain of midprice extended-stay hotels under the
HOMEGATE Studios & Suites brand name to capitalize on what management believes
is a large and underserved market for extended-stay accommodations. This market
includes business travelers, professionals on temporary work assignments,
persons between domestic situations, and persons relocating or purchasing a
home, who often desire accommodations for an extended duration. As of December
31, 1996, the Company owned seven hotels and had ten more under development.
Additionally, the Company has 20 sites under contract with letters of intent and
other arrangements. The Company's objective is to have approximately 65
extended-stay hotels open or under construction by December 31, 1998.
The Company was recently founded by management and by affiliates of
the following three entities: Trammell Crow Residential Company ("TCR"), one of
the nation's leading developers of multi-family housing units with 22 regional
offices; Greystar Capital Partners, L.P. ("Greystar"), a private investment
company with substantial multi-family housing development and construction
expertise; and Crow Realty Investors d/b/a Crow Investment Trust ("Crow"), the
real estate investment arm of the various descendants of Mr. and Mrs. Trammell
Crow and various corporations, partnership trusts and other entities
beneficially owned or controlled by such persons known collectively as the Crow
Family. In TCR, Greystar, and Crow, the Company brings together extensive
experience in developing, constructing and managing properties on a national
scale and in structuring, financing and executing national real estate
investment programs. The Company has entered into a master development
agreement with a partnership (the "Developer Partnership"), comprised of TCR and
Greystar (the "Developer Affiliates"), to provide site selection, construction
and development services to the Company as it pursues its initial objective to
open or begin construction on approximately 65 hotels by December 31, 1998 (the
"Initial Hotel Program"). Management believes the Developer Affiliates'
expertise and local market presence will significantly enhance the Company's
ability to execute its Initial Hotel Program, while minimizing the Company's
development costs and administrative overhead.
The Company also has entered into a master management assistance
agreement (the "Management Agreement") with a subsidiary of Wyndham Hotel
Corporation (together with its predecessors and affiliates "Wyndham"), which
owns, operates or franchises more than 70 hotels in North America, to manage the
Company's hotels pursuant to 10-year management contracts. Management believes
that Wyndham's experience in managing and operating one of the nation's leading
hotel chains will facilitate the Company's ability to provide consistently high
quality accommodations and services to its guests, and that access to Wyndham's
resources will reduce the Company's overhead expenses during its initial phase
of operations. Although Wyndham owns no common stock, par value $.01 per share
(the "Common Stock"), of the Company, over 48% of Wyndham's common stock is
owned by the Crow Family. TCR, Greystar, Crow and their affiliates own
approximately 60% of the outstanding Common Stock. See "Security Ownership of
Beneficial Owners and Management."
The Company's product strategy is to develop a well-recognized
national brand under the HOMEGATE Studios & Suites name by offering consistent,
high quality accommodations in a standard format, providing much of the value
offered by limited service hotels with many of the added features and comforts
of apartment living. HOMEGATE Studios & Suites hotels feature three functional
room configurations, each with a fully-equipped kitchen, upscale residential-
quality furnishings and accessories, and separated cooking, living, and sleeping
areas. In addition, other amenities, such as weekly maid service, twice-weekly
linen service, resident laundry facilities, direct telephone service with voice
mail messaging and dataport capabilities, cable T.V., a business center and an
exercise facility are also offered. See "--Product Concept."
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The Company was incorporated in August 1996 as a Delaware corporation
to succeed to the business of a predecessor partnership. The Company's
executive offices are at 111 Congress Avenue, Suite 2600, Austin, Texas 78701,
and its telephone number is (512) 477-6400.
GROWTH STRATEGY
The Company's growth strategy is to develop rapidly a chain of high
quality, midprice extended-stay hotels by capitalizing upon its relationships
with TCR, Greystar, Crow, and Wyndham. Although the Company expects that the
construction and development of new extended-stay hotels will be its primary
means of expansion, the Company may consider, as part of its growth strategy,
franchising opportunities or future acquisitions of existing extended-stay
hotels or other properties that are suitable for conversion to the Company's
extended-stay concept. On December 31, 1996, the Company purchased a property
located on Towne Lake, adjacent to the central business district in Austin,
Texas. The Company regularly pursues and evaluates acquisition opportunities of
extended-stay lodging facilities or facilities that may be converted to the
Company's extended-stay lodging concept, and at any given time may be in various
stages of evaluating such opportunities.
Pursuant to the master development agreement, the Developer
Partnership has agreed to develop up to 60 HOMEGATE Studios & Suites hotels, and
that neither it, its partners, nor their respective affiliates will own, operate
or develop a competing extended-stay facility, subject to certain exceptions,
within the continental United States during the duration of such agreement.
This agreement will terminate upon the earlier of the commencement of the 60/th/
facility or December 31, 1998. Pursuant to this agreement, the Developer
Affiliates' regional offices will, under the Company's direction, provide site
sourcing, obtain entitlements and building permits, and provide construction,
architectural and engineering oversight. In addition, individual affiliates of
the Developer Affiliates will provide business asset guaranties for construction
cost overruns on each project. The Company believes its utilization of the
regional office network will produce competitive advantages and cost
efficiencies in the Company's site selection, development and construction
operations, by providing local expertise and minimizing the Company's
development and administrative overhead costs during its Initial Hotel Program.
The Company's developmental plan calls for identification of multiple
markets in which construction can occur within the Company's targeted time frame
and budget. The Company has developed a list of target markets and submarkets
based upon local hotel market conditions, the availability of development sites
and local construction capabilities, the existence of developmental barriers to
entry, the overall health and growth trends of the local economies, and the
presence of multiple corporate, residential and leisure travel demand
generators. Having identified its target markets, the Company reviews each
market to determine if operational efficiencies can be achieved by either
locating its hotels close to existing Wyndham-managed hotels or by clustering
two or more Company hotels within the market.
In selecting sites within the Company's targeted markets, the Company
considers demographics analysis, including surrounding population and employment
data. The prototypical site includes the following attributes:
. located close to an employment center (Fortune 500 companies and
corporate headquarters preferred) and to a freeway or major traffic
thoroughfare with good visibility;
. located in a clean, accessible area that provides some buffer from
noise generators and is close to restaurants and retail services;
. located in an area with residential density; and
. site size of approximately 2.5 to 3.0 acres that allows for the
construction of 80 to 150 units.
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The Company has begun development of the following ten hotels:
Size Location
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1. 139 unit facility Phoenix, Arizona
2. 143 unit facility Denver, Colorado
3. 117 unit facility Lenexa, Kansas
4. 133 unit facility Overland Park, Kansas
5. 136 unit facility Dallas, Texas
6. 131 unit facility Phoenix, Arizona (Chandler)
7. 120 unit facility Austin, Texas (North)
8. 120 unit facility Austin, Texas (Northwest)
9. 131 unit facility Indianapolis, Indiana
10. 82 unit facility Houston, Texas (Stafford)
As of December 31, 1996, the Company had contracted for 20 sites (the
"Planned Hotels Sites") in eleven different states illustrated in the following
schedule:
Location Number of Sites
-------- ---------------
Tampa, Florida 1
Denver, Colorado 1
Durham, North Carolina 1
Portland, Oregon 2
Dallas, Texas 2
Las Vegas, Nevada 1
Indianapolis, Indiana 1
Ft. Lauderdale, Florida 1
Austin, Texas 1
Chicago, Illinois 1
Phoenix, Arizona 2
Orlando, Florida 1
Albuquerque, New Mexico 1
Houston, Texas 3
Atlanta, Georgia 1
The purchase prices for these Planned Hotel Sites range from $600,000
to $1,500,000. The arrangements that the Company enters into for the purchase
of potential hotel sites provide for numerous investigations and other due
diligence, including environmental studies and title reports, prior to the
acquisition of the real property. The Company reserves the right to terminate
each contract if the results of its investigations and due diligence are not
satisfactory. There can be no assurance that the Company will be successful in
purchasing or developing any of the sites that are under contract or are subject
to a letter of intent or other arrangement. However, the Company is currently
evaluating a variety of sites for construction of HOMEGATE Studios & Suites
hotels, and does not believe that the failure to acquire any or all of these
sites currently under some form of purchase arrangement would have a material
adverse effect upon its ability to complete its Initial Hotel Program.
The Company currently operates a total of seven hotels located in the
following areas: Austin, Texas on Towne Lake; Grand Prairie, Texas near
Dallas/Fort Worth International Airport and Six Flags Amusement Park; Irving,
Texas also near Dallas/Fort Worth International Airport; two in San Antonio,
Texas located near the airport and Fiesta Park Amusement Center; El Paso, Texas;
and Amarillo, Texas. The Austin and Grand Prairie hotels were
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purchased on December 31, 1996, and May 31, 1996, respectively. The other five
hotels, referred to as the "Westar" hotels, were purchased on September 6, 1996.
The Westar hotels contain an aggregate of 622 units, all of which are similar to
the HOMEGATE Studios & Suites prototype. The Westar hotels are being renovated
at an aggregate anticipated cost of $5.0 million to conform to the quality
standards of the Company's prototype, and will be operated under the HOMEGATE
Studios & Suites brand name. The Grand Prairie property contains 139 units and
has been operated as an extended-stay hotel since its opening. The Austin Towne
Lake property contains 149 units which enjoy views of the lake and downtown
Austin. The Towne Lake property had been operated as an extended-stay property
by the previous owner. The Company plans to "reflag" the property. The Company
does not plan to renovate this property as it currently conforms to Homegate's
quality standards.
PRODUCT CONCEPT
Based on the Company's expected average weekly room rate of $280 to
$500, the quality of its interior design elements and furnishings, the
separation between cooking, sleeping and living areas, and the available
amenities, management believes that HOMEGATE Studios & Suites hotels will offer
a superior price/value relationship and appeal to extended-stay guests of both
upscale and economy facilities. The Company believes that the extended-stay
industry is currently segmented into three price categories with weekly room
rates charged in the various categories as follows: less than $280 in the
economy or budget category; greater than $280 and less than or equal to $500 in
the midprice category; and more than $500 in the upscale category. The
Company's hotels will generally offer extended-stay accommodations for average
weekly rates between $280 and $500, but room rates at specific hotels may vary
significantly depending upon local market factors. The Company's hotels are
designed to compete primarily in the midprice segment of the extended-stay
industry segment, and contain a variety of features that are attractive to the
extended-stay guest, such as fully equipped kitchens, resident laundry
facilities, twice-weekly linen service, weekly maid service, business centers
and exercise facilities. The facilities consist of an apartment-style complex
with two or three story buildings containing, on average, approximately 136
guest rooms. The Company utilizes both interior and exterior corridor building
designs, depending primarily on local market standards, building codes and
weather factors.
The hotels typically feature three functional room configurations:
studio, deluxe, and one bedroom. Management believes that the price/value
relationship of its guest rooms is enhanced by offering the following features:
. a fully equipped kitchen with full-size refrigerator, stove,
microwave, coffee maker, dishwasher and cooking utensils;
. separate cooking, living and sleeping areas;
. residential-quality interior design elements;
. upscale furnishings and accessories;
. an oversized work desk;
. two telephone jacks with dataports;
. direct dial telephone with voice mail messaging;
. fax and copy services available to guests;
. cable TV; and
. a sleeper sofa.
OPERATIONS
The Company's operating objective is to establish a well-organized national
brand of extended-stay hotels, while maximizing operating performance. The
Company intends to achieve its goals by (i) developing and offering consistent,
high quality accommodations; (ii) capitalizing on the attractive operating
characteristics of the extended-stay segment of the lodging industry; and (iii)
leveraging Wyndham's significant hotel management expertise.
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Consistent Lodging Experience. The Company believes it will be able to
create a well-recognized national brand under the HOMEGATE Studios & Suites name
by creating a uniform high-quality lodging experience for its guests. Because
the Company will own and Wyndham will manage each hotel, the Company will be
better able to maintain a high level of consistency and quality at each hotel.
Management believes that consistency and reliability in lodging experience are
among the most important factors considered by midprice extended-stay guests in
determining where to stay. Management believes that its focus on these factors
will lead to higher level of customer satisfaction that will enable the Company
to create a positive brand image for its hotels.
Attractive Extended-Stay Operating Characteristics. The Company believes
that the extended-stay industry segment offers superior property-level operating
characteristics when compared with other segments of the lodging industry.
Extended-stay hotels typically experience longer average guest stays than
traditional hotels, resulting in higher average occupancies and a more stable
revenue stream. The Company will require minimum stays of one week at its
hotels, and will provide daily rates only after the minimum stay requirement has
been satisfied.
In addition, the staffing levels of extended-stay hotels are much lower
than those of traditional hotels, because many labor intensive services offered
by full-service hotels are de-emphasized or excluded entirely, resulting in
lower labor costs. At the Company's hotels, there will be no food and beverage
services and limited common area amenities. The front desk will typically offer
a limited operating schedule (7:00 a.m. to 9:00 p.m. Monday through Friday plus
9:00 a.m. to 1:00 p.m. Saturday and 1:00 p.m. to 5:00 p.m. Sunday). Voice mail
messaging will eliminate the need for a telephone switchboard. The Company has
developed a system to allow for after-hours check-in, eliminating the need for
24-hour front desk operations. Housekeeping services will be offered weekly,
and linen service is available twice weekly. Several common area amenities that
do not substantially increase operating expenses will be included, such as an
exercise room, resident laundry, and a business center.
Wyndham Hotel Management. Pursuant to the Management Agreement, Wyndham
has agreed to manage up to 60 Company hotels, each pursuant to a 10-year
management contract. Each Company hotel will have a Wyndham hotel manager, who
will share administrative responsibilities with and oversee a Wyndham-employed
and trained staff generally consisting of approximately 10 employees. Wyndham's
hotel managers typically consist of college educated, career-oriented
individuals. The Company believes that Wyndham-trained hotel managers will
provide consistent, high quality service and will assist the Company in
achieving operating efficiencies. In particular, management believes that
Wyndham's expertise will be particularly beneficial in helping the Company's
hotels quickly achieve normalized occupancy levels. In addition, Wyndham will
provide the Company with market research, a preferred vendor program, a
proprietary property management software system, and national and local
marketing efforts.
The Company's strategy includes leveraging Wyndham's national and local
marketing efforts to market its hotels. The Company believes that direct sales
will be one of the Company's primary marketing tools, and will utilize Wyndham's
"push-pull" approach to marketing, where appropriate.
. The "push" refers to Wyndham's national marketing efforts, which include
among other things, calling programs of frequent travelers and national
corporate travel departments, and marketing major travel agencies. The
Wyndham National Sales Office has more than 20 sales people and offices
in Chicago, Los Angeles, Dallas, New York and Washington, D.C., and will
attempt to generate business on behalf of the Company. Wyndham will
provide these services pursuant to the Management Agreement and will
receive a fee for business generated.
. The "pull" refers to property-specific marketing efforts both before and
after a facility has opened. Prior to opening, Wyndham will conduct a
marketing program to establish relationships with likely users of the
facility, such as human resource personnel or travel executives at local
corporations, local
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realtors and other lodging demand generators. After the grand opening,
the manager of each hotel will be responsible for maintaining these
relationships and generating new prospects, as well as direct mailings,
fliers, and local advertising.
In markets with existing Wyndham-managed hotels, each of the Company's
local managers will attend weekly sales meeting with the sales organization of
the Wyndham hotel. The marketing representatives of the Wyndham hotels will
also be trained to refer extended-stay demand to the Company's hotels, as well
as to refer leads to the Company's local hotel manager.
The Company believes that the management and additional services furnished
by Wyndham will provide it with competitive advantages over other extended-stay
hotel companies, although the Company's hotels will not be operated under the
Wyndham name.
INDUSTRY OVERVIEW
Traditional Lodging Industry. The U.S. Lodging industry is estimated to
have generated approximately $52.7 billion in annual room revenues in 1995 and
to have had approximately 3.3 million rooms at the end of 1995. 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. The recession in 1990 and 1991 compounded the negative effects
of the overbuilding in the mid- and late-1980s, and led to depressed industry
performance and a lack of capital available to the industry in the early-1990s.
The Company believes that the lodging industry has benefited from a
gradually improving supply and demand balance, evidenced by increased average
daily room and occupancy rates in recent years. Room supply growth in the
lodging industry slowed in the early-1990s and has rebounded in recent years,
but demand continues to grow faster than supply. According to industry reports,
which the Company believes to be reliable, supply growth was 1.1% in 1993, 1.4%
in 1994, and 1.6% in 1995. This slow supply growth, coupled with 3.3%, 4.1% and
2.9% increases in demand (measured by occupied rooms) in 1993, 1994 and 1995,
respectively, reflects an improved supply and demand balance in the industry.
Management believes that these factors have led to an increase in average daily
room rates from $61.85 in 1993 to $64.24 in 1994 and to $67.34 in 1995 and
increases in the industry average occupancies as shown below.
Extended-Stay Category. The extended-stay category (defined as hotel
suites with full kitchens) is one of the most rapidly growing sectors of the
U.S. lodging industry. From 1990 through 1995, the compounded annual growth
rate in occupied rooms in dedicated extended-stay hotels was 7.2% compared with
2.1% for the overall U.S. lodging industry, while the compounded annual growth
rate in room supply was 5.3% compared with 1.0% for the overall U.S. lodging
industry. However, the vast majority of the dedicated extended-stay hotel rooms
developed during this period were in the upscale segment of the extended-stay
category. 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 six years, and extended-stay hotel chains have achieved an 80% or
greater occupancy level during each of the past three years.
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YEAR ENDED DECEMBER 31,
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1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- -----
Average Occupancy Rates:
Extended-Stay Hotel Chains (1) 73.9% 73.4% 76.7% 80.0% 81.3% 80.9%
All U.S. Lodging Industry (1) 62.4% 60.6% 61.6% 63.0% 63.0% 65.4%
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(1) Occupancy rates were provided by Smith Travel Research. Includes Homestead
Village(R), Villager Lodge(R), Studio Plus(R), Lexington Hotel Suites(R),
Hawthorn Suites(R), Homewood Suites(R), Residence Inn(R), Summerfield
Suites(R), and Woodfin Suites(R).
Based on 1995 industry statistics, which the Company believes to be
reliable, the size of the demand for extended-stay lodging compares favorably to
the limited supply of dedicated extended-stay rooms, especially in the midprice
segment of the extended-stay category. In 1995, extended-stay guests (defined
as those guests staying five or more nights) accounted for a total of 175.1
million room nights, or 15.8% of the total number of room nights that were
accommodated by hotel and non-hotel facilities in the United States. Of these
175.1 million extended-stay room nights, 79%, or 137.8 million room nights, were
accommodated at hotels, 11%, or 19.1 million room nights, in apartments or
apartment complexes, and 10%, or 18.2 million room nights, in other types of
accommodations, such as bed and breakfast inns, timeshares and cruises. Of
these 137.8 million room nights, only 6 to 9% (8.3 million to 12.4 million) of
the room nights generated by extended-stay guests at hotels were accommodated by
extended-stay hotel chains. Management believes that the extended-stay hotel
chains' limited penetration of the extended-stay room demand in 1995 was partly
due to the limited number of dedicated extended-stay facilities in operation in
1995. Of the approximately 3.3 million total available rooms in the U.S.
lodging industry at the end of 1995, approximately 51,100, or only 1.5%, were
extended-stay rooms at approximately 445 dedicated extended-stay facilities. Of
these 445 dedicated extended-stay facilities, approximately 320, or 72%,
operated in the upscale segment of the extended-stay market, while approximately
25, or 5.6%, operated in the midprice segment of the extended-stay category.
The sources of the industry information set forth above were Smith Travel
Research and D.K. Shifflet, who have not consented to the use of the data
presented in this report.
In addition, management believes that the disparity between demand and
supply for extended-stay facilities in 1995 was greater for the midprice segment
of the total extended-stay category. In 1995, extended-stay guests who were
accommodated at hotels represented approximately 378,000 daily occupied rooms,
while the total number of available dedicated extended-stay rooms consisted of
only approximately 51,100. Of these 378,000 daily occupied rooms, approximately
164,000 represented rooms occupied in the midprice range, while the total number
of available dedicated extended-stay, midprice rooms consisted of approximately
1,800. As a result, management believes that favorable growth opportunities
exist in the midprice segment of the extended-stay category for the near term.
COMPETITION
The U.S. lodging industry is highly competitive. Competition in the U.S.
lodging industry is based generally on convenience of location, price, range of
services and guest amenities offered, and quality of customer service. Each of
the Company's facilities will be located in a developed area that includes
competing lodging facilities. The Company believes the location of its hotels,
the high quality of its accommodations, the reasonableness of its room rates,
and its services and guest amenities will be among the most important factors in
its business. Demographics or other changes in one or more of the Company's
markets could impact the convenience or desirability of the sites of certain
hotels, which would adversely affect their operations.
The Company anticipates that competition within the extended-stay industry
segment will increase substantially in the foreseeable future. In the midprice
category of the extended-stay industry segment, several other lodging chains and
developers have recently announced plans to develop or are currently developing
extended-stay
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hotels which may compete with the Company's hotels. The Company may compete for
guests and for development sites with certain of these entities and other
entities which have greater financial resources and brand awareness than the
Company and better relationships with lenders and real estate sellers. Further,
there can be no assurance that new or existing competitors, including
traditional hotels with nationally recognized brand names, will not
significantly lower rates or offer greater convenience, services, or amenities
or significantly expand or improve facilities in a market in which the Company's
facilities compete, thereby adversely affecting the Company's operations.
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
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 of or transports for disposal or treatment of 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 remediate
properly such substances, may adversely affect the owner's ability to sell real
estate or to borrow using such real estate as collateral. In connection with
the ownership of its properties, the Company may be potentially liable for any
such costs.
The Company has obtained recent 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 concerns 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
The lodging industry is subject to numerous federal, state and local
government regulations including those relating to building and zoning
requirements. Many states also regulate the licensing of hotels by requiring
registration, disclosure statements, and compliance with specific standards of
conduct. In addition, the Company is subject to employment laws, including
minimum wage requirements, overtime, working conditions and work permit
requirements. Recent amendments to the minimum wage laws went into effect in
October 1996 which increased the Company's labor costs. The Company believes
that all of its hotels have the necessary permits, approvals and licenses to
operate their respective business and that collectively they comply with the
applicable employment laws, and the Company intends to continue to comply with
such laws and regulations. A change in such building, zoning, or licensing
requirements or a further increase in the minimum wage rate, employee benefit
costs or other costs associated with employees could materially and adversely
affect the Company.
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Under the Americans With Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that all of its
hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement policies affecting
the use and operation of the facilities, including changes to building codes and
fire and life-safety codes, may occur. If the Company were required to make
substantial modifications at its hotels to comply with the ADA or other
governmental rules and regulations, the Company's financial condition and
ability to develop or acquire new hotels could be materially and adversely
affected.
TRADEMARKS
The Company has registered its name and service mark as "HOMEGATE Studios &
Suites" with the United States Patent and Trademark office. In addition, the
Company may have certain common law rights to the Westar Suites and InnHome
America trade names.
LIABILITY 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 limits of its insurance coverage or for claims
beyond the scope of its insurance coverage, the Company's business, results of
operations, and financial condition could be materially and adversely affected.
EMPLOYEES
As of December 31, 1996, the Company employed approximately eighteen
people. The Company expects that it will add additional 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
On May 31, 1996, the Company purchased Studio Suites, a 139-unit
extended-stay facility located in Grand Prairie, Texas. The property opened for
business on June 17, 1996.
On September 6, 1996, the Company acquired beneficial ownership of
five hotels (the "Westar hotels"). The Westar hotels are located in San Antonio
(two), El Paso, Amarillo, and Irving, Texas. These hotels contain a total of
622 units and are being renovated to conform to the quality standards of the
HOMEGATE prototype. The Company intends to operate the Westar hotels under the
HOMEGATE banner as extended-stay facilities.
The Company purchased the existing InnHome America extended-stay hotel
in Austin, Texas for $7,700,000 on December 31, 1996. The property consists of
149 rooms with 37 enjoying lakeside views. The property was renovated in early
1995 and flagged as a dedicated extended-stay hotel. The InnHome America
property had no operating history under the HOMEGATE name during 1996.
As of December 31, 1996, the Company had commenced development of
extended-stay hotels on land parcels in Phoenix, Arizona (139 units), Denver,
Colorado (143 units), Lenexa, Kansas (117 units), Overland Park, Kansas (133
units), Dallas, Texas (136 units), Austin, Texas (two sites with 120 units
each), Phoenix, Arizona (131 units), Houston, Texas (82 units) and
Indianapolis, Indiana (131 units).
10
<PAGE>
The Company has entered into contracts, letters of intent or other
arrangements with respect to the acquisition of twenty additional sites and is
evaluating other sites for potential acquisitions. The ten sites currently under
development are expected to be completed and operating at various dates in 1997.
The Company intends to commence development on additional sites in 1997.
The Company has lent $1,900,500 to two related parties (that are
unaffiliated with the Company) for the purchase of two parcels of land in
Austin, Texas, on which extended-stay hotel facilities are being constructed.
The Company is negotiating the final terms of an agreement pursuant to which the
Company would acquire the hotels upon completion for a total price equal to the
lesser of $14,100,000 or actual cost. The hotels are being developed in
conformity to the quality standards and design of the HOMEGATE prototype and are
included in the ten sites under development described above.
The Company will account for these acquisitions under the purchase
method of accounting.
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
(a) Prior to the Company's initial public offering, a written consent
in lieu of special meeting of the sole stockholder of the Company, dated October
17, 1996 was executed by such stockholder.
(b) The following matters were approved by the sole stockholder of the
Company in the written consent:
(i) The adoption and approval of the merger agreement and all of the
transactions contemplated thereby (the "Formation Transaction"), pursuant to
which Extended Stay Limited Partnership, a Delaware limited partnership
("ESLP"), was merged with and into the Company in consideration of the
issuance of 6,386,087 shares of Common Stock.
(ii) The adoption of the Homegate Hospitality, Inc. 1996 Long-Term
Incentive Plan (the "1996 Plan"), pursuant to which the compensation committee
of the Board of Directors may award stock options or restricted stock awards
to employees and advisors of the Company or any of its subsidiaries. The
maximum number of shares of Common Stock that may be awarded under the 1996
Plan is initially 750,000, and will automatically increase by 100,000 on each
anniversary of October 24, 1996 through the fifth such anniversary.
Accordingly, the maximum number of shares that may be awarded under the plan
will be 1,250,000 shares of Common Stock.
(iii) The adoption and approval of indemnification agreements for
each of the current and future officers and directors of the Company.
11
<PAGE>
PART II
Item. 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the
symbol "HMGT."
The following table sets for the range of high and low bid prices for
the Company's Common Stock as reported by the Nasdaq National Market for the
period of October 24, 1996 through December 31, 1996.
1996
High Low
-------------
October 24 - December 31 $12.25 $6.75
At March 19, 1997, the number of record holders of the registrant's
Common Stock was 40.
During 1996 the Company paid no dividends. The Company intends to
retain its earnings to finance its growth and for general purposes and therefore
does not anticipate paying any cash dividends in the foreseeable future. In
addition, future financing agreements may contain limitations on the payment of
cash dividends or other distributions of assets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Liquidity and
Capital Resources."
12
<PAGE>
Item 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected financial data set forth below has been derived from the
financial statements of the Company for the period from inception (February 9,
1996) through December 31, 1996. The selected financial data should be read in
conjunction with the financial statements and related notes thereto contained
elsewhere herein.
13
<PAGE>
THE COMPANY
<TABLE>
<CAPTION>
Period from Inception
(February 9, 1996)
through December 31, 1996
-----------------------------
<S> <C>
OPERATING DATA:
Revenue............................................ $ 2,690
Property operating expenses........................ 1,676
Corporate operating expenses....................... 951
Depreciation and amortization...................... 344
Interest expense................................... 585
-----------
Net loss........................................... $ (866)
===========
Pro forma net loss per share....................... $(.08)
Pro forma weighted average number of shares
outstanding....................................... 10,725,000
OTHER DATA:
EBITDA(1).......................................... $ 63
===========
Cash flows provided by (used in):
Operating activities............................. $ (717)
Investing activities............................. (35,808)
Financing activities............................. 68,001
December 31, 1996
-----------------
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 31,476
Property and equipment, net........................ 51,107
Total assets....................................... 88,533
Total debt......................................... 21,387
Total stockholders' equity......................... 64,688
</TABLE>
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash from
operating activities in accordance with GAAP, is not to be considered as an
alternative to net income or any other GAAP measurement as a measure of
operating performance and is not necessarily indicative of cash available to
fund cash needs. The Company has included EBITDA herein because the Company
believes that it is one measure used by certain investors to determine
operating cash flow. EBITDA, as calculated above, may not be comparable to
other similarly titled measures of other companies.
14
<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Homegate Hospitality, Inc. ("Homegate") was incorporated in August
1996, to succeed to the business of Extended Stay Limited Partnership ("ESLP"),
which was organized in February 1996 to become a provider of high quality
midprice extended-stay hotels. In October 1996, ESLP was merged into Homegate,
in exchange for 6,386,087 shares of Common Stock. Hereinafter, Homegate and its
predecessor, ESLP, are collectively referred to as the "Company." On October 24,
1996, the Company completed an initial public offering of 4,325,000 shares of
Common Stock at $11.50 per share.
During the period from inception through December 31, 1996, the
Company hired its initial employees, engaged in concept and product design,
market study and site selection activities, and acquired its first properties.
The Company had 18 employees at December 31, 1996 and plans to add between five
and ten more employees in 1997.
RESULTS OF OPERATIONS - HISTORICAL
PROPERTY OPERATIONS
Homegate's results of operations include ESLP from February 1996,
through October 1996, along with the operations of the five Westar hotels from
the date of acquisition (September 6, 1996). The Studio Suites hotel in Grand
Prairie began operations on June 17, 1996. The Westar hotels have not been, nor
are they currently being, operated as extended-stay facilities. The Westar
hotels are currently undergoing renovation and refurbishment and will be
operated as extended-stay facilities when such renovations are completed.
Annual "REVPAR" for the Company was $23.05 computed on a daily basis.
Occupancy was 56.4% with an average daily rate ("ADR") of $40.90. The fourth
quarter REVPAR dropped to $22.55 from $25.84 in the third quarter. Occupancy was
down from 60.3% in the third quarter to 55.3% in the fourth quarter. "ADR" was
also down from third quarter's $42.87 to $40.79
The Company believes that the downward movement of the Company's
operating statistics resulted from a decrease in demand over the holiday season,
as well as disruptions for potential guests resulting from the refurbishment
program for the "Westar" hotels. The fourth quarter was also the first full
quarter for the Westar hotels to be operated by Homegate. None of the six
operating hotels had been designated as HOMEGATE Studio & Suites at December 31,
1996. The five Westar hotels were also not operated as extended stay hotels for
the fourth quarter in 1996.
The operating properties generated $1,582,689 of revenue in the fourth
quarter. This represents an increase of $947,794 over the third quarter.
Revenues were $2,240,161 for the year (the period from inception, February 9,
1996 through December 31, 1996). Property operating expenses were $1,184,384
for the fourth quarter and $1,675,936 for the year. Fourth quarter operating
expenses were 75% of revenues compared with 73% in the third quarter. Property
operating expenses were also 75% of revenues for the year. Property operating
expenses include salaries and wages, administration, advertising, repairs and
maintenance, energy, property taxes, insurance and property management fees.
Interest income of approximately $450,000 for the fourth quarter and
year was the result of investing the proceeds of the initial public offering.
15
<PAGE>
INTEREST
Interest expense reflects the interest on the Studio Suites mortgage
from May 31, 1996, through December 31, 1996, as well as interest from September
6, 1996 through December 31, 1996 on the mortgage secured by the Westar hotels.
CORPORATE OPERATIONS
Corporate operating expenses include all expenses related to the
administration of the corporate offices and all expenses not directly related to
individual developments and hotels. Corporate operating expenses for the fourth
quarter of 1996 and for the year were $436,608 and $951,261, respectively.
Increased corporate operating expenses relate to the increase in corporate
personnel needed to effectuate the Company's growth plans. The Company
anticipates increased operating expenses as the Company continues to expand.
The Company incurred a $.08 loss on a pro forma basis for the year (as
if the shares of Common Stock issued in the Company's initial public offering
and other formation transactions had been outstanding since inception).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$31,475,679. In October 1996, the Company received proceeds from its initial
public offering totaling $46,255,875 before offering costs. The cash and cash
equivalents are currently deposited in a money market account which invests in
Treasury Bills.
The Company owes approximately $18 million on a 9.71% secured
promissory note related to the Westar hotels. This debt is payable on a fixed
25-year amortization schedule in monthly installments through January 11, 2021.
The Company has a $30 million mortgage loan facility (the "Existing
Mortgage Facility") with Bank One, Arizona, N.A. ("BOA"), which provides the
Company with construction financing for new extended-stay hotels. The Company
may obtain commitments under the Existing Mortgage Facility through November 30,
1997. Each project may be funded under the Existing Mortgage Facility through a
separate loan, with all loans being cross-collateralized and cross-defaulted.
Initially, such loans will be advanced as construction loans, payable over
twenty-four months (the "Construction Term") with interest at either the BOA
prime rate plus 0.5% or LIBOR plus 2.25%. The Company must make interest
payments on each construction loan for the first twelve months of the loan,
followed by principal and interest payments based upon a fifteen-year
amortization schedule for the remaining twelve months of the loan. The Company
may elect to extend each loan for three additional years (the "Mini-perm Term")
if certain conditions are met and upon payment of a specified extension fee. If
the Company elects to extend the loan as a mini-permanent financing, the Company
will continue to make principal and interest payments on a fifteen-year
amortization schedule during each year of the three-year extension period, and
the interest rate may, in certain circumstances, be reduced. During the
Construction Term, the amount of any loan may not exceed 55% of the total
project costs of the related project. During the Mini-perm Term, the loan amount
to costs-of-project ratio may be increased to 65% if certain conditions are met.
BOA has full recourse against the Company for the loans, including environmental
indemnities.
As of December 31, 1996, the Company had incurred indebtedness under
the Existing Mortgage Facility for the Studio Suites property of approximately
$2,917,000 bearing interest at LIBOR plus 2.25%. This debt is due June 1, 1998,
and may be extended for an additional three years as described above.
Although the Company has access to financing under the Existing
Mortgage Facility, the Company will need to procure substantial additional
financing over time to complete its Initial Hotel Program, the amount of which
financing
16
<PAGE>
will depend upon a number of factors including the number of properties the
Company constructs or acquires and the cash flow generated by its properties.
Additionally, including proceeds from the initial public offering and the funds
that may be available under the Existing Mortgage Facility, the Company believes
that it has access to sufficient resources to fund the development or
acquisition of approximately 18 hotels (including the six existing facilities
owned at the completion of the initial public offering), based on expected
development or acquisition costs. In particular, the Company anticipates
spending an aggregate of approximately $5 million to renovate the Westar
facilities to conform to the HOMEGATE Studios & Suites prototype, and expects
that it will spend between $4 million and $8 million on each development or
acquired hotel. The Company's Initial Hotel Program calls for 65 hotels to be
opened or under construction by December 31, 1998. There can be no assurance
regarding the availability or terms of additional financing the Company may be
able to procure over time. In addition, future financing facilities may
restrict the ability of the Company to incur additional debt in the future. The
failure of the Company to obtain the required additional financing needed to
complete the Initial Hotel Program would adversely affect the Company's ability
to implement its growth strategy and would have a material adverse effect on the
Company's earnings and operations. In addition, future debt facilities may
materially limit the Company's ability to pay dividends. The Existing Mortgage
Facility and any future debt financings or issuances of preferred stock by the
Company will be senior to the rights of the holders of Common Stock, and any
future issuances of Common Stock will result in the dilution of the then-
existing stockholders' proportionate equity interests in the Company.
The Company is currently negotiating a $78 million master line of
credit (the "Replacement Facility") with BOA to replace the Existing Mortgage
Facility. The Company will be permitted to borrow under the Replacement
Facility for up to two years after the closing of the facility, provided that in
no event may the Company's debt to net worth ratio exceed 1.50:1. The Company's
future financing agreements may contain net worth and other covenants and
limitations on payment of any cash dividends or other distribution of assets,
which could restrict the Company's ability to pay dividends. The closing of the
Replacement Facility is subject to a variety of conditions, including the
negotiation of definitive documents and the syndication of $48 million of the
facility amount. There can be no assurance that the Replacement Facility can be
obtained or, if obtained, that it will be in the anticipated amount.
SEASONALITY
The lodging industry is seasonal in nature. Quarterly earnings may be
adversely affected by events beyond the Company's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, occupancy rates and room revenues typically decline during the fourth
calendar quarter as business travel decreases during the holiday season. The
timing of openings of new properties could also lead to fluctuations in the
Company's quarterly earnings.
INFLATION
The rate of inflation as measured by changes in the consumer price
index has not had a material effect on the revenue or operating results of the
Company. There can be no assurance, however, that inflation will not affect
future operating or construction costs.
FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS
The Company's future results of operations may be impacted by a number
of factors. Among such factors are local, regional and national economic
conditions, competition from other lodging properties, changes in real property
tax rates and in the availability, cost and terms of financing, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, changes in operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war and adverse changes in zoning laws.
17
<PAGE>
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The forward looking
statements with regard to the Company's expectation of completing during 1997
the ten sites currently under development are subject to the risks of weather-
induced construction delays. The forward looking statements made herein with
respect to the Company's plans to commence construction on an additional 15
development sites during 1997 are subject to the risks of the Company's ability
to identify, negotiate the acquisition of and close on such sites (to the extent
it has not already done so) in a timely fashion, the risks associated with
various entitlements processes, the risks of inclement weather and the risks
associated with the Company's ability to obtain the required equity and debt
capital (to the extent it has not already done so).
18
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Report of Independent Auditors.......................................... F-1
Financial Statements:
Balance Sheet at December 31, 1996.............................. F-2
Statement of Operations for the period from Inception
(February 9, 1996) through December 31, 1996.................... F-3
Statement of Stockholders' Equity (Deficit) for the period from
Inception (February 9, 1996) through December 31, 1996.......... F-4
Statement of Cash Flows for the period from Inception
(February 9, 1996) through December 31, 1996.................... F-5
Notes to Financial Statements................................... F-6
Schedule III - Real Estate and Accumulated Depreciation................. F-17
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
19
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Homegate Hospitality, Inc.
We have audited the accompanying balance sheet of Homegate Hospitality, Inc. as
of December 31, 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for the period from inception (February 9,
1996) through December 31, 1996. Our audit also included the financial statement
schedule listed in the index at Item 8. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assur ance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Homegate Hospitality, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the period from inception (February 9, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 20, 1997
F-1
<PAGE>
Homegate Hospitality, Inc.
Balance Sheet
December 31, 1996
ASSETS
Current assets
Cash and cash equivalents $31,475,679
Restricted cash 959,198
Accounts receivable
Hotel 241,403
Other 256,939
Interest 208,411
Prepaid insurance 552,054
-----------
Total current assets 33,693,684
Property and equipment, net (Note 2) 51,106,541
Loans receivable (Note 3) 1,900,500
Deferred loan costs, net of accumulated amortization of $16,113 335,547
Other assets, net of accumulated amortization of $68,586 1,497,136
-----------
Total assets $88,533,408
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,101,225
Accrued expenses 224,694
Payables to affiliates (Note 6) 1,132,274
Current maturities of mortgage and other notes payable 425,738
-----------
Total current liabilities 2,883,931
Mortgage and other notes payable (Note 4) 20,961,009
Stockholders' equity (Note 7)
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued --
Common stock, $.01 par value; 20,000,000 shares authorized;
10,725,000 shares issued and outstanding 107,250
Additional paid in capital 65,447,625
Retained earnings (deficit) (866,407)
-----------
Total stockholders' equity 64,688,468
-----------
Total liabilities and stockholders' equity $88,533,408
===========
See accompanying notes.
F-2
<PAGE>
Homegate Hospitality, Inc.
Statement of Operations
Period from Inception (February 9, 1996)
through December 31, 1996
REVENUES
Room revenue $ 2,233,391
6,770
Interest income 450,536
-----------
2,690,697
COSTS AND EXPENSES
Property operating expenses 1,675,936
Corporate operating expenses 951,261
Depreciation and amortization 344,459
Interest 585,448
-----------
3,557,104
-----------
Net loss $ (866,407)
===========
Pro forma net loss per share $ (.08)
===========
Pro forma weighted average number of shares outstanding 10,725,000
See accompanying notes.
F-3
<PAGE>
Homegate Hospitality, Inc.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED PARTNERS'
SHARES STOCK PAID IN CAPITAL EARNINGS CAPITAL TOTAL
------------ ---------- ---------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed at
inception (February 9, 1996) -- $ -- $ -- $ -- $ 20,000,000 $20,000,000
Net loss of ESLP (February 9,
1996 through October 23, 1996) -- -- -- -- (732,642) (732,642)
Issuance of common stock to
ESLP partners 6,386,087 63,861 19,936,139 (732,642) (19,267,358) --
Sale of common stock in
initial public offering,
net of offering costs 4,325,000 43,250 45,351,625 -- -- 45,394,875
Issuance of common stock to
employees and others 13,913 139 159,861 -- -- 160,000
Net loss of the Company
(October 24, 1996 through
December 31,1996) -- -- -- (133,765) -- (133,765)
------------ --------- ----------- --------- ------------ -----------
Balance at December 31, 1996 10,725,000 $107,250 $65,447,625 $(866,407) $ -- $64,688,468
============ ========= =========== ========= ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Homegate Hospitality, Inc.
Statement of Cash Flows
Period from Inception (February 9, 1996)
through December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (866,407)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 344,459
Amortization of loan costs 16,113
Accrued interest added to mortgage note payable 70,000
Changes in operating assets and liabilities:
Restricted cash (959,198)
Accounts receivable (706,753)
Prepaid insurance, net of financing (67,368)
Accounts payable 1,101,225
Accrued expenses 224,694
Payables to affiliates 126,623
------------
Net cash used in operating activities (716,612)
INVESTING ACTIVITIES
Acquisition of hotel facilities, net of debt assumed (19,501,988)
Acquisition of land (8,835,000)
Additions to property and equipment, net of development
costs payable (4,037,851)
Advances under loans receivable (1,900,500)
Additions to other assets (1,533,061)
------------
Net cash used in investing activities (35,808,400)
------------
FINANCING ACTIVITIES
Proceeds from mortgage note payable 2,893,092
Principal payments on mortgage and other notes payable (62,955)
Payment of deferred loan costs (384,322)
Capital contribution from ESLP partners 20,000,000
Payment of initial public offering costs (861,997)
Proceeds from issuance of common stock 46,416,873
------------
Net cash provided by financing activities 68,000,691
------------
Net increase in cash and cash equivalents 31,475,679
Cash and cash equivalents at beginning of period --
------------
Cash and cash equivalents at end of period $31,475,679
============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Homegate Hospitality, Inc. (the "Company") was organized in Delaware on August
16, 1996. The Company was capitalized with the issuance of 10 shares of common
stock to Extended Stay Limited Partnership ("ESLP"). The Company was formed to
continue the extended-stay lodging facility development, acquisition, and
management operations of ESLP, and to acquire, develop and maintain extended-
stay lodging facilities throughout the United States.
ESLP, a Delaware limited partnership, was formed on February 9, 1996, by ESH
Partners, L.P. ("Crow") and JMI/Greystar Extended Stay Partners, L.P.
("Greystar"), as the general partners and various limited partners. On October
24, 1996, ESLP was merged with and into the Company (see Note 7). Accordingly,
the financial results of ESLP, the predecessor to the Company, for the period
from inception (February 9, 1996) through October 23, 1996, have been included
herein.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, VPS I, L.P. All material intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in financial statements and accompanying notes.
Actual results could differ from these estimates.
REVENUE RECOGNITION
Room revenue and other income are recognized when earned, utilizing the accrual
method of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents.
F-6
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The Company capitalizes costs directly related to the acquisition, renovation or
development of property and equipment while maintenance and repairs are charged
to operating expense when incurred. Interest costs during construction periods
are also capitalized. Property and equipment is recorded at cost. The building
and improvements and furniture and fixtures are depreciated over their estimated
useful lives, which are 40 years and 7 years, respectively, using the straight-
line method.
DEFERRED LOAN COSTS
Costs incurred in obtaining financing have been deferred and are amortized over
the life of the loan.
OTHER ASSETS
Other assets include site deposits, pursuit costs, pre-opening costs, and
organization costs. Site deposits have been paid to escrow agents in conjunction
with executed purchase agreements, whereby the Company is considering the
purchase of certain land parcels.
Costs related to the acquisition of property sites are capitalized when it is
probable that a site will be acquired and are reclassified to property and
equipment upon acquisition. In the event the acquisition is not consummated, the
costs are expensed.
Compensation, promotional and other costs relating to the opening of new
properties are capitalized. Amortization is provided using the straight line
method over a twelve-month period.
Organization costs incurred in conjunction with the formation of the ESLP have
been capitalized and are being amortized over sixty months using the straight-
line method.
F-7
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
2. PROPERTY AND EQUIPMENT
At December 31, 1996, property and equipment consists of the following:
Land $16,473,296
Buildings and improvements 28,300,127
Construction in progress 4,623,153
Furniture, fixtures, and equipment 1,985,837
-----------
51,382,413
Less accumulated depreciation 275,872
-----------
$51,106,541
===========
On May 31, 1996, ESLP acquired Studio Suites in Grand Prairie, Texas. Operations
of the Studio Suites commenced during June 1996 and are included in the
accompanying statement of operations since acquisition.
During 1996, the Company acquired two land parcels in Phoenix, one parcel of
land in Denver, two parcels of land in Kansas, and one parcel of land in Dallas,
all of which are under development for hotel construction. Estimated costs to
complete development on these projects total approximately $24.9 million.
Additionally, the Company acquired one parcel in Indianapolis, for future
development of a hotel facility. As of December 31, 1996, the Company has
entered into agreements, letters of intent, contracts, or other arrangements to
purchase eighteen additional land parcels.
Long-lived assets are evaluated when indicators of impairment are present and
provisions for possible losses are recorded when the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
ACQUISITION OF WESTAR
On September 6, 1996, ESLP acquired all the interests in VPS I, L.P. an
unaffiliated Delaware limited partnership that owned five hotels in several
Texas cities operating under the name Westar Suites ("Westar"). ESLP paid
$7,738,696 and assumed debt of $18,001,924 (See Note 4). The acquisition was
accounted for as a purchase with the excess of the purchase price over the net
book value of the Westar assets acquired allocated to property and equipment.
The Company's statement of operations includes the operations of Westar from the
date of acquisition.
Assuming that Westar had been acquired at the beginning of the period presented
(February 9, 1996), operating results of the Company would have been as follows:
Room revenue $6,854,060
F-8
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
Net income (loss) (746,024)
Proforma earnings (loss) per share (.07)
ACQUISITION OF INNHOME AMERICA - TOWNE LAKE
On December 31, 1996, the Company acquired, from an unrelated party, an
extended-stay hotel in Austin, Texas operating under the name InnHome America -
Towne Lake ("InnHome") for a total purchase price of $7.7 million. The
acquisition was accounted for as a purchase with the excess of the purchase
price over the net book value of the InnHome assets acquired allocated to
property and equipment.
Assuming that InnHome had been acquired at the beginning of the period presented
(February 9, 1996), operating results of the Company would have been as follows:
Room revenue $3,916,343
Net income (loss) (198,465)
Proforma earnings (loss) per share (.02)
3. LOANS RECEIVABLE
The Company advanced $1,900,500 under two promissory notes to two unrelated
parties for the purchase of two parcels of land in Austin, Texas, on which
extended-stay hotel facilities will be developed. These notes accrue interest at
ten percent and mature on the sooner of November 2000 or five business days
after demand. Monthly interest payments of $15,838 begin on February 1, 1997.
The Company has a letter agreement to purchase the hotels upon completion for a
total price equal to the lesser of $14.1 million or actual costs.
4. MORTGAGE AND OTHER NOTES PAYABLE
MORTGAGE NOTES PAYABLE
The Company has entered into a Master Loan Agreement (the "Note") with Bank One,
Arizona. The Note provides up to $30 million in construction/mini-perm mortgage
loans for the acquisition and development of land and hotel facilities for up to
five years. A loan was committed under the Note in connection with the
acquisition of Studio Suites. This loan, secured by Studio Suites, accrues
interest at either LIBOR plus 2.25% or prime plus .5% based on the election of
the Company (7.75% at December 31, 1996), and requires interest payments for the
first ten months of the loan, followed by principal and interest payments based
upon a fifteen year amortization until maturity, May 31, 1999. The outstanding
balance at December 31, 1996, includes $2,847,930 of original principal borrowed
and $70,000 of accrued interest added from an interest reserve.
F-9
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
4. MORTGAGE AND OTHER NOTES PAYABLE (CONTINUED)
Another loan, in the amount of $3,509,885, was committed under the Note in
connection with the construction of the hotel in Phoenix, Arizona. This loan,
secured by the hotel at 44th and Oak, accrues interest at either LIBOR plus
2.25% or prime plus .5% based on the election of the Company (7.75% at December
31, 1996), and requires interest payments for the first twelve months of the
loan, followed by principal and interest payments based upon a fifteen year
amortization until maturity, August 15, 1998. The maturity date may be extended
for thirty-six months with the payment of an extension fee of .25% of the loan
amount. The outstanding balance at December 31, 1996 was $45,162.
In connection with the acquisition of Westar, the Company assumed an $18,100,000
mortgage note due to Nomura Asset Capital Corporation, with interest at 9.71%
through January 11, 2011 and the greater of 14.71% or the Treasury Rate plus 9%
thereafter. The note is due in monthly installments of $160,789, including
interest, commencing February 1996 through January 2021, and is secured by the
Westar hotel properties and improvements. The outstanding balance at December
31, 1996 was $17,961,075.
Restricted cash includes cash retained by the mortgage servicer for payment of
taxes, insurance and debt service.
F-10
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
4. MORTGAGE AND OTHER NOTES PAYABLE (CONTINUED)
The mortgage note payable to Nomura Asset Capital Corporation does not allow for
prepayment of the debt until January 11, 2011, except by providing the lender
with U.S. obligations that produce payments which replicate the payment
obligations of the Company under the note. This restriction represents a
substantial prepayment penalty. On or after January 11, 2011, the loan can be
prepaid at any time with no prepayment penalty.
OTHER NOTES PAYABLE
The Company has two unsecured notes payable for the purchase of directors and
officers insurance. The notes accrue interest at 6.98% and require monthly
principal and interest payments of $16,497 through July 1999. The outstanding
balance at December 31, 1996 was $462,580.
Principal maturities of the mortgages and other notes payable at December 31,
1996, are as follows:
MORTGAGE OTHER
NOTES NOTES TOTAL
----------- -------- -----------
1997 $ 257,582 $ 168,156 $ 425,738
1998 300,549 183,089 483,638
1999 2,920,239 111,335 3,031,574
2000 221,514 - 221,514
2001 249,377 - 249,377
Thereafter 16,974,906 - 16,974,906
----------- --------- -----------
$20,924,167 $ 462,580 $21,386,747
=========== ========= ===========
Interest incurred during 1996 was $718,298, of which $132,850 was capitalized.
The Company paid interest totaling $532,596 during 1996.
The carrying value of the mortgage and other notes payable as of December 31,
1996 approximates fair value as the interest rate approximates market rate for
similar debt instruments.
F-11
<PAGE>
Homegate Hospitality, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes result from temporary differences between the carrying amounts of
assets for financial reporting purposes and the amounts used for income tax
purposes and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
The portion of the loss included in the accompanying financial statements that
was incurred by ESLP prior to its merger into the Company will be included in a
separate partnership tax return. The loss incurred by the Company subsequent to
the merger will be reflected in its corporate income tax return.
The differences between the provision for income taxes ($0) and the amounts
computed by applying the statutory federal income tax rates to loss before
income taxes are:
Statutory rate applied to loss before income taxes $(294,578)
ESLP partnership loss 249,098
---------
(45,480)
Provision for valuation allowance 45,480
---------
$ --
=========
The components of the Company's deferred taxes at December 31, 1996, are:
Deferred tax asset - net operating loss carryforward $ 45,480
Valuation allowance (45,480)
---------
Net deferred tax asset (liability) $ --
=========
At December 31, 1996, the Company has unused net operating loss carryforwards of
approximately $134,000 for income tax purposes, that expire in the year 2011.
No tax payments were made in 1996.
F-12
<PAGE>
Homegate Hospitality, Inc.
Notes to Consolidated Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
Wyndham Management Corporation ("Wyndham") an affiliate of Crow, administered
and funded payroll and insurance benefits for all employees of the Company
through September 30, 1996 and continues to administer payroll for the employees
of the Studio Suites and Westar hotels. Payables to affiliates includes $46,267
due to Wyndham at December 31, 1996, for reimbursement of payroll and insurance
expenditures. Payroll and insurance expenditures reimbursed to Wyndham was
$179,123 during 1996.
Wyndham is entitled to receive a management fee equal to 3% of gross revenues,
as defined, for management of the Company's hotels. Management fees were
$69,265 in 1996. Payables to affiliates includes $51,710 due to Wyndham at
December 31, 1996, for management fees and marketing fees.
Trammell Crow Residential (TCR), an affiliate of Crow, and Greystar Realty
Services (GRS), an affiliate of Greystar, have collectively agreed to develop up
to 60 hotel facilities for the Company, under an agreement that expires at the
earlier of the completion of the sixtieth hotel or December 31, 1998.
Development fees paid to TCR and GRS were $460,175 and $50,000, respectively,
during 1996.
Payables to affiliates includes $879,523, $28,420 and $126,353 due to TCR,
Wyndham, and Greystar, respectively, at December 31, 1996, for reimbursement of
construction costs and out-of-pocket expenditures incurred in conjunction with
the pursuit and acquisition of land and property.
7. STOCKHOLDERS' EQUITY
COMMON STOCKHOLDERS' VOTING RIGHTS
Common stockholders are entitled to one vote for each share held on all matters
presented for a vote of stockholders. Stockholders are entitled to receive pro
rata, such dividends, if any, as may be declared by the Board of Directors in
their discretion from funds legally available. Upon liquidation or dissolution,
stockholders are entitled to receive pro rata, all of the remaining assets of
the Company available for distribution to its stockholders.
F-13
<PAGE>
Homegate Hospitality, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
ISSUANCE OF COMMON STOCK TO ESLP PARTNERS
On October 24, 1996, ESLP merged with and into the Company. The Company issued
6,386,087 shares of common stock to the partners of ESLP in exchange for their
partnership interests. The cost basis of the partnership interests acquired for
stock was $19,267,358.
INITIAL PUBLIC OFFERING
On October 24, 1996, the Company completed an initial public offering of
4,325,000 shares of its common stock at a public offering price of $11.50 per
share (the "Offering"). The proceeds to the Company from the offering were
$45,394,875, net of offering expenses.
LONG-TERM INCENTIVE PLAN
The Company has adopted the 1996 Long-Term Incentive Plan (the "1996 Plan") to
attract and retain employees and consultants. Under the plan, options and stock
awards may be granted with respect to a total of not more than 1,250,000 shares
of common stock, subject to antidilution and other adjustment provisions. The
options generally vest over a four-year period and may be exercised over a
period of 10 years from the date of grant, subject to the vesting provisions.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
On October 24, 1996, the Company granted options to acquire an aggregate of
511,250 shares of common stock to certain employees and Company advisors. The
exercise price for these options is the initial public offering price of $11.50.
The stock option grants include 336,250 shares granted to Company officers and
employees, 25,000 shares granted to advisors from Greystar, 55,000 shares
granted to advisors from TCR, 45,000 shares granted to advisors from Crow Realty
Investors, L.P., and 50,000 shares granted to advisors from Wyndham Hotel
Company. The options granted to advisors from TCR vested immediately and the
remaining stock options will vest ratably over a four-year period. No options
were exercised, forfeited or expired in 1996.
The effect of applying the fair value method prescribed by Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
to the Company's stock-based awards to employees results in net loss and
earnings (loss) per share that are not materially different from amounts
reported in 1996.
F-14
<PAGE>
Homegate Hospitality, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK AWARDS
In connection with the Offering, the Company granted 13,913 shares of common
stock under the Plan to certain employees and consultants of the Company. As a
result, $64,998 has been recorded to compensation expense and $34,995 has been
capitalized to property and equipment for stock granted to employees. In
addition, $60,007 has been recorded to offering costs for services provided by
consultants in connection with the Offering.
8. PROFIT SHARING AND SAVINGS PLAN
The Company has a 401(k) plan for all full-time employees. Employees may
contribute up to 15% of their gross pay, subject to certain limitations. The
Company's 401(k) plan was effective December 1, 1996. The Company matches 50% of
the amount contributed by each employee, up to 6% of the employee's gross pay.
In 1996, expenses included $2,298 representing the employer's matching
contribution to the plan.
9. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company purchased three land sites for an
aggregate purchase price of $3,224,066. Additionally, the Company began
development on two more hotel facilities. Total expected development costs for
the two facilities are approximately $8,077,374.
F-15
<PAGE>
Homegate Hospitality, Inc.
Notes to Consolidated Financial Statements (continued)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1996 is as follows:
QUARTER ENDED: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------- -------- ---------- ------------- ------------
Total revenues $ - $ 24,803 $ 634,895 $ 2,029,296
Net loss - (239,070) (412,723) (214,614)
Pro forma loss per share - (.02) (.04) (.02)
F-16
<PAGE>
Homegate Hospitality, Inc.
Schedule III - Real Estate Investments and Accumulated Depreciation
December 31, 1996
<TABLE>
<CAPTION>
Costs Capitalized
Initial Costs Subsequent to Acquisition
------------------------------------- -------------------------------------------
Buildings Furniture, Buildings Furniture,
Related and Fixtures and Fixtures Construction
Description Encumbrances Land Improv. & Equipment Improv. & Equipment In Progress
- -------------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Studio Suites - Arlington, TX $ 2,917,930 $ 825,000 $ 3,911,029 $ 191,090 $ 76,119 $244,106 $ 0
44th and Oak - Phoenix, AZ 45,162 1,310,000 0 0 0 0 2,340,741
Denver Tech. - Denver, CO 750,000 0 0 0 0 881,210
Metro Center - Phoeniz, AZ 850,000 0 0 0 0 0
Overland Park - Kansas 1,200,000 0 0 0 0 353,701
Lenexa - Kansas City 800,000 0 0 0 0 225,173
Park Central - Dallas, TX 1,075,000 0 0 0 0 358,551
I-10 and Chandler - Phoenix, AZ 1,550,000 0 0 0 0 197,056
Indianapolis Airport/Marion - 1,300,000 0 0 0 0 33,959
Indianapolis, IN
InnHome Towne Lake - Austin, TX 1,896,000 4,567,845 1,106,430 0 0 0
Westar - Irving (a) 757,234 3,028,937 29,955 17,252 34,143 59,026
Westar - San Antonio Airport (a) 1,189,940 4,759,759 47,071 15,071 23,849 56,306
Westar - San Antonio Fiesta (a) 860,464 3,441,974 34,039 14,640 19,546 50,083
Westar - El Paso (a) 1,249,135 4,995,780 49,406 15,026 26,569 30,051
Westar - Amarillo (a) 864,963 3,441,974 34,039 14,720 22,107 37,296
---------- ---------- --------- ------- -------- ---------
$16,473,296 $28,147,298 $1,492,030 $152,829 $370,320 $4,623,153
========== ========== ========= ======= ======== =========
Gross Amount at Which Carried at Close of Period
-----------------------------------------------------------------
Buildings Furniture,
and Fixtures Construction Accum. Date of
Description Land Improv. & Equipment In Progress Total(c) Depres. Construc.
- -------------------------------- ---------- ---------- ----------- ----------- ---------- --------- -------------
Studio Suites - Arlington, TX $ 825,000 $ 3,987,148 $ 435,196 $ 0 $ 5,247,344 $ 88,831 1996
44th and Oak - Phoenix, AZ 1,310,000 0 0 2,340,741 3,650,741 0 06/96-12/96
Denver Tech. - Denver, CO 750,000 0 0 881,210 1,631,210 0 06/96-12/96
Metro Center - Phoeniz, AZ 850,000 0 0 0 850,000 0
Overland Park - Kansas 1,200,000 0 0 353,701 1,553,701 0 08/96-12/96
Lenexa - Kansas City 800,000 0 0 225,173 1,025,173 0 08/96-12/96
Park Central - Dallas, TX 1,075,000 0 0 358,551 1,433,551 0 10/96-12/96
I-10 and Chandler - Phoenix, AZ 1,550,000 0 0 197,056 1,747,056 0 11/96-12/96
Indianapolis Airport/Marion - 1,300,000 0 0 33,959 1,333,959 0 1/97
Indianapolis, IN
InnHome Towne Lake - Austin, TX 1,986,000 4,567,845 1,106,430 0 7,570,275 0 (b)
Westar - Irving 757,234 3,046,189 64,098 59,026 3,926,547 27,710 1985
Westar - San Antonio Airport 1,189,940 4,774,830 70,920 56,306 6,091,996 42,676 1986
Westar - San Antonio Fiesta 860,494 3,456,614 53,585 50,083 4,420,776 30,908 1985
Westar - El Paso 1,249,135 5,010,506 75,975 30,051 6,365,967 44,835 1986
Westar - Amarillo 860,493 3,456,695 56,146 37,296 4,410,630 30,988 1985
---------- ---------- --------- --------- ---------- -------
$16,473,296 $28,300,127 $1,862,350 $4,623,153 $51,258,926 $265,948
========== ========== ========= ========= ========== =======
Depreciable
Date Lives in
Description Acquired Years
- -------------------------------- ----------- -----------
Studio Suites - Arlington, TX 05/31/96 7 to 40
44th and Oak - Phoenix, AZ 02/15/96 7 to 40
Denver Tech. - Denver, CO 05/24/96 7 to 40
Metro Center - Phoeniz, AZ 7 to 40
Overland Park - Kansas 08/09/96 7 to 40
Lenexa - Kansas City 07/22/96 7 to 40
Park Central - Dallas, TX 09/30/96 7 to 40
I-10 and Chandler - Phoenix, AZ 11/05/96 7 to 40
Indianapolis Airport/Marion - 12/31/96 7 to 40
Indianapolis, IN
InnHome Towne Lake - Austin, TX 12/31/96 7 to 40
Westar - Irving 09/06/96 7 to 40
Westar - San Antonio Airport 09/06/96 7 to 40
Westar - San Antonio Fiesta 09/06/96 7 to 40
Westar - El Paso 09/06/96 7 to 40
Westar - Amarillo 09/06/96 7 to 40
</TABLE>
(a) These properties are collateral for the $18,100,000 loan from Nomura Asset
Capital Corporation dated 12/29/95. The outstanding balance of the loan at
December 31, 1996 is $17,961,075.
(b) This property was built in the 1960's as a dormitory for the University of
Texas. This property was renovated in late 1994/ early 1995 as an extended-
stay hotel facility.
(c) The aggregate cost for federal income tax purposes is approximately
$51,259,000.
Homegate Hospitality, Inc.
Notes to Schedule III - Real Estate Investments and Accumulated Depreciation
<TABLE>
<CAPTION>
Period Ended
December 31, 1996
-----------------
<S> <C>
Real Estate Investments:
Balance, beginning of period $ -
Additions during period:
Purchase of hotel properties 37,277,624
Purchase of land 8,835,000
Improvements 5,146,302
-------------
Balance, end of period $ 51,258,926
-------------
Period Ended
December 31, 1996
-----------------
Accumulated Depreciation:
Balance, beginning of period $ -
Additions during period:
Depreciation 265,948
-------------
Balance, end of period $ 265,948
-------------
</TABLE>
<PAGE>
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information set forth under the headings "Election of Directors,"
"Management of the Company" and "Compliance with Section 16(a) of the Exchange
Act" contained in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 (the "Exchange Act"),
in connection with the Company's 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Executive Compensation"
contained in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A of the Exchange Act in connection with the Company's 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information set forth under the heading "Security Ownership of
Directors and Executive Officers" and "Principal Stockholders" contained in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A of
the Exchange Act in connection with the Company's 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the heading "Election of Directors,"
"Executive Compensation" and"Other Matters" contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act in connection with the Company's 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
20
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
Exhibit
Number Description
- ------ -----------
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements, Supplementary Financial Data
and Financial Statement Schedule on page 19 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 8
is listed in the Index to Financial Statements, Supplementary Financial
Data and Financial Statement Schedule on page 19 of this Report.
(a)(3) The following documents are filed or incorporated by references as
exhibits to this Report:
2.1 Form of Plan of Merger between Extended Stay Limited Partnership
and Homegate Hospitality, Inc. (ii)
3.1 Certificate of Incorporation (i)
3.2 Bylaws (i)
4.1 Form of specimen certificate for the Common Stock (ii)
10.1 Master Management Assistance Agreement between Wyndham Hotel
Corporation and Homegate Hospitality, Inc. (ii)
10.2 Master Development Agreement between Developer Extended Stay
Partners, L.P. and Homegate Hospitality, Inc. (i)
10.3 Employment Agreement between John C. Kratzer and Homegate
Hospitality, Inc. (ii)
10.4 Homegate Hospitality, Inc. 1996 Long-term Incentive Plan (ii)
10.5 Form of Non-Competition Agreement between the Company and Robert
A. Faith (ii)
10.6 Form of Indemnity Agreement (ii)
10.7 Agreement to Purchase Ownership Interests and Termination of
Management Agreement Among RHF-Amarillo, Ltd., RHF-El Paso, Ltd.,
RHF-Irving, Ltd., RHF-San Antonio North, Ltd., Westar Hotels, Inc.
and Extended Stay Limited Partnership (i)
10.8 Loan Agreement between VPS I, L.P. and Nomura Asset Capital
Corporation(ii)
10.9 Mortgage Loan Facility between Bank One Arizona, N.A. and Homegate
Hospitality, Inc. (i)
10.10 Form of Stockholders Agreement between ESH Partners, L.P. and
JMI/Greystar Extended Stay Partners, L.P. (ii)
10.11 Form of Registration Rights Agreement (ii)
10.12 Limited Partnership Agreement of Developer Extended Stay Partners,
L.P. (i)
22.1 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
___________
(i) Previously filed with the Securities Exchange Commission (the
"Commission") as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-11113) filed with the Commission on August 30,
1996, and incorporated herein by reference.
21
<PAGE>
(ii) Previously filed with the Commission as an exhibit to the Company's
Amendment No. 2 to the Registration Statement on Form S-1 (File Number
333-11113) filed with the Commission on October 18, 1996, and
incorporated herein by reference.
(b) Reports of Form 8-K.
The Company did not file any reports on Form 8-K during the period ended
December 31, 1996.
22
<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.
Homegate Hospitality, Inc.
By: /s/ Robert A. Faith
---------------------------------
Robert A. Faith
Chief Executive Officer
Date: March 31, 1997
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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
----------- ---------- ------
<S> <C> <C>
/s/ Robert A. Faith President, Chief Executive March 31, 1997
- ---------------------------------- Officer and Chairman of the
(Robert A. Faith) Board (Principal Executive
Officer)
/s/ Tim V. Keith Chief Financial Officer March 28, 1997
- ---------------------------------- (Principal Financial Officer
(Tim V. Keith) and Accounting Officer)
/s/ William B. Buchanan, Jr. Director March 31, 1997
- ----------------------------------
(William B. Buchanan)
/s/ James D. Carreker Director March 31, 1997
- ----------------------------------
(James D. Carreker)
/s/ Harlan R. Crow Director March 28, 1997
- ----------------------------------
(Harlan R. Crow)
/s/ Anthony W. Dona Director March 28, 1997
- ----------------------------------
(Anthony W. Dona)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
----------- ---------- ------
<S> <C> <C>
/s/ John R. Huff Director March 27, 1997
- ----------------------------------
(John R. Huff)
/s/ John J. Moores Director March 27, 1997
- ----------------------------------
(John J. Moores)
/s/ Charles E. Noell Director March 27, 1997
- ----------------------------------
(Charles E. Noell)
/s/ Leonard W. Wood Director March 28, 1997
- ----------------------------------
(Leonard W. Wood)
</TABLE>
24
<PAGE>
Exhibit 22.1
Subsidiaries of Homegate Hospitality, Inc.
VPS I, L.P., a Delaware limited partnership
VPS, Inc., a Delaware corporation
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-20453) pertaining to the Homegate Hospitality, Inc. 1996 Long-Term
Incentive Plan of our report dated February 20, 1997, with respect to the
financial statements and schedule of Homegate Hospitality, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Dallas, Texas
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> FEB-09-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,434,877
<SECURITIES> 0
<RECEIVABLES> 2,607,253
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,693,684
<PP&E> 51,382,413
<DEPRECIATION> 275,872
<TOTAL-ASSETS> 88,533,408
<CURRENT-LIABILITIES> 2,883,931
<BONDS> 0
0
0
<COMMON> 107,250
<OTHER-SE> 64,581,218
<TOTAL-LIABILITY-AND-EQUITY> 88,533,408
<SALES> 2,233,391
<TOTAL-REVENUES> 2,690,697
<CGS> 0
<TOTAL-COSTS> 1,675,936
<OTHER-EXPENSES> 1,295,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 585,448
<INCOME-PRETAX> (866,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (866,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (866,407)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
