<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 000-22843
BRIDGESTREET ACCOMMODATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3327773
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30670 Bainbridge Road, Solon, OH 44139
(Address of principal executive offices) (Zip code)
(440)248-3005
(Registrant's telephone number, including area code)
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
--- ---
As of November 3, 1998, there were 7,975,805 Common Shares, without par value,
of the registrant outstanding.
<PAGE> 2
BRIDGESTREET ACCOMMODATIONS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets:
September 30, 1998 (unaudited) and December 31, 1997............................. 3
Consolidated Statements of Operations:
Three and Nine Months Ended September 30, 1998 (unaudited) and 1997 4
(unaudited)......................................................................
Consolidated Statements of Cash Flows:
Three and Nine Months Ended September 30, 1998 (unaudited) and 1997
(unaudited) ..................................................................... 5-6
Notes to the Consolidated Financial Statements (unaudited) ........................... 7-10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................................ 11-17
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..................................................................... 18
ITEM 2 CHANGES IN SECURITIES................................................................. 18
ITEM 3 DEFAULTS UPON SENIOR SECURITIES....................................................... 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 18
ITEM 5 OTHER INFORMATION..................................................................... 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K..................................................... 18
SIGNATURES............................................................................ 19
</TABLE>
<PAGE> 3
BRIDGESTREET ACCOMMODATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,922,215 $ 3,392,636
Trade accounts receivable, less allowance for doubtful
accounts of $167,000 and $200,000 in 1997 and 1998, respectively 2,217,930 6,393,746
Security deposits held by landlords 264,541 441,952
Deferred income taxes 524,156 537,618
Prepaid rent 817,769 1,858,324
Other current assets 709,254 3,371,022
------------ ------------
Total current assets 13,455,865 15,995,298
Operating stock, net of accumulated amortization 1,682,579 2,148,730
Property and equipment, net of accumulated depreciation 2,535,094 3,960,183
Other assets 208,930 10,276
Due from stockholders/affiliates 348,000 --
Goodwill, net of amortization 24,332,484 40,789,266
------------ ------------
Total assets $ 42,562,952 $ 62,903,753
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 20,121 $ 755,846
Due to stockholders and affiliates 100,835 498,432
Accounts payable 1,027,307 1,772,723
Accrued payroll and employee benefits 511,963 1,016,893
Accrued expenses, other 1,473,486 5,624,328
Deferred revenue 690,509 792,763
Security deposits due to customers 459,251 638,076
------------ ------------
Total current liabilities 4,283,472 11,099,061
Long-term debt, net of current maturities 25,803 7,653,357
Deferred income taxes 675,480 1,462,849
Stockholders' Equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $0.01 par value; authorized 35,000,000 shares;
7,789,345 and 8,169,825 shares issued and
outstanding in 1997 and 1998, respectively 77,893 81,695
Additional paid in capital 35,889,414 40,134,730
Retained earnings 1,610,890 2,581,125
Translation adjustment -- (109,064)
------------ ------------
Total stockholders' equity 37,578,197 $ 42,688,486
------------ ------------
Total liabilities and stockholders' equity $ 42,562,952 $ 62,903,753
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
BRIDGESTREET ACCOMMODATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 15,370,619 $ 27,563,948 $ 36,914,828 $ 71,563,701
Operating Expenses:
Cost of services 10,922,684 19,826,565 26,737,715 52,634,177
Selling, general and administrative expense 2,947,295 5,348,618 7,344,665 15,111,119
Officers' stock compensation -- -- 1,210,261 --
Goodwill amortization 129,750 296,010 358,840 800,121
Restructuring charge -- -- -- 1,330,000
------------ ------------ ------------ ------------
Total operating expenses 13,999,729 25,471,193 35,651,481 69,875,417
------------ ------------ ------------ ------------
Operating income 1,370,890 2,092,755 1,263,347 1,688,284
Other Income (Expense):
Interest income 18,648 21,751 35,936 82,986
Interest expense (22,170) (144,670) (119,643) (297,556)
Other income, net 87,147 106,565 215,831 290,348
------------ ------------ ------------ ------------
Other income (expense), net 83,625 (16,354) 132,124 75,778
------------ ------------ ------------ ------------
Income before provision
for income taxes 1,454,515 2,076,401 1,395,471 1,764,062
Provision for income taxes 654,424 934,380 1,172,444 793,827
------------ ------------ ------------ ------------
Net income $ 800,091 $ 1,142,021 $ 223,027 $ 970,235
============ ============ ============ ============
Comprehensive income 800,091 1,070,923 223,027 861,171
============ ============ ============ ============
Net income per share-basic and dilutive $ 0.15 $ 0.14 $ 0.04 $ 0.12
============ ============ ============ ============
Weighted average shares outstanding-basic 5,498,952 8,169,825 5,326,478 8,107,616
Weighted average shares outstanding-dilutive 5,498,952 8,169,825 5,326,478 8,107,616
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 5
BRIDGESTREET ACCOMMODATIONS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 223,027 $ 970,235
Adjustments to reconcile net income to net
cash provided by operating activities--
Officers' stock compensation 1,210,261 --
Depreciation and amortization 641,038 1,594,607
Changes in operating assets and liabilities
excluding the effect of acquisitions--
Accounts receivable (1,870,443) (3,853,031)
Security deposits held by landlords (56,590) (50,593)
Prepaid expenses and other assets (685,064) (2,335,360)
Accounts payable and accrued expenses 3,419,172 2,848,966
Accrued income taxes 206,589 --
Deferred income taxes 161,506 773,907
Security deposits due to customers (20,375) (348,634)
Deferred revenue 533,450 102,254
------------ ------------
Net cash provided by (used) in operating activities 3,762,571 (297,649)
------------ ------------
Cash Flows From Investing Activities:
Sales of investments in short-term marketable
securities 152,253 --
Acquisitions, net of cash acquired (655,581) (12,354,293)
Purchases of operating stock (675,026) (696,247)
Purchases of property and equipment (582,175) (1,567,347)
------------ ------------
Net cash used in investing activities (1,760,529) (14,617,887)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from Initial Public Offering,
net of operating costs 14,612,400 --
Capitalization of offering costs 236,783 --
Addition (repayment) of long-term debt (1,203,451) 8,242,823
Due to stockholders/affiliates (806,742) 397,597
Collection on notes receivable 10,568 745,537
------------ ------------
Net cash provided by financing activities 12,849,558 9,385,957
------------ ------------
Net increase(decrease) in cash
and cash equivalents 14,851,600 (5,529,579)
Cash and cash equivalents, beginning of period 597,939 8,922,215
------------ ------------
Cash and cash equivalents, end of period $ 15,449,539 $ 3,392,636
============ ============
</TABLE>
5.
<PAGE> 6
<TABLE>
<S> <C> <C>
Supplemental Cash Flow Information:
Cash paid for interest $ 157,813 $ 274,615
Cash paid for income taxes $ 694,975 $ 1,479,793
Non-Cash Transaction:
During the first quarter of 1997, the Company exchanged 4,301,000 shares of
Common Stock of the Company for all of the outstanding stock of the five
Founding Companies.
In the first quarter of 1998, the Company issued approximately 379,000
shares of Common Stock of the Company or securities convertible into
Common Stock of the Company as consideration in three acquisitions.
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
BRIDGESTREET ACCOMMODATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was
incorporated on August 19, 1996, to create a leading national provider of
flexible accommodation services through the acquisition and consolidation of the
operations of flexible accommodation service companies. During the first quarter
of 1997, the Company acquired all the outstanding stock of five flexible
accommodation service providers (the "Founding Companies"), in exchange for
4,301,000 shares of Common Stock of the Company (the "Combination"). The Company
conducted no operations prior to January 2, 1997, except in connection with its
initial public offering and the Combination. For financial reporting purposes,
the largest Founding Company, Temporary Corporate Housing Columbus, Inc. ("TCH")
was designated as the accounting acquirer, and its acquisition of the remaining
four Founding Companies was accounted for using the purchase method of
accounting.
The interim consolidated financial statements presented herein have
been prepared by the Company and include the unaudited accounts of TCH,
Corporate Lodgings, Inc. and its four affiliates, Exclusive Interim Properties,
Ltd. and its affiliate, and Temporary Housing Experts, Inc. all of which were
merged with and into subsidiaries of the Company on January 2, 1997, as well as
the accounts of the following wholly-owned operating subsidiaries from the
indicated dates on which they acquired (by merger with or purchase of
substantially all of the assets of) flexible accommodation service providers:
HAI Acquisition Corp. (March 31, 1997); BridgeStreet Texas, L.P. (December 1,
1997); BridgeStreet Arizona, Inc. (December 1, 1997); BridgeStreet North
Carolina, Inc. (January 2, 1998); BridgeStreet Raleigh, Inc. (January 2, 1998);
BridgeStreet Texas, L.P. (Austin, January 2, 1998); BridgeStreet Colorado, Inc.
(January 2, 1998); BridgeStreet Accommodations Limited (February 19, 1998);
BridgeStreet Canada, Inc. (March 2, 1998); and BridgeStreet California, Inc.
(June 1, 1998). All intercompany accounts and transactions have been eliminated.
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position of the Company as of September 30, 1998
and the results of its operations and cash flows for the three and nine month
periods ended September 30, 1998 and 1997 have been included.
Operating results for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
Certain items in the 1997 financial statements have been reclassified
to conform to the 1998 presentation.
2. ACQUISITIONS
As discussed in Note 1, in the first quarter of 1997, the Company
merged with the five Founding Companies in stock-for-stock tax-free mergers. The
mergers have been accounted for using the purchase method of accounting with TCH
designated as the accounting acquirer and the other operating companies
designated as "acquired companies." The results of operations of the "acquired
companies" have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. The purchase price and
allocation of the purchase price of the four "acquired companies," including the
value of stock issued to the founders of BridgeStreet as a transaction fee, was
approximately $17.7 million based on an independent appraisal of the net assets
acquired. The aggregate cost of the acquisitions exceeded the estimated fair
value of assets and liabilities of the acquired companies by $17.5 million which
is being amortized as goodwill over 35 years.
7.
<PAGE> 8
Between April 1 and December 31, 1997, the Company made three
additional acquisitions. The acquisitions have been accounted for using the
purchase method of accounting. The aggregate cost of these acquisitions was
$6.75 million, consisting of $4.4 million of cash and $2.35 million of stock.
The preliminary purchase price allocation of these acquisitions resulted in
goodwill of approximately $7.25 million that is being amortized over 35 years.
The results of operations of these acquisitions have been included in the
accompanying consolidated financial statements from the date of acquisition.
Details of these acquisitions are noted below.
On June 30, 1997, the Company acquired for cash certain assets of
Corporate Housing Services, Inc., a flexible accommodation company servicing the
Memphis, Tennessee metropolitan area.
On December 1, 1997, the Company acquired certain assets of
Accommodations by Apple, Inc. ("ABA of Dallas"), a Texas flexible accommodation
company servicing Dallas and surrounding cities. The purchase consideration
consisted of cash and the issuance of approximately 151,000 shares of common
stock.
On December 1, 1997, the Company acquired certain assets of
Accommodations by Apple, Inc. ("ABA of Phoenix"), an Arizona flexible
accommodation company servicing several markets including Phoenix, Tucson and
Scottsdale. The purchase consideration consisted of cash and the issuance of
approximately 71,000 shares of common stock.
In the first quarter of 1998, the Company acquired six companies. The
acquisitions have been accounted for using the purchase method of accounting.
The total cost of these acquisitions was approximately $14.6 million, consisting
of cash and notes of $10.4 million and $4.2 million in stock. The preliminary
purchase price allocation of these acquisitions resulted in goodwill of
approximately $15.0 million that will be amortized over 35 years. The results of
operations of these acquisitions have been included in the accompanying
consolidated financial statements from the date of acquisition. Details
regarding these acquisitions are noted below.
On January 2, 1998, the Company acquired certain assets of Home on the
Road, Inc. of Charlotte, a North Carolina flexible accommodation company
servicing Charlotte and surrounding cities. The purchase consideration consisted
of cash and a promissory note.
On January 2, 1998, the Company acquired all the outstanding stock of
Home on the Road-Raleigh, a North Carolina flexible accommodation company
servicing several markets including Raleigh, Durham, Research Triangle Park,
Winston-Salem and Greensboro. The purchase consideration consisted of the
issuance of approximately 75,000 shares of common stock.
On January 2, 1998, the Company acquired for cash certain assets of
Accommodations by Apple-Denver and Accommodations by Apple-Austin, flexible
accommodation companies servicing several markets in the Denver metropolitan
area including Colorado Springs, Boulder and Fort Collins, and in the Austin,
Texas, metropolitan area. The purchase consideration of the two acquisitions was
cash and notes. Pro forma data is not presented as these acquisitions were not
material to the Company's results of operations.
On February 19, 1998, the Company acquired all the issued and
outstanding stock of London Life Apartments, Limited ("London Life"), a flexible
accommodation company servicing London, U.K. The purchase consideration
consisted of cash and the issuance of approximately 165,000 shares of common
stock.
On March 2, 1998, the Company acquired all the issued and outstanding
stock of Global Travel Apartments, Inc. ("GTA"), one of Canada's largest
providers of flexible accommodations services. GTA services the Toronto,
Montreal, Ottawa, Edmonton, Regina, Vancouver and Victoria markets. The purchase
consideration consisted of cash and the issuance of approximately 139,000 shares
of the stock of a Canadian subsidiary that is exchangeable for an equal number
of shares of common stock of the Company.
8.
<PAGE> 9
In the second quarter of 1998, the Company made one acquisition. On
June 1, 1998, the Company acquired certain assets of Gracious Corporate Lodging,
a California flexible accommodation company servicing several markets including
Santa Clara, Palo Alto and San Jose, California, and Austin, Texas. The
acquisition has been accounted for using the purchase method of accounting. The
cost of the acquisition was $1.7 million consisting of cash and notes. The
preliminary purchase price allocation of the acquisition resulted in goodwill of
approximately $1.95 million that will be amortized over 35 years. The results of
operations of this acquisition have been included in the accompanying
consolidated financial statements from the date of acquisition.
The following table presents unaudited selected financial information
for the Company, the five Founding Companies, and the acquisitions of ABA of
Dallas and ABA of Phoenix, Home on the Road, Inc. of Charlotte, Home on the
Road-Raleigh, London Life, GTA and Gracious Corporate Lodging on a pro forma
basis, assuming the companies had been combined and the initial public offering
had occurred as of the beginning of 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $26,273,598 $27,563,948 $65,515,021 $77,796,762
Net income 1,439,266 1,142,021 1,066,759 1,128,323
Net income per share-basic and dilutive $ 0.18 $ 0.14 $ 0.13 $ 0.14
</TABLE>
The pro forma results for the nine months ended September 30, 1998
include a one-time restructuring charge of $732,000, net of taxes. Excluding
this charge, pro forma net income and earnings per share would have been
$1,798,759, or $0.22 for the nine month period. The pro forma results for the
nine months ended September 30, 1997 include a one-time charge of $1.2 million,
net of taxes. Excluding this charge, pro forma net income and earnings per share
for the nine months ended September 30, 1997 would have been $2,277,021, or
$0.28.
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the acquisitions
been made at the beginning of 1997.
3. REVOLVING CREDIT AGREEMENT
During the first quarter of 1998, the Company increased its revolving
credit agreement from $10.0 million to $25.0 million. The revolving credit
agreement, secured by the capital stock of the Company's operating subsidiaries,
extends to March 31, 2002. Interest is payable at the option of the borrower at
the prime rate, or 1.5% above the Eurodollar or LIBOR rates. A commitment fee is
payable on the average unused credit at a rate of 0.2%. The revolving credit
agreement contains certain restrictive covenants with which the Company must
comply. The credit facility (i) prohibits the payment of dividends and other
distributions by the Company, (ii) generally will not permit the Company to
incur or assume other indebtedness and (iii) requires the Company to comply with
certain financial covenants. The Company had no amounts outstanding under the
facility at December 31, 1997, and $7.5 million outstanding at September 30,
1998.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share, which is effective for periods ending after
December 15, 1997. The standard requires the presentation of basic earnings per
share ("EPS") and diluted EPS. Basic EPS replaces the primary EPS calculation
required under APB Opinion No. 15. Basic EPS excludes dilution and is calculated
using the weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion
No. 15. The share amounts used to calculate earnings per share for the three and
nine months ended September 30, 1997 and 1998 are as follows:
9.
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic common shares (weighted average) 5,497,742 8,169,825 5,326,071 8,107,616
Dilutive stock options 1,210 -- 408 --
--------- --------- --------- ---------
Dilutive common shares 5,498,952 8,169,825 5,326,478 8,107,616
========= ========= ========= =========
</TABLE>
There are no adjustments to the reported amounts of net income for
purposes of computing diluted EPS.
5. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as changes
in stockholders' equity from nonowner sources and, for the Company, includes net
income and changes in the foreign currency translation.
6. ACCOUNTING STANDARDS NOT YET ADOPTED
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which is effective for the Company as of January 1, 1999.
This SOP requires start-up and organization costs to be expensed as incurred and
also requires previously deferred start-up costs to be recognized as a
cumulative effect adjustment in the statement of income. The Company plans to
adopt this SOP as of January 1, 1999. The effect of adopting this SOP has not
been determined.
7. RESTRUCTURING CHARGE
During the second quarter of 1998, the Company announced a realignment
of its senior management resulting in a charge of $1.33 million on a pretax
basis ($732,000 after tax). The second quarter charge to earnings of $1.33
million represents an accrual of $800,000 for severance and other employee
benefits for five employees and an accrual of $530,000 for lease termination
costs, the write off of certain software and marketing costs and professional
fees associated with the realignment. The accounting for the restructuring
charge is in compliance with the Emerging Issues Task Force ("EITF") 94-3,
"Liability Recognition for Cost to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)." In the third quarter, $285,000 was charged
against the reserve consisting of severance and benefits expenses of $128,000,
the write-off of marketing materials and software of $90,000 and professional
fees of $40,000. The Company expects all costs, with the exception of severance
related expenses for one employee, to be incurred by the end of the second
quarter of 1999, and no material incremental costs are expected to be recognized
in future periods.
10.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was
incorporated in August 1996 with the goal of becoming a leading national
provider of flexible accommodation services. The Company plans to achieve this
goal by implementing an acquisition program and a national operating strategy
designed to increase internal revenue growth, cost efficiencies and
profitability. In the first quarter of 1997, BridgeStreet acquired, by merger,
five flexible accommodation service providers (the "Founding Companies").
During the second and fourth quarters, the Company acquired the assets of three
flexible accommodation service providers. In the first quarter of 1998, six
additional providers were acquired, and in the second quarter of 1998, one
additional provider was acquired.
The Company's revenues are derived primarily from renting
accommodations to guests for extended periods. Revenues depend on the number of
accommodations the Company has available under lease, the occupancy rate and the
rate charged. The rate charged is a function of, among other factors, (i) the
type, size and location of the accommodation being rented, (ii) the rental
period and (iii) any additional amenities made available to the guest during his
or her stay. Cost of services consists primarily of lease payments for
accommodations and their furnishings, and expenses associated with cleaning,
maintaining and providing utilities to accommodations. Selling, general and
administrative expense consists primarily of compensation and related benefits
for management and key employees, administrative salaries and benefits, office
rents and utilities, professional fees and advertising.
As discussed in Note 1 to the financial statements, in the first
quarter of 1997, the Company merged with five Founding Companies in stock for
stock tax-free mergers. For financial reporting purposes, Temporary Corporate
Housing Columbus, Inc. (together with its three affiliates, "TCH") is presented
as the accounting acquirer of the other Founding Companies, which have been
designated "acquired companies." The mergers have been accounted for using the
purchase method of accounting. The results of operations of the "acquired
companies" have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. The purchase price and
allocation of the purchase price of the four "acquired companies," including the
value of stock issued to the founders of BridgeStreet as a transaction fee, was
approximately $17.7 million based on an independent appraisal of the net assets
acquired. The aggregate cost of the acquisitions exceeded the estimated fair
value of assets and liabilities of the acquired companies by $17.5 million which
is being amortized as goodwill over 35 years.
11.
<PAGE> 12
RESULTS OF OPERATIONS - BRIDGESTREET INTERIM RESULTS
BridgeStreet's Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 include the unaudited accounts of TCH,
Corporate Lodgings, Inc. (together with four affiliates, "CLI"), Exclusive
Interim Properties, Ltd. (together with an affiliate, "EIP") and Temporary
Housing Experts, Inc. ("THEI"), all of which were acquired on January 2, 1997,
and, for the three months ended June 30, 1997, HAI Acquisition Corp. ("HA")
which was acquired on March 31, 1997. The operating results for the three and
nine months ended September 30, 1998 also include the unaudited accounts of the
following wholly-owned operating subsidiaries from the indicated dates on which
they were acquired (by merger with or purchase of substantially all of the
assets of) flexible accommodation service providers: BridgeStreet Texas L.P.
(December 1, 1997); BridgeStreet Arizona, Inc. (December 1, 1997); BridgeStreet
North Carolina, Inc. (January 2, 1998); BridgeStreet-Raleigh, Inc. (January 2,
1998); BridgeStreet Colorado, Inc. (January 2, 1998); BridgeStreet Texas L.P.
(Austin, January 2, 1998); BridgeStreet Accommodation Limited (February 19,
1998); BridgeStreet Canada, Inc. (March 2, 1998), and BridgeStreet California,
Inc. (June 1, 1998).
The Company's Consolidated Balance Sheet as of December 31, 1997,
reflects the accounts of TCH, CLI, EIP, THEI, HA, BridgeStreet Texas L.P. and
BridgeStreet Arizona, Inc. The Company's Consolidated Balance Sheet as of
September 30, 1998, also includes the accounts of BridgeStreet North Carolina,
Inc., BridgeStreet Raleigh, Inc., BridgeStreet Colorado, Inc., BridgeStreet
Texas L.P. (Austin, Texas), BridgeStreet Accommodations Limited, BridgeStreet
Canada, Inc., and BridgeStreet California, Inc.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues. Revenues for the three months ended September 30, 1998
increased $12.2 million, or 79%, from $15.4 million in 1997 to $27.6 million for
the three months ended September 30, 1998. The increase in revenues primarily
was the result of an increase in the number of accommodations rented during the
period due to the acquisition of flexible accommodation service providers and
growth in existing markets.
Cost of Services. Cost of services for the three months ended September
30, 1998 increased $8.9 million, or 82%, from $10.9 million in 1997 to $19.8
million in 1998. Cost of services as a percentage of revenues for the three
months ended September 30 increased from 71.1% in 1997 to 71.9% in 1998. The
dollar increase in cost of services was primarily related to the acquisition of
flexible accommodation service providers. Cost of services as a percentage of
revenues increased as a result of higher leasing and maintenance costs in
certain newly acquired companies and lower occupancy rates in some markets.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended September 30, 1998 increased
$2.4 million, or 81%, from $2.9 million in 1997 to $5.3 million in 1998.
Selling, general and administrative expense as a percentage of revenues for the
three months ended September 30 was 19.2% in 1997 and 19.4% in 1998. The dollar
and percentage increase in selling, general and administrative expense primarily
was a result of the acquisition of flexible accommodation service providers,
and other costs associated with creating a public company infrastructure.
Other Income, Net and Income Tax Provision. Other income, net totaled
$(16,000) down from $84,000. The decrease is a result of higher interest expense
resulting from borrowings under the Company's revolving line of credit. For the
three months ended September 30, 1998, the Company recorded a tax provision of
$934,000 on pre-tax income of $2.1 million, compared to a tax provision of
$654,000 on pre-tax income of $1.5 million for the three months ended September
30, 1997. The tax provision is based on the Company's estimated consolidated
effective tax rate for the 1998 fiscal year after considering nondeductible
goodwill expense.
12.
<PAGE> 13
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues. Revenues for the nine months ended September 30, 1998
increased $34.7 million, or 94%, from $36.9 million in 1997 to $71.6 million in
1998. The increase in revenues primarily was the result of an increase in the
number of accommodations rented during the period due to acquisitions of the
flexible accommodation service providers and growth in existing markets.
Cost of Services. Cost of services for the nine months ended September
30, 1998 increased $25.9 million, or 97%, from $26.7 million in 1997 to $52.6
million in 1998. Cost of services as a percentage of revenues for the nine
months ended September 30 increased from 72.4% in 1997 to 73.5% in 1998. The
dollar increase in cost of services was primarily related to the acquisition of
flexible accommodation service providers. Cost of services as a percentage of
revenues increased as a result of higher leasing and maintenance costs in
certain newly acquired companies and lower occupancy rates in some markets.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the nine months ended September 30, 1998 increased
$7.8 million, or 106%, from $7.3 million in 1997 to $15.1 million in 1998.
Selling, general and administrative expense as a percentage of revenues for the
nine months increased from 19.9% to 21.1% in 1998. The dollar increase in
selling, general and administrative expenses primarily was a result of the
acquisitions of flexible accommodation service providers and increased
corporate overhead. The increase as a percentage of revenues is primarily a
result of increased corporate overhead. The increase in corporate overhead is a
direct result of hiring a corporate management team during the second half of
1997 and other costs associated with creating a public company infrastructure.
The Company expects corporate overhead costs to remain relatively level during
the remainder of 1998. The Statement of Operations for the nine months ended
September 30, 1997 includes $1.2 million of non-recurring, non-cash
compensation expense relating to the accelerated vesting of restricted stock
held by executive officers. The compensation charge represents the difference
between the value of stock issued to officers and the amount paid. The
Statement of Operations for the nine months ended September 30, 1998 includes a
restructuring charge of $1.33 million related to a management realignment. See
footnote 7 included in the notes to the Consolidated Financial Statements for
additional information.
Other Income, Net and Income Tax Provision. Other income, net decreased
to $76,000 from $132,000 as a result of higher interest expense. For the nine
months ended September 30, 1998 the Company recorded a tax provision of $794,000
on pretax income of $1.8 million, compared to a tax provision of $1.2 million on
pretax income of $1.4 million for the nine months ended September 30, 1997. The
tax provision is based on the Company's estimated consolidated effective tax
rate for the 1998 fiscal year after considering nondeductible goodwill expense.
LIQUIDITY AND CAPITAL RESOURCES - BRIDGESTREET
For the nine months ended September 30, 1998, net cash used in
operating activities totaled $0.3 million. Net cash used in investing activities
was $14.6 million, primarily for acquisitions (as described below) and the
purchase of operating stock and equipment required in the Company's business.
Net cash provided by financing activities was $9.4 million, primarily due to
borrowings against the revolving line of credit. Cash and cash equivalents
decreased by $5.5 million during the period and totaled $3.4 million at
September 30, 1998.
In September 1997, the Company completed its initial public offering of
3,007,250 common shares, of which 2,092,250 shares were issued by the Company
and 915,000 shares were sold by certain stockholders of the Company at a public
offering price of $9.00 per share (the "Offering"). The net proceeds to the
Company (after deducting underwriting discounts and commissions and expenses
incurred in connection with the Offering) of approximately $14.8 million were
used to repay $1.0 million of certain indebtedness of the Founding Companies
assumed in connection with the Combination, $2.8 million (of which $1.0 million
related to acquisitions) of indebtedness outstanding under the Company's
revolving credit facility, $28,000 of the outstanding amount due under a loan
made to the Company by the spouse of one of the Company's directors, and
approximately $3.6 million for acquisitions and expenses associated with
acquisitions. The remaining net proceeds were invested in short-term, interest
bearing, investment grade securities at December 31, 1997, and subsequently were
used for acquisitions.
13.
<PAGE> 14
The Company has a revolving credit facility that provides the Company
with up to $25.0 million, secured by guarantees by certain material subsidiaries
of the Company and a pledge of the capital stock of all of the Company's
wholly-owned operating subsidiaries. The credit facility may be used for
refinancing of the Company's subsidiaries' indebtedness, acquisitions and
working capital. Loans made under the credit facility bear interest, at the
Company's option, at the bank's prime lending rate, or 1.5% above the Eurodollar
or LIBOR rates. The credit facility will terminate on March 31, 2002, or sooner
at the discretion of the Company, and all amounts outstanding thereunder (if
any) will be due upon such termination. The credit facility (i) prohibits the
payment of dividends and other distributions by the Company, (ii) generally will
not permit the Company to incur or assume other indebtedness and (iii) requires
the Company to comply with certain financial covenants. The Company had $0 and
$7.5 million outstanding under the facility at December 31, 1997 and September
30, 1998, respectively.
On March 31, 1997, the Company acquired Home Again, Inc. and two
affiliates ("Home Again") in a stock-for-stock merger and issued 475,000 shares
of Common Stock as merger consideration. The acquisition has been accounted for
using the purchase method of accounting. The Company has recorded approximately
$2.3 million of goodwill related to the transaction that is being amortized over
a period of 35 years. Home Again had combined revenues of approximately $1.2
million for the three months ended March 31, 1997.
Between April 1 and December 31, 1997, the Company made three
additional acquisitions. The acquisitions have been accounted for using the
purchase method of accounting. The aggregate cost of these acquisitions was
$6.75 million, consisting of $4.4 million of cash and $2.35 million of stock.
The preliminary purchase price allocation of these acquisitions resulted in
goodwill of approximately $7.25 million that is being amortized over 35 years.
Details of these acquisitions are noted below.
On June 30, 1997, the Company acquired for cash all the assets of
Corporate Housing Services ("CHS"), a provider of flexible accommodation
services in the Memphis, Tennessee metropolitan area. The cost of the
acquisition was funded through borrowings from the Company's revolving line of
credit. CHS's assets and operations were merged into BridgeStreet's Memphis
subsidiary, Temporary Housing Experts, Inc.
On December 1, 1997, the Company acquired certain assets of
Accommodations by Apple, Inc. ("ABA of Dallas"), a Texas flexible accommodation
company servicing Dallas and surrounding cities. The purchase consideration
included cash, funded from the proceeds of the Offering, and the issuance of
151,000 shares of common stock.
On December 1, 1997, the Company acquired certain assets of
Accommodations by Apple, Inc. ("ABA of Phoenix"), an Arizona flexible
accommodation company servicing several markets including Phoenix, Tucson and
Scottsdale. The purchase consideration included cash, funded from the proceeds
of the Offering, and the issuance of 71,000 shares of common stock.
Subsequent to December 31, 1997, the Company has acquired seven
companies. The acquisitions have been accounted for using the purchase method of
accounting. The total aggregate cost of these acquisitions was approximately
$16.3 million, consisting of cash and notes of $12.1 million and $4.2 million in
common stock or securities exchangeable for common stock. The preliminary
purchase price allocation of these acquisitions resulted in goodwill of
approximately $17.0 million that is being amortized over 35 years. Details
regarding these acquisitions are noted below.
On January 2, 1998, the Company acquired all the assets of Home on the
Road, Inc. of Charlotte, a North Carolina flexible accommodation company
servicing Charlotte and surrounding cities. The purchase consideration consisted
of cash, funded from the proceeds of the Offering, and a promissory note. Home
on the Road, Inc. had revenues of $2.2 million in 1997.
14.
<PAGE> 15
On January 2, 1998, the Company acquired all the outstanding stock of
Home on the Road-Raleigh, a North Carolina flexible accommodation company
servicing several markets including Raleigh, Durham, Research Triangle Park,
Winston-Salem and Greensboro. The purchase consideration of the acquisition was
the issuance of 75,000 shares of common stock. Home on the Road-Raleigh had
revenues of $1.3 million in 1997.
On January 2, 1998, the Company acquired for cash certain assets of
Accommodations by Apple-Denver and Accommodations by Apple-Austin, two flexible
accommodation companies servicing several markets in the Denver metropolitan
area including Colorado Springs, Boulder and Fort Collins, and in Austin, Texas,
and surrounding cities. The purchase consideration of the two acquisitions was
cash, funded from the proceeds of the Offering, and notes. The acquisitions had
revenues of approximately $2.6 million in 1997.
On February 19, 1998, the Company acquired all the issued and
outstanding stock of London Life Apartments, Inc. ("London Life"), a flexible
accommodation company servicing London, U.K. The purchase consideration
consisted of cash and the issuance of approximately 165,000 shares of common
stock. London Life had revenues of approximately $10.0 million in 1997.
On March 2, 1998, the Company acquired all the issued and outstanding
stock of Global Travel Apartments, Inc. ("GTA"), one of Canada's largest
providers of flexible accommodation services. GTA services the Toronto,
Montreal, Ottawa, Edmonton, Regina, Vancouver and Victoria markets. The purchase
consideration consisted of cash and the issuance of approximately 139,000 shares
of the stock of a Canadian subsidiary that is exchangeable for an equal number
of shares of common stock of the Company. GTA had revenues of approximately $7.7
million for the eleven months ended January 31, 1998.
On June 1, 1998, the Company acquired for cash certain assets of
Gracious Corporate Lodging, a California flexible accommodation company
servicing Santa Clara, Palo Alto and San Jose, California, and Austin, Texas.
The purchase consideration of the acquisition was cash, funded from borrowings
against the Company's revolving line of credit. Gracious Corporate Lodging had
revenues of approximately $6.4 million in 1997.
The Company will continue to pursue growth through the acquisition of
flexible accommodation service providers. The Company's primary sources of
funding to date have been cash flow from operations, proceeds from the Offering
and its revolving credit facility. The Company anticipates that cash flow from
operations and funds from its revolving credit facility will be its principal
future sources of funding. The Company's principal future uses of cash, in
addition to cash used in operating activities, include funding of acquisitions
and investment in the Company's management information systems. The Company does
not plan to make any material capital expenditures for leasehold improvements.
Capital expenditure requirements in 1998 are anticipated to be approximately
$2.9 million. During the nine months ended September 30, 1998, the Company had
capital expenditures of $2.3 million. While there can be no assurance,
management believes that cash flow from operations and funds from the revolving
credit facility will be adequate to meet the Company's capital requirements for
the next 12 months, depending on the size and methods of financing potential
acquisitions.
INFLATION
Due to the relatively low levels of inflation experienced in 1997 and
1998, inflation did not have a significant affect on the results of the Company
during these periods.
SEASONALITY
Quarterly earnings may be affected by the timing of certain holidays,
business and vacation patterns, weather conditions, economic factors and other
considerations affecting travel. Corporate relocation activity peaks in the
summer months and declines significantly during the fourth quarter and the first
part of the first quarter. Long-term consulting activity tends to follow a
similar pattern, but not to the same extent. The Company expects to realize
lower revenues, operating income and net income during the first and fourth
quarters.
15.
<PAGE> 16
MANAGEMENT INFORMATION SYSTEMS AND YEAR 2000 ISSUES
The Company was formed in August 1996 and during 1997 and 1998 has acquired
fifteen flexible accommodation companies. The acquired companies each have their
own unique technology As a result of these acquisitions the Company has
undertaken a complete review and assessment of its information techology ("IT")
systems. The Company has determined that all accounting and property management
systems will be replaced with a single integrated system. Year 2000 compliance
is a requirement for all new systems the Company has acquired and will acquire
or internally develop. The Company is in process of analyzing all other
non-information technology systems such as voice and data communication systems
to ensure Year 2000 issues are adequately addressed.
During the fourth quarter of 1997 the Company evaluated several major accounting
software vendors. Key criteria evaluated included: year 2000 compliance; meeting
company functional requirements; reporting capabilities; software flexibility
and scalability; vendor stability, growth and support; ease of use; and, cost.
In the first quarter of 1998, based on these criteria and extensive review of
the software vendors, the Company selected an accounting software vendor.
During the second and third quarters of 1998 the Company undertook phase one of
its Financial Systems Implementation. Phase one included: analyzing accounting
requirements, purchasing and setting up hardware and application software;
conducting a conference room pilot; and application documentation and training.
In August of 1998 the Company began the roll out phase and the Cleveland Region
implemented the accounting application and by month end was fully "live" on the
accounting software. The Company is in the process of rolling out the
accounting software application to each of its regions with planned completion
during the second quarter of 1999. During the fourth quarter of 1998 four
additional regions will be fully converted and running live by December 31,
1998 with the remaining five regions undergoing the conversion process during
the first and second quarters of 1999. At the same time the Company is
implementing a wide area network (WAN) to connect all offices to the central
computer system.
During the first quarter of 1998 the Company evaluated several major property
management software vendors. Key criteria evaluated included: year 2000
compliance; meeting company functional requirements; reporting capabilities;
software flexibility and scalability; vendor stability, growth and support; ease
of use; and cost. Based on this review the Company determined that there was no
one software application that entirely met the key needs of the Company. In the
second quarter of 1998 the Company made the decision to internally develop its
property management systems. The system will be developed within the accounting
software package discussed above. This will provide the Company with a fully
integrated accounting and property management system. During 1997 the Company
had developed a prototype property management system which will be the
underlying design framework for the first phase of the property management
system
During the third quarter of 1998 the Company undertook phase one of its Property
Management Systems Implementation. Phase one included: analyzing property
management requirements, purchasing and setting up hardware and application
software; conducting a conference room pilot; and, application documentation and
training. This phase has been completed and during the fourth quarter the
Company will begin the roll out phase and the Cleveland Region is expected to
implement the property management application by December 31, 1998. The Company
will then begin the full roll out to all other reporting regions during the
first, second and third quarters of 1999 with full implementation targeted by
August 30, 1999.
The total cost to replace existing software, hardware and the cost of
implementation is estimated to be $2.5 million, which will be capitalized as
incurred.
In the most reasonably likely worst case "Year 2000" scenario, the Company
believes it has the internal controls and manual systems in place to prevent
any material interruption in its business operations. Prior to the
implementation of the above noted accounting and property management systems
the Company's operating subsidiaries will continue to primarily operate in a
manual environment. The Company's contingency plan is to rely on these manual
systems and controls at each operating subsidiary until the subsidiary is fully
implemented on the new systems.
The Company is working with its processing banks to ensure their systems are
Year 2000 compliant. All of these costs will be borne by the processing banks.
In the event some of the processing banks are unable to convert their systems,
the Company will switch to banks that are able to perform the processing
requirements of the Company.
16.
<PAGE> 17
FACTORS TO BE CONSIDERED
The information set forth above contains forward-looking statements,
which involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements.
Readers should refer to discussion under "Risk Factors" contained in the
Company's Registration Statement on Form S-4 (No. 333-39187) filed with the
Securities and Exchange Commission, which is incorporated herein by reference,
concerning certain factors which could cause the Company's actual results to
differ materially from the results anticipated in the forward-looking statements
contained herein.
17.
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS: None
- ----------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: None
- -----------------------------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
- -------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS: None
- ---------------------------------------------------------------------
ITEM 5. OTHER INFORMATION: None
- -----------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
- ---------------------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: None
18.
<PAGE> 19
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements 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.
BRIDGESTREET ACCOMMODATIONS, INC.
Date: November 10, 1998 By: /s/ John E. Danneberg
--------------------------------------
John E. Danneberg
President and Chief Executive Officer
Date: November 10, 1998 By: /s/ Mark D. Gagne, CPA
--------------------------------------
Mark D. Gagne, CPA
Chief Financial Officer
19.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038078
<NAME> BRIDGESTREET ACCOMMODATIONS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,392,636
<SECURITIES> 0
<RECEIVABLES> 6,393,746
<ALLOWANCES> 200,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,995,298
<PP&E> 6,108,913
<DEPRECIATION> 2,053,484
<TOTAL-ASSETS> 62,903,753
<CURRENT-LIABILITIES> 11,099,061
<BONDS> 7,653,357
0
0
<COMMON> 81,695
<OTHER-SE> 42,606,791
<TOTAL-LIABILITY-AND-EQUITY> 62,903,753
<SALES> 71,563,701
<TOTAL-REVENUES> 71,563,701
<CGS> 52,634,177
<TOTAL-COSTS> 52,634,177
<OTHER-EXPENSES> 17,241,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,556
<INCOME-PRETAX> 1,764,062
<INCOME-TAX> 793,827
<INCOME-CONTINUING> 970,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 970,235
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<FN> Other expenses include $1,330,000 of restructuring charges relating to a
realignment of senior management.
</FN>
</TABLE>
