<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 . . . . . . . . . .
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 000-21509
HOMEGATE HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-0511313
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
111 CONGRESS AVENUE, SUITE 2600
AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (512) 477-6400
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
--- ---
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of November 13, 1997: 10,725,000 shares.
<PAGE> 2
HOMEGATE HOSPITALITY, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets -
September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated statements of operations -
Three and Nine months ended September 30, 1997 and September 30, 1996 . . . . . . . . 4
Consolidated statements of cash flows -
Nine months ended September 30, 1997 and September 30, 1996 . . . . . . . . . . . . . 5
Notes to consolidated financial statements - September 30, 1997 . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
Signatures
2
<PAGE> 3
Part I - Financial Information
Item 1. - Consolidated Financial Statements
Homegate Hospitality, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,534,752 $ 31,475,679
Restricted cash 680,747 959,198
Accounts receivable
Hotel 288,727 241,403
Other 156,125 256,939
Interest - 208,411
Earnest money deposits 490,000 546,000
Prepaid expenses 461,680 552,054
-------------- --------------
Total current assets 3,612,031 34,239,684
Property and equipment, net (Note 2) 121,428,027 51,106,541
Loans receivable (Note 3) - 1,900,500
Deferred loan costs, net 1,027,155 335,547
Other assets, net 641,523 951,136
-------------- --------------
Total assets $ 126,708,736 $ 88,533,408
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,069,305 $ 1,101,225
Accrued expenses 704,464 224,694
Payables to affiliates 1,703,447 1,132,274
Note payable - Prime Hospitality (Note 4) 23,894,000 -
Current maturities of mortgage and other notes payable 720,214 425,738
-------------- --------------
Total current liabilities 28,091,430 2,883,931
Mortgage and other notes payable (Note 5) 35,662,582 20,961,009
Stockholders' equity (Note 6)
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 107,250 107,250
Additional paid in capital 65,447,625 65,447,625
Retained earnings (deficit) (2,600,151) (866,407)
-------------- --------------
Total stockholders' equity 62,954,724 64,688,468
-------------- --------------
Total liabilities and stockholders' equity $ 126,708,736 $ 88,533,408
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE> 4
Homegate Hospitality, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Room revenue $ 1,954,579 $ 630,051 $ 5,976,507 $ 654,854
Other revenue 49,134 4,844 152,526 6,548
Interest income 32,225 - 635,443 -
------------ ----------- ------------ -----------
Total revenues 2,035,938 634,895 6,764,476 661,402
COSTS AND EXPENSES
Property operating expenses 1,463,214 461,239 4,172,895 491,552
Corporate operating expenses 532,913 314,309 1,947,001 518,582
Depreciation and amortization 428,097 103,267 1,053,262 112,800
Interest 444,920 168,803 1,325,065 190,260
------------ ----------- ------------ -----------
Total costs and expenses 2,869,144 1,047,618 8,498,223 1,313,194
------------ ----------- ------------ -----------
Net loss $ (833,206) $ (412,723) $ (1,733,747) $ (651,792)
============ =========== ============ ===========
Net loss per share $ (.08) $ (.04) $ (.16) $ (.06)
============ =========== ============ ===========
Weighted average number
of shares outstanding 10,725,000 10,725,000 10,725,000 10,725,000
============ =========== ============ ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
Homegate Hospitality, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
<S> <C> <C>
OPERATING ACTIVITIES 1997 1996
-------------- --------------
Net loss $ (1,733,747) $ (651,793)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 1,053,262 112,800
Amortization of loan costs 25,519 -
Accrued interest added to mortgage note payable 155,459 70,000
Changes in operating assets and liabilities
Restricted cash 278,452 -
Accounts receivable 261,900 (652,418)
Prepaid expenses 90,374 (93,389)
Property taxes payable 315,121 -
Other current liabilities 14,089 -
Accounts payable (203,671) 1,029,882
Accrued expenses 479,771 411,923
Payables to affiliates (33,089) 202,596
-------------- --------------
Net cash provided by operating activities 703,440 429,601
-------------- --------------
INVESTING ACTIVITIES
Acquisition of land (21,895,896) (30,004,529)
Acquisition of hotel facility (2,773,410) (6,049,645)
Construction in progress, net of payables to affiliates (28,361,841) -
Additions to property and equipment, net of development costs payable (14,585,900) (1,284,775)
Additions to earnest money deposits (420,000) -
Additions to development costs (262,255) -
Additions to other assets (226,611) (754,698)
-------------- --------------
Net cash used in investing activities (68,525,913) (38,093,647)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from mortgage and other notes payable 39,127,752 20,849,854
Principal payments on mortgage and other notes payable (393,162) -
Payment of deferred loan costs (853,044) (351,741)
Contributions from partners - 18,669,920
-------------- --------------
Net cash provided by financing activities 37,881,546 39,168,033
-------------- --------------
Net increase/(decrease) in cash and cash equivalents (29,940,927) 1,503,987
Cash and cash equivalents at beginning of period 31,475,679 -
-------------- --------------
Cash and cash equivalents at end of period $ 1,534,752 $ 1,503,987
============== ==============
</TABLE>
See accompanying notes.
5
<PAGE> 6
Homegate Hospitality, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
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. Accordingly, the financial
results of ESLP, the predecessor to the Company, for the period from inception
(February 9, 1996) through September 30, 1996, have been included herein. ESLP
had no operations until June 1996.
The financial statements included herein have been prepared in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not
include all disclosures required under generally accepted accounting principles
for complete financial statements. In the opinion of management, the financial
statements reflect all adjustments, which consist only of normal recurring
adjustments, necessary for a fair presentation of the financial statements for
the interim periods presented. Interim results of operations are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
On July 25, 1997, the Company entered into a definitive merger agreement
("Merger Agreement") with Prime Hospitality Corp. ("Prime") pursuant to which
the Company will merge with a wholly owned subsidiary of Prime. Under the
Merger Agreement, Prime will issue 0.6073 shares of its common stock for each
of the 10,725,000 outstanding shares of the Company's common stock. The Merger
Agreement is subject to the approval of the stockholders of the Company and
other customary terms and conditions. A meeting of the Company's stockholders
has been called for on December 1, 1997 and the merger is expected to be
completed promptly thereafter.
6
<PAGE> 7
HOMEGATE HOSPITALITY, INC.
Notes to Consolidated Financial Statements (continued)
(unaudited)
2. PROPERTY AND EQUIPMENT
At September 30, 1997 and December 31, 1996, property and equipment consisted
of the following:
<TABLE>
<CAPTION>
September 30, December 31,
-------------- --------------
1997 1996
-------------- --------------
<S> <C> <C>
Land $ 41,565,767 $ 16,473,296
Buildings and improvements 42,308,785 28,300,127
Construction in progress 32,780,024 4,623,153
Furniture, fixtures, and equipment 6,036,495 1,985,837
-------------- --------------
122,691,071 51,382,413
Less accumulated depreciation 1,263,044 275,872
-------------- --------------
$ 121,428,027 $ 51,106,541
============== ==============
</TABLE>
During the third quarter of 1997, the Company acquired three land parcels in
Austin, Texas, and one in Tampa, Florida that are under development for hotel
construction. Additionally, the Company acquired one land parcel in each of the
following cities: Aurora, Colorado; Orlando, Florida; Columbia, Maryland; and
Columbus, Ohio for future development of hotel facilities. On August 12, 1997
the company purchased an existing corporate housing project in Charlotte, North
Carolina. The Company is intending to convert this project to an extended stay
hotel in 1998. The Company must first obtain the proper zoning for this
conversion to occur. As of September 30, 1997, the Company had entered into
agreements, letters of intent, contracts, or other arrangements for the future
purchase of eleven additional land parcels.
Trammell Crow Residential (TCR) and Greystar Realty Services (GRS) are
developing the hotel facilities under an agreement that expires at the earlier
of the completion of the sixtieth hotel or December 31, 1998.
7
<PAGE> 8
HOMEGATE HOSPITALITY, INC.
Notes to Consolidated Financial Statements (continued)
(unaudited)
3. LOANS RECEIVABLE
During 1996, the Company advanced $1,900,500 under two promissory notes to an
unrelated party for the purchase of two parcels of land in Austin, Texas (the
"Rutherford and Jolleyville sites"), on which extended-stay hotel facilities
are being developed. During the first quarter and second quarters of 1997, the
Company advanced an additional $400,000 and $793,837, respectively, under the
notes for various development costs. These notes accrued interest at ten
percent and matured on the sooner of November 2000 or five business days after
demand. On July 3, 1997, the Company purchased the Rutherford and Jolleyville
sites for a total purchase price of $508,713, net of the two promissory notes
and the related accrued interest.
4. NOTE PAYABLE - PRIME HOSPITALITY
In accordance with a commitment letter executed by the Company and Prime
contemporaneously with the execution of the Merger Agreement, the Company and
Prime thereafter executed a loan agreement pursuant to which Prime provided a
$65 million interim secured construction term loan facility ("Construction Term
Loan Facility") to the Company. The Construction Term Loan Facility is to be
used for the acquisition and development of specific sites. The Construction
Term Loan Facility matures and all amounts outstanding thereunder are due at
the earlier of (a) April 1, 1998, (b) the date on which the Company enters into
any agreement (other than the Merger Agreement) with respect to any alternative
proposal or otherwise relating to the merger or sale of substantially all of
the assets of the Company and (c) four months after the termination of the
Merger Agreement. The Company paid a loan fee of 1% of the aggregate principal
amount of the Construction Term Loan Facility. Monthly interest payments
commence December 15, 1997. The interest accrues monthly at a rate of the one
month LIBOR plus 3.5%; provided that the interest rate will increase to the one
month LIBOR plus 5% on the date that is the earlier of (a) November 30, 1997
and (b) the date of the termination of the Merger Agreement (other than a
termination as a result of a breach by Prime). The loan is secured by a first
priority perfected security interest in specified sites. The amount of any loan
under the facility may not exceed 75% of the total project costs of the related
project. The outstanding balance at September 30, 1997 was $23,894,000.
8
<PAGE> 9
HOMEGATE HOSPITALITY, INC.
Notes to Consolidated Financial Statements (continued)
(unaudited)
5. MORTGAGE AND OTHER NOTES PAYABLE
MORTGAGE NOTES PAYABLE
The Company has entered into a Master Loan Agreement (the "Note") with Bank
One, Arizona, N.A. ("BOA"). 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. As of September 30, 1997, six
loans have been committed under the Note with aggregate note amounts equaling
$24,611,067.
On May 31, 1996, a loan, in the amount of $3,448,250, was committed under the
Note in connection with the acquisition of the hotel in Grand Prairie, Texas.
This loan, secured by the hotel in Grand Prairie, accrues interest at either
LIBOR plus 2.25% or prime plus .5% based on the election of the Company (7.91%
at September 30, 1997), and required 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
September 30, 1997 was $2,861,194.
On August 15, 1996, a 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 2.5% or prime plus .5% based on the election of the Company (8.13%
at September 30, 1997), and required 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 September 30, 1997 was
$3,168,839.
On February 4, 1997, a loan, in the amount of $5,070,000, was committed under
the Note, secured by the Austin Town Lake hotel facility. The funding of this
loan by BOA occurred on May 12, 1997. This loan accrues interest at either
LIBOR plus 2.25% or prime plus .5% based on the election of the Company (7.91%
at September 30, 1997), and requires principal and interest payments based upon
a fifteen year amortization until maturity, February 4, 2000. The outstanding
balance at September 30, 1997 was $4,859,006.
On July 21, 1997, a loan, in the amount of $3,961,379, was committed under the
Note in connection with the construction of the hotel in Denver, Colorado. This
loan, secured by the hotel at Denver Tech Center, accrues interest at either
LIBOR plus 2.5% or prime plus .5% based on the election of the Company (8.13%
at September 30, 1997), 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, July 21, 1999. 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 September 30, 1997 was
$2,477,954.
9
<PAGE> 10
HOMEGATE HOSPITALITY, INC.
Notes to Consolidated Financial Statements (continued)
(unaudited)
On August 6, 1997, a loan, in the amount of $4,294,828, was committed under the
Note in connection with the construction of the hotel in Phoenix, Arizona. This
loan, secured by a hotel at Phoenix Interstate 10 & Chandler, accrues interest
at either LIBOR plus 2.5% or prime plus .5% based on the election of the
Company (8.16% at September 30, 1997), 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 6, 1999. 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 September
30, 1997 was $1,858,231.
On August 18, 1997, a loan, in the amount of $4,326,725, was committed under
the Note in connection with the construction of the hotel in Dallas, Texas.
This loan, secured by a hotel at Dallas Park Central (Vantage Point Drive),
accrues interest at either LIBOR plus 2.5% or prime plus .5% based on the
election of the Company (8.16% at September 30, 1997), 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
18, 1999. 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 September 30, 1997 was $1,084,082.
In connection with the acquisition of the 511 Queens corporate housing project
in Charlotte, North Carolina, the Company entered into a $1,900,000 mortgage
note due to Morgan Guaranty Trust Company of New York, with interest at 7.97%
through September 1, 2007. The note is due in monthly installments of
$14,626.77, including interest, from October 1997 through September 2007, and
is secured by the 511 Queens property and improvements. The outstanding balance
at September 30, 1997 was $1,897,992.
In connection with the acquisition of Westar, the Company assumed an
$18,100,000 mortgage note due to Nomura Asset Capital Corporation ("Nomura"),
with interest at 9.71% through January 11, 2011 and thereafter at the greater
of 14.71% or the Treasury Rate plus 9%. The note is due in monthly installments
of $160,789, including interest, from February 1996 through January 2021, and
is secured by the Westar hotel properties and improvements. The outstanding
balance at September 30, 1997 was $17,837,175.
The mortgage note payable to Nomura 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.
Restricted cash includes cash retained by Nomura's mortgage servicer for
payment of taxes, insurance and debt service.
10
<PAGE> 11
HOMEGATE HOSPITALITY, INC.
Notes to Consolidated Financial Statements (continued)
(unaudited)
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 September 30, 1997 was $338,323.
6. STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"),
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will be
excluded. Management believes that adoption of SFAS No. 128 will not have a
material effect on earnings per share.
11
<PAGE> 12
HOMEGATE HOSPITALITY, INC.
Item 2. - 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 mid-price
extended-stay hotels. In October 1996, ESLP was merged into Homegate, in
exchange for 6,386,087 shares of common stock. Hereinafter, Homegate, its
predecessor ESLP, and its subsidiaries are collectively referred to as the
"Company." On October 29, 1996, the Company completed an initial public
offering of 4,325,000 shares of common stock at $11.50 per share.
On July 25, 1997, the Company entered into a definitive merger agreement
("Merger Agreement") with Prime Hospitality Corp. ("Prime") pursuant to which
the Company will merge with a wholly owned subsidiary of Prime. Under the
Merger Agreement, Prime will issue 0.6073 shares of its common stock for each
of the 10,725,000 outstanding shares of the Company's common stock. The Merger
Agreement is subject to the approval of the stockholders of the Company and
other customary terms and conditions. A meeting of the Company's stockholders
has been called for December 1, 1997 and the merger is expected to be completed
promptly thereafter.
The Company, during the period from its inception through September 30, 1997,
completed its concept and product design, market study and initial site
selection activities, and acquired and/or constructed its first properties. As
of September 30, 1997, the Company had 22 employees.
The Company operated nine hotels and one corporate housing project during the
third quarter of 1997. The following is a summary of the Company's operating
properties as of September 30, 1997 and September 30, 1996 by date operations
started:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- -----------------------
# OF TOTAL # # OF TOTAL # DATE COMPANY
METROPOLITAN AREA PROPERTIES OF UNITS PROPERTIES OF UNITS OPERATIONS STARTED
----------------- ---------- -------- ---------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
* Grand Prairie, Texas 1 139 1 139 June 17, 1996
** Amarillo, Texas 1 126 1 126 September 6, 1996
** El Paso, Texas 1 126 1 126 September 6, 1996
** Irving, Texas 1 126 1 126 September 6, 1996
** San Antonio, Texas 2 244 2 244 September 6, 1996
* Austin, Texas 1 149 - - January 1, 1997
* Phoenix, Arizona 1 139 - - April 4, 1997
* Charlotte, North Carolina 1 54 - - August 12, 1997
* Denver, Colorado 1 139 - - September 5, 1997
------------------ -------------------
10 1,242 6 761
================== ===================
</TABLE>
* - These properties have been operated as extended stay facilities from the
date Company operations started.
** - These properties ("Westar" hotels) were acquired on September 6, 1996 and
were operated as nightly stay hotels for most of the nine months ended
September 30, 1997 pending completion of renovations. The following is a
summary of when the renovations were complete which is when they began
operations as extended stay hotels:
# Amarillo, Texas - To be completed during the fourth
quarter of 1997
# El Paso, Texas - Completed August 3, 1997
# Irving, Texas - Completed August 7, 1997
# San Antonio, Texas - Airport - Completed August 3, 1997
12
<PAGE> 13
HOMEGATE HOSPITALITY, INC.
# San Antonio, Texas - Fiesta - To be completed during the fourth
quarter of 1997
The following is a summary of the Company's development and construction
activities as of September 30, 1997 and September 30, 1996 by metropolitan
areas:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
# IN TOTAL # # IN TOTAL #
METROPOLITAN AREA AREA OF UNITS AREA OF UNITS
----------------- ---- -------- ---- ---------
<S> <C> <C> <C> <C>
Austin, Texas 3 376 - -
Columbia, Maryland 1 131 - -
Columbus, Ohio 1 83 - -
Dallas, Texas 2 267 - -
Denver, Colorado 1 130 1 143
Houston, Texas 3 358 - -
Indianapolis, Indiana 2 255 - -
Kansas City, Kansas 2 250 2 250
Las Vegas, Nevada 1 127 - -
Orlando, Florida 2 264 - -
Phoenix, Arizona 3 396 1 139
Pompano Beach, Florida 1 129 - -
Portland, Oregon 2 258 - -
Raleigh, North Carolina 1 138 - -
Tampa, Florida 1 132 - -
Webster, Texas 1 82 - -
----------------- --------------------
27 3,376 4 532
================= ====================
</TABLE>
The 27 sites currently under construction and development are expected to be
completed at various times during 1997 and 1998. As of September 30, 1997, the
Company had 11 sites subject to letters of intent, contracts, or other purchase
arrangements and was evaluating another 11 sites. As of September 30, 1996, the
Company had eight sites subject to letters of intent, contracts, or other
purchase arrangements.
13
<PAGE> 14
HOMEGATE HOSPITALITY, INC.
RESULTS OF OPERATIONS
PROPERTY OPERATIONS
The following is a summary of the properties operated during the three months
ended September 30, 1997 and 1996 and the related Available Room Nights,
occupancy rate, Average Weekly Rate, and weekly REVPAR (Refer to Table on Page
12 for listing of operating hotel properties):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------------------------------
AVAILABLE AVERAGE AVAILABLE AVERAGE
FACILITIES OCCUPANCY ROOM WEEKLY FACILITIES OCCUPANCY ROOM WEEKLY
OPEN % NIGHTS RATE REVPAR OPEN % NIGHTS RATE REVPAR
---- - ------ ---- ------ ---- - ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Extended Stay
facilities 5 63% 44,538 $259.32 $163.87 1 49% 12,788 $207.91 $102.10
Westar facilities 5 43% 57,224 $257.24 $111.06 5 63% 15,550 $321.69 $199.66
-------------------------------------------------------------------------------------------------------------
Total 10 52% 101,762 $258.35 $134.18 6 56% 28,338 $276.84 $155.63
=============================================================================================================
</TABLE>
The Company's average occupancy rate dropped to 52% for the three months ended
September 30, 1997, as compared to 56% for the same period in 1996 resulting in
a 4% decrease in occupancy. The Average Weekly Rate dropped to $258.35 for the
three months ended September 30, 1997, as compared to $276.84 in the same
period in 1996 resulting in a decrease of $18.49. The weekly REVPAR fell to
$134.18 for the three months ended September 30, 1997, as compared to $155.63
for the same period in 1996 resulting in a decrease of $21.45. The decrease in
occupancy, Average Weekly Rate, and weekly REVPAR for the three months ended
September 30, 1997 as compared to the same period in 1996 was significantly
influenced by the loss of 14% of available room nights during the third quarter
of 1997 due to the Westar renovations. After reducing the available room nights
by the number of Westar rooms under renovation, weekly REVPAR would have been
$156.55 for the three months ended September 30, 1997.
The following is a summary of the properties operated during the nine months
ended September 30, 1997 and 1996 and the related Available Room Nights,
occupancy rate, Average Weekly Rate, and weekly REVPAR (Refer to Table on Page
12 for listing of operating hotel properties):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------------------------------------------------------------------------------------------------
AVAILABLE AVERAGE AVAILABLE AVERAGE
FACILITIES OCCUPANCY ROOM WEEKLY FACILITIES OCCUPANCY ROOM WEEKLY
OPEN % NIGHTS RATE REVPAR OPEN % NIGHTS RATE REVPAR
---- - ------ ---- ------ ---- - ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Extended stay
facilities 5 71% 108,898 $262.23 $186.37 1 49% 14,734 $207.01 $100.40
Westar facilities 5 48% 169,184 $267.59 $127.70 5 63% 15,550 $321.69 $199.66
---------------------------------------------------------------------------------------------------------------
Total 10 57% 278,082 $265.65 $150.68 6 56% 30,284 $229.64 $119.99
===============================================================================================================
</TABLE>
14
<PAGE> 15
HOMEGATE HOSPITALITY, INC.
The Company's average occupancy rate rose to 57% for the nine months ended
September 30, 1997, as compared to 56% for the same period in 1996 resulting in
a 1% increase in occupancy. The Average Weekly Rate rose to $265.65 for the
nine months ended September 30, 1997, as compared to $229.64 in the same period
in 1996 resulting in a increase of $36.01. The weekly REVPAR rose to $150.68
for the nine months ended September 30, 1997, as compared to $119.99 for the
same period in 1996 resulting in an increase of $30.69. The increase in
occupancy, Average Weekly Rate, and weekly REVPAR for the nine months ended
September 30, 1997 as compared to the same period for 1996, reflects the
stabilization of three of the extended stay facilities. However, these results
were negatively impacted by the pre-stabilization periods for the two extended
stay facilities (44th and Oak in Phoenix and Denver Tech Center) opened in 1997
and the loss of 13% of available room nights during the nine months ended
September 30, 1997 due to the Westar renovations (see below). After reducing
the available room nights by the number of Westar rooms under renovation,
weekly REVPAR would have been $172.88 for the nine months ended September 30,
1997.
Room revenue increased to $1,955,000 for the third quarter of 1997, as compared
to $630,000 for the same period in 1996 and increased to $5,977,000 for the
nine months ended September 30, 1997, as compared to $655,000 for the same
period in 1996. These increases in room revenue are attributable to the opening
of new or acquired properties in 1996 and 1997.
Property operating expenses increased to $1,463,000 in the third quarter of
1997 as compared to $461,000 in the same period of 1996 and increased to
$4,173,000 for the nine months ended September 30, 1997 as compared to $492,000
for the same period of 1996. These increases are attributable to the opening of
new or acquired properties in 1996 and 1997.
Depreciation and amortization expense applicable to hotel operations increased
to $407,000 for the third quarter of 1997, as compared to $97,000 in the same
period of 1996 and increased to $1,039,000 for the nine months ended September
30, 1997, as compared to $102,000 in the same period of 1996. These increases
are attributable to the opening of new or acquired properties in 1996 and 1997.
Interest expense increased to $445,000 for the third quarter of 1997, as
compared to $169,000 for the same period in 1996 and increased to $1,325,000
for the nine months ended September 30, 1997, as compared to $190,000 for the
same period in 1996. This interest relates primarily to the loan on the Westar
hotels which was acquired by the Company on September 6, 1996. Interest on all
other loans has been capitalized as construction period interest for the
properties under development. The increases in interest expense are due to
there being a full three months of interest expense on the Westar hotels in the
third quarter of 1997 and a full nine months of interest expense on the Westar
hotels for the nine months ended September 30, 1997, as compared to twenty-five
days in the same periods of 1996.
The hotel in Grand Prairie, which began operations on June 17, 1996, was the
only hotel that the Company operated for the full three months ended September
30, 1996 and three months ended September 30, 1997. The occupancy rate for the
Grand Prairie hotel increased to 60% for the third quarter of 1997, as compared
to 49% for the same period in 1996. The Average Weekly Rate increased to
$234.78 for the third quarter of 1997, as compared to $207.91 for the same
period in 1996. The weekly REVPAR increased to $140.01 for the third quarter of
1997 as compared to $102.10 in the same period of 1996.
During the three months and nine months ended September 30, 1997, the Westar
hotels lost 14,496 and 35,610 room nights, respectively, due to rooms being
renovated. The Available Room Nights for the three months and nine months ended
September 30, 1997 were 56,602 and 169,184, respectively. This represented a
26% loss and 21% loss of potential revenue from these hotels during the three
months and nine months ended September 30,
15
<PAGE> 16
HOMEGATE HOSPITALITY, INC.
1997, respectively, with an additional loss of revenue due to guests not
wanting to be inconvenienced while the hotels are under construction.
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 increased to $533,000 for
the third quarter of 1997 as compared to $314,000 in the same period of 1996
and increased to $1,947,000 for the nine months ended September 30, 1997, as
compared to $519,000 in the same period in 1996. These increases are primarily
due to the increase in the number of employees and related expenses and
increased costs due to the Company being a publicly held entity.
16
<PAGE> 17
HOMEGATE HOSPITALITY, INC.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of $1,535,000.
Cash balances are currently invested in short-term, investment grade, interest
bearing securities.
The Company owes approximately $17.8 million on a 9.71% secured promissory note
for the purchase of the Westar hotels. This debt is payable on a fixed 25-year
amortization schedule in monthly installments through January 11, 2021.
The Company owes approximately $1.9 million on a 7.97% secured promissory note
for the purchase of the 511 Queens corporate housing project in Charlotte,
North Carolina. This debt is payable on a fixed 10-year amortization schedule
in monthly installments through September 2007.
The Company has a $30 million mortgage loan facility (the "Existing Mortgage
Facility") with Bank One, Texas, N.A. ("BOA"), which provides the Company with
construction financing for up to eight extended-stay hotels. The Company is
permitted to borrow 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 on 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 be obligated 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 will have full recourse against the Company for the loans,
including environmental indemnities.
As of September 30, 1997, the Company had incurred indebtedness under the
Existing Mortgage Facility of approximately $16.3 million of which $4.8 million
was attributed to the Town Lake hotel in Austin, $2.8 million was attributed to
the Studio Suites hotel in Grand Prairie, $3.2 million was attributed to the
44th and Oak hotel in Phoenix, $2.5 million was attributed to the Denver Tech
Center hotel in Denver, $1.1 million was attributed to the Park Central hotel
in Dallas, and $1.9 million was attributed to the I-10 and Chandler hotel in
Phoenix . The Austin Town Lake hotel and Grand Prairie hotel loans bear
interest at LIBOR plus 2.25% and the remaining four loans bears interest at
LIBOR plus 2.5%. The Austin debt is due on February 4, 2000 and the Grand
Prairie debt is due on May 31, 1999. The Phoenix 44th and Oak debt is due on
August 15, 1998, the Denver Tech Center debt is due on July 21, 1999, the
Phoenix I-10 and Chandler debt is due on August 6, 1999, the Dallas Park
Central debt is due on August 18, 1999; however, these loans may be extended
for an additional three years as described above.
On July 25, 1997, the Company entered into a definitive merger agreement
("Merger Agreement") with Prime Hospitality Corp. ("Prime") pursuant to which
the Company will merge with a wholly owned subsidiary of Prime. Under the
Merger Agreement, Prime will issue 0.6073 shares of its common stock for each
of the 10,725,000 outstanding shares of the Company's common stock. In
connection with the Merger Agreement, the Company and Prime executed a loan
agreement pursuant to which Prime agreed to provide a $65 million interim
secured construction term loan facility ("Construction Term Loan Facility") to
the Company. As of September 30, 1997, the outstanding balance on the
Construction Term Loan Facility was $23.9 million leaving a balance of $41.1
17
<PAGE> 18
HOMEGATE HOSPITALITY, INC.
million to be drawn, if necessary. The Construction Term Loan Facility is to be
used for the acquisition and hotel development of specific sites. The
Construction Term Loan Facility matures and all amounts outstanding thereunder
are due at the earlier of (a) April 1, 1998, (b) the date on which the Company
enters into any agreement (other than the Merger Agreement) with respect to any
alternative proposal or otherwise relating to the merger or sale of
substantially all of the assets of the Company and (c) four months after the
termination of the Merger Agreement. The Company paid a loan fee of 1% of the
aggregate principal amount of the Construction Term Loan Facility. Monthly
interest payments commence December 15, 1997. Interest accrues monthly at a
rate of the one month LIBOR plus 3.5%; provided that the interest rate will
increase to the one month LIBOR plus 5% on the date that is the earlier of (a)
November 30, 1997 and (b) the date of the termination of the Merger Agreement
(other than a termination as a result of a breach by Prime). The loans are
secured by a first priority perfected security interest in specified sites. The
amount of any loan under the facility may not exceed 75% of the total project
costs of the related project.
The Construction Term Loan Facility is secured by 23 properties currently under
development and by any future development properties. The amount of any
Construction Term Loan may not exceed 75% of the total project costs of the
related project. The loan documentation for the Construction Term Loan Facility
contains various affirmative and negative covenants concerning the operation of
the Company as well as events of default (including failure to pay amounts due
under the loan documents or to comply with such covenants or a breach of the
Merger Agreement by the Company). The loan documents require the Company to
comply with the covenants contained in the Merger Agreement.
Although the Company has access to financing under the Existing Mortgage
Facility and the Construction Term Loan Facility, the Company may need to
procure substantial additional financing over time to complete its Initial
Hotel Program, which calls for 65 hotels to be opened or under construction by
December 31, 1998. The exact amount of financing 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. The Company expects that it will
spend between $4 million and $9 million on each development or acquired hotel.
If the Merger is not consummated, the Company will face an immediate working
capital shortage that will require it to seek additional financing and take
measures to preserve cash. The Company would also be required to seek
replacement financing for the Construction Term Loan Facility, which will
mature on April 30, 1998. There can be no assurance that the required
additional financing would be available or that it would be available on
acceptable terms. Measures taken to preserve cash would most likely include the
interruption of construction activity on some or all projects under
development. Interruption of construction activity would preclude the Company
from meeting its growth plans, which would most likely have at least a
temporary material adverse effect on the market price of the Company's common
stock.
The Existing Mortgage Facility, Construction Term Loan 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. In addition, future debt
facilities may materially limit the Company's ability to pay dividends.
In connection with the execution of the Merger Agreement, the Company, Prime,
Crow Hotel Realty Investors, L.P. ("Crow"), and Wyndham Hotel Corporation and
certain of its affiliates (collectively, "Wyndham") entered into an Agreement
Regarding Termination of Management Agreements pursuant to which, upon
completion of the Merger, either the Company or Wyndham will have the right to
terminate all management agreements providing for Wyndham's management of the
Company's properties, thereby obligating the Company to pay to Wyndham $8
million and Crow to deliver to Wyndham a $4 million, six month, secured
promissory note, which
18
<PAGE> 19
HOMEGATE HOSPITALITY, INC.
payment and delivery will be in full satisfaction of any and all claims Wyndham
may have against the Company relating to termination of the management
agreements. On November 1, 1997, the Company transitioned the management of the
hotel properties from Wyndham to Prime.
19
<PAGE> 20
HOMEGATE HOSPITALITY, INC.
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.
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. The forward looking
statement made in Item 2 with respect to the Company's expectation of
construction and developing 27 hotels by the end of 1998 is subject to the
risks of weather-induced construction delays. The forward looking statements
made in Item 2 with regard to the Company's 11 sites with letters of intent,
contracts or other agreements to purchase and the other 11 sites under
evaluation are subject to the risks of the Company's ability to 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 the various entitlements
processes, the risks of inclement weather and the risks associated with the
Company's ability to obtain the required capital (to the extent it has not
already done so). The forward looking statement made in Item 2 with reference
to the Company's expectation that the merger will occur promptly after the
December 1, 1997 stockholders meeting is subject to the risk that the Company's
stockholders could fail to approve the merger or that other conditions to the
merger could fail to be satisfied.
20
<PAGE> 21
HOMEGATE HOSPITALITY, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
----------- -----------
27 Article 5 Financial Data Schedule for the Nine
Months Ended September 30, 1997
(b) Reports on Form 8-K:
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and 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, President, Chief
Executive Officer and Chairman of
the Board (Principal Executive Officer)
By: /s/ TIM V. KEITH
---------------------------------------
Tim V. Keith, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: November 13, 1997
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <S>
27 Article 5 Financial Data Schedule for the Nine
Months Ended September 30, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,215,499
<SECURITIES> 0
<RECEIVABLES> 444,852
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,612,031
<PP&E> 121,428,027
<DEPRECIATION> 1,263,044
<TOTAL-ASSETS> 126,708,736
<CURRENT-LIABILITIES> 28,091,430
<BONDS> 0
0
0
<COMMON> 107,250
<OTHER-SE> 62,847,747
<TOTAL-LIABILITY-AND-EQUITY> 126,708,736
<SALES> 5,976,507
<TOTAL-REVENUES> 6,764,476
<CGS> 0
<TOTAL-COSTS> 6,119,896
<OTHER-EXPENSES> 1,053,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,325,065
<INCOME-PRETAX> (1,733,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,733,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,733,747)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
