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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-22941
EXECUSTAY CORPORATION
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(Exact name of registrant as specified in its charter)
MARYLAND 52-2042280
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(State of Incorporation) (IRS Employer identification No.)
7595 RICKENBACKER DRIVE
GAITHERSBURG, MARYLAND 20879
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (301) 948-4888
Securities registered pursuant to section 12 (b) of the Act: None.
Securities registered pursuant to section 12 (g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[ X ] No[ ]
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The aggregate market value of the registrant's Common Stock, par value
$.01 per share, held as of March 10, 1998 by non-affiliates of the registrant
was $41,433,983 based on the $11.50 closing sale price of the Common Stock on
the Nasdaq National Market on such date.
As of March 10, 1998, the registrant had 7,352,955 shares of its
Common Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers, pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is
incorporated by reference from the registrant's definitive proxy statement for
its 1998 annual meeting of stockholders which will be filed not later than 120
days after the end of the fiscal year covered by this report.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 4A. Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 12
Item 6. Selected Consolidated Financial Information 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 18
Item 8. Consolidated Financial Statements 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 39
Signatures 42
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
ExecuStay is a leading provider of interim housing for corporate
clients and professionals. Through its thirteen regional offices, ExecuStay
provides fully furnished high-quality apartments for stays of 30 days or more,
offering a choice of locations, types of accommodation and accessories.
ExecuStay residents enjoy home-like accommodations that are furnished according
to their needs and preferences and generally priced comparably or more
affordably than traditional full service hotels or all-suite hotels.
The Company began offering interim housing services in 1988. The
number of apartments occupied by ExecuStay residents has grown from
approximately 190 at December 31, 1994 to approximately 1,900 at December 31,
1997, with an average rental period in 1997 of more than three months. The
Company currently leases apartments in over 37 states and the District of
Columbia. The Company does not derive any revenues from operations outside the
United States.
The Company believes that demand for interim housing services has been
driven by continued growth in management and professional employment, the
increasing importance to American business of flexibility and outsourcing and
the impact of a more mobile and transitory population. The Company's customers
include Fortune 500 companies, federal and state governmental agencies, small
businesses and individuals. Corporate clients generally use interim housing to
meet seasonal, temporary or startup needs and to accommodate employees who have
been relocated or are on temporary assignment.
The Company does not own any apartments, thereby avoiding the risks
and capital requirements normally associated with real estate ownership.
Instead, housing occupied by ExecuStay customers is leased to the Company (as
tenant) from a variety of unaffiliated property owners and managers. When
responding to inquiries from prospective ExecuStay residents, the Company is
not limited to any particular pool of apartment units and therefore is able to
select suitable accommodations from any apartment property in the desired
location, affording greater flexibility in accommodating the preferences of its
customers. The Company generally has been able to enter into leases with
property owners that match each resident's desired length of stay and, as a
result, the units leased to the Company were vacant less than 5% of the time
during 1997. As the Company expands into markets with a scarcity of housing
accommodations available for rent, it may enter into longer leases that do not
necessarily match the lease terms of its residents, which could result in a
decrease in the Company's overall occupancy rate.
The Company generally can locate and furnish a residence within 24
hours of a request and usually can arrange the length of each lease to fit the
customer's needs. The Company furnishes residences, from its own warehouse or
through unaffiliated rental companies, to each customer's taste with furniture,
linens, electronics and housewares, along with art work and decorative
accessories. Residential office furniture, fax machines, additional phone
lines, computer equipment, exercise equipment and maid service can be provided
upon request. ExecuStay can locate accommodations for families with young
children, infants or pets. Amenities vary by location but often include a
swimming pool, hot tub, sauna, fitness center, tennis courts and clubhouse.
All expenses relating to each residence, including rent, local and
long-distance telephone service, cable television, utilities and trash removal,
are billed to and paid by ExecuStay, which then bills each customer monthly in
a single invoice. For corporate employees, the Company often bills the
employer. For non-corporate customers, the Company typically charges the
individual's credit card, which customers provide before commencement of
occupancy.
ExecuStay has established marketing, sales and service offices
in the Atlanta, Charlotte, Ft. Lauderdale, Hartford, Los Angeles, New York
City, Orlando, Philadelphia, Phoenix, Raleigh, Richmond, San Francisco and
Washington metropolitan areas. ExecuStay provides housewares (non-furniture
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accessories) both to its residents and to others from its warehouses in the Los
Angeles, Ft. Lauderdale, Charlotte, San Francisco and Washington locations.
The ownership of housewares inventory allows the Company to provide quality and
consistency. In addition to housewares rental, the Washington warehouse also
provides furniture for ExecuStay residents in the Mid-Atlantic area and rents
residential and commercial furniture to customers other than ExecuStay
residents. In areas other than the Mid-Atlantic region, the Company uses
unaffiliated furniture rental companies to provide furniture to ExecuStay
residents.
THE HOUSING ACCOMMODATIONS INDUSTRY
The U.S. lodging industry has experienced significant growth and
increased market segmentation in the 1990s. The interim housing segment of the
lodging industry, defined as stays of four weeks or longer, has grown faster
than the lodging industry as a whole. The Company believes that the growth in
the interim housing industry continued through 1997 and is a result of
favorable economic and business conditions in recent years, continued growth in
management and professional employment, the increasing importance to American
business of flexibility and outsourcing, the heightened awareness of interim
housing as a lodging alternative and the impact of a more mobile and transitory
population.
Amenities found in lodging accommodations vary greatly. The following
chart illustrates typical amenities and characteristics found in each of these
types of accommodations.
<TABLE>
<CAPTION>
Traditional All-Suite Extended Stay ExecuStay Interim
Hotel Hotel Facilities Housing
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<S> <C> <C> <C> <C>
Kitchen No Efficiency Efficiency/Full Full
Dining room No Rarely Rarely Always
Residential feel No No Rarely Always
Washer/dryer No No Rarely Usually
Choice of furnishings No No No Wide Selection
</TABLE>
INTERIM HOUSING RESIDENTS AND PROVIDERS
Because of the length of their stays, interim housing residents seek a
"home away from home." Just like any individual or family seeking a permanent
home, interim housing residents desire accommodations that have a residential
feel and the convenience typically found only in homes. Interim housing
residents typically have the following needs and preferences:
Flexibility in Locations and Types of Accommodations. Interim housing
residents typically seek housing accommodations conveniently located near their
temporary workplace or in a desired neighborhood or school district. Residents
also have varying needs with respect to the size, style and cost of their
housing accommodations.
Flexibility in Furnishings, Housewares and Amenities. Interim housing
residents like to choose their own furniture and many wish to have fax
machines, computers, home exercise equipment, extra televisions or telephones
or other additional accessories. Many interim housing residents are also
accustomed to amenities found in apartment or condominium complexes, such as
swimming pools and fitness centers.
Flexibility in Length of Stay. Interim housing residents have varying
rental term needs, which are often less than the minimum rental periods
typically available to individual tenants from apartment managers.
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Convenience. An interim housing customer generally prefers to avoid
the difficulties and inconvenience of locating and leasing an apartment,
arranging utilities, contracting for furniture, housewares and accessories and
preparing the residence for occupancy.
Interim housing customers traditionally have had to choose between two
alternatives to meet their needs: renting a hotel room or leasing an
apartment. Traditional hotel rooms do not offer the most basic amenities found
in apartments or houses, such as kitchen and dining facilities. Interim
housing customers staying at hotels live as permanent travelers rather than
temporary residents. Although all-suite hotels usually provide larger units
than traditional hotel rooms and often contain efficiency kitchens, most
all-suite hotels rates are priced for short-stay business travelers, which may
be too expensive for the longer stays of interim housing customers. In
addition, traditional hotels and all-suite hotels generally are not located in
residential neighborhoods and may not be located near an interim housing
customer's workplace.
To meet the increasing demand for housing accommodations for stays
longer than five days, a growing number of hotel companies are building chains
of extended-stay hotels, which offer standardized, pre-furnished units.
However, extended-stay facilities are limited in the number of locations, types
of accommodations and choice of amenities that they offer. In addition,
extended-stay hotels do not offer the flexibility in furnishings and housewares
that interim housing customers often desire, nor do they offer the feel of a
residential community.
Interim housing providers either own or lease living accommodations
from third parties. These providers then rent the housing accommodations,
usually fully furnished, to customers seeking long-term, but not permanent,
accommodations.
Interim housing providers vary widely in their structure, size and
location. Some are apartment and condominium owners or managers who seek to
fill vacancies or increase rental revenues by making a percentage of their
units available to interim housing customers. These property owners and
managers have an incentive to place customers in the limited number of
apartments or condominiums that they manage. Also, many of these owners and
managers pre-furnish their apartments or condominiums, limiting their
customers' choices. Other competitors include small or medium size local and
regional businesses that locate and furnish housing accommodations and operate
much like ExecuStay.
As corporations are increasingly outsourcing non-core functions, many
have turned to service providers for their interim housing needs. These
corporate clients generally prefer to deal with a single source that can
provide customized services an a national basis. Because of this trend, the
Company believes that local and regional providers of interim housing will find
it increasingly difficult to compete for corporate clients. The Company
believes that the general preference of corporate clients to work with a single
national provider already has spurred consolidation within the interim housing
services industry.
BUSINESS STRATEGY
ExecuStay's goal is to strengthen its position as a leading provider
of interim housing. The Company's business strategy encompasses the following
elements:
Expand Nationally. The Company believes that as it expands into new
markets, its growing national presence and brand name recognition will enhance
its ability to attract additional corporate clients and professionals as well
as increase business with existing clients. The primary focus of the Company's
expansion strategy is the acquisition of local and regional interim housing
providers, while continuing to grow internally by selectively opening
additional regional offices.
ExecuStay evaluates potential expansion markets based on local
competition, the availability of rental properties, the overall health and
growth trends of local economies and the presence of corporate and government
employers with significant interim housing needs. ExecuStay then decides
whether to enter a new market through acquisition or by internal expansion.
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Acquisitions. In target markets, the Company pursues the
acquisition of existing businesses with profitable operating
histories, a recognized local and regional presence and existing
management that fits well with the Company's entrepreneurial
management style. Expanding through acquisitions allows the Company
to quickly gain market share in new or existing regions. When
acquiring an existing business, ExecuStay generally attempts to retain
key marketing and sales personnel, typically by offering incentive
compensation based on the performance of the acquired business.
Internal Expansion. In target markets where ExecuStay does
not find an attractive acquisition prospect, the Company may open
additional regional offices to support its existing relationships or
to establish new relationships with suppliers of housing
accommodations. When establishing a new office, the Company generally
seeks to hire an individual who has relationships with local interim
housing customers as well as property managers that would give the
Company both a supply of rental units and interim housing referrals.
The Company's strategy is to pursue internal expansion opportunities
where it believes it has the potential to achieve profitability within
twelve months.
Expand Corporate Client Base. The Company strives to broaden its
corporate client base through its growing national presence and name
recognition, regional and national advertising and by increasing and
strengthening its corporate relationships. The Company's customized billing
and reporting services and its ability to locate and furnish the desired
accommodations of a corporate employee in as little as 24 hours, are attractive
to corporate clients. The Company believes that its specialized corporate
client services, flexibility and increasing national presence and name
recognition will be particularly attractive to corporate clients seeking a
single national provider.
Develop and Enhance Relationships with REITs and Other Apartment
Owners and Managers. A key component of the Company's business strategy is to
strengthen its existing relationships and to build new relationships with REITs
and other property owners and managers throughout the country. These property
owners and managers are not only the primary suppliers of rental units, but
also are important sources of interim housing referrals. Maintaining close
relationships with property owners and managers has helped the Company become
established in new markets and strengthen its presence in existing markets.
The Company believes that apartment owners and managers prefer to do
business with the Company because it provides the property owner and manager
with a single reliable tenant. Further, because ExecuStay does not own any
real estate, it does not compete for tenants with property owners and managers
but instead provides incremental business to them. By leasing to ExecuStay,
property managers avoid the cost of tenant credit and reference checks.
Apartment managers have also contracted with ExecuStay to operate their
existing interim housing programs, providing ExecuStay an opportunity for
immediate increases in local market share.
Maintain Housing Flexibility / No Real Estate Ownership. The Company
does not own and does not plan to own any of the accommodations that it rents
to ExecuStay customers. As a result, ExecuStay can expand into new markets
more quickly, avoid competing with property owners and avoid the risks normally
associated with real estate ownership. This approach also reduces the
Company's capital requirements and overhead costs and enables the Company to
quickly adjust the quantity, mix and location of its accommodations as client
needs dictate and local economic conditions warrant. In markets characterized
by rental property shortages, the Company may be required to enter into longer
term leases (six months to one year) with property owners in order to secure
the needed supply of housing units. The Company considers the added risk of
longer lease terms when pricing the rental units in such markets.
Maintain and Enhance Management Information System. ExecuStay intends
to maintain and enhance its proprietary management information system ("MIS").
The MIS operates through a wide area
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network that connects all ExecuStay offices throughout the country.
ExecuStay's MIS assists the Company in controlling and managing customer
service, lease and furnishings inventory and accounting and billing functions.
At each ExecuStay regional office, service personnel input customer needs and
preferences into the MIS, which seeks to match each new customer's occupancy
date with the vacate date of an existing ExecuStay resident, thereby reducing
turn-over costs. If a suitable match is not available, the MIS indicates the
need for and facilitates the selection of a new apartment lease. As a result,
ExecuStay is usually able to obtain a customer's desired housing accommodations
within 24 hours of the customer's request. The MIS capabilities have enabled
the Company to establish and access a nationwide database and will, the Company
believes, facilitate the effective integration of the operations of acquired
businesses and newly established offices.
EXECUSTAY SERVICES
The Company provides the following services in markets throughout the
country:
Interim Housing Rental. ExecuStay provides high-quality interim
housing accommodations. Residents specify the desired location, size and type
of accommodations and also choose from an ExecuStay catalog of furniture and
housewares. The Company generally arranges the length of each lease to fit the
resident's needs. All leases are for 30 days or more. After locating the
desired residence, the Company furnishes it with the resident's choice of
furniture, linens, electronics, housewares, art work and decorative
accessories. Upon request, the Company provides office furniture, fax
machines, additional phone lines, computer equipment, exercise equipment and
maid service. ExecuStay arranges all utility services, including cable
television and long distance telephone service. Amenities vary by location but
often include a swimming pool, hot tub, sauna, fitness center, tennis courts
and clubhouse.
Houseware Rental. Housewares for substantially all of the ExecuStay
accommodations are supplied from the Company's regional warehouses located in
Washington, Los Angeles, San Francisco, Ft. Lauderdale and Charlotte. In
markets where the Company does not have a warehouse that can service its
customers, the Company rents housewares from unaffiliated rental companies. In
addition to servicing ExecuStay's interim housing customers, the Company's
warehouses provide housewares to other interim housing providers and local
apartment owners and managers. As it implements its expansion strategy, the
Company plans to continue to supply most of its customers' houseware needs.
ExecuStay's houseware business generates an attractive return on investment,
complements the Company's other interim housing services and allows the Company
to control the quality and availability of housewares.
Furniture Rental. Except in the Mid-Atlantic area, the Company
furnishes its accommodations with furniture rented from unaffiliated rental
companies. In the Mid-Atlantic area, ExecuStay furnishes its housing
accommodations with furniture from its Washington warehouse. ExecuStay's
furniture division rents both to ExecuStay residents and to other interim
housing providers. In 1995, the Company established a commercial office
furniture rental division, which also utilizes the Washington warehouse.
Convenient Billing. The Company provides one monthly invoice to its
customers. All expenses relating to each residence, including rent,
furnishings, basic and long-distance telephone service, cable television,
utilities and trash removal, are billed to and paid by ExecuStay, which then
bills each customer in one charge on a single monthly invoice. For corporate
employees, the Company bills either the employee or the corporate employer.
For other ExecuStay residents, the Company typically charges the individual's
credit card, which is provided by the customer before commencement of
occupancy. ExecuStay also offers customized billing options and reporting to
national corporate clients.
Quality Assurance. ExecuStay monitors the quality of its services
both through regional personnel and by a satisfaction survey that residents are
asked to complete upon expiration of their stays. Because of the short-term
nature of most of ExecuStay's leases, ExecuStay can quickly change suppliers of
rental properties if a landlord is not responsive to the needs of ExecuStay and
its customers. Similarly, in cases
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where ExecuStay does not provide furniture and housewares, ExecuStay can easily
change the suppliers from whom it rents such items.
HEADQUARTERS AND REGIONAL OFFICES
ExecuStay's headquarters, Washington regional office and Mid-Atlantic
warehouse are located in Gaithersburg, Maryland. The Company performs all of
its administrative services from this office, including accounting, national
marketing and inventory management. ExecuStay established the following
regional offices in the years indicated:
<TABLE>
<S> <C>
Los Angeles, California July 1988
Washington, D.C. * March 1991
Philadelphia, Pennsylvania April 1993
Richmond, Virginia * March 1995
Charlotte, North Carolina November 1995
Raleigh, North Carolina January 1996
Ft. Lauderdale, Florida January 1996
Orlando, Florida April 1997
San Francisco, California June 1997
Atlanta, Georgia June 1997
New York City, New York November 1997
Hartford, Connecticut January 1998
Phoenix, Arizona February 1998
</TABLE>
* The Washington regional office has a satellite sales office in Chantilly,
Virginia. The Richmond office has a satellite sales office in Virginia Beach,
Virginia.
ExecuStay has found that the key elements to successful regional
offices are: (i) providing ExecuStay's high-quality service and attention to
customer needs; (ii) establishing strong relationships with corporate clients
and with local apartment owners and managers; and (iii) attracting and
retaining key personnel who have industry experience and relationships with
local interim housing customers and suppliers.
SALES, MARKETING AND ADVERTISING
Each of the regional offices employ office managers who are
responsible for developing and maintaining relationships with corporate clients
and property owners and managers. Because the Company does not own any real
estate, it can establish mutual referral programs with property owners and
managers. As a result of ExecuStay's centralized administration, managers and
salespersons can focus on obtaining new clients and servicing existing ones.
To develop client relationships, ExecuStay's salespersons regularly
attend seminars and conferences attended by human resources professionals. The
Company also obtains customers from advertisements in local rental property
magazines and newspapers.
Through its MIS, the Company offers customized billing and reporting
to corporate clients. In addition, as ExecuStay's operations expand throughout
the country, ExecuStay may offer temporary incentive programs to selected
corporate clients to encourage them to use ExecuStay in new markets.
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REGIONAL WAREHOUSES
ExecuStay maintains warehouses in Washington, Los Angeles, Ft.
Lauderdale, San Francisco and Charlotte. These warehouses provide items such
as cutlery, dishes, kitchen utensils, linens and electronic products, including
televisions, VCRs and stereos. The Washington furniture warehouse provides
both residential and office furniture to ExecuStay's customers in the
Mid-Atlantic area. ExecuStay leases all of its warehouse properties.
Additional regional warehouses may be opened in existing markets or to serve
new markets. ExecuStay does not plan to open new furniture warehouses,
although the Company currently intends to expand the furniture warehouse
facilities in Washington to better meet actual and anticipated growth in the
region.
ACQUISITIONS
Orlando. On April 1, 1997, the Company paid $850,000 in cash to
Corporate Accommodations, Inc. ("Corporate Accommodations") to acquire
certain assets and all existing customer leases related to its interim housing
business in Orlando. In connection with the acquisition, the Company and
Corporate Accommodations' sole shareholder entered into a five-year employment
and non-competition agreement. The Company accounted for the transaction using
purchase accounting and recorded tangible assets of $25,000 and certain
intangible assets including $120,000 relating to a non-compete agreement and
goodwill of $705,000.
San Francisco. On June 1, 1997, the Company acquired for $1.9 million
in cash the interim housing business of Prom X, Inc. ("Prom X"). In addition
to the purchase of all intangible assets of the Prom X business, the Company
has the right, for a period of 36 months, to provide interim housing services
at 17 apartment complexes (the "Properties") owned or managed by affiliates of
Prom X throughout the San Francisco metropolitan area. The Company has the
right to be the exclusive provider of interim housing services at 15 of the
Properties. In connection with the purchase, Prom X has agreed to refrain from
engaging in the interim housing business in Northern California for a period of
eight years. The Company accounted for the transaction using purchase
accounting and recorded intangible assets, including $100,000 relating to a
non-compete agreement, $160,000 relating to existing contract rights and to an
exclusivity agreement, and goodwill of $1.6 million.
New York. On November 1, 1997, the Company purchased 100% of the
outstanding common stock of Boland Corporate Housing, an interim housing
company in New York for approximately $8,250,000, consisting of $6,300,000 in
cash and 186,000 of the Company's unregistered shares of common stock valued at
approximately $1,950,000 at the time of purchase. The total purchase price was
subject to a post-closing adjustment based upon the seller's 1997 adjusted
earnings before interest and taxes and a final determination of the acquired
company's tangible net book value. An additional $1,728,000 was accrued in
1997 to cover the post closing adjustment. The Company accounted for the
transaction using purchase accounting and recorded certain intangible assets
including $100,000 relating to a non-compete agreement and goodwill of
approximately $9.2 million.
Hartford. On January 1, 1998, the Company purchased 100% of the
outstanding stock of Corporate Accommodations, Inc., an interim housing company
in Connecticut, for approximately $1,450,000, consisting of $1,050,000 in cash
and 45,455 of the Company's unregistered shares of common stock valued at
$400,000 at the time of the purchase. The total purchase price is subject to a
post-closing adjustment based upon the seller's December 31, 1997 tangible net
book value. The purchase price included seller non-compete agreements and
employment agreements with certain seller employees. The Company has accounted
for the transaction in 1998 using purchase accounting and recorded intangible
assets including $ 25,000 relating to a non-compete agreement and goodwill of
approximately $1.1 million.
Phoenix. On February 1, 1998 the Company purchased the net assets of
F.L. Taylor Corporation, an interim housing company located in Arizona, for
approximately $837,000. The total purchase price is
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subject to a post closing adjustment based upon the seller's increase in gross
profit over gross profit for 1997. The purchase price also included a seller
non-compete agreement. The Company has accounted for the transaction in 1998
using purchase accounting and recorded tangible assets of $30,000 and
intangible assets including $25,000 relating to a non-compete agreement and
goodwill of approximately $782,000.
NEW OFFICES
Atlanta. In June 1997, the Company established a regional office in
Atlanta. The Company has hired an office manager who has worked for various
providers of interim housing and has relationships with interim housing
corporate clients in the local market.
COMPETITION
The interim housing industry is highly competitive. The Company
competes against numerous local, regional and national interim housing
providers, both for customers and for accommodations. The Company expects
competition in its business to intensify as existing competitors expand and new
competitors enter the industry. The financial barriers to entry in the interim
housing industry are relatively low, making it an industry for potential new
competitors. In particular, entities that maintain a vendor-vendee
relationship with companies in this industry, such as real estate managers or
furniture rental businesses, have entered the industry and more such entities
may decide to enter the industry in the future.
ExecuStay believes that the larger providers of interim housing are
the Company's primary competitors. At the present time, such competitors
include Oakwood Corporate Housing, Inc. ("Oakwood"), Bridgestreet
Accommodations, Inc., Globe Business Resources, Inc. and Accommodations
America, Inc. Oakwood has established itself as the largest provider of
interim housing accommodations, currently renting more than 10,000 interim
housing units. Other significant competitors may emerge in the future.
Certain of the Company's existing competitors have, and any new competitors
that enter the industry may have, access to significantly greater financial
resources than the Company.
Providers of interim housing services also compete with traditional
hotels, motels, and all-suite and extended-stay hotels. A number of lodging
chains and developers have recently announced plans to develop, or are
currently developing, extended-stay hotels that may compete with the interim
housing services provided by the Company. Moreover, several extended-stay
lodging companies have recently raised substantial amounts of capital in public
offerings for purposes of constructing and expanding lodging facilities.
Factors that influence an interim housing customer's decision to
choose one service provider over another include location, price and quality of
accommodations, quality and scope of service and brand name recognition.
EMPLOYEES
As of March 10, 1998, the Company employed approximately 300 full-time
employees.
ITEM 2. PROPERTIES
The Company's headquarters and largest warehouse facility is located
in Gaithersburg, Maryland. In addition, as of March 10, 1998, ExecuStay
operated at an additional 15 locations in 9 other states. The Company's
locations are occupied under leases expiring between the years of 1998 and
2114. ExecuStay intends to expand its headquarters and warehouse facilities in
Gaithersburg, Maryland to better meet actual and anticipated growth in the
region. ExecuStay believes that all other facilities leased by it are adequate
for carrying on its current interim lodging operations at its existing
locations as well as
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its anticipated future needs at those locations. ExecuStay believes it will be
able to renew such leases as they expire or find comparable or additional space
on commercially suitable terms.
ITEM 3. LEGAL PROCEEDINGS
Legal proceedings to which ExecuStay is subject arise in the ordinary
course of business. Currently, ExecuStay is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of stockholders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the Company's
current executive officers:
Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
Gary R. Abrahams 45 Chief Executive Officer, President and Director
Marc B. Kaplan 49 Chief Financial Officer, Treasurer and Director
Robert W. Zaugg 53 Chief Operating Officer, Secretary and Director
Benny E. Anderson 35 Executive Vice President-Western Operations
Joseph C. Porpiglia 50 Senior Vice President-Furniture Operations
</TABLE>
ExecuStay Corporation was organized on June 4, 1997. Mr. Abrahams, Mr.
Kaplan and Mr. Zaugg co-founded the Company's original subsidiary in 1986 and
have held positions similar to those set forth above with each of the Company's
subsidiaries since their respective inceptions. The following is a brief
summary of the business experience of each of the executive officers of the
Company.
GARY R. ABRAHAMS. Mr. Abrahams is the Company's Chief Executive
Officer, President, a Director and a co-founder of the Company. He was an
executive officer of Horizon Financial Corporation in Washington, D.C. from
1983 to 1987, was employed by Standard Federal Savings & Loan in Gaithersburg,
Maryland from 1979 to 1983, and by Ernst & Ernst from 1975 to 1978.
MARC B. KAPLAN. Mr. Kaplan is the Company's Chief Financial Officer,
Treasurer, a Director and a co-founder of the Company. He was President of
Horizon Financial Corporation from 1983 to 1987, was employed by Standard
Federal Savings & Loan from 1976 to 1983, and by Arthur Young & Company from
1972 to 1976.
ROBERT W. ZAUGG. Mr. Zaugg is the Company's Chief Operating Officer,
Secretary, a Director and a co-founder of the Company. He was an executive
officer of Horizon Financial Corporation from 1983 to 1987, was employed by
Standard Federal Savings & Loan from 1975 to 1983, by Equitable Federal Savings
from 1972 to 1974, and by Peat Marwick, Mitchell & Company from 1968 to 1972.
BENNY E. ANDERSON. Mr. Anderson joined the Company in 1991 and is
currently the Company's Executive Vice President of Western Operations. Before
joining the Company, Mr. Anderson worked at Seychelles, Inc. as a controller
from 1990 to 1991. He also worked as a controller from 1988 to 1990 at
Trendmasters, Inc., a Los Angeles-based toy manufacturer.
11
<PAGE> 12
JOSEPH C. PORPIGLIA. Mr. Porpiglia has served as Senior Vice
President of Furniture Operations since 1995. From 1989 to 1995, Mr. Porpiglia
was a General Manager of CORT Business Services Corporation, a furniture rental
company, where he most recently managed the furniture rental operations in Los
Angeles and Washington.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") is traded under the
symbol "EXEC." The following table sets forth for the periods indicated the
high and low closing sales prices per share for the Common Stock on the Nasdaq
National Market System since the date of the Company's initial public offering.
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
August 27-September 30 $ 12.00 $ 10.50
Fourth Quarter $ 12.50 $ 8.25
</TABLE>
As of March 18, 1998 there were 20 holders of record of the Common
Stock. This number does not reflect the number of individuals or institutional
investors holding stock in nominee name through banks, brokerage firms, and
others.
DIVIDEND POLICY
On June 13, 1997, prior to its initial public offering the Company
declared a dividend related to its S corporation status. The dividend
consisted of approximately $1.1 million representing prior years' capital
contributions and a final S corporation distribution totaling approximately
$4.5 million equal to the undistributed cumulative earnings. Other than this
dividend, the Company has not paid cash dividends on its Common Stock and
intends to continue this policy for the foreseeable future. ExecuStay plans to
retain earnings for use in its business. The terms of ExecuStay's credit
facilities could limit the payment of dividends on its Common Stock without the
consent of the lender. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors of the Company and will be
dependent on ExecuStay's results of operations, financial condition,
contractual and legal restrictions and any other factors deemed to be relevant.
12
<PAGE> 13
USE OF PROCEEDS
The net offering proceeds to the Company of $27,754,158 from its
initial Registration Statement on Form S-1 (file No. 333-0049) were used for
the following purposes:
<TABLE>
<S> <C>
Construction of plant, building and facilities: $ -
Purchase and installation of machinery and equipment: -
Purchase of real estate: -
Repayment of indebtedness: 6,250,411
Acquisition of other businesses: 6,304,752
Working capital: -
Temporary investments:
Short term bonds 61,669*
Interest bearing money market accounts 9,525,957*
Other purposes:
Undistributed S corporation earnings 4,531,433
Payment of previously declared distributions 1,079,936
</TABLE>
* On January 2, 1998, the Company transferred $5.0 million from
interest bearing money market accounts into short term bonds.
The undistributed S corporation earnings ($4,531,433) and the payment
of previously declared distributions ($1,079,936) were made directly to the
following individuals in the amounts indicated: (i) $1,780,835 to Gary R.
Abrahams, Chief Executive Officer, President, Director and greater than ten
percent (10%) shareholder of the Company; (ii) $1,780,835 to Marc B. Kaplan,
Chief Financial Officer, Treasurer, Director and greater than ten percent (10%)
shareholder of the Company; (iii) $1,780,835 to Robert W. Zaugg, Chief
Operating Officer, Secretary, Director and greater than ten percent (10%)
shareholder of the Company; and (iv) $268,864 to Benny E. Anderson, Executive
Vice President of Western Operations of the Company. All other payments were
made directly or indirectly to persons other than officers, directors,
affiliates or greater than ten percent (10%) shareholders of the Company.
The use of proceeds contained herein does not represent a material
change in the use of proceeds described in the prospectus.
13
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected financial information presented below has been derived
from the consolidated financial statements of the Company. The Company's
financial statements for the years ended December 31, 1995, 1996 and 1997 have
been by audited by Grant Thornton LLP. All of the data should be read in
conjunction with the Company's audited financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Interim housing revenue $ 3,651 $ 6,917 $ 9,390 $20,905 $41,927
Furniture and houseware revenue 5,071 6,856 7,818 8,740 9,831
-------- -------- -------- ------- -------
Total Revenue 8,722 13,773 17,208 29,645 51,758
Operating costs and expenses:
Cost of revenue 4,753 7,670 9,614 18,472 35,306
Personnel and payroll costs 2,390 3,464 3,876 5,597 8,246
Occupancy costs and nonrental
depreciation and amortization 455 626 660 994 1,600
Other operating costs 212 488 942 1,616 2,209
-------- -------- -------- ------- -------
Total operating costs and expenses 7,810 12,248 15,092 26,679 47,361
-------- -------- -------- ------- -------
Earnings from operations 912 1,525 2,116 2,966 4,397
Interest expense 68 195 240 308 156
-------- -------- -------- ------- -------
Earnings before income taxes 844 1,330 1,876 2,658 4,241
Income tax expense - - - - 285
-------- -------- -------- ------- -------
Net income $ 844 $ 1,330 $ 1,876 $ 2,658 $ 3,956
======== ======== ======== ======= =======
PRO FORMA DATA (1):
Pro forma net income $ 506 $ 798 $ 1,126 $ 1,595 $ 2,545
======== ======== ======== ======= =======
Pro forma net income per common share $ 0.12 $ 0.20 $ 0.28 $ 0.39 $ 0.51
======== ======== ======== ======= =======
Weighted average common shares
outstanding (2) 4,074 4,074 4,074 4,074 4,986
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 19 $ 24 $ 229 $ 503 $16,134
Property on or held for lease, net 1,907 2,660 3,059 4,099 4,912
Total assets 3,241 5,932 6,519 9,678 43,830
Bank line of credit 612 546 200 800 5,000
Notes payable to bank 490 453 743 1,882 -
Total stockholders' equity 1,409 1,862 2,481 2,983 31,026
</TABLE>
(1) Prior to the public offering, the Company elected to be treated as an
S Corporation and was not subject to federal and certain state income
taxes. The Pro Forma Data reflects federal and state income tax based
on applicable tax rates as if the Company had not elected S
corporation status for those periods. See Note D to the Consolidated
Financial Statements.
(2) The pro forma weighted average common shares outstanding is based on:
(i) the weighted average sharesoutstanding during the period; and (ii)
the assumed sale of sufficient number of shares of Common Stock
necessary to provide funds to make a distribution of all undistributed
S corporation earnings at June 30, 1997 in excess of earnings for the
twelve-month period then ended and to make the distribution of $1.1
million declared on June 13, 1997. See Notes A and D to the
Consolidated Financial Statements.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth below is a discussion of the results of the Company's
operations for the years ended December 31, 1995, 1996 and 1997, and the
Company's liquidity and capital resources at December 31, 1997. The discussion
which follows should be read in conjunction with ExecuStay's Selected
Consolidated Financial Statements and the Consolidated Financial Statements and
notes thereto included elsewhere herein.
OVERVIEW
ExecuStay Corporation ("ExecuStay" or the "Company") is a leading
provider of interim housing for corporate clients and professionals. ExecuStay
provides fully furnished high-quality apartments for stays of 30 days or more.
In addition to providing fully furnished interim housing to ExecuStay
residents, the Company also rents housewares and furniture to customers other
than ExecuStay residents such as owners and managers of apartment communities
who wish to offer fully furnished accommodations directly to their tenants.
While housewares rental services are provided by the Company in most locations
where it has sales offices, the Company only provides furniture rental services
to its residents located within approximately 200 miles of its warehouse in
Gaithersburg, Maryland.
In recent years, the Company has experienced significant increases in
revenue from its interim housing operations. Since the costs associated with
interim housing revenue are greater as a percentage of revenue than the costs
of furniture and housewares revenue, the Company's earnings from operations as
a percentage of total revenue has declined as the revenue mix has shifted
heavily toward interim housing revenue. As interim housing revenue continues to
increase as a percentage of the company's total revenue, earnings as a
percentage of revenue may continue to decline slightly.
Growth in revenue is derived primarily from increases in the number of
leases signed with ExecuStay residents. As the Company has opened sales offices
and acquired other interim housing businesses, the number of apartments under
lease has increased each year.
The following table sets forth the number of units leased by the
Company as of the end of each of the last three calendar years:
<TABLE>
<CAPTION>
DECEMBER 31, *
----------------------
1995 1996 1997
----------------------
<S> <C> <C> <C>
MidAtlantic 385 511 986
West 81 81 435
South East 51 331 446
--- --- -----
Total 517 923 1,867
=== === =====
</TABLE>
*Regional data for the MidAtlantic region includes the Philadelphia, New York,
Washington and Richmond offices; the West region includes the Los Angeles and
San Francisco offices; and the South East region includes the North Carolina,
Florida and Atlanta offices.
The following selected data presented below is for the year ended
December 31, 1997.
<TABLE>
<S> <C>
Percentage of leases entered into by ExecuStay with property owners for one year or less 100%
Average occupancy rate 95%
Average daily rate paid by ExecuStay to property owners $44
Average daily rate charged by ExecuStay to its customers* $76
</TABLE>
*Includes all services provided by ExecuStay
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations
data as a percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------------------------------
<S> <C> <C> <C>
Revenue:
Interim housing revenue 54.6% 70.5% 81.0%
Furniture and houseware revenue 45.4 29.5 19.0
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenue 55.9 62.3 68.2
Personnel and payroll costs 22.5 18.8 16.0
Occupancy costs and nonrental
depreciation and amortization 3.8 3.4 3.1
Other operating costs 5.5 5.5 4.3
----- ----- -----
Total operating costs and expenses 87.7 90.0 91.6
----- ----- -----
Earnings from operations 12.3 10.0 8.4
Interest expense 1.4 1.0 0.3
----- ----- -----
Earnings before income tax 10.9 9.0 8.1
Income tax expense - - 0.5
----- ----- -----
Net Income 10.9% 9.0% 7.6%
===== ===== =====
Number of leased units at end of period 517 923 1,867
</TABLE>
Inflation has not had a significant effect on the Company's
operations, as increased costs to the Company generally have been offset by
increased prices of products and services sold.
In the discussions below, the following terms have the meanings
described hereinafter.
Interim housing revenue consists of the total charges to ExecuStay
residents for their housing accommodations, including charges for furniture,
housewares, accessories and utilities.
Furniture and houseware revenue includes all income from customers
other than ExecuStay residents and also includes revenue from the sale of used
inventory.
Cost of revenue includes costs related to apartment units rented to
ExecuStay residents, such as property rent, furniture and houseware rental
costs, utilities, telephone and cable television expenses. Also included is
depreciation on furniture and housewares inventory on rental or held in
inventory.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Revenue increased 75% to $51.8 million for the year ended December 31,
1997 from $29.6 million for the year ended December 31, 1996. This increase was
primarily due to a $21.1 million increase (101%) in interim housing revenue,
reflecting the Company's continued focus on expanding its interim housing
business. The acquisitions made during 1997 accounted for $11.4 million of the
increase in interim housing revenue. These acquisitions accounted for 679
leased units out of 1,867 units as of December 31, 1997. Aggregate interim
housing revenue from the seven offices that were operating during both periods
increased 46.7%, accounting for $9.7 million of the interim housing revenue
increase, which reflects the continued development and market penetration of
these offices. The balance of the increase in revenue resulted from a $1.1
million increase (12.5%) in furniture and houseware revenue for 1997 compared
to the same period in 1996. This increase included a furniture sale of
approximately $480,000 to one customer in 1997.
16
<PAGE> 17
Cost of revenue increased 91% for the year ended December 31, 1997 to
$35.3 million from $18.5 million for the same period in 1996. This increase was
driven by the Company's continued growth in the volume of interim housing units
leased and rented to customers. The Company's gross margin (revenue less cost
of revenue) decreased from 38% to 32% primarily because of the Company's
changing revenue mix as discussed above.
Compared to the year ended 1996, personnel and payroll cost during the
year ended 1997 increased by $2.6 million (47%), and occupancy and nonrental
depreciation and amortization increased by $606,000 (61%). These increases
were due to recent acquisitions and management's continued emphasis on
strengthening the current infrastructure to support the Company's growth. Other
operating costs increased 37% to $2.2 million from $1.6 million during the same
period, primarily as a result of new acquisitions and increased national
advertising and promotional expenses.
Interest expense decreased by $152,000 in the year ended December 31,
1997 (from $308,000 to $156,000) due primarily to the fact that the Company
used proceeds from the initial public offering to repay outstanding bank debt
in September 1997.
Net income increased from $2.7 million for the year ended December 31,
1996 to $4.0 million for the year ended December 31, 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
The Company's total revenue increased 72% to $29.6 million for the
year ended December 31, 1996 from $17.2 million for the year ended December 31,
1995. Most of this increase resulted from an $11.5 million increase (122%) in
interim housing revenue, which was $20.9 million in 1996 compared to $9.4
million in 1995. The three offices that had been opened prior to 1995
accounted for $4.9 million of this $11.5 million increase, and the balance of
this increase was the result of increased activity at the four sales offices
opened in 1995 and early 1996. Furniture and houseware revenue increased 12%
to $8.7 million in 1996 from $7.8 million in 1995. The growth in furniture and
houseware revenue was less than the growth in interim housing revenue primarily
because of the Company's strategy to focus on expanding its interim housing
business.
The cost of revenue increased 92% to $18.5 million in 1996 from $9.6
million in 1995. This cost increase paralleled the increase in related interim
housing revenue. Personnel and payroll costs increased by 44% to $5.6 million
in 1996 from $3.9 million in 1995. This increase primarily resulted from the
addition of three offices and increased staffing in four established offices.
Interim housing operations were responsible for $1.0 million (60%) of this
increase. Similarly, occupancy costs increased by 51% to $994,000 in 1996 from
$660,000 in 1995. This increase was due to the opening of the Charlotte,
Raleigh and Fort Lauderdale offices and related warehouse locations. Other
operating costs increased 70% to $1.6 million in 1996 from $942,000 in 1995.
This increase was primarily due to additional advertising, promotion and other
selling expenses incurred in new and existing interim housing markets.
Interest expense increased to $308,000 in 1996 from $240,000 in 1995
due to an increase in indebtedness associated with establishing new office and
warehouse locations.
Net income increased 42% to $2.7 million in 1996 from $1.9 million in
1995.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997 the Company's cash and cash
equivalents increased by $15.6 million, from $500,000 to $16.1 million. The
increase was due mostly to the Company's initial public offering completed in
August 1997, pursuant to which the Company received $27.8 million in net
proceeds, as well as net cash provided by operating activities of $2.2 million.
17
<PAGE> 18
Cash used in investing activities for the year ended December 31, 1997
was $9.0 million, of which $8.5 million was used to fund acquisitions of
interim housing companies located in the New York, Orlando and San Francisco
Bay areas.
Cash flows provided by financing activities for the year ended
December 31, 1997 totaled $22.5 million. This amount was generated primarily
from $27.8 million in proceeds received from the Company's initial public
offering. Upon completion of this offering, the Company used a portion of the
proceeds to repay approximately $6.2 million in bank debt. The Company also
used a portion of the proceeds to pay $4.5 million in final S-Corporation
distributions to the principal stockholders and to fund a $1.1 million dividend
distribution declared on June 13, 1997.
In addition to the $16.1 million in cash available to the Company as
of December 31, 1997, the Company also has an arrangement with its bank to
obtain revolving lines of credit in the amount of $25 million, which will be
available for future acquisitions and working capital needs. The Company
expects that the definitive agreements with respect to the lines of credit will
be finalized in April 1998.
OTHER MATTERS
The Company is currently assessing and working to resolve the
potential impact of the year 2000 on the processing of date-sensitive
information by the Company's computerized information systems. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or systems failures. The Company has and will continue to make certain
investments in its software systems and applications to ensure the Company is
Year 2000 compliant. The financial impact of becoming Year 2000 compliant has
not been and is not expected by the Company to be material to the Company's
financial position or results of operations in a given year. However, there is
no guarantee that the systems of other companies on which the Company's systems
and operations rely will be converted on a timely basis and will not have a
material effect on the Company.
CAUTIONARY NOTE
This Annual Report on Form 10-K contains forward-looking statements
reflecting management's knowledge and judgment about factors which could
materially affect Company performance in the future. Terms indicating future
expectation and optimism about future potential and anticipated growth in
revenue and earnings of the Company's business lines and like expressions
typically identify such statements. Actual results and events may differ
significantly from those discussed in forward-looking statements.
All forward-looking statements are subject to the risks and
uncertainties inherent with predictions and forecasts. They are necessarily
speculative statements, and unforeseen factors, such as a significant downturn
in the economy, increased competitive pressures, failure to absorb newly
acquired businesses or to successfully develop newly opened offices, could
cause results to differ materially from any that may be projected.
Forward-looking statements are made in the context of information
available as of the date stated. The Company undertakes no obligation to
update or revise such statements to reflect new circumstances or unanticipated
events as they occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
18
<PAGE> 19
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and 1997 20
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 21
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1996
and 1997 22
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 23
Notes to Consolidated Financial Statements 24
Report of Independent Certified Public Accountants 38
</TABLE>
19
<PAGE> 20
EXECUSTAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 503,099 $16,134,958
Accounts receivable, net 2,266,518 5,657,600
Prepaid rent and other 323,521 723,350
Property on or held for lease, net 4,098,894 4,912,013
Property and equipment, net 2,076,330 2,383,958
Deferred tax-asset - 241,000
Intangible and other assets 410,114 13,777,058
-------------------------
Total assets $9,678,476 $43,829,937
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank line of credit $ 800,000 $ 5,000,000
Notes payable to bank 1,881,527 -
Capital lease obligation 1,555,860 1,519,844
Accounts payable 1,110,592 2,632,348
Accrued and other liabilities 1,347,664 3,651,960
-------------------------
Total liabilities 6,695,643 12,804,152
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
5,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.01 par value;
45,000,000 shares authorized,
3,750,000 and 6,983,500 shares
issued and outstanding 37,500 69,835
Additional paid-in capital 1,135,280 29,720,738
Retained earnings 1,810,053 1,235,212
-------------------------
Total stockholders' equity 2,982,833 31,025,785
-------------------------
Total liabilities and stockholders' equity $9,678,476 $43,829,937
=========================
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 21
EXECUSTAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Interim housing revenue $9,390,373 $20,905,463 $41,926,966
Furniture and housewares revenue 7,817,677 8,740,394 9,831,135
------------------------------------------------------
Total revenue 17,208,050 29,645,857 51,758,101
OPERATING COSTS AND EXPENSES
Cost of revenue 9,613,393 18,472,252 35,306,569
Personnel and payroll costs 3,875,845 5,596,781 8,245,994
Occupancy costs and nonrental
depreciation and amortization 660,323 994,107 1,599,675
Other operating costs 942,697 1,616,312 2,208,602
------------------------------------------------------
TOTAL OPERATING COST AND EXPENSES 15,092,258 26,679,452 47,360,840
------------------------------------------------------
EARNINGS FROM OPERATIONS 2,115,792 2,966,405 4,397,261
INTEREST EXPENSE 240,109 307,709 156,095
------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 1,875,683 2,658,696 4,241,166
INCOME TAX EXPENSE - - 284,573
NET INCOME 1,875,683 2,658,696 3,956,593
-----------------------------------------------------------------------------------------------------------------------
PRO FORMA DATA (Note D)
HISTORICAL EARNINGS BEFORE INCOME TAXES $1,875,683 $ 2,658,696 $ 4,241,166
PROVISION FOR INCOME TAXES 750,000 1,063,000 1,696,000
------------------------------------------------------
PRO FORMA NET INCOME $1,125,683 $ 1,595,696 $ 2,545,166
-----------------------------------------------------------------------------------------------------------------------
PRO FORMA INCOME PER SHARE - BASIC $ 0.28 $ 0.39 $ 0.51
- DILUTED
$ 0.28 $ 0.39 $ 0.51
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 4,074,000 4,074,000 4,986,081
- DILUTED 4,074,000 4,074,000 4,988,006
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 22
EXECUSTAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL RETAINED
STOCK STOCK PAID-IN CAPITAL EARNINGS TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ - $ 36,500 $ 1,108,673 $ 716,856 $ 1,862,029
Net income for 1995 - - - 1,875,683 1,875.683
Distributions - - - (1,284,053) (1,284,053)
Issuance of common stock - 1,000 26,607 - 27,607
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 - 37,500 1,135,280 1,308,486 2,481,266
Net income for 1996 - - - 2,658,696 2,658,696
Distributions - - - (2,157,129) (2,157,129)
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 - 37,500 1,135,280 1,810,053 2,982,833
Net income for 1997 - - - 3,956,593 3,956,593
Distributions - - (1,079,935) (4,531,434) (5,611,369)
Net proceeds from public
offering - 30,475 27,714,253 - 27,744,728
Issuance of common stock - 1,860 1,951,140 - 1,953,000
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ - $ 69,835 $29,720,738 $1,235,212 $31,025,785
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 23
EXECUSTAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1996 1997
--------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,875,683 $ 2,658,696 $ 3,956,593
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for doubtful accounts and vacancy reserve 922,353 929,331 456,681
Depreciation and amortization 1,442,779 1,906,904 2,324,040
Deferred income tax benefit - - (241,000)
Net purchase of property on or held for lease (1,549,326) (2,632,460) (2,555,913)
Compensation paid in stock 27,607 - -
Changes in assets and liabilities
Increase in accounts receivable (984,358) (2,283,671) (1,754,289)
Increase in prepaid rent and other (33,572) (229,196) (280,349)
Increase in other assets (20,025) (183,199) (418,343)
(Decrease) increase in accounts payable (76,738) 575,738 1,200,358
Increase (decrease) in accrued and other liabilities 193,112 373,301 (478,500)
--------------------------------------------------
Total adjustments (78,168) (1,543,252) (1,747,315)
--------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,797,515 1,115,444 2,209,278
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (252,996) (392,251) (514,390)
Net decrease (increase) in due from unconsolidated affiliates 18,932 (731) (22,808)
Cash paid for acquisitions - - (8,515,182)
--------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (234,064) (392,982) (9,052,380)
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on line of credit (346,000) 600,000 4,200,000
Repayment of loans acquired through acquisitions - - (1,940,854)
Distributions to stockholders (1,284,053) (2,157,129) (5,611,369)
Borrowings on bank loans 750,000 1,900,000 4,350,000
Payments on bank loans (459,976) (761,386) (6,231,528)
Payments on capital lease obligations (18,683) (29,758) (36,016)
Net proceeds from public offering - - 27,744,728
--------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,358,712) (448,273) 22,474,961
--------------------------------------------------
NET INCREASE IN CASH 204,739 274,189 15,631,859
CASH AT BEGINNING OF YEAR 24,171 228,910 503,099
--------------------------------------------------
CASH AT END OF YEAR $ 228,910 $ 503,099 $16,134,958
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid during the year $ 249,818 $ 313,098 $ 397,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 24
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting principles applied in the
preparation of the consolidated financial statements follows:
FORMATION OF HOLDING COMPANY, RECAPITALIZATION, AND INITIAL PUBLIC OFFERING
ExecuStay Corporation was formed on June 4, 1997, to be a newly
created holding company for its four wholly owned subsidiaries (ExecuStay
Corporation and such subsidiaries being collectively referred to as the
"Company"). On June 4, 1997, ExecuStay Corporation issued an aggregate of
1,000,000 shares of a total of 45,000,000 newly authorized shares of Common
Stock in exchange for all of the outstanding shares of capital stock of the
subsidiaries and, in addition, authorized 5,000,000 preferred shares (the
"Recapitalization"). Prior to the Recapitalization, all subsidiaries were
subchapter S corporations.
On June 13, 1997, the Company effected a 3.75-for-one stock split of
its Common Stock in the form of a stock dividend.
The accompanying financial statements, including stockholders' equity
and per share amounts, give retroactive effect to the Recapitalization and the
stock split for all periods presented.
On June 13, 1997, in conjunction with the Recapitalization, the
Company declared a distribution totaling approximately $1.1 million,
representing prior years' capital contributions made by the original
stockholders to two of the subsidiaries for tax basis purposes. The original
contributions were funded from distributions received by the stockholders from
the other two subsidiaries.
On August 27, the Company consummated an initial public offering of
2,650,000 shares of its common stock at a price of $10.00 per share. During
September 1997, the underwriters' exercised their over-allotment option to
purchase an additional 397,500 shares of the Company's common stock at a price
of $10.00 per share. The net proceeds to the Company from the offering were
approximately $27.8 million.
The Company declared a final S corporation distribution totaling
approximately $4.5 million to its original stockholders immediately prior to
the effective date of the public offering, equal to the undistributed
cumulative earnings reported for tax purposes at that date.
NATURE OF OPERATIONS
The Company is a provider of interim housing for corporate clients and
professionals. In addition to providing fully furnished housing, the Company
also rents housewares and furniture to property management companies and
apartment communities. The Company operates from 16 offices throughout the
United States.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of ExecuStay and its four wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
24
<PAGE> 25
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over estimated useful lives of five to seven
years. Capital leases and leasehold improvements are amortized over the lesser
of the estimated useful lives of the related assets or the lease term.
PROPERTY ON OR HELD FOR LEASE
Furniture and amenities on or held for lease are depreciated over
estimated useful lives ranging from two to seven years for furniture and one to
five years for household amenities. Depreciation is computed on the
straight-line method for financial reporting purposes and on accelerated
methods for tax purposes.
USING ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company defines cash and cash equivalents as all cash held by
depository institutions, cash on hand and short-term liquid investments with
initial maturities of three months or less. Cash balances may exceed insurable
amounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
Cash and cash equivalents, accounts receivable, accounts payable, line
of credit and other accrued liabilities - The carrying amounts approximate fair
values because of the short maturity of these instruments.
Installment notes payable to bank - The carrying amounts are deemed to
be substantially equal to fair value.
INTANGIBLE ASSETS
Intangible assets consist primarily of amounts paid for non-compete
agreements in connection with business acquisitions, purchased contract rights
and goodwill. Non-compete agreements and purchased contract rights are
amortized on a straight-line basis over the lives of the respective agreements,
ranging from three months to eight years. Goodwill is amortized on a
straight-line basis over 20 to 35 years. Impairment losses, if any, are
measured as the excess of carrying cost over estimated fair market value, and
are recognized in operations if a permanent decline in value occurs.
25
<PAGE> 26
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record stock-based employee compensation plans at their fair
value. The Company has elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for employee stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the exercise price an employee must pay to
acquire the stock. Pro forma disclosures of net income and earnings per share
are presented in Note M as if the fair value based method of accounting defined
in SFAS 123 had been applied.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." This statement
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarity to fully
diluted EPS pursuant to Opinion 15. In complying with the requirements of SFAS
No. 128, the Company has restated all prior period pro forma EPS data.
For purposes of computing the diluted EPS, the Company has dilutive
stock options as share equivalents using the treasury stock method.
The following table reconciles basic and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1996 1997
-----------------------------------------
<S> <C> <C> <C>
Numerator
- ---------
Pro forma net income $1,125,683 $1,595,696 $2,545,166
Denominator/Weighted Average Shares
- -----------------------------------
Denominator for basic EPS 4,074,000 4,074,000 4,986,081
Effect of dilutive securities stock
options - - 1,925
--------- --------- ----------
Denominator for diluted EPS 4,074,000 4,074,000 4,988,006
========= ========= ==========
</TABLE>
26
<PAGE> 27
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. The statement must be adopted by the Company in the first quarter of
1998. Under provisions of this statement, the Company will be required to
include a financial statement presentation of comprehensive income and its
components to conform to these new requirements. As a consequence of this
change, certain reclassifications will be necessary for previously reported
amounts to achieve the required presentation of comprehensive income.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," was issued. The statement must be adopted
by the Company on December 31, 1998. Under provisions of this statement, the
Company will be required to modify or expand the financial statement
disclosures for operating segments, products and services, and geographic
areas. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
In December 1997, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," was issued and is effective for the
Company's 1998 fiscal year. The statement revises current disclosure
requirements for employers' pension and other retiree benefits. Implementation
of this disclosure standard will not affect the company's financial position or
results of operations.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the current presentation.
NOTE B - ACQUISITIONS
On April 1, 1997, the Company purchased for cash certain leases and
contracts of Corporate Accommodations, Inc., an interim housing business in
Orlando for $850,000. In conjunction with the purchase, the Company entered
into a five-year non-compete agreement and a five-year employment agreement
which provides for base salary and incentive compensation. The Company
obtained additional financing of $850,000 from its bank to fund the
transaction. The Company accounted for the transaction using purchase
accounting and recorded certain intangible assets including $120,000 relating
to a non-compete and goodwill of $705,000. Earnings since the acquisition date
have been included in the consolidated statements of operations.
On June 1, 1997, the Company purchased from Prom X, Inc., an interim
housing business in the San Francisco area for a total purchase price of
$1,890,000. The Company obtained additional financing of $1,500,000 from its
bank to fund the transaction. The acquisition included certain rental
exclusivity and seller non-compete arrangements, along with the existing
customer base. The Company also entered into employment agreements with
certain seller employees. The Company has accounted for the transaction using
purchase accounting and recorded intangible assets including $100,000 relating
to a non-compete agreement, $160,000 relating to existing contract rights and
an exclusivity agreement and goodwill of $1,630,000. Earnings since the
acquisition date have been included in the consolidated statements of
operations.
27
<PAGE> 28
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS - (CONTINUED)
On November 1, 1997, the Company purchased 100% of the outstanding
common stock of Boland Corporate Housing, Inc., an interim housing company
located in New York, for approximately $8,250,000, consisting of $6,300,000 in
cash and 186,000 of the Company's unregistered shares of common stock valued at
approximately $1,950,000 at the time of purchase. The total purchase price was
subject to a post-closing adjustment based upon the seller's 1997 adjusted
earnings before interest and taxes and a final determination of the acquired
company's tangible net book value. An additional $1,728,000 was accrued in
1997 to cover the post closing adjustment. The Company accounted for the
transaction using purchase accounting and recorded certain intangible assets
including $100,000 relating to a non-compete agreement and goodwill of
approximately $9.2 million. Earnings since the acquisition data have been
included in the consolidated statements of operations.
The following table summarizes the unaudited consolidated pro forma
information, assuming the acquisition of Boland Corporate Housing, Inc. had
occurred at the beginning of each of the following periods (the effects of the
acquired companies, Corporate Accommodations, Inc., and Prom X are immaterial
to the consolidated financial statements and have not been included in the
table below):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revenue $37,335,000 $63,720,000
Earnings from operations 2,981,000 4,945,000
Net income 1,617,000 3,001,000
Net income per share - Basic and Diluted $ 0.40 $ 0.60
</TABLE>
The pro forma results do not necessarily represent results which would
have occurred if the acquisitions had taken place at the beginning of each
period, nor are they indicative of the results of future combined operations.
The pro forma information should be read in conjunction with the related
historical information.
NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION
On November 1, 1997, the Company issued 186,000 shares of its common
stock valued at $1,953,000 in connection with the acquisition of Boland
Corporate Housing, Inc.
NOTE D - PRO FORMA INFORMATION
Prior to the consummation of the initial public offering, the Company
filed its federal and state income tax returns under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision was
provided in the accompanying consolidated financial statements for federal and
state income taxes for the S Corporation periods, since the income of the
Company was taxable directly to its stockholders. On August 27, 1997, the
Company converted to a C Corporation and is subject to both federal and state
income taxes (see Note N).
The pro forma adjustment in the consolidated statements of operations
reflects a provision for income taxes based upon pro forma pretax earnings as
if the Company had been subject to federal and state and local income taxes.
The pro forma income tax provision has been prepared in accordance with SFAS
No. 109.
28
<PAGE> 29
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - ACCOUNTS RECEIVABLE, NET
The Company grants credit to corporate and individual customers.
Provisions have been established for uncollectible amounts and vacancy credits.
Following is a summary of accounts receivable:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
-----------------------------
<S> <C> <C>
Accounts receivable $2,490,548 $6,245,060
Due from nonconsolidated affiliates 14,026 36,833
Reserve for vacancies and doubtful accounts (238,056) (624,293)
---------- ----------
Accounts receivable - net $2,266,518 $5,657,600
========== ==========
</TABLE>
NOTE F - PROPERTY ON OR HELD FOR LEASE
The following is a summary of property on or held for lease:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
-----------------------------
<S> <C> <C>
Furniture $5,867,089 $6,461,018
Household amenities 1,890,866 2,631,989
---------- ----------
7,757,955 9,093,007
Less accumulated depreciation 3,659,061 4,180,994
---------- ----------
$4,098,894 $4,912,013
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and
1997 totaled approximately $1,150,000, $1,580,000 and $1,598,000 respectively.
NOTE G - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
---------------------------
<S> <C> <C>
Vehicles $ 544,110 $ 604,241
Leasehold improvements 125,208 181,196
Computer equipment and software 399,262 731,629
Furniture and equipment 388,061 726,960
---------- ----------
1,456,641 2,244,026
---------- ----------
Less accumulated depreciation and
amortization 777,559 1,177,728
---------- ----------
679,082 1,066,298
---------- ----------
Capital lease - building 1,612,208 1,612,208
Less accumulated depreciation 214,960 294,548
---------- ----------
1,397,248 1,317,660
---------- ----------
$2,076,330 $2,383,958
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 totaled approximately $293,000, $327,000 and $413,000
respectively.
29
<PAGE> 30
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - INTANGIBLE AND OTHER ASSETS
The following is a summary of other assets:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
-------------------------
<S> <C> <C>
Goodwill $ - $11,998,305
Non-compete agreements - 400,381
Deposits 410,114 1,440,688
Deferred software costs - 105,330
Other - -
--------- -----------
Less accumulated amortization 410,114 13,944,704
- 167,646
--------- -----------
$ 410,114 $13,777,058
========= ===========
</TABLE>
Amortization expense for the year ended December 31, 1997 totaled
$167,646.
NOTE I - BANK NOTES
The Company has a revolving line-of-credit and various term loans with
a bank.
Under the terms of the current line-of-credit agreement, which expires
May 31, 1998, the Company may borrow up to $2,000,000 at the bank's Prime Rate
plus 0.50% (8.75% at December 31, 1996). At December 31, 1996 and 1997, the
borrowings outstanding on the line-of-credit amounted to $800,000 and $0,
respectively. The revolving credit agreement is collateralized by a blanket
security interest on all assets of the Company, and is personally guaranteed by
the principal stockholders.
On December 31, 1997, the Company secured a $5,000,000 bridge loan
with a maturity date the earlier of January 30, 1998 or the closing of the
line-of-credit agreement discussed below. The Company was required to pay
interest at the one month LIBOR plus 0.75%. The loan was collerateralized by
an assignment of the stock of all subsidiaries of the company, and was repaid
on January 2, 1998.
Subsequent to December 31, 1997, the Company has entered into an
arrangement with its bank to obtain a $20,000,000 acquisition line-of-credit and
a $5,000,000 working capital line-of-credit. These agreements will expire
December 31, 2000 and 1998 respectively. Under the proposed terms of the
agreements, the Company will have an option of a floating rate of interest at
the bank's Prime Rate plus 0.75% to 1.25% or a fixed rate of interest at the
Prime Rate plus 1.00% to 1.50%, depending upon performance. Draws under the
acquisition line will amortize over a term not to exceed 60 months with an
option to pay interest only for the first 6 months and fully amortize the
principal over the remaining 54 months. Advances for capital expenditures
aggregating $500,000 shall be setup on a term basis and amortized over two
years. If the fixed rate option is chosen, the Company will be subject to
prepayment penalties. The revolving credit agreements are collateralized by an
assignment of the stock of all subsidiaries of the Company. The Company expects
that the definitive agreements with respect to the lines of credit will be
finalized in April 1998.
30
<PAGE> 31
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - BANK NOTES - (CONTINUED)
STANDBY LETTERS OF CREDIT
The Company has two standby letters of credit amounting to $26,010
with a bank. They are available as required by certain utility companies in the
event of default on payments by the Company. The standby letters of credit
expire May 1, and December 31, 1998.
Term notes payable to the bank are as follows. They are deemed to be
substantially equal to fair value.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
---------------------------------
<S> <C> <C>
$1,900,000 note dated July 29, 1996,
payable to bank, interest at 8.70%, with
24 payments of $79,167 plus interest due
monthly through August 1998;
collateralized by a blanket security
interest on all assets of the Company and
personally guaranteed by the original
stockholders............................... $1,583,333 $ -
$750,000 note dated June 21, 1995, payable
to bank, interest at 8.08%, with 24
payments of $31,250 plus interest due
monthly through July 1997; collateralized
by a blanket security interest on all
assets of the Company and personally
guaranteed by the original stockholders.... 282,909 -
Notes payable to bank with interest ranging
from 6.75% to 7.75%; principal and interest
payments due monthly through June 1997;
secured by vehicles with a cost of
$130,350.............................. 15,285 -
---------- --------
$1,881,527 $ -
========== ========
</TABLE>
NOTE J - ACCRUED AND OTHER LIABILITIES
The following is a summary of accrued and other liabilities:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
Accrued payroll and related expenses $ 442,118 $ 587,556
Accrued sales tax payable 199,764 199,466
Customer deposits held 295,111 528,707
Accrued acquisition costs - 1,728,000
Current income taxes payable - 572,295
Other accrued expenses 410,671 35,936
---------- ----------
$1,347,664 $3,651,960
========== ==========
</TABLE>
31
<PAGE> 32
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - RELATED PARTY TRANSACTIONS
UNCONSOLIDATED AFFILIATE
In 1993, the Company entered into a capital lease for a building owned
by 7595 Rickenbacker LLC, an entity owned by three of the Company's original
stockholders (see Note L). In addition, the Company leases the land under an
operating lease. Rent expense for the lease of the land was $67,700 and
$62,500 for the years ended December 31, 1997 and 1996 respectively.
NOTE L - COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE
In 1993, the Company entered into a 20-year noncancelable lease
commencing in May 1994, for its Washington headquarters, warehouse and regional
office building with 7595 Rickenbacker LLC. The building portion of the lease
is classified as a capital lease, and the related asset and liability have been
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The land portion of the lease is classified as an
operating lease, as discussed below. The asset is being amortized over the
related lease term, and amortization of the asset has been included in
depreciation for years ended December 31, 1996 and 1997.
Minimum future payments under the capital lease as of December 31,
1997, for each of the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998............................................. $ 186,900
1999............................................. 186,900
2000............................................. 186,900
2001............................................. 186,900
2002............................................. 186,900
Thereafter....................................... 2,118,200
----------
Total minimum lease payments..................... 3,052,700
Less amounts representing interest............... (1,532,856)
----------
Present value of net minimum lease payments $1,519,844
==========
</TABLE>
32
<PAGE> 33
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
OPERATING LEASES
The Company leases the land associated with its Washington facility as
well as other office and warehouse space, vehicles and equipment under non
cancelable operating leases expiring on various dates through April 2114.
Certain leases include various provisions for annual increases based on the
Consumer Price Index.
Minimum future rental payments are as follows:
<TABLE>
<S> <C>
1998.......................................... $ 507,100
1999.......................................... 323,800
2000.......................................... 274,400
2001.......................................... 241,400
2002.......................................... 192,200
Thereafter.................................... 724,800
----------
$2,263,700
==========
</TABLE>
Rent expense under the operating leases amounted to approximately
$279,000 and $428,894 for 1996 and 1997 respectively.
NOTE M - BENEFIT PLANS
SAVINGS PLAN
On January 1, 1996, the Company adopted a savings plan ( the "401 (k)
Plan") covering all eligible employees. Employees must be at least 21 years of
age and have completed one year of service to be eligible to participate in the
401 (k) Plan. Enrollment occurs quarterly on January 1, April 1, July 1 and
October 1 of each year. Participants may contribute up to 15% of their
compensation, and the Company provides a matching contribution of 15% of the
participant's contribution. In addition to the matching contribution, the
Company may make an additional discretionary contribution annually. Vesting in
the employer's contribution is at a rate of 25% per year beginning with the
participant's third year of service. The Company's contribution expense for
the years ended December 31, 1996 and 1997 was $20,000 respectively.
1997 INCENTIVE AND STOCK OPTION PLAN
In June 1997, the Board of Directors and stockholders adopted the 1997
Incentive and Stock Option Plan ( the "Plan"). The Plan provides for the
granting of options to employees of the Company to purchase shares of the
Company's common stock at a price equal to or in excess of the fair market
value of the common stock at the date of grant. Vesting in the Plan is at a
rate of 25% per year beginning on the effective date of the grant and with
options expiring ten years after the grant. At December 31, 1997, the Company
had reserved for issuance under the Plan 513,500 shares of common stock. The
Company granted options to purchase an aggregate of 186,850 shares of common
stock under the Plan at a price ranging from $9.63 to $10.50.
33
<PAGE> 34
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - BENEFIT PLANS - (CONTINUED)
The following is a summary of option transactions and exercise prices:
<TABLE>
<CAPTION>
Non-qualified
Stock Option Stock
Plan Options
--------------------------- -----------------------
Weighted Price Per Weighted
Shares Price Per Share Average Shares Share Average
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1997 - -
Granted 166,850 $9.63 to $10.50 $ 9.99 20,000 $10.00 $10.00
Terminated (1,550) $10.00 $10.00 -
------- ------
Outstanding at
December 31,1997 165,300 $9.63 to $10.50 $ 9.99 20,000 $10.00 $10.00
======= ======
Vested at
December 31,1997 41,325 5,000
======= ======
Weighted average fair
value of options
granted during the $ 4.79 $ 4.81
year
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. The Company grants stock options at exercise prices
equal to the fair market value of the stock on the date of grant. Accordingly,
no compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's pro forma net
income and pro forma earnings per share would have been reduced to the
unaudited pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Pro forma net income: As reported $2,545,166
Pro forma $2,411,900
Pro forma income per share
(Basic and Diluted): As reported $ 0.51
Pro forma $ 0.48
</TABLE>
The pro forma information regarding net income and earnings per share
is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for 1997: a risk-free interest rate ranging from 5.59% to 5.81%,
0% dividend yield, volatility factor of the expected market price of the
Company's common stock of 46.5% and a weighted average life of the option of 5
years.
34
<PAGE> 35
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - BENEFIT PLANS - (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can material affect the fair value estimates,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employees stock options.
Additionally, application of SFAS 123 in the current year may not be
representative of future effects of applying this statement.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted Average
----------------------------
Number of Weighted
Range of Exercise Options and Remaining Life Exercise Number of Options Average
Prices Awards (Years) Price and Awards Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.63 to $10.50 185,300 9.77 $9.99 46,325 $9.99
</TABLE>
NOTE N - INCOME TAXES
Prior to the consummation of an initial public offering, the Company
filed its Federal and state income tax returns under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision was
recorded in the accompanying financial statements for Federal and state income
taxes for the S Corporation periods, since income of the Company was taxable
directly to its stockholders. On August 27, 1997, the Company converted to a C
Corporation and became subject to both Federal and state income taxes.
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). SFAS 109 requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
35
<PAGE> 36
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - INCOME TAXES - (CONTINUED)
The income tax expense for the year ended December 31, 1997 consisted
of the following:
<TABLE>
<S> <C>
CURRENT:
Federal......................................... $ 387,998
State........................................... 137,575
----------
Total........................................... 525,573
DEFERRED:
Federal and State............................... (241,000)
----------
Income tax expense.............................. $ 284,573
==========
</TABLE>
Temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Accrued expenses........................................ $ 43,100
Deferred revenue........................................ 51,700
Accounts receivable reserves............................ 123,300
Capital lease........................................... 76,800
Depreciation and amortization........................... (53,900)
----------
Net deferred tax asset.................................. $ 241,000
==========
</TABLE>
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes selected quarterly financial data:
<TABLE>
<CAPTION>
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Revenue............................ $9,645 $10,791 $14,817 $16,505
Earnings from operations........... 1,015 828 1,383 1,171
Pro forma net income............... 560 420 789 776
Pro forma net income per share..... $ 0.14 $ 0.10 $ 0.16 $ 0.11
Year Ended December 31, 1996:
Revenue............................ $5,102 $ 6,756 $ 8,910 $ 8,877
Earnings from operations........... 241 678 1,298 749
Pro forma net income............... 109 362 726 399
Pro forma net income per share. $ 0.02 $ 0.09 $ 0.18 $ 0.10
</TABLE>
NOTE P - SUBSEQUENT EVENTS
On January 1, 1998, the Company purchased 100% of the outstanding
stock of Corporate Accommodations, Inc., an interim housing company in
Connecticut, for approximately $1,450,000, consisting of $1,050,000 in cash and
45,455 of the Company's unregistered shares of common stock
36
<PAGE> 37
EXECUSTAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - SUBSEQUENT EVENTS - (CONTINUED)
valued at $400,000 at the time of the purchase. The total purchase price is
subject to a post-closing adjustment based upon the seller's December 31, 1997
tangible net book value. The purchase price included seller non-compete
agreements and employment agreements with certain seller employees. The Company
has accounted for the transaction in 1998 using purchase accounting and
recorded intangible assets including $ 25,000 relating to a non-compete
agreement and goodwill of approximately $1.1 million.
On February 1, 1998 the Company purchased the net assets of F.L.
Taylor Corporation, an interim housing company located in Arizona, for
approximately $837,000. The total purchase price is subject to a post closing
adjustment based upon the seller's increase in gross profit over gross profit
for 1997. The purchase price also included a seller non-compete agreement. The
Company has accounted for the transaction in 1998 using purchase accounting and
recorded tangible assets of $30,000 and intangible assets including $25,000
relating to a non-compete agreement and goodwill of approximately $782,000.
37
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ExecuStay Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of ExecuStay
Corporation and Subsidiaries (the "Company") as of December 31, 1996 and 1997,
and the related consolidated statements of operations, changes in stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of ExecuStay Corporation and
Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Vienna, Virginia
February 27, 1998
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item regarding directors is hereby incorporated by reference
from the Company's definitive proxy statement or amendment hereto to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report. Information regarding the Company's executive
officers is set forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G (3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G (3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G (3) of Form 10-K, the information
called for by this item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are incorporated herein by
reference:
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1995, 1996 and 1997
39
<PAGE> 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a) 2. CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
Report of Independent Certified Public Accountants on
Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted either because they are not applicable
or required, or because the required information is included in the
consolidated financial statements or notes thereto:
(a) 3. LISTING OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated June 4, 1997, by and among
the Company and certain stockholders of the Company (Incorporated by
reference to Exhibit 2.1 to Amendment No. 2 of the Company's
Registration Statement on Form S-1, File No. 33-30049 (the
"Registration Statement").
3.1 Articles of Incorporation of the Company, as amended to date.
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement).
4.1 Form of Certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement).
10.1 1997 Incentive and Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement).
10.2 Asset Purchase Agreement, dated April 1, 1997, by and among Corporate
Accommodations, Inc., Linda Harper and the Company (Incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement).
10.4 Purchase Agreement, dated June 1, 1997, by and among Prom Management
Group and the Company (Incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement).
10.6 Lease Agreement, dated August 20, 1993, by and among 7595 Rickenbacker
LLC and Executive Amenities, Inc., as amended on May 12, 1994
(Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement).
40
<PAGE> 41
10.7 Promissory Note, dated July 29, 1996, by and among the Company and
Citizens Bank (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement).
10.8 Business Loan Agreement, dated July 29, 1996, by and among the Company
and Citizens Bank (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement).
10.9 Commercial Security Agreement, dated June 2, 1997, by and among the
Company and Crestar Bank (Incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement).
10.11 Stock Purchase Agreement, dated November 1, 1997, by and between the
Company, ExecuStay Corporation of America, Boland Corporate Housing,
Inc., Ellen Boland and William Boland (Incorporated by Reference to
Exhibit 2.1 to the Current Report on Form 8-K, filed on November 14,
1997).
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On November 1, 1997, the Company filed a Current Report on Form 8-K to
report the acquisition of Boland Corporate Housing, Inc. ("Boland") pursuant to
Item 2 to the Form 8-K. In an amendment to the Form 8-K, the Company filed the
following financial reports (dated as of December 19, 1997): audited balance
sheets of Boland as of December 31, 1996 and September 30, 1997 and the related
statements of operations, changes in stockholder's equity, and cash flows for
the year ended December 31, 1996, and the nine months ended September 30, 1997;
unaudited pro forma condensed consolidated balance sheet of ExecuStay
Corporation and subsidiaries as if the Boland acquisition had occurred on
September 30, 1997; and unaudited pro forma condensed consolidated statement of
operations of ExecuStay Corporation and subsidiaries for the year ended
December 31, 1996 and the nine months ended September 30, 1997 as if the Boland
acquisition had been completed at the beginning of the respective periods.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EXECUSTAY CORPORATION
Dated: March 27, 1998 By: /s/ GARY R. ABRAHAMS
------------------------------------
Gary R. Abrahams
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 27, 1998 By: /s/ GARY R. ABRAHAMS
------------------------------------
Gary R. Abrahams
Chief Executive Officer and Director
(Principal executive officer)
Dated: March 27, 1998 By: /s/ MARC B. KAPLAN
------------------------------------
Marc B. Kaplan
Chief Financial Officer and Director
(Principal accounting and financial
officer)
Dated: March 27, 1998 By: /s/ ROBERT W. ZAUGG
------------------------------------
Robert W. Zaugg
Chief Operating Officer and Director
Dated: March 27, 1998 By: /s/ DAVID S. SANTEE
------------------------------------
David S. Santee
Director
Dated: March 27, 1998 By: /s/ STUART C. SIEGEL
------------------------------------
Stuart C. Siegel
Director
42
<PAGE> 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
Board of Directors
ExecuStay Corporation and Subsidiaries
In connection with our audit of the consolidated financial statements of
ExecuStay Corporation and Subsidiaries referred to in our report dated February
27, 1998, which is included in the Annual Report on Form 10-K, we have also
audited Schedule II for each of the three years in the period ended December
31, 1997. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Vienna, Virginia
February 27, 1998
43
<PAGE> 44
Schedule II
ExecuStay Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions-charged
Balance at to operating Balance at
beginning of costs and end of
Description period expenses Deductions period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve for Vacancies and Doubtful Accounts
Year ended December 31, 1997: $238,056 $456,681 $ 70,443 $624,293
Year ended December 31, 1996: 139,511 929,331 830,786 238,056
Year ended December 31, 1995: 107,864 922,353 890,706 139,511
</TABLE>
44
<PAGE> 45
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated June 4, 1997, by and among
the Company and certain stockholders of the Company (Incorporated by
reference to Exhibit 2.1 to Amendment No. 2 of the Company's
Registration Statement on Form S-1, File No. 33-30049 (the
"Registration Statement").
3.1 Articles of Incorporation of the Company, as amended to date.
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement).
4.1 Form of Certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement).
10.1 1997 Incentive and Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement).
10.2 Asset Purchase Agreement, dated April 1, 1997, by and among Corporate
Accommodations, Inc., Linda Harper and the Company (Incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement).
10.4 Purchase Agreement, dated June 1, 1997, by and among Prom Management
Group and the Company (Incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement).
10.6 Lease Agreement, dated August 20, 1993, by and among 7595 Rickenbacker
LLC and Executive Amenities, Inc., as amended on May 12, 1994
(Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement).
10.7 Promissory Note, dated July 29, 1996, by and among the Company and
Citizens Bank (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement).
10.8 Business Loan Agreement, dated July 29, 1996, by and among the Company
and Citizens Bank (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement).
10.9 Commercial Security Agreement, dated June 2, 1997, by and among the
Company and Crestar Bank (Incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement).
10.11 Stock Purchase Agreement, dated November 1, 1997, by and between the
Company, ExecuStay Corporation of America, Boland Corporate Housing,
Inc., Ellen Boland and William Boland (Incorporated by Reference to
Exhibit 2.1 to the Current Report on Form 8-K, filed on November 14,
1997).
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
EXECUSTAY CORPORATION
The undersigned, David A. Wechsler, Esq., whose business post office
address is 4550 Montgomery Avenue, Suite 900, Bethesda, Maryland, 20814, being
at least eighteen (18) years of age, does hereby act as Incorporator for the
purpose of forming a corporation under and by virtue of the general laws of the
State of Maryland, and does hereby set forth the following provisions:
FIRST: The name of the corporation (which is hereinafter called the
"Corporation") is ExecuStay Corporation.
SECOND: The purposes for which this Corporation is formed are to engage
in any businesses for which it shall be lawful for Corporations of the State of
Maryland to engage in and to do all lawful and appropriate actions and things
with respect thereto.
THIRD: The post office address of the principal office of the
Corporation is 7595 Rickenbacker Drive, Gaithersburg, Maryland 20879.
FOURTH: The name and post office address of the resident agent of the
Corporation in the State of Maryland is CWS&B, Inc., 4550 Montgomery Avenue,
<PAGE> 2
Suite 900, North, Bethesda, Maryland 20814. Said resident agent is a
Corporation chartered in the State of Maryland.
FIFTH: The total number of shares of capital stock which the
Corporation is authorized to issue shall be 50,000,000 shares, consisting of
45,000,000 shares of common stock, par value $.01 per share ("Common Stock"),
and 5,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock").
SIXTH: All shares of Common Stock shall be voting shares and shall be
entitled to one vote per share. Subject to any preferential rights of holders of
Preferred Stock, holders of Common Stock shall be entitled to receive their pro
rata share, based upon the number of shares of Common Stock held by them, of
such dividends or other distributions as may be declared by the board of
directors from time to time and of any distribution of the assets of the
Corporation upon its liquidation, dissolution or winding up, whether voluntary
or involuntary.
SEVENTH: The board of directors of the Corporation is hereby authorized
to provide, by resolution or resolutions adopted by such board, for the issuance
of Preferred Stock from time to time in one or more classes and/or series, to
establish the designation and number of shares of each such class or series, and
to fix the relative rights and preferences of the shares of each such class or
series, all to the full extent permitted by Section 2-105 of the Corporations
and Associations Article of the
-2-
<PAGE> 3
Annotated Code of Maryland (the "Maryland Corporations Article"), or any
successor or amended provision. Without limiting the generality of the
foregoing, the board of directors of the Corporation is authorized to provide
that shares of a class or series of Preferred Stock:
(a) are entitled to cumulative, partially cumulative or
noncumulative dividends or other distributions payable in cash, capital
stock or indebtedness of the Corporation or other property, at such
times and in such amounts as are set forth in the board resolutions
establishing such class or series or as are determined in a manner
specified in such resolutions;
(b) are entitled to a preference with respect to payment of
dividends over one or more other classes and/or series of capital stock
of the Corporation;
(c) are entitled to a preference with respect to any
distribution of assets of the Corporation upon its liquidation,
dissolution or winding up over one or more other classes and/or series
of capital stock of the Corporation in such amount as is set forth in
the board resolutions establishing such class or series or as is
determined in a manner specified in such resolutions;
(d) are redeemable or exchangeable at the option of the
Corporation and/or on a mandatory basis for cash, capital stock or
indebtedness of the Corporation or other property, at such times or
upon the occurrence of such events, and at such prices, as are set
forth in the board resolutions establishing
-3-
<PAGE> 4
such class or series or as are determined in a manner specified in such
resolutions;
(e) are entitled to the benefits of such sinking fund, if any,
as is required to be established by the Corporation for the redemption
and/or purchase of such shares by the board resolutions establishing
such class or series;
(f) are convertible at the option of the holders thereof into
shares of any other class or series of capital stock of the
Corporation, at such times or upon the occurrence of such events, and
upon such terms, as are set forth in the board resolutions establishing
such class or series or as are determined in a manner specified in such
resolutions;
(g) are exchangeable at the option of the holders thereof for
cash, capital stock or indebtedness of the Corporation or other
property, at such times or upon the occurrence of such events, and at
such prices, as are set forth in the board resolutions establishing
such class or series or as are determined in a manner specified in such
resolutions;
(h) are entitled to such voting rights, if any, as are
specified in the board resolutions establishing such class or series
(including, without limiting the generality of the foregoing, the right
to elect one or more directors voting alone as a single class or series
or together with one or more other classes and/or series of Preferred
Stock, if so specified by such board resolutions) at all times or upon
the occurrence of specified events; and
-4-
<PAGE> 5
(i) are subject to restrictions on the issuance of additional
shares of Preferred Stock of such class or series or of any other class
or series, or on the reissuance of shares of Preferred Stock of such
class or series or of any other class or series, or on increases or
decreases in the number of authorized shares of Preferred Stock of such
class or series or of any other class or series.
Without limiting the generality of the foregoing authorizations, any of the
rights and preferences of a class or series of Preferred Stock may be made
dependent upon facts ascertainable outside these Articles of Incorporation or
the board resolutions establishing such class or series, and may incorporate by
reference some or all of the terms of any agreements, contracts or other
arrangements entered into by the Corporation in connection with the issuance of
such class or series, all to the full extent permitted by the Maryland
Corporations Article. Unless otherwise specified in the board resolutions
establishing a class or series of Preferred Stock, holders of a class or series
of Preferred Stock shall not be entitled to cumulate their votes in any election
of directors in which they are entitled to vote and shall not be entitled to any
preemptive rights to acquire shares of any class or series of capital stock of
the Corporation.
EIGHTH: There shall be no cumulative voting by the shareholders of the
Corporation.
NINTH: The shareholders of the Corporation shall not have any
preemptive rights to subscribe for or acquire securities or rights to purchase
securities of any class, kind or series of the Corporation.
-5-
<PAGE> 6
TENTH: Shares of any class or series of the Corporation, including
shares of any class or series which are then outstanding, may be issued to the
holders of shares of another class or series of the Corporation, whether to
effect a share dividend or split, including a reverse share split, or otherwise,
without the authorization, approval or vote of the holders of shares of any
class or series of the Corporation.
ELEVENTH: The number of directors constituting the initial board of
directors of the Corporation shall be three (3), to wit:
Gary R. Abrahams
Marc B. Kaplan
Robert W. Zaugg
who shall serve until the first meeting of the shareholders of the Corporation
and/or their successors shall have been elected and qualified. Thereafter, the
Corporation shall have the number of directors set forth in the By-Laws of the
Corporation.
TWELFTH: An action required or permitted to be taken at a meeting of
the board of directors of the Corporation may be taken by a written action
signed, or counterparts of a written action signed in the aggregate, by all of
the directors.
THIRTEENTH: The Corporation shall, and hereby agrees to, indemnify all
of its directors, officers, employees and agents to the maximum extent permitted
by
-6-
<PAGE> 7
Section 2-418 of the Maryland Corporations Article, as amended or re-
enacted from time to time, the same to be subject to such determinations and
procedures as are set forth in said Section 2-418 from time to time.
FOURTEENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in these Articles of Incorporation in the
manner now or hereafter prescribed by the laws of the State of Maryland. All
rights conferred on stockholders, directors and officers herein are granted
subject to this reservation. The directors shall adopt such rules, appoint such
officers, designate responsibilities and do all other things necessary in the
conduct of the business of the Corporation.
FIFTEENTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I do hereby declare and affirm under the penalties of
perjury that the contents of the foregoing Articles of Incorporation are true
and correct to the best of my knowledge, information and belief, and I have
hereunto affixed my signature as my free and voluntary act, all on the 4th day
of June, 1997.
/s/ David A. Wechsler
------------------------------
David A. Wechsler, Esquire
Incorporator
-7-
<PAGE> 8
ARTICLES OF AMENDMENT
OF
EXECUSTAY CORPORATION
ExecuStay Corporation, a Maryland Corporation having its
principal office in Gaithersburg, Montgomery County, Maryland (hereinafter
called the Corporation), hereby certifies to the State Department of
Assessments and Taxation of Maryland, that:
FIRST: The Articles of the Corporation are hereby amended by adding a
sixteenth article which shall be as follows:
"SIXTEENTH: To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, no director or
officer of the Corporation shall be personally liable to the Corporation
or its stockholders for money damages. No amendment of the Articles of
Incorporation of the Corporation or repeal of any of its provisions shall
limit or eliminate the limitation on liability provided to directors and
officers hereunder with respect to any act or omission occurring prior to
such amendment or repeal."
SECOND: The board of directors of the Corporation by unanimous
written consent pursuant to Section 2-408 of Corporations and Associations
Article of the Annotated Code of Maryland on July 31, 1997 duly adopted a
resolution in which was set forth the forgoing amendment to the charter,
declaring that the said amendment of the charter as proposed was advisable and
directing that it be submitted for action thereon by the stockholders of the
Corporation.
THIRD: That the said amendment has been consented to and authorized
by the holders of all the issued and outstanding stock, entitled to vote, by a
written consent given in accordance with the provisions of Section 2-505 of
Corporations and Associations Article of the Annotated Code of Maryland, and
filed with the records of stockholders meeting.
FOURTH: The amendment of the Articles of the Corporation as
hereinabove set forth has been duly advised by the board of directors and
approved by the stockholders of the Corporation.
FIFTH: The information required by subsection (b)(2)(i) of Section
2-607 of the Maryland General Corporation Law was not changed by the amendment.
IN WITNESS WHEREOF, ExecuStay Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnesses by its
Secretary on July 31, 1997.
EXECUSTAY CORPORATION
By /s/ Gary R. Abrahams
-----------------------------
Gary R. Abrahams, President
Witness: (Attest)
/s/ Robert W. Zaugg
- ----------------------------
Robert W. Zaugg, Secretary
THE UNDERSIGNED, President of ExecuStay Corporation, who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ Gary R. Abrahams
----------------------------
Gary R. Abrahams, President
<PAGE> 1
Exhibit 21.1
ExecuStay Corporation
SUBSIDIARIES OF THE REGISTRANT
ExecuStay Corporation of America
Executive Amenities, Inc.
Executive Amenities-West, Inc.
Executive Furniture Centre, Inc.
Boland Corporate Housing, Inc.
45
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