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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-27360
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EXTENDED STAY AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3996573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
450 E. Las Olas Boulevard, 33301
Ft. Lauderdale, Florida (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (954) 713-1600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange On Which Registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately
$775,608,000 at March 22, 1999 (based on the closing sale price on the New York
Stock Exchange, Inc. ("NYSE") on March 22, 1999). At March 22, 1999, the
registrant had issued and outstanding an aggregate of 95,974,679 shares of
common stock.
Documents Incorporated by Reference
Those sections or portions of the registrant's proxy statement for the
Annual Meeting of Stockholders to be held on May 19, 1999, described in Part III
hereof, are incorporated by reference in this report.
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PART I
ITEM 1. BUSINESS
Our Company
We develop, own, and operate extended stay lodging facilities which provide
an affordable and attractive lodging alternative at a variety of price points
for value-conscious guests. Our facilities are designed to offer a superior
product at lower rates than most other lodging providers within their respective
price segments. Our facilities feature fully furnished rooms which are generally
rented on a weekly basis to guests such as business travelers, professionals on
temporary work assignment, persons between domestic situations, and persons
relocating or purchasing a home, with most guests staying for multiple weeks. On
April 11, 1997, we completed a merger (the "Merger") with Studio Plus Hotels,
Inc. ("SPH"). The Merger was accounted for as a pooling of interests and our
business development and historical financial statements have been restated to
include the operations and accounts of SPH, which is now one of our wholly-owned
subsidiaries. In this Annual Report on Form 10-K, the words "Extended Stay
America", "Company", "we", "our", "ours", and "us" refer to Extended Stay
America, Inc. and its subsidiaries (including SPH), unless the context suggests
otherwise.
Our goal is to be a national provider of extended stay lodging. We believe
that the first companies to do so will benefit from establishing a brand name
and customer awareness. We intend to achieve this goal by rapidly developing
properties in selected markets, providing high value accommodations for our
guests, actively managing our properties to increase revenues and reduce
operating costs, and increasing customer awareness of our products. Through
December 31, 1998, we had developed 294 extended stay lodging facilities,
acquired 11 others, and had 51 facilities under construction. Beginning in 1999,
we plan to open properties with total costs of approximately $350 million per
year.
Extended Stay America was formed in 1995 as a Delaware corporation and our
executive offices are located at 450 E. Las Olas Boulevard, Fort Lauderdale,
Florida 33301. Our telephone number is (954) 713-1600.
Our Brands
We own and operate three brands in the extended stay lodging
market--StudioPLUS(TM) hotels ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland Economy StudiosSM ("Crossland"). Each
brand is designed to appeal to different price points below $500 per week. All
three brands offer the same core components: a living/sleeping area; a
fully-equipped kitchen or kitchenette; and a bathroom. EXTENDED STAY rooms are
designed to compete in the economy category. Crossland rooms are typically
smaller than EXTENDED STAY rooms and are targeted for the budget category, and
StudioPLUS facilities serve the mid-price category and generally feature larger
guest rooms, an exercise room, and a swimming pool.
Our Strategy
Our strategy is to maximize value to customers by providing a superior,
newly-constructed, and well-maintained product at each price point while
maintaining high operating margins. We attempt to achieve this goal through the
following:
Create Brand Awareness. We believe that guests value a recognizable
brand when selecting lodging accommodations. By positioning our brands as
the first nationwide extended stay providers in their targeted price
segments, we believe our brands will have a distinct advantage over their
local and regional competitors. We also believe that our evolving national
presence and high customer satisfaction ratings, coupled with selective
advertising and promotion, will establish StudioPLUS, EXTENDED STAY, and
Crossland as desirable and well recognized brands.
1
Provide a Superior Product at a Lower Price. Our facilities are
designed to offer a superior product at lower rates than most other lodging
providers within their respective price segments. Each of our brands is
targeted to a different price point: StudioPLUS--$299 to $399 per week
(daily equivalent--$43 to $57); EXTENDED STAY--$199 to $299 per week (daily
equivalent--$29 to $43); and Crossland--$159 to $199 per week (daily
equivalent--$23 to $29). Room rates at our facilities vary significantly
depending upon market factors affecting their locations. These rates
contrast with average daily rates in 1998 of $71, $54, and $45 for the
mid-price, economy, and budget segments, respectively, of the traditional
lodging industry.
Achieve Operating Efficiencies. We believe that the design and price
level of our facilities attract guest stays of several weeks. This creates
a more stable revenue stream which, together with low labor-cost amenities,
should lead to reduced administrative and operational costs and higher
operating margins. We also use sophisticated control and information
systems to manage individual facility-specific factors, such as pricing,
payroll, and occupancy levels, on a Company-wide basis.
Optimize Low Cost Amenities. We seek to provide the level of amenities
needed to offer quality accommodations while maintaining high operating
margins. Our facilities contain a variety of non-labor intensive features
that are attractive to extended stay guests. These features include a
fully-equipped kitchen or kitchenette, weekly housekeeping, color
television with cable or satellite hook-up, coin-operated laundromat, and
telephone service with voice mail messaging, and, at many StudioPLUS
facilities, an exercise room and swimming pool. To help maintain
affordability of room rates, labor-intensive services such as daily
cleaning, room service, and restaurants are not provided.
Employ a Standardized Concept. We have developed standardized plans and
specifications for our facilities. This provides for lower construction and
purchasing costs and establishes uniform quality and operational standards.
We also benefit from the experience of various members of our management
team in rapidly developing and operating numerous commercial properties to
a uniform set of design standards on a cost-effective basis.
Industry Overview
Traditional Lodging Industry
The U.S. lodging industry is estimated to have generated approximately $67
billion in annual room revenues in 1998 and had approximately 3.7 million rooms
at the end of 1998. Industry statistics, which we believe to be reliable,
indicate that the U.S. lodging industry's performance is strongly correlated to
economic activity. Room supply and demand historically have been sensitive to
shifts in economic growth, which has resulted in cyclical changes in average
daily room and occupancy rates.
Overbuilding in the lodging industry in the mid and late 1980s, when
approximately 500,000 rooms were added, resulted in an oversupply of rooms. We
believe this oversupply and the general downturn in the economy led to depressed
industry performance and a lack of capital available to the industry in the late
1980s and early 1990s. We believe that the lodging industry has since benefited
from an improved supply and demand balance, as evidenced by the compound annual
growth of 5% in revenue per available room from 1992 through 1998. The number of
available rooms in the industry has grown at an average annual rate of 3.5% for
the years 1996 through 1998, however, and the annual growth in revenue per
available room has declined from 6.4% in 1996 to 3.6% in 1998. We believe that
this decline in the growth rate of revenue per available room, along with
concerns of a decline in the U.S. economy in general, resulted in a significant
contraction in capital available for the development of new lodging products in
1998. As a result, we expect the rate of growth of new hotel rooms to moderate
for the next few years.
The lodging industry generally can be segmented by the level of service
provided and the pricing of the rooms. Segmentation by level of service is
divided into the following categories:
o full service hotels, which offer food and beverage services, meeting
rooms, room service, and similar guest services;
2
o limited service hotels, which generally offer only rooms with amenities
such as swimming pools, continental breakfast, or similar limited
services; and
o all-suite hotels, which generally have limited public spaces but
provide guests with two rooms or distinct partitioned areas and which
may or may not offer food and beverage service to guests.
The lodging industry may also be segmented by price level and is generally
divided into categories based on average daily room rates, which in 1998 were
$45 for budget, $54 for economy, $71 for mid-price, $91 for upscale, and $139
for luxury.
The all-suite segment of the lodging industry is a relatively new segment.
It is principally oriented toward business travelers in the mid-price to upscale
price levels. All-suite hotels were developed partially in response to the
increasing number of corporate relocations, transfers, and temporary assignments
and the need of business travelers for more than just a room. To address those
needs, all-suite hotels began to offer suites with additional space and, in some
cases, an efficiency kitchen. In addition, guests staying for extended periods
of time were offered discounts to daily rates when they paid on a weekly or
monthly basis. We believe the extended stay market in which we participate is an
additional and emerging segment of the traditional lodging industry similar to
the all-suite segment.
Extended Stay Market
We believe that extended stay hotels generally have higher operating
margins, lower occupancy break-even thresholds, and higher returns on capital
than traditional hotels. This is primarily a result of the typically longer
length of stay, lower guest turnover, and lower operating expenses. We also
believe the extended stay market is one of the most rapidly growing and
underserved segments of the U.S. lodging industry, with demand for extended stay
lodging significantly exceeding the current and anticipated near-term supply of
dedicated extended stay rooms.
In September 1998, we announced the results of a recently completed
analysis of extended stay lodging demand which was performed for us by
PricewaterhouseCoopers. Their analysis indicated an estimate of total U.S.
demand for extended stay properties of approximately 300,000 rooms. As of
December 31, 1998, the inventory of dedicated extended stay rooms based on data
provided by Smith Travel Research for the following extended stay hotel chains
totaled approximately 138,000 rooms.
Upscale Extended Stay Chains Other Extended Stay Chains
---------------------------- ------------------------------------------------------
Hawthorn Suites(R) Candlewood Hotel MainStay Suites
Homewood Suites(R) Crossland Sierra Suites(R)
Residence Inn(R) EXTENDED STAY SpringHill Suites(TM)
Summerfield Suites(R) Homegate Studios & Suites(R) StayBridge Suites(SM)
Woodfin Suites(R) Homestead Village(R) StudioPLUS
InnSuites Hotels Suburban Lodge(R)
Inn Town Suites TownPlace Suites
Lexington Hotel Suites(R) Villager Lodges(R)
We believe that these chains represent the majority of dedicated extended
stay rooms available in the U.S. lodging industry.
An upscale extended stay room generally has a weekly rate of $500 or more.
Our weekly room rates are generally less than $500. Approximately 38% of the
supply of extended stay rooms were operated above our targeted price points and
we owned approximately 38% of the rooms operated in our targeted price segments.
The following table indicates the total rooms for the extended stay chains
listed above, the total rooms for the upscale chains, and the total rooms owned
by us at the end of each of the last three years.
1996 1997 1998
---- ---- ----
Total extended stay rooms available...... 60,000 93,000 138,000
Upscale extended stay rooms.............. 36,000 43,000 53,000
Extended stay rooms owned by us.......... 8,000 19,000 32,000
3
We believe the continuing significant demand/supply imbalance and the
longer average length of stay have caused occupancy rates for extended stay
hotels to significantly exceed occupancy rates in the overall U.S. lodging
industry. The table below shows that average occupancy rates for extended stay
hotel chains have exceeded the rates in the overall U.S. lodging industry for
each of the previous five years based on data provided by Smith Travel Research.
Year Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Average Occupancy Rates:
Extended Stay Hotel Chains........................... 80.5% 79.8% 78.3% 74.7% 71.6%
All U.S. Lodging Industry............................ 64.9 65.2 65.1 64.5 64.0
We believe the decline in occupancy rates for extended stay hotel chains
since 1995 is in part the result of an increase in the proportion of
newly-opened hotels, which generally experience lower occupancies during their
pre-stabilization period. The table below shows that, while there has been rapid
growth in available room nights for both the extended stay market in general and
for us in particular, there has also been rapid growth in occupied room nights.
This indicates that much of the new construction in the extended stay market has
been absorbed.
Increase Percentage Increase Percentage
in Increase from in Increase from
1997 Prior Year 1998 Prior Year
-------- ------------- -------- -------------
Extended Stay Hotel Chains:
Available Room Nights....................... 7,200,000 44.0% 14,200,000 55.9%
Occupied Room Nights........................ 5,200,000 37.5 9,400,000 49.4
Our Facilities:
Available Room Nights....................... 3,200,000 232.0 4,700,000 101.7
Occupied Room Nights........................ 2,400,000 233.8 3,400,000 100.0
As a segment of the total U.S. lodging industry, extended stay hotel
chains experienced a significant contraction in the availability of capital
during 1998. As a result, we expect the growth in available dedicated extended
stay rooms to moderate for the next few years.
Property Development
Our goal is to become a national provider of extended stay facilities
through a rapid development program. We believe that the first companies to do
so will benefit from establishing a brand name and customer awareness. We expect
that our primary means of expansion will be the construction and development of
new extended stay lodging facilities. We have also acquired, and we may make
additional acquisitions of, existing extended stay lodging facilities or other
properties that we can convert to the extended stay concept.
Our strategy is to expand nationally into regions of the country that
contain the demographic factors we think are necessary to support one or more of
our facilities. We target sites that generally have a large and/or growing
population in the surrounding area with a large employment base. These sites
also generally have good visibility from a major traffic artery and are in close
proximity to convenience stores, restaurants, and shopping centers.
Our development is conducted through six regional offices located in Signal
Hill, California; Chicago, Illinois; Clayton, Missouri; Spartanburg, South
Carolina; Dallas, Texas; and Vienna, Virginia. From these regional offices, we
have approximately 15 real estate professionals and approximately 20
construction professionals who perform site selection, entitlement, and
construction activities according to our established criteria and procedures. It
generally takes us at least twenty-two months to identify a site and complete
construction of a facility. We try to minimize our capital outlays incurred in
this process until after the commencement of construction.
The site selection process includes assessing the characteristics of a
market area based on our development standards, identifying sites for
development within a qualified market area, and negotiating an option to
purchase qualified sites. Although the time required to complete the selection
process in a market varies significantly based on local market conditions, we
typically need approximately six months to assess a market and obtain an option
to purchase a site in a qualified market.
4
After we obtain an option to purchase a site, our legal, environmental, and
business due diligence begins. During this period, our real estate and
construction professionals evaluate whether the site is financially suitable for
development, obtain necessary approvals and permits, and negotiate construction
contracts with third party general contractors. It generally takes us eight
months to complete this process, however, the time needed can vary significantly
by market area due to local regulations and restrictions.
The site selection and due diligence processes are reviewed periodically by
our senior management and our approval to begin construction is based on a
detailed review of the demographic, physical, and financial qualifications of
each site. Once our senior management approves the development of a site, it is
purchased, the construction contract is executed, and construction generally
begins immediately. We use a number of general contractors. The selection of a
contractor for a specific site depends upon the geographic area, the negotiated
construction costs, and the financial and physical capacities of the
contractors. The construction process is regularly inspected by our construction
professionals to monitor both the quality and timeliness of completion of
construction. Although the construction period varies significantly based on
local construction requirements and weather conditions, it generally takes us
eight months to complete construction once it has begun.
Our development status as of December 31, 1998 was as follows:
StudioPLUS EXTENDED STAY Crossland Total
------------------ ------------------- ----------------- --------------------
Properties Rooms Properties Rooms Properties Rooms Properties Rooms
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating................... 91 7,018 181 20,889 33 4,282 305 32,189
Under Construction.......... 14 1,182 31 3,355 6 783 51 5,320
The design plans for our lodging facilities call for a newly-constructed
apartment style complex. They generally consist of two- to four-story buildings
with laundromat and office areas and use interior and exterior corridor building
designs, depending primarily on local zoning and weather factors. All three of
our brands offer the same core components: a living/sleeping area; a
fully-equipped kitchen or kitchenette with a refrigerator, stovetop, microwave,
and sink; and a bathroom. The typical building design criteria for each of our
brands is shown in the table below:
Average Average
Number Living Space
Of Rooms Per Room (Ft.2)
-------- ---------------
StudioPLUS....................... 80 425
EXTENDED STAY.................... 100 300
Crossland........................ 120 225
The actual number of rooms and living space per room may vary significantly
depending on location and date of construction. In addition, each facility may
include certain non-standard room types.
Property Operations
Each of our facilities employs a property manager who is responsible for
the operations of that particular property. The property manager shares duties
with and oversees a staff typically consisting of an assistant manager, a desk
clerk, a maintenance person, and a housekeeping/laundry staff of approximately
2-10 persons (many of whom are part-time employees). The office at each of our
facilities is generally open daily as follows: Crossland--from 8:00 a.m. to 7:00
p.m.; EXTENDED STAY--from 7:00 a.m. to 11:00 p.m.; and StudioPLUS--from 7:00
a.m. to 11:00 p.m., although an employee normally is on duty at all facilities
twenty-four hours a day to respond to guests' needs.
The majority of daily operational decisions are made by the property
managers. Each property manager is under the supervision of one of our district
managers, who typically are responsible for five to seven facilities, depending
on geographic location. Our district managers oversee the performance of our
property managers in such areas as guest service, property maintenance, and
payroll and cost control. The district managers report to a regional director
who is responsible for the supervision of 8-10 district managers. The regional
directors report to our Vice
5
President of Operations, who is responsible for implementing all operational and
strategic policies for our brands. Each facility is evaluated against a detailed
revenue and expense budget, as well as against the performance of our other
facilities. Our corporate offices use sophisticated information systems to
support the district managers and regional directors.
Marketing Strategy
We believe that guests value a recognizable brand when selecting lodging
accommodations. To date, we have created brand awareness primarily by increasing
the number of hotels through a rapid national development program, with sites
that typically are in highly-visible locations. We also have approximately 20
national and regional sales representatives that call on national and local
corporate customers to promote our brands. We have established a toll free
reservation number (1-800-EXT-STAY) and a web site (www.extstay.com) to provide
information about our locations and to reserve rooms. We think that we can
increase demand for our facilities by building awareness for both the extended
stay concept as well as our various brands.
Lodging Facilities
At December 31, 1998, we had 305 extended stay lodging facilities in
operation (91 StudioPLUS, 181 EXTENDED STAY, and 33 Crossland) and 51 facilities
under construction (14 StudioPLUS, 31 EXTENDED STAY, and 6 Crossland) in a total
of 38 states. The following table shows certain information regarding those
facilities.
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
ALABAMA
Birmingham....................................... StudioPLUS March 1996 71
Birmingham....................................... StudioPLUS May 1996 71
Huntsville....................................... EXTENDED STAY July 1997 108
Mobile........................................... EXTENDED STAY May 1997 114
Montgomery....................................... EXTENDED STAY August 1997 120
Montgomery....................................... StudioPLUS February 1996 71
ARIZONA
Chandler......................................... EXTENDED STAY September 1998 101
Mesa............................................. EXTENDED STAY December 1997 104
Peoria........................................... EXTENDED STAY December 1998 101
Phoenix.......................................... Crossland September 1998 133
Phoenix.......................................... EXTENDED STAY January 1998 101
Phoenix.......................................... EXTENDED STAY July 1998 104
Scottsdale....................................... EXTENDED STAY June 1997 120
Tucson........................................... Crossland April 1998 117
Tucson........................................... EXTENDED STAY April 1997 120
ARKANSAS
Little Rock...................................... EXTENDED STAY September 1996 120
Little Rock...................................... StudioPLUS November 1997 84
CALIFORNIA
Alameda.......................................... StudioPLUS Under Construction 87
Arcadia.......................................... EXTENDED STAY April 1998 122
Bakersfield...................................... EXTENDED STAY November 1996 120
Fremont.......................................... EXTENDED STAY December 1998 119
Fremont.......................................... StudioPLUS Under Construction 81
Fresno........................................... Crossland November 1998 128
Fresno........................................... EXTENDED STAY July 1997 120
Gardena.......................................... Crossland December 1998 137
6
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Huntington Beach................................. EXTENDED STAY December 1998 104
La Mirada........................................ EXTENDED STAY June 1998 104
Lake Forest...................................... EXTENDED STAY September 1997 119
Livermore........................................ EXTENDED STAY January 1998 122
Long Beach....................................... EXTENDED STAY November 1997 134
Los Angeles...................................... EXTENDED STAY Under Construction 133
Los Angeles...................................... EXTENDED STAY Under Construction 122
Milpitas......................................... EXTENDED STAY January 1998 146
Morgan Hill...................................... EXTENDED STAY December 1998 92
Oceanside........................................ EXTENDED STAY Under Construction 101
Ontario.......................................... EXTENDED STAY May 1997 127
Pleasant Hill.................................... EXTENDED STAY August 1997 122
Rancho Cordova................................... Crossland November 1998 129
Rancho Cordova................................... EXTENDED STAY June 1997 132
Roseville........................................ EXTENDED STAY August 1998 122
Sacramento....................................... EXTENDED STAY March 1997 120
Sacramento....................................... EXTENDED STAY August 1997 120
San Dimas........................................ EXTENDED STAY Under Construction 104
Santa Rosa....................................... EXTENDED STAY June 1997 114
Santa Barbara.................................... EXTENDED STAY January 1998 104
Torrance......................................... EXTENDED STAY December 1997 122
COLORADO
Aurora........................................... Crossland December 1998 133
Colorado Springs................................. Crossland November 1998 133
Colorado Springs................................. EXTENDED STAY September 1998 104
Englewood........................................ StudioPLUS August 1998 71
Glendale......................................... Crossland July 1998 129
Lakewood......................................... EXTENDED STAY November 1996 120
Lakewood......................................... EXTENDED STAY January 1997 147
Thornton......................................... Crossland Under Construction 133
CONNECTICUT
Farmington....................................... StudioPLUS December 1998 90
FLORIDA
Clearwater....................................... EXTENDED STAY March 1998 104
Daytona Beach.................................... StudioPLUS August 1998 72
Deerfield Beach.................................. EXTENDED STAY December 1997 104
Fort Lauderdale.................................. Crossland Under Construction 128
Fort Lauderdale.................................. EXTENDED STAY March 1998 108
Fort Lauderdale.................................. EXTENDED STAY Under Construction 117
Fort Lauderdale.................................. StudioPLUS Under Construction 73
Gainesville...................................... EXTENDED STAY July 1997 120
Jacksonville..................................... EXTENDED STAY May 1997 122
Jacksonville..................................... StudioPLUS July 1998 72
Maitland......................................... EXTENDED STAY Under Construction 104
Maitland......................................... StudioPLUS Under Construction 81
Melbourne........................................ StudioPLUS October 1998 84
Orlando.......................................... Crossland Under Construction 139
Orlando.......................................... EXTENDED STAY November 1997 119
Orlando.......................................... EXTENDED STAY Under Construction 122
7
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Orlando.......................................... StudioPLUS June 1998 83
Orlando.......................................... StudioPLUS Under Construction 111
Pensacola........................................ EXTENDED STAY September 1997 101
Tallahassee...................................... StudioPLUS January 1998 58
Tampa............................................ StudioPLUS Under Construction 85
Temple Terrace................................... EXTENDED STAY August 1997 101
West Palm Beach.................................. StudioPLUS November 1998 72
GEORGIA
Alpharetta....................................... EXTENDED STAY Under Construction 101
Alpharetta....................................... StudioPLUS July 1997 91
Atlanta.......................................... EXTENDED STAY April 1998 104
Atlanta.......................................... StudioPLUS December 1997 96
Columbus......................................... EXTENDED STAY January 1997 108
Duluth........................................... EXTENDED STAY September 1997 119
Kennesaw......................................... EXTENDED STAY December 1998 104
Kennesaw......................................... StudioPLUS December 1997 83
Lawrenceville.................................... EXTENDED STAY June 1996 121
Macon............................................ StudioPLUS March 1998 72
Marietta......................................... EXTENDED STAY August 1995 121
Marietta......................................... EXTENDED STAY January 1998 113
Morrow........................................... EXTENDED STAY June 1998 104
Norcross......................................... EXTENDED STAY January 1996 199
Norcross......................................... EXTENDED STAY February 1996 133
Norcross......................................... StudioPLUS March 1997 72
Riverdale........................................ EXTENDED STAY February 1996 147
IDAHO
Boise............................................ EXTENDED STAY January 1997 107
ILLINOIS
Buffalo Grove.................................... EXTENDED STAY February 1998 122
Burr Ridge....................................... EXTENDED STAY November 1996 119
Champaign........................................ EXTENDED STAY September 1998 89
Darien........................................... EXTENDED STAY Under Construction 104
Des Plaines...................................... EXTENDED STAY March 1998 122
Des Plaines...................................... StudioPLUS Under Construction 87
Downers Grove.................................... EXTENDED STAY May 1996 154
Elmhurst......................................... EXTENDED STAY August 1997 117
Gurnee........................................... EXTENDED STAY January 1997 101
Hanover Park..................................... EXTENDED STAY Under Construction 104
Itasca........................................... EXTENDED STAY November 1996 125
Lansing.......................................... EXTENDED STAY November 1998 122
Lombard.......................................... StudioPLUS March 1998 97
Naperville....................................... EXTENDED STAY November 1996 125
O'Fallon......................................... EXTENDED STAY September 1998 89
Rockford......................................... EXTENDED STAY September 1997 104
Rockford......................................... StudioPLUS November 1997 72
Rolling Meadows.................................. EXTENDED STAY October 1996 125
Romeoville....................................... EXTENDED STAY October 1998 101
Schaumburg....................................... EXTENDED STAY Under Construction 104
Waukegan......................................... Crossland November 1997 121
8
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
INDIANA
Evansville....................................... StudioPLUS February 1997 71
Fort Wayne....................................... EXTENDED STAY September 1997 101
Fort Wayne....................................... StudioPLUS December 1996 71
Indianapolis..................................... EXTENDED STAY October 1998 107
Indianapolis..................................... StudioPLUS August 1990 71
Indianapolis..................................... StudioPLUS March 1991 71
Merrillville..................................... EXTENDED STAY November 1996 105
Mishawaka........................................ StudioPLUS September 1997 72
IOWA
Des Moines....................................... StudioPLUS December 1997 85
Urbandale........................................ EXTENDED STAY Under Construction 104
KANSAS
Lenexa........................................... EXTENDED STAY May 1996 59
Overland Park.................................... EXTENDED STAY September 1997 119
Wichita.......................................... StudioPLUS December 1997 72
KENTUCKY
Covington........................................ EXTENDED STAY December 1997 105
Florence......................................... EXTENDED STAY October 1997 101
Florence......................................... StudioPLUS September 1996 71
Lexington........................................ EXTENDED STAY September 1996 126
Lexington........................................ StudioPLUS July 1986 59
Lexington........................................ StudioPLUS August 1987 71
Louisville....................................... EXTENDED STAY October 1996 120
Louisville....................................... StudioPLUS December 1988 75
Louisville....................................... StudioPLUS April 1989 65
LOUISIANA
Baton Rouge...................................... Crossland June 1998 129
Bossier City..................................... Crossland September 1997 117
Lafayette........................................ EXTENDED STAY November 1998 104
Lake Charles..................................... Crossland August 1997 117
Metairie......................................... EXTENDED STAY August 1998 102
MARYLAND
Columbia......................................... EXTENDED STAY October 1997 104
Columbia......................................... StudioPLUS December 1997 94
Frederick........................................ EXTENDED STAY Under Construction 101
Gaithersburg..................................... EXTENDED STAY Under Construction 101
Gaithersburg..................................... StudioPLUS Under Construction 87
Landover......................................... EXTENDED STAY July 1998 104
Linthicum........................................ EXTENDED STAY June 1997 122
Milestone........................................ EXTENDED STAY Under Construction 104
Timonium......................................... EXTENDED STAY June 1998 104
MASSACHUSETTS
Danvers.......................................... EXTENDED STAY February 1998 104
MICHIGAN
Ann Arbor........................................ EXTENDED STAY May 1997 112
Ann Arbor........................................ StudioPLUS December 1997 70
9
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Auburn Hills..................................... EXTENDED STAY February 1997 133
Farmington Hills................................. EXTENDED STAY June 1997 113
Kentwood......................................... EXTENDED STAY September 1998 104
Livonia.......................................... Crossland August 1998 127
Madison Heights.................................. EXTENDED STAY May 1997 122
Novi............................................. EXTENDED STAY January 1997 125
Sterling Heights................................. EXTENDED STAY November 1997 116
Warren........................................... StudioPLUS November 1997 58
MINNESOTA
Bloomington...................................... EXTENDED STAY April 1998 104
Brooklyn Center.................................. EXTENDED STAY November 1998 104
Eagan............................................ EXTENDED STAY September 1997 104
Eden Prairie..................................... EXTENDED STAY January 1998 104
Maple Grove...................................... EXTENDED STAY January 1998 104
Woodbury......................................... EXTENDED STAY Under Construction 104
MISSISSIPPI
Jackson.......................................... EXTENDED STAY October 1997 108
Ridgeland........................................ StudioPLUS November 1996 71
MISSOURI
Earth City....................................... StudioPLUS June 1997 72
Hazelwood........................................ EXTENDED STAY November 1996 122
Hazelwood........................................ StudioPLUS June 1992 71
Independence..................................... Crossland January 1997 120
Kansas City...................................... Crossland Under Construction 133
Kansas City...................................... EXTENDED STAY January 1997 109
Kansas City...................................... EXTENDED STAY June 1997 119
Maryland Heights................................. EXTENDED STAY August 1996 150
Springfield...................................... EXTENDED STAY October 1997 110
St. Louis........................................ StudioPLUS November 1994 71
St. Peters....................................... EXTENDED STAY July 1997 122
NEBRASKA
Omaha............................................ StudioPLUS December 1997 85
NEVADA
Las Vegas........................................ EXTENDED STAY July 1996 123
Las Vegas........................................ EXTENDED STAY July 1996 211
Las Vegas........................................ EXTENDED STAY July 1996 177
Las Vegas........................................ EXTENDED STAY July 1996 123
NEW JERSEY
Cherry Hill...................................... EXTENDED STAY July 1998 77
East Rutherford.................................. EXTENDED STAY Under Construction 127
Edison........................................... EXTENDED STAY August 1997 134
Maple Shade...................................... Crossland December 1998 129
Mount Laurel..................................... EXTENDED STAY January 1998 77
Mount Laurel..................................... StudioPLUS Under Construction 84
South Brunswick.................................. EXTENDED STAY Under Construction 133
10
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
NEW MEXICO
Albuquerque...................................... Crossland January 1998 129
Albuquerque...................................... Crossland Under Construction 121
Rio Rancho....................................... EXTENDED STAY May 1998 101
NEW YORK
Albany........................................... EXTENDED STAY November 1996 134
Amherst.......................................... EXTENDED STAY September 1997 119
Bethpage......................................... EXTENDED STAY Under Construction 104
East Syracuse.................................... EXTENDED STAY December 1996 121
Rochester........................................ EXTENDED STAY November 1996 125
Rochester........................................ EXTENDED STAY December 1996 127
NORTH CAROLINA
Asheville........................................ EXTENDED STAY February 1998 101
Cary............................................. EXTENDED STAY January 1998 122
Cary............................................. StudioPLUS September 1996 71
Cary............................................. StudioPLUS January 1998 82
Charlotte........................................ EXTENDED STAY April 1998 113
Charlotte........................................ EXTENDED STAY October 1998 101
Charlotte........................................ StudioPLUS May 1995 71
Charlotte........................................ StudioPLUS March 1996 71
Durham........................................... Crossland September 1998 129
Durham........................................... EXTENDED STAY October 1997 120
Durham........................................... StudioPLUS December 1996 71
Durham........................................... StudioPLUS September 1998 84
Fayetteville..................................... EXTENDED STAY July 1997 120
Fayetteville..................................... StudioPLUS Under Construction 77
Greensboro....................................... EXTENDED STAY September 1996 129
Greensboro....................................... StudioPLUS December 1995 71
Greensboro....................................... StudioPLUS Under Construction 84
Jacksonville..................................... EXTENDED STAY October 1998 98
Morrisville...................................... EXTENDED STAY September 1997 120
Pineville........................................ EXTENDED STAY Under Construction 107
Pineville........................................ StudioPLUS Under Construction 77
Raleigh.......................................... EXTENDED STAY December 1997 104
Raleigh.......................................... StudioPLUS December 1996 71
Wilmington....................................... EXTENDED STAY February 1998 104
Winston-Salem.................................... Crossland July 1998 133
Winston-Salem.................................... EXTENDED STAY September 1996 111
OHIO
Blue Ash......................................... Crossland December 1998 132
Blue Ash......................................... StudioPLUS December 1991 71
Columbus......................................... EXTENDED STAY June 1997 119
Columbus......................................... EXTENDED STAY December 1998 97
Columbus......................................... EXTENDED STAY Under Construction 104
Columbus......................................... StudioPLUS August 1989 71
Copley........................................... EXTENDED STAY February 1997 95
Copley........................................... StudioPLUS November 1996 71
Dayton........................................... StudioPLUS November 1989 70
Dublin........................................... EXTENDED STAY January 1998 104
Dublin........................................... StudioPLUS May 1990 71
Fairborn......................................... StudioPLUS January 1997 71
11
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Fairfield........................................ StudioPLUS June 1989 71
Holland.......................................... EXTENDED STAY January 1997 125
Maumee........................................... StudioPLUS June 1997 72
Middlebury Heights............................... StudioPLUS November 1997 70
North Olmsted.................................... StudioPLUS September 1997 91
Sharonville...................................... EXTENDED STAY July 1996 130
Springdale....................................... EXTENDED STAY November 1996 126
Springdale....................................... StudioPLUS November 1988 71
Westlake......................................... StudioPLUS November 1997 72
OKLAHOMA
Oklahoma City.................................... EXTENDED STAY September 1997 101
Oklahoma City.................................... EXTENDED STAY Under Construction 110
Oklahoma City.................................... StudioPLUS January 1998 70
Tulsa............................................ EXTENDED STAY April 1997 120
Tulsa............................................ StudioPLUS June 1997 72
OREGON
Beaverton........................................ EXTENDED STAY October 1998 122
Portland......................................... EXTENDED STAY January 1998 104
Salem............................................ Crossland October 1998 129
Springfield...................................... Crossland November 1997 127
PENNSYLVANIA
Bensalem......................................... EXTENDED STAY June 1998 101
Carnegie......................................... EXTENDED STAY June 1997 116
Exton............................................ EXTENDED STAY Under Construction 101
Great Valley..................................... EXTENDED STAY Under Construction 104
Philadelphia..................................... EXTENDED STAY February 1998 145
Philadelphia..................................... StudioPLUS May 1998 82
Pittsburgh....................................... StudioPLUS April 1998 84
SOUTH CAROLINA
Charleston....................................... StudioPLUS September 1996 71
Columbia......................................... EXTENDED STAY April 1996 120
Columbia......................................... EXTENDED STAY May 1997 120
Columbia......................................... StudioPLUS December 1995 71
Greenville....................................... EXTENDED STAY December 1996 109
Greenville....................................... StudioPLUS February 1995 71
Mt. Pleasant..................................... EXTENDED STAY January 1998 101
North Charleston................................. EXTENDED STAY August 1996 126
Spartanburg...................................... EXTENDED STAY August 1995 126
TENNESSEE
Brentwood........................................ EXTENDED STAY September 1996 120
Brentwood........................................ StudioPLUS December 1990 71
Chattanooga...................................... EXTENDED STAY July 1996 120
Cordova.......................................... StudioPLUS December 1996 71
Knoxville........................................ EXTENDED STAY May 1997 96
Knoxville........................................ StudioPLUS September 1990 71
Memphis.......................................... EXTENDED STAY January 1997 126
Memphis.......................................... EXTENDED STAY Under Construction 104
Memphis.......................................... StudioPLUS October 1990 71
Nashville........................................ Crossland October 1997 117
12
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Nashville........................................ EXTENDED STAY February 1997 114
Nashville........................................ StudioPLUS September 1993 71
TEXAS
Arlington........................................ StudioPLUS September 1997 137
Austin........................................... Crossland August 1998 139
Austin........................................... EXTENDED STAY Under Construction 102
Austin........................................... StudioPLUS January 1998 84
Bedford.......................................... StudioPLUS December 1998 84
Corpus Christi................................... StudioPLUS July 1998 72
Dallas........................................... EXTENDED STAY November 1998 116
Dallas........................................... EXTENDED STAY December 1998 104
Dallas........................................... StudioPLUS September 1997 97
El Paso.......................................... StudioPLUS January 1997 120
El Paso.......................................... StudioPLUS December 1997 72
Farmers Branch................................... StudioPLUS October 1998 82
Fort Worth....................................... Crossland December 1998 121
Fort Worth....................................... EXTENDED STAY Under Construction 104
Fort Worth....................................... StudioPLUS July 1998 72
Fort Worth....................................... StudioPLUS October 1998 84
Houston.......................................... Crossland May 1998 145
Houston.......................................... Crossland June 1998 145
Houston.......................................... EXTENDED STAY September 1998 122
Houston.......................................... EXTENDED STAY September 1998 122
Houston.......................................... EXTENDED STAY December 1998 101
Houston.......................................... EXTENDED STAY December 1998 104
Houston.......................................... EXTENDED STAY Under Construction 110
Houston.......................................... EXTENDED STAY Under Construction 110
Houston.......................................... StudioPLUS September 1997 85
Houston.......................................... StudioPLUS December 1997 97
Houston.......................................... StudioPLUS December 1997 84
Houston.......................................... StudioPLUS July 1998 84
Irving........................................... Crossland June 1998 139
Irving........................................... StudioPLUS January 1998 116
Mesquite......................................... Crossland December 1998 138
Plano............................................ StudioPLUS December 1997 72
Round Rock....................................... Crossland December 1998 138
San Antonio...................................... StudioPLUS February 1998 84
Spring........................................... Crossland June 1998 141
UTAH
Midvale.......................................... EXTENDED STAY September 1997 134
Sandy............................................ EXTENDED STAY January 1998 122
West Valley City................................. EXTENDED STAY August 1997 122
VIRGINIA
Alexandria....................................... EXTENDED STAY Under Construction 104
Chesapeake....................................... EXTENDED STAY August 1996 132
Glen Allen....................................... StudioPLUS July 1997 91
Newport News..................................... EXTENDED STAY December 1996 120
Newport News..................................... StudioPLUS July 1997 72
Richmond......................................... EXTENDED STAY December 1997 108
Richmond......................................... StudioPLUS Under Construction 81
Roanoke.......................................... EXTENDED STAY February 1998 90
13
Date Opened or Number
City Brand Acquired of Rooms
---- ----- -------------- --------
Sterling......................................... EXTENDED STAY July 1998 101
Virginia Beach................................... EXTENDED STAY September 1996 120
WASHINGTON
Bellevue......................................... EXTENDED STAY January 1998 148
Everett.......................................... EXTENDED STAY April 1997 104
Everett.......................................... StudioPLUS Under Construction 87
Federal Way...................................... EXTENDED STAY Under Construction 101
Fife............................................. EXTENDED STAY October 1997 104
Kent............................................. Crossland September 1998 133
Kent............................................. EXTENDED STAY September 1998 120
Lynnwood......................................... EXTENDED STAY February 1998 109
Puyallup......................................... Crossland November 1998 133
Renton........................................... StudioPLUS June 1998 109
Spokane.......................................... Crossland May 1998 115
Tacoma........................................... Crossland Under Construction 129
Tacoma........................................... EXTENDED STAY May 1998 109
Tukwilla......................................... EXTENDED STAY January 1997 96
Vancouver........................................ EXTENDED STAY September 1997 116
WISCONSIN
Appleton......................................... EXTENDED STAY June 1997 107
Madison.......................................... EXTENDED STAY September 1998 104
Madison.......................................... StudioPLUS September 1998 72
Waukesha......................................... EXTENDED STAY August 1997 122
Wauwatosa........................................ EXTENDED STAY June 1997 122
Competition
The lodging industry is highly competitive. This competition is based on a
number of factors including room rates, quality of accommodations, service
levels, convenience of location, reputation, reservation systems, name
recognition, and supply and availability of alternative lodging in local
markets, including short-term lease apartments and limited service hotels. All
of our facilities are located in developed areas and compete with budget,
economy, and mid-price segment hotels and other companies focusing on the
extended stay market. The greater the number of competitive lodging facilities
in a particular area, the more likely it is that those competitors may have a
material adverse effect on the occupancy levels and average weekly room rates of
our facilities.
We expect that competition within the budget, economy, and mid-price
segments of the extended stay lodging market will continue to increase. Although
we expect the contraction of capital available to the lodging industry during
1998 to slow the rate of growth of new lodging products in general, we expect
our existing competitors to continue to develop extended stay facilities to the
extent that their capital permits and we expect them to increase their
development in the event that additional capital should become available in the
future. Competitors may include new participants in the lodging industry
generally and participants in other segments of the lodging industry that may
enter the extended stay market. They may also include existing participants in
the extended stay market that may increase their product offerings to include
facilities in the budget, economy, or mid-price segments. Competition is for
both quality locations to build new facilities and for guests to fill and pay
for those facilities. A number of our competitors have greater financial
resources than we do and better relationships with lenders and sellers, and may
therefore be able to find and develop the best sites before we can. There can
also be no assurance that our competitors will not reduce their rates, offer
greater convenience, services, or amenities, or build new hotels in direct
competition with our existing facilities, all of which could have a material
adverse effect on our operations.
14
Environmental Matters
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
hazardous or toxic substances on such property. These laws often impose
liability without regard to whether the owner knew of, or was responsible for,
the presence of those hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment a hazardous
substance at a property owned by another may be liable for the costs of removal
or remediation of hazardous substances released into the environment at that
property. These costs may be substantial, and the presence of hazardous
substances, or the failure to properly remediate hazardous substances, may
adversely affect the owner's ability to sell the real estate or to borrow using
that real estate as collateral. We may be liable for any of these costs that
occur in connection with our properties.
We have obtained Phase I environmental site assessments ("Phase I Surveys")
on our existing properties and we intend to obtain Phase I Surveys before the
purchase of any future properties. Phase I Surveys are intended to identify
potential environmental contamination and regulatory compliance problems. A
Phase I Survey generally includes an historical review of the relevant property,
a review of certain public records, a preliminary investigation of the site and
surrounding properties, and the preparation of a written report. A Phase I
Survey generally does not include invasive procedures, such as soil sampling or
ground water analysis.
None of our Phase I Surveys have revealed any environmental liability or
compliance concern that we believe would have a material adverse effect on our
business, assets, results of operations, or liquidity, and we are not aware of
any such liability or concern. Nevertheless, it is possible that our Phase I
Surveys did not reveal all environmental liabilities or compliance problems or
that there are material environmental liabilities or compliance problems of
which we will not be aware. Moreover, new or changed laws, ordinances, or
regulations may impose material environmental liabilities. In addition, the
environmental condition of our properties may also be affected by the condition
of neighboring properties (such as the presence of leaking underground storage
tanks) or by third parties unrelated to us.
Governmental Regulation
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements, and compliance with specific standards of
conduct. We believe that each of our facilities has the necessary permits and
approvals to operate its respective business and we intend to continue to obtain
such permits and approvals for our new facilities. We are also subject to laws
governing our relationship with our employees, including minimum wage
requirements, overtime, working conditions, and work permit requirements. An
increase in the minimum wage rate, employee benefit costs, or other costs
associated with employees could adversely affect our business. There are
frequently proposals under consideration, at the federal and state level, to
increase the minimum wage.
Under the Americans With Disabilities Act ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. We attempt to satisfy ADA requirements in
the designs for our facilities, but we cannot assure you that we will not be
subjected to a material ADA claim. If that were to happen, we could be ordered
to spend substantial sums to achieve compliance, fines could be imposed against
us, and we could be required to pay damage awards to private litigants. The ADA
and other regulatory initiatives could adversely affect our business as well as
the lodging industry in general.
Insurance
We currently have the types and amounts of insurance coverage that we
consider appropriate for a company in our business. While we believe that our
insurance coverage is adequate, our business, results of operations, and
financial condition could be materially and adversely affected if we were held
liable for amounts exceeding the limits of our insurance coverage or for claims
outside of the scope of our insurance coverage.
15
Employees
At December 31, 1998, we employed approximately 4,600 persons, of which
approximately 2,500 were part-time employees. We expect that we will
significantly increase the number of our employees as our business expands. Our
employees are not subject to any collective bargaining agreements and we believe
that our relationship with our employees is good.
ITEM 2. PROPERTIES
In addition to our lodging facilities described in "Item 1.
Business--Lodging Facilities" above, we also maintain a corporate headquarters
and six regional offices. Our principal executive offices are located in Fort
Lauderdale, Florida and our regional offices are located in Signal Hill,
California; Chicago, Illinois; Clayton, Missouri; Spartanburg, South Carolina;
Dallas, Texas; and Vienna, Virginia. We generally rent our office space on a
short-term basis, although we have five to eight year leases for our corporate
headquarters. Our offices are sufficient to meet our present needs and we do not
anticipate any difficulty in securing additional office space, as needed, on
terms acceptable to us.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any significant litigation or claims, other than
routine matters incidental to the operation of our business. To date, we have
had no material claims and we do not expect that the outcome of any pending
claims will have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock ("Common Stock") began trading on the New York Stock
Exchange, Inc. (the "NYSE") on June 30, 1997, under the symbol "ESA." Before
that, it was traded in the National Market tier of The Nasdaq Stock Market
("Nasdaq") under the symbol "STAY." On December 31, 1998, the last reported sale
price of the Common Stock on the NYSE was $10.50 per share. At December 31,
1998, there were approximately 450 record holders of the Common Stock. The table
below sets forth the high and low sales prices of shares of Common Stock on the
NYSE and Nasdaq for the periods indicated.
We have not paid any dividends on our Common Stock. We intend to continue
to retain our earnings to finance our growth and for general corporate purposes.
We do not anticipate paying any dividends in the foreseeable future. In
addition, our credit facility and senior subordinated notes contain, and future
financing agreements may contain, maximum debt to capitalization ratio covenants
and limitations on payment of any cash dividends or other distributions of
assets. These covenants and limitations could restrict our ability to pay
dividends.
Market Information
Common Stock
------------
High Low
---- ---
Year Ended December 31, 1997:
1st Quarter................................ $20.75 $14.75
2nd Quarter................................ 17.50 11.75
3rd Quarter................................ 16.62 13.00
4th Quarter................................ 16.00 10.62
Year Ended December 31, 1998:
1st Quarter................................ 15.00 10.94
2nd Quarter................................ 14.75 10.75
3rd Quarter................................ 11.62 6.12
4th Quarter................................ 11.06 6.37
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
consolidated financial statements for the years ended December 31, 1994, 1995,
1996, 1997, and 1998. You should read this information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- -----------
(in thousands, except per share and operating data)
Income Statement Data:
Revenue....................................... $ 12,152 $ 16,768 $ 38,809 $ 130,800 $ 283,087
Property operating expenses................... 5,256 6,706 16,560 60,391 122,469
Corporate operating and property
management expenses......................... 881 4,669 16,867 29,951 39,073
Merger, financing and other charges........... -- -- -- 19,895 12,000
Depreciation and amortization................. 1,472 2,059 6,139 21,331 42,293
Income (loss) from operations................. 4,543 3,334 (757) (768) 67,252
Interest income (expense), net (1)............ (2,532) (507) 13,744 9,242 (20,521)
Provision for income taxes (2)................ -- 1,217 5,231 5,838 18,693
Net income from continuing operations......... $ 1,653 $ 1,468 $ 7,756 $ 2,636 $ 28,038
========= ========= ========= ========== ==========
Net income from continuing operations per
share (3):
Basic..................................... $ 0.05 $ 0.11 $ 0.03 $ 0.29
========= ========= =========== ==========
Diluted................................... $ 0.05 $ 0.10 $ 0.03 $ 0.29
========= ========= =========== ==========
Weighted average shares outstanding (3):
Basic..................................... 30,381 71,933 94,233 95,896
========= ========= ========== ==========
Diluted................................... 31,434 73,935 95,744 96,800
========= ========= ========== ==========
Operating Data:
Average occupancy rates (4)................... 85% 83% 73% 73% 73%
Average weekly rate........................... $ 222 $ 250 $ 261 $ 263 $ 286
Operating facilities (at period end).......... 18 24 75 185 305
Weighted average rooms available (5).......... 1,201 1,479 3,783 12,558 25,334
Rooms (at period end)......................... 1,263 1,794 7,611 19,299 32,189
Facilities under construction (at period end). 2 16 61 84 51
Rooms under construction (at period end)...... 144 1,780 6,864 8,953 5,320
Other Financial Data:
Cash flows provided by (used in):
Operating activities........................ $ 3,160 $ 4,186 $ 20,828 $ 50,263 $ 118,145
Investing activities........................ (5,891) (35,330) (279,259) (609,064) (630,027)
Financing activities........................ 2,327 156,601 356,841 337,689 509,292
EBITDA (6).................................... 6,015 5,393 5,382 20,563 109,545
Adjusted EBITDA (7)........................... 6,015 5,393 5,382 40,458 121,545
Capital expenditures.......................... 5,794 33,722 277,531 607,649 630,276
Balance Sheet Data (at period end):
Cash and cash equivalents..................... $ 457 $ 125,915 $ 224,325 $ 3,213 $ 623
Total assets.................................. 36,222 213,445 668,435 1,070,891 1,694,582
Long-term debt................................ 32,306 4,000 -- 135,000 653,000
Stockholders' equity (deficit)................ (1,247) 199,322 628,714 834,659 866,751
(1) Excludes interest of $153,000, $256,000, $329,000, $1,731,000, and
$17,617,000 for 1994, 1995, 1996, 1997, and 1998, respectively, capitalized
during the construction of our facilities under Statement of Financial
Accounting Standards ("SFAS") Statement No. 34 "Capitalization of Interest
Cost."
(2) On April 11, 1997, we completed the Merger with SPH. Historical financial
information prior to SPH's initial public offering of common stock does not
include a provision for income taxes because SPH's predecessor entities
were S corporations or partnerships not subject to income taxes.
(3) Net income per share for the year ended December 31, 1995 is presented on
a pro forma basis as if all of our income for the period was subject to
income taxes.
18
(4) Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to our rapid expansion, our
overall average occupancy rate has been negatively impacted by the lower
occupancy typically experienced during the pre-stabilization period for
newly opened facilities. We expect the negative impact on overall average
occupancy to decline as the ratio of newly opened properties to total
properties in operation declines.
(5) Weighted average rooms available is calculated by dividing total room
nights available during the year by 365.
(6) EBITDA represents earnings before interest, income taxes, depreciation, and
amortization. EBITDA is provided because it is a measure commonly used in
the lodging industry. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
(7) Adjusted EBITDA for 1998 means EBITDA before $12.0 million of pre-tax
charges relating to a reduction in our development plans for 1999 and 2000
as a result of unfavorable capital market conditions. Adjusted EBITDA for
1997 means EBITDA before $19.9 million of pre-tax charges consisting of (i)
$9.7 million of merger expenses and costs associated with the integration
of SPH's operations following the Merger, (ii) the write-off of $9.7
million of debt issuance costs associated with terminating two mortgage
loan facilities upon execution by us of a revolving credit facility, and
(iii) a $500,000 charge in connection with the listing of our Common Stock
on the NYSE. We believe these charges are non-recurring in nature and will
not affect our future results of operations.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Extended Stay America, Inc. was organized on January 9, 1995 as a Delaware
corporation to develop, own, and operate extended stay lodging facilities.
Studio Plus Hotels, Inc. was formed in December 1994 and acquired all of the
assets of the SPH predecessor entities, which owned and operated StudioPLUS(TM)
extended stay facilities since 1986. The acquisition of the interests of the
SPH predecessor entities was accounted for as if it were a pooling of interests.
On April 11, 1997, we completed a merger with SPH. The 12,557,786 shares of
SPH common stock that were outstanding on the closing date were converted into
15,410,915 shares of our Common Stock and options to purchase 1,072,565 shares
of SPH common stock were converted into options to purchase 1,316,252 shares of
our Common Stock. As a result of the Merger, SPH became one of our wholly-owned
subsidiaries. Our accompanying consolidated financial statements give effect to
the Merger, which has been accounted for as a pooling of interests.
We own and operate three brands in the extended stay lodging
market--StudioPLUS(TM) hotels, EXTENDED STAYAMERICA Efficiency Studios, and
Crossland Economy StudiosSM. Each brand is designed to appeal to different price
points below $500 per week. All three brands offer the same core components: a
living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom.
EXTENDED STAY rooms are designed to compete in the economy category. Crossland
rooms are typically smaller than EXTENDED STAY rooms and are targeted for the
budget category, and StudioPLUS facilities serve the mid-price category and
generally feature larger guest rooms, an exercise room, and a swimming pool.
The table below provides a summary of our selected development and
operational results for 1996, 1997, and 1998.
Year Ended December 31,
--------------------------
1996 1997 1998
------ ------ ------
Total Facilities Open (at period end)............ 75 185 305
Total Facilities Developed....................... 41 110 120
Total Facilities Acquired........................ 10 -- --
Average Occupancy Rate........................... 73% 73% 73%
Average Weekly Room Rate......................... $ 261 $ 263 $ 286
Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to our rapid expansion, our
overall average occupancy rate has been negatively impacted by the lower
occupancy typically experienced during the pre-stabilization period for
newly-opened facilities. We expect the negative impact on overall average
occupancy to decline as the ratio of newly-opened properties to total properties
in operation declines. Average weekly room rates are determined by dividing room
revenue by the number of rooms occupied on a daily basis for the applicable
period and multiplying by seven. The average weekly room rates are generally
greater than standard room rates because of (i) stays of less than one week,
which are charged at a higher nightly rate, (ii) higher weekly rates for rooms
that are larger than the standard rooms, and (iii) additional charges for more
than one person per room. We expect that our future occupancy and room rates
will be impacted by a number of factors, including the number and geographic
location of new facilities as well as the season in which we open those
facilities. We also cannot assure you that we can maintain our occupancy and
room rates.
The following is a summary of the our development status as of December 31,
1998, by brand. We expect to complete the construction of the facilities
currently under construction generally within the next twelve months, however,
we cannot assure you that we will complete construction within the time periods
we have historically experienced. Our ability to complete construction may be
materially impacted by various factors including final permitting and obtaining
certificates of occupancy, as well as weather-induced construction delays.
20
EXTENDED
Crossland STAY StudioPLUS Total
--------- -------- ---------- -----
Operating Facilities........................... 33 181 91 305
Facilities Under Construction.................. 6 31 14 51
Results of Operations
1998 Compared to 1997
Property Operations
The following is a summary of the number of properties in operation at the
end of each year along with the related average occupancy rates and average
weekly room rates during each year:
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------- ------------------------------
Average Average
Average Weekly Average Weekly
Facilities Occupancy Room Facilities Occupancy Room
Open Rate Rate Open Rate Rate
---------- --------- ------- ---------- --------- --------
Crossland................................. 33 61% $ 198 6 65% $183
EXTENDED STAY............................. 181 75 281 114 72 251
StudioPLUS................................ 91 70 322 65 78 302
---- -- ----- ---- -- -----
Total................................ 305 73% $ 286 185 73% $263
==== == ===== ==== == =====
The average occupancy rate in 1998 for the 75 properties that we owned and
operated as of January 1, 1997 was 80%. Because newly-opened properties
typically experience lower occupancies during their pre-stabilization period,
average occupancy rates are impacted by the ratio of newly-opened properties to
total properties. A total of 120 properties commenced operations in 1998
compared to 110 properties that were opened in 1997. For the EXTENDED STAY
brand, occupancy rates increased for 1998 as compared to 1997 primarily due to a
decrease in the ratio of newly-opened properties to total properties for that
brand. Occupancy rates decreased for the Crossland brand primarily due to an
increase in the number of newly-opened properties for that brand. Occupancy
rates for the StudioPLUS brand were also diluted by an increase in the number of
newly-opened properties for that brand. In addition, the 35 StudioPLUS
properties opened before 1997 experienced average declines in occupancy of
approximately five percentage points. We believe that this decline was due to a
number of factors, including primarily a change in the pricing policies for the
StudioPLUS brand during 1998 to eliminate certain rate discounts, changes in
personnel as a result of management restructuring following the Merger with SPH,
and additional competition from new properties that we and our competitors have
opened in the markets served by these properties. We do not expect that the
majority of our properties will experience similar conditions.
The increase in overall average weekly room rates for 1998 compared to 1997
reflects the geographic dispersion of properties opened during 1998 and the
higher standard weekly room rates in certain of those markets. The increase also
is due in part to increases in rates charged in previously opened properties.
The average weekly room rate for the 75 properties that we owned and operated
throughout both periods increased by 2% in 1998. These increases were partially
offset by an increase in the percentage of total facilities (as of the end of
the year) represented by lower priced EXTENDED STAY and Crossland facilities.
This percentage increased to 70% for 1998 from 65% for 1997. We expect our
overall average weekly room rate will continue to be impacted as EXTENDED STAY
and Crossland facilities increase as a percentage of our total facilities.
We recognized total revenue for 1998 and 1997 of $283.1 million and $130.8
million, respectively. This is an increase of $152.3 million or 116%.
Approximately $150.2 million of the increased revenue was attributable to
properties that we opened during 1998 and 1997, and approximately $2.1 million
was attributable to an increase in revenue for the 75 properties that we owned
and operated throughout both periods.
Property operating expenses, consisting of all expenses directly allocable
to the operation of the facilities but excluding any allocation of corporate
operating and property management expenses, depreciation, or interest were
$122.5 million (43% of total revenue) for 1998 compared to $60.4 million (46% of
total revenue) for 1997. The
21
decrease in property operating expenses as a percentage of total revenue for
1998 as compared to 1997 was primarily a result of a decrease in the ratio of
newly opened properties to total properties. Operating expenses as a percentage
of revenue generally decline as a newly-opened property increases its occupancy
and revenue because the majority of these expenses do not vary based on
occupancy. As a result, we realized property operating margins of 57% for 1998
and 54% for 1997.
The provisions for depreciation and amortization for our lodging facilities
of $40.8 million for 1998 and $19.9 million for 1997 were computed using the
straight-line method over the estimated useful lives of the assets. These
provisions reflect a pro rata allocation of the annual depreciation and
amortization charge for the periods for which the facilities were in operation.
The increase in depreciation and amortization for 1998 as compared to 1997 is
because we opened 120 additional properties in 1998 and we operated for a full
year the 110 properties opened in 1997.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of the lodging facilities.
These expenses consist primarily of personnel, travel, and certain marketing
costs, as well as development costs that are not directly related to a site that
we will develop. We incurred corporate operating and property management
expenses of $39.1 million (14% of total revenue) in 1998 and $30.0 million (23%
of total revenue) in 1997. The increase in the amount of these expenses for 1998
as compared to 1997 reflects the impact of additional personnel and related
expenses in connection with the increased number of facilities we operated and
sites we developed. We expect these expenses will continue to increase in total
amount but decline as a percentage of revenue as we develop and operate
additional facilities in the future.
Depreciation and amortization in the amount of $1.5 million for 1998 and
$1.4 million for 1997 were computed using the straight-line method over the
estimated useful lives of the assets for assets not directly related to the
operation of our facilities. These assets were primarily office furniture and
equipment.
We realized $2.9 million of interest income during 1998 and $9.2 million
during 1997. This interest income was primarily attributable to the temporary
investment of funds drawn under our credit facilities and funds received from an
offering of Common Stock in 1997. The decrease in interest income for 1998 as
compared to 1997 was due to the decrease in our average cash and cash equivalent
balances as a result of our continued investments in property and equipment
during 1998. We incurred interest charges of $41.0 million during 1998 and $1.7
million during 1997. Of these amounts, $17.6 million during 1998 and $1.7
million during 1997 was capitalized and included in the cost of buildings and
improvements.
We recognized income tax expense of $18.7 million (40% of income before
taxes) for 1998 and $5.8 million (69% of income before taxes) for 1997. Our
income tax expense differs from the federal income tax rate of 35% primarily due
to state and local income taxes and, for 1997, due to permanent tax differences
relating to merger expenses and tax exempt interest income. We expect that our
annualized effective income tax rate for 1999 will be approximately 40%.
Merger, Financing, and Other Charges
Our normal operating procedures call for us to invest varying amounts in
our sites under option in terms of (1) earnest money which would be applied to
the purchase of a site, but that in certain circumstances may not be refundable,
(2) legal, environmental, engineering, and architectural outlays needed to
determine the feasibility of acquiring a site and constructing a hotel on that
site, and (3) salaries, wages, and travel costs of our personnel related to the
sites. We capitalize these expenses in accordance with generally accepted
accounting principles. In the quarter ended September 30, 1998, we announced a
reduction in our development plans for 1999 and 2000 as a result of unfavorable
capital market conditions. This meant that certain sites we had under option
would not be developed. As a result, we established a valuation allowance of
$12.0 million for the write-off of expenses related to these sites. This
resulted in a corresponding expense during the quarter ended September 30, 1998.
At December 31, 1998, a total of $10.5 million of those costs, including
$265,000 in termination payments to employees, had been charged against the
allowance and $1.5 million was included in other current liabilities. We believe
that these charges are non-recurring in nature and will not affect the future
results of operations.
22
1997 Compared to 1996
Property Operations
The following is a summary of the number of properties in operation at the
end of each year along with the related average occupancy rates and average
weekly room rates during each year:
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------------------- ------------------------------
Average Average
Average Weekly Average Weekly
Facilities Occupancy Room Facilities Occupancy Room
Open Rate Rate Open Rate Rate
---------- --------- -------- ---------- --------- --------
Crossland................................. 6 65% $ 183 -- -- --
EXTENDED STAY............................. 114 72 251 40 65% $ 233
StudioPLUS................................ 65 78 302 35 81 284
---- -- ----- -- -- ---
Total................................ 185 73% $ 263 75 73% $ 261
==== == ===== == == =====
The average occupancy rate in 1997 for the 24 properties that we owned and
operated as of January 1, 1996 was 83%. A total of 110 properties commenced
operations in 1997 compared to 41 properties that were opened in 1996. For the
EXTENDED STAY brand, occupancy rates increased for 1997 as compared to 1996
primarily due to a decrease in the ratio of newly-opened properties to total
properties for that brand. Occupancy rates decreased for the StudioPLUS brand
primarily due to an increase in the ratio of newly-opened properties to total
properties for that brand.
The increase in overall average weekly room rates for 1997 compared to 1996
reflects the geographic dispersion of properties opened during 1997 and the
higher standard weekly room rates in certain of those markets. The increase also
is due in part to increases in rates charged in previously opened properties.
The average weekly room rate for the 24 properties that we owned and operated
throughout both periods increased by 2% in 1997. These increases were partially
offset by an increase in the percentage of total facilities (as of the end of
the year) represented by lower priced EXTENDED STAY and Crossland facilities.
This percentage increased to 65% for 1997 from 53% for 1996.
We recognized total revenue for 1997 and 1996 of $130.8 million and $38.8
million, respectively. This is an increase of $92.0 million or 237%.
Approximately $91.2 million of the increased revenue was attributable to
properties that we opened or acquired during 1997 and 1996, and approximately
$757,000 was attributable to an increase in revenue for the 24 properties that
we owned and operated throughout both periods.
Property operating expenses were $60.4 million (46% of total revenue) for
1997, compared to $16.6 million (43% of total revenue) for 1996. The increase in
property operating expenses as a percentage of total revenue for 1997 as
compared to 1996 was primarily a result of the lower occupancies and revenue
during the pre-stabilization period for the 110 properties that commenced
operations during 1997. As a result, we realized property operating margins of
54% for 1997 and 57% for 1996.
The provisions for depreciation and amortization for our lodging facilities
were $19.9 million for 1997 and $5.6 million for 1996. The increase in
depreciation and amortization for 1997 as compared to 1996 is because we opened
110 additional properties in 1997 and we operated for a full year the 51
properties opened or acquired in 1996.
Corporate Operations
We incurred corporate operating and property management expenses of $30.0
million (23% of total revenue) in 1997 and $16.9 million (43% of total revenue)
in 1996. The increase in the amount of these expenses for 1997 as compared to
1996 reflects the impact of additional personnel and related expenses in
connection with the increased number of facilities we operated and sites we
developed.
Depreciation and amortization for assets not directly related to the
operation of our facilities was $1.4 million for 1997 and $495,000 for 1996.
23
We realized $9.2 million of interest income during 1997 and $13.7 million
during 1996. This interest income was primarily attributable to the investment
of funds received from offerings of common stock. The decrease in interest
income for 1997 as compared to 1996 was due to the decrease in our average cash
and cash equivalent balances as a result of our continued investments in
property and equipment during 1997. We incurred interest charges of $1.7 million
during 1997 and $332,000 during 1996, substantially all of which was capitalized
and included in the cost of buildings and improvements.
We recognized income tax expense of $5.8 million (69% of income before
taxes) for 1997 and $5.2 million (40% of income before taxes) for 1996. Our
income tax expense differs from the federal income tax rate of 35% primarily due
to state and local income taxes and, for 1997, due to permanent tax differences
relating to merger expenses and tax exempt interest income.
Merger, Financing, and Other Charges
During 1997, we recorded merger, financing, and other charges totaling
$19.9 million. These pre-tax charges consisted of (i) $9.7 million of merger
expenses and costs associated with the integration of SPH's operations following
the Merger, (ii) the write-off of $9.7 million of deferred costs associated with
two mortgage loan facilities, which were terminated upon execution of a
revolving credit facility, and (iii) a charge of $500,000 in connection with
moving the listing of our Common Stock to the NYSE from the National Market tier
of the Nasdaq Stock Market. We believe that these charges are non-recurring in
nature and will not affect the future results of operations.
Liquidity and Capital Resources
We had net cash and cash equivalents of $0.6 million as of December 31,
1998 and $3.2 million as of December 31, 1997. At December 31, 1998, we had
invested approximately $5.9 million in short-term demand notes having credit
ratings of A1/Pl or equivalent using domestic commercial banks and other
financial institutions. We did not have these investments as of December 31,
1997. We also deposited excess funds during these periods in an overnight sweep
account with a commercial bank which in turn invested those funds in short-term,
interest-bearing reverse repurchase agreements. Due to the short-term nature of
these investments, we did not take possession of the securities, which were
instead held by the financial institutions. The market value of the securities
held pursuant to these arrangements approximates the carrying amount. Deposits
in excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation. During 1996, SPH temporarily invested proceeds from an offering of
its common stock in investments with maturities greater than 90 days. These
investments were in a mutual fund (primarily in municipal bonds) and in United
States Government obligations and have been classified as "investments
available-for-sale" in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In 1996, purchases of these
"investments available-for-sale" aggregated $38.8 million and proceeds from the
sale or maturity of these investments aggregated $39.3 million.
Our operating activities generated cash of $118.1 million in 1998, $50.3
million in 1997, and $20.8 million in 1996.
We used $630.3 million to acquire land and develop and furnish 171 sites
opened or under construction in 1998, $607.6 million for 194 sites in 1997, and
$273.3 million for 102 sites in 1996. We also acquired ten existing extended
stay facilities in 1996. Those facilities were paid for by the issuance of
Common Stock valued at $55.2 million and the payment of $4.3 million in cash.
Our cost to develop a property varies significantly by brand and by
geographic location due to differences in land and labor costs. Similarly, the
average weekly rate charged and the resultant cash flow from these properties
will vary significantly but generally are expected to be in proportion to the
development costs. For the 272 properties we opened from January 1, 1996 through
December 31, 1998, the average development cost was approximately $5.0 million
with an average of 107 rooms. In 1999, we expect to open a number of properties
in the Northeast and West where average development costs are higher.
Accordingly, we expect our average development cost for 1999 to increase to
approximately $6.3 million per property.
24
We received net proceeds from the exercise of options to purchase common
stock and from offerings of common stock totaling $4.5 million in 1998, $202.1
million in 1997, and $365.6 million in 1996. In 1998, we also made open market
repurchases of 169,900 shares of Common Stock for approximately $1.3 million.
In May 1995, SPH entered into a $30 million revolving credit agreement to
fund future development and construction of additional hotels and for working
capital. In February 1996, SPH increased this line of credit to $50 million,
maturing in 1998. During 1996, SPH received proceeds of $27.0 million and made
payments of $31.6 million on its line of credit, which was terminated upon
consummation of the Merger with us in 1997.
In September 1997, we executed an agreement with various banks establishing
a credit facility that provided for up to $500 million of revolving loans on a
senior collateralized basis that had a maturity of December 31, 2002 to be used
for general corporate purposes, including the construction and acquisition of
extended stay properties. Upon entering into the revolving credit facility, we
terminated two mortgage loan facilities, which had provided for an aggregate of
$400 million in mortgage loans. We recorded a pre-tax charge of $9.7 million at
that time, which represented the write-off of debt issuance costs associated
with the mortgage loan facilities. In March 1998 we amended the revolving credit
facility and, as amended, it became the Credit Facility. The Credit Facility was
again amended in September 1998 and December 1998.
The Credit Facility provides for a $350 million revolving loan facility
(the "Revolving Facility"), a $150 million term loan facility (the "Tranche A
Facility"), a $200 million term loan facility (the "Tranche B Facility"), and a
$100 million term loan facility (the "Tranche C Facility"). As of December 31,
1998, we had outstanding loans of $105 million under the Revolving Facility,
$150 million under the Tranche A Facility and $200 million under the Tranche B
Facility. At least $275 million of loans must be outstanding under the Revolving
Facility on the date any term loans under the Tranche C Facility are funded.
Loans under the Credit Facility bear interest, at the our option, at either
a prime-based rate ("Base Rate") or a LIBOR-based rate ("Eurodollar Rate"), plus
an applicable margin. The applicable margin is an annual rate that fluctuates
based on our ratio of Consolidated Debt to Consolidated EBITDA (as defined in
the Credit Facility). The applicable margin for the various loan facilities in
the Credit Facility are shown in the table below:
Base Rate Eurodollar Rate
--------- ---------------
Revolving Facility................ 0-0.875% 1.00-1.875%
Tranche A Facility................ 0-0.875% 1.00-1.875%
Tranche B Facility................ 1.75% 2.75%
Tranche C Facility................ 2.50% 3.50%
The loans under the Revolving Facility and the Tranche A Facility mature on
December 31, 2002. The loans under the Tranche B Facility and the Tranche C
Facility mature on December 31, 2003 and 2004, respectively, but are subject to
principal payments of 1% of the initial loan amounts in each of the years 1999
through 2002 for the Tranche B Facility and 2000 through 2003 for the Tranche C
Facility. The remaining balances must be repaid in four equal quarterly
installments in the years of maturity.
Our obligations under the Credit Facility are guaranteed by each of our
subsidiaries. They are also collateralized by a first priority lien on all stock
of our subsidiaries and all other current and future assets owned by us and our
subsidiaries (other than mortgages on our real property).
The Credit Facility contains a number of negative covenants, including,
among others, covenants that limit our ability to incur debt, make investments,
pay dividends, prepay other indebtedness, engage in transactions with
affiliates, enter into sale-leaseback transactions, create liens, make capital
expenditures, acquire or dispose of assets, or engage in mergers or
acquisitions. In addition, the Credit Facility contains affirmative covenants,
including, among others, covenants that require us to maintain our corporate
existence, comply with laws, maintain our properties and insurance, and deliver
financial and other information to the lenders. The Credit Facility also
requires us to comply with certain financial tests and to maintain certain
financial ratios on a consolidated basis.
25
On March 10, 1998, we issued $200 million aggregate principal amount of
Senior Subordinated Notes (the "Notes"). The Notes bear interest at an annual
rate of 9.15%, payable semiannually on March 15 and September 15 of each year
and mature on March 15, 2008. We may redeem the Notes beginning on March 15,
2003. The initial redemption price is 104.575% of their principal amount, plus
accrued interest. The redemption price declines each year after 2003 and is 100%
of their principal amount, plus accrued interest, after 2006. In addition,
before March 15, 2001, we may redeem up to $70 million of the Notes, using the
proceeds from certain sales of our stock, at 109.15% of their principal amount,
plus accrued interest.
The Notes are uncollateralized and are subordinated to all of our senior
indebtedness including the Credit Facility, and contain certain covenants for
the benefit of the holders of the Notes. These covenants, among other things,
limit our ability to incur additional indebtedness, pay dividends and make
investments and other restricted payments, enter into transactions with 5%
stockholders or affiliates, create liens, and sell assets.
We had commitments totaling approximately $120.0 million at December 31,
1998 to complete construction of extended stay properties. We believe that the
remaining availability under the Credit Facility, together with cash on hand and
cash flows from operations, will provide sufficient funds to develop the
properties we currently plan to open in 1999 and to fund our operating expenses
through 1999. We expect we will continue to rapidly expand our operations.
Beginning in 1999, we plan to open properties with total costs of approximately
$350 million per year. We expect to finance this development with internally
generated cash flows and increases in our debt facilities. The timing and amount
of financing we will need will depend on a number of factors, including the
number of properties we construct or acquire, the timing of that development,
and the cash flow generated by our properties. Also, if capital markets provide
favorable opportunities, our plans or assumptions change or prove to be
inaccurate, our existing sources of funds prove to be insufficient to fund our
growth and operations, or if we consummate acquisitions, we may seek additional
capital sooner than currently anticipated. Sources of financing may include
public or private debt or equity financing. We cannot assure you that we will be
able to obtain additional financing on acceptable terms, if at all. Our failure
to raise additional capital could result in the delay or abandonment of some or
all of our development and expansion plans, and could have a material adverse
effect on the Company.
Impact of the Year 2000 Issue and Accounting Releases
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Based on our
assessment, we do not anticipate that any significant modification or
replacement of our hardware or software will be necessary for our computer
systems to properly use dates beyond December 31, 1999 or that we will incur
significant operating expenses to make any such computer system improvements. We
are undertaking an assessment as to whether any of our significant suppliers,
lenders, or service providers will need to make any such software modifications
or replacements. While we do not expect the failure of any third parties to
address the Year 2000 Issue to uniquely impact our business, we could be
adversely affected should the availability of electricity, gas, water, and
telephone services be interrupted. In addition, we could be adversely affected
if other businesses are impacted by the Year 2000 Issue to the extent that
business related travel is reduced significantly or in the event that our
employees are unable to fulfill their responsibilities. We do not expect these
pervasive failures to result from the Year 2000 Issue, however, we cannot give
you any assurance that these problems will not arise.
In April 1998, the Accounting Standards Executive Committee released
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that start-up costs, including pre-opening and
organizational costs be expensed as incurred and is effective for financial
statements issued for periods beginning after December 15, 1998. At December 31,
1998, we had unamortized pre-opening and organization costs of approximately
$1.3 million. Under SOP 98-5, we would have reported an increase in expenses of
approximately $139,000 for 1998.
Seasonality and Inflation
Based upon the operating history of our facilities, we believe that
extended stay lodging facilities are not as seasonal in nature as the overall
lodging industry. We do expect, however, that our occupancy rates and revenues
will be lower than average during the first and fourth quarters of each calendar
year. Because many of our expenses do not fluctuate with changes in occupancy
rates, declines in occupancy rates may cause fluctuations or decreases in our
quarterly earnings.
26
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on our revenue or operating results during
any of the periods presented. We cannot assure you, however, that inflation will
not affect our future operating or construction costs.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. All
statements regarding our expected financial position, business, and financing
plans are forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events.
However, these forward-looking statements are subject to risks, uncertainties,
assumptions, and other factors ("Cautionary Statements") which may cause our
actual results, performance, or achievements to be materially different. These
factors include, among other things:
o our limited operating history and uncertainty as to our future
profitability;
o our ability to meet construction and development schedules and
budgets;
o our ability to develop and implement the operational and financial
systems needed to manage rapidly growing operations;
o uncertainty as to the consumer demand for extended stay lodging;
o increasing competition in the extended stay lodging market;
o our ability to integrate and successfully operate acquired
properties and the risks associated with such properties;
o our ability to obtain financing on acceptable terms to finance our
growth; and
o our ability to operate within the limitations imposed by financing
arrangements.
Other matters set forth in this Annual Report may also cause our actual
future results to differ materially from these forward-looking statements. There
can be no assurance that our expectations will prove to be correct. In addition,
all subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements. You are cautioned not to place undue reliance on these
forward-looking statements. All of these forward-looking statements are based on
our expectations as of the date of this Annual Report. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*****
INDEX TO FINANCIAL STATEMENTS
Page
----
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
Report of Independent Accountants...................... 29
Consolidated Balance Sheets as of December 31, 1998
and 1997............................................ 30
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996................... 31
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997, and 19..... 32
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996............. 33
Notes to Consolidated Financial Statements............. 34
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Extended Stay America, Inc.
Ft. Lauderdale, Florida
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Extended Stay America, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Spartanburg, South Carolina
January 29, 1999
29
EXTENDED STAY AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS December 31,
------ ------------
1998 1997
----------- ----------
Current assets:
Cash and cash equivalents................................................... $ 623 $ 3,213
Accounts receivable......................................................... 5,946 3,651
Prepaid expenses............................................................ 1,743 3,869
Deferred income taxes....................................................... 27,735 6,895
Other current assets........................................................ 781 866
----------- ----------
Total current assets..................................................... 36,828 18,494
Property and equipment, net...................................................... 1,637,334 1,042,741
Deferred loan costs.............................................................. 19,260 8,167
Other assets..................................................................... 1,160 1,489
----------- ----------
$ 1,694,582 $ 1,070,891
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................................ $ 62,834 $ 51,310
Income taxes payable........................................................ 7,079
Accrued retainage........................................................... 25,442 19,951
Accrued property taxes...................................................... 6,856 3,417
Accrued salaries and related expenses....................................... 1,816 2,707
Accrued interest............................................................ 7,010 356
Other accrued expenses...................................................... 15,304 5,098
Current portion of long-term debt........................................... 2,000
----------- ----------
Total current liabilities................................................ 128,341 82,839
----------- ----------
Deferred income taxes............................................................ 46,490 18,393
----------- ----------
Long-term debt................................................................... 653,000 135,000
----------- ----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding...................................................
Common stock, $.01 par value, 500,000,000 shares authorized, 95,968,379 and
95,604,208 shares issued and outstanding,
respectively............................................................ 960 956
Additional paid-in capital.................................................. 827,110 823,060
Retained earnings........................................................... 38,681 10,643
----------- ----------
Total stockholders' equity............................................... 866,751 834,659
----------- ----------
$ 1,694,582 $ 1,070,891
=========== ===========
See notes to consolidated financial statements.
30
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1998 1997 1996
--------- -------- ---------
Revenue:
Room revenue......................................................... $ 273,864 $ 126,095 $ 37,480
Other revenue........................................................ 9,223 4,705 1,329
--------- -------- ---------
Total revenue.................................................... 283,087 130,800 38,809
--------- -------- ---------
Costs and expenses:
Property operating expenses.......................................... 122,469 60,391 16,560
Corporate operating and property management expenses................. 39,073 29,951 16,867
Merger, financing and other charges.................................. 12,000 19,895
Depreciation and amortization........................................ 42,293 21,331 6,139
--------- -------- ---------
Total costs and expenses......................................... 215,835 131,568 39,566
--------- -------- ---------
Income (loss) from operations............................................. 67,252 (768) (757)
Interest income (expense), net............................................ (20,521) 9,242 13,744
---------- -------- ---------
Income before income taxes................................................ 46,731 8,474 12,987
Provision for income taxes................................................ 18,693 5,838 5,231
--------- -------- ---------
Net income................................................................ $ 28,038 $ 2,636 $ 7,756
========= ======== =========
Net income per share:
Basic................................................................ $ 0.29 $ 0.03 $ 0.11
========= ======== ========
Diluted.............................................................. $ 0.29 $ 0.03 $ 0.10
========= ======== ========
Weighted average shares:
Basic................................................................ 95,896 94,233 71,933
Effect of dilutive options........................................... 904 1,511 2,002
--------- -------- ---------
Diluted.............................................................. 96,800 95,744 73,935
========= ======== =========
See notes to consolidated financial statements.
31
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
------- ----------- -------- -------------
Balance as of January 1, 1996......... 284 $ 198,787 $ 251 $ 199,322
Issuances of common stock for
acquisitions of extended stay
facilities......................... 45 55,198 55,243
Issuances of common stock,
net of issuance costs.............. 255 365,972 366,227
Stock options exercised, including
tax benefit of $108................ 166 166
Retroactive effect of three-for-two
stock split on July 9, 1996........ 32 (32)
Retroactive effect of two-for-one
stock split on July 19, 1996....... 221 (221)
Net income............................ 7,756 7,756
-------- ---------- -------- ---------
Balance as of December 31, 1996....... 837 619,870 8,007 628,714
Issuance of common stock,
net of issuance costs.............. 115 197,978 198,093
Stock options exercised, including
tax benefit of $1,174.............. 4 5,212 5,216
Net income............................ 2,636 2,636
-------- ---------- ----------- ---------
Balance as of December 31, 1997....... 956 823,060 10,643 834,659
Repurchases of common stock........... (1) (1,251) (1,252)
Stock options exercised, including
tax benefit of $794................ 5 5,301 5,306
Net income............................ 28,038 28,038
-------- ---------- ----------- ---------
Balance as of December 31, 1998....... 960 $ 827,110 $ 38,681 $ 866,751
======== ========== =========== =========
See notes to consolidated financial statements.
32
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
--------- -------- --------
Cash flows from operating activities:
Net income................................................................ $ 28,038 $ 2,636 $ 7,756
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 42,293 21,331 6,139
Amortization and write off of deferred loan costs..................... 2,566 9,667
Write offs and unsuccessful development costs......................... 14,917 2,731 1,475
Deferred income taxes................................................. 8,051 5,832 2,574
Other, net............................................................ 485 (469)
Changes in operating assets and liabilities:
Accounts receivable............................................. (2,795) (1,986) (1,002)
Prepaid expenses................................................ 2,775 (3,073) (480)
Other current assets............................................ (1,403) (954) (28)
Accounts payable................................................ (982) 7,542 643
Income taxes payable............................................ 7,079
Accrued property taxes.......................................... 3,439 2,634
Accrued salaries and related expenses........................... (891) 324 885
Accrued interest................................................ 6,653 356
Other accrued expenses.......................................... 8,405 2,738 3,335
--------- -------- --------
Net cash provided by operating activities................... 118,145 50,263 20,828
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment....................................... (630,276) (607,649) (273,260)
Acquisitions of extended stay properties.................................. (4,271)
Purchase of investments available-for-sale................................ (38,829)
Proceeds from sale/maturity of investments available-for-sale............. 39,298
Other assets.............................................................. 249 (1,415) (2,197)
--------- -------- --------
Net cash used in investing activities....................... (630,027) (609,064) (279,259)
---------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of Company stock options and issuances of
common stock 4,512 202,135 365,636
Repurchase of Company common stock........................................ (1,252)
Proceeds from long-term debt.............................................. 548,500 143,869 27,000
Principal payments on long-term debt...................................... (31,630)
Repayments of revolving credit facility................................... (28,500)
Additions to deferred loan and other costs................................ (13,968) (8,315) (4,165)
--------- -------- --------
Net cash provided by financing activities................... 509,292 337,689 356,841
--------- -------- --------
Increase (decrease) in cash and cash equivalents.............................. (2,590) (221,112) 98,410
Cash and cash equivalents at beginning of period.............................. 3,213 224,325 125,915
--------- -------- --------
Cash and cash equivalents at end of period.................................... $ 623 $ 3,213 $224,325
========= ======== ========
Noncash investing and financing transactions:
Issuances of common stock for acquisitions of extended stay properties.... $ $ $ 55,243
========= ======== ========
Capitalized or deferred items included in accounts payable and
accrued liabilities $ 67,566 $ 49,308 $ 17,671
======== =====================
Conversion of amounts due under revolving credit facility to term loan.... $ 100,000
=========
Capitalization of amortized deferred loan costs........................... $ 511
=========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes, net of refunds of $415 in 1998.......................... $ 2,681 $ 1,340 $ 2,267
========= ======== ========
Interest expense, net of amounts capitalized.......................... $ 23,396 $ $ 3
========= ======== ========
See notes to consolidated financial statements.
33
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted in all tables except per share data)
Note 1--Organization, Operations and Basis of Presentation
Extended Stay America, Inc. ("ESA") was organized on January 9, 1995, as
a Delaware corporation to develop, own, and operate extended stay lodging
facilities.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), a wholly-owned
subsidiary of ESA, and Studio Plus Hotels, Inc. ("SPH") consummated a merger
(the "Merger") pursuant to which SPH was merged with and into Merger Sub and the
12,557,786 shares of SPH common stock issued and outstanding on such date were
converted into the right to receive 15,410,915 shares of common stock, par value
$.01 per share, of ESA ("Common Stock") and options to purchase 1,072,565 shares
of SPH common stock were converted into options to purchase 1,316,252 shares of
Common Stock. The Merger was accounted for using the pooling of interests method
of accounting. The accompanying consolidated financial statements of ESA and SPH
(together the "Company") give effect to the Merger as if it had been consummated
as of the beginning of the periods presented.
All per share data and numbers of shares of Common Stock for all periods
presented included in the consolidated financial statements and notes thereto
have been adjusted to reflect stock splits as more fully described in Note
8--Stockholders' Equity.
Note 2--Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid instruments with maturities of three months or less when purchased. The
carrying amount of cash and cash equivalents is the estimated fair value at the
respective balance sheet date. At December 31, 1997, approximately $8.9 million
of outstanding checks were included in accounts payable.
At December 31, 1998, the Company had invested approximately $5.9 million
in short-term demand notes. The Company did not have such investments as of
December 31, 1997. In addition, during these periods the Company invested excess
funds in an overnight sweep account with a commercial bank which invested in
short-term, interest-bearing reverse repurchase agreements. Due to the
short-term nature of these investments, the Company did not take possession of
the securities, which were instead held by the financial institution. The market
value of the securities held pursuant to the agreements approximates the
carrying amount. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
34
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is stated at cost. The Company capitalizes salaries
and related costs for site selection, design and construction supervision. The
Company also capitalizes construction period interest.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Maintenance and repairs are charged to operations as
incurred; major renewals and improvements are capitalized. The gain or loss on
the disposition of property and equipment is recorded in the year of
disposition.
The estimated useful lives of the assets are as follows:
Building and improvements................. 40 years
Furniture, fixtures and equipment......... 3-10 years
Preacquisition Costs
The Company incurs costs related to the acquisition of property sites.
These costs are capitalized when it is probable that a site will be acquired.
These costs are included in property and equipment. In the event the acquisition
of the site is not consummated, the costs are charged to corporate operating
expenses.
Deferred Loan Costs
The Company has incurred costs in obtaining financing. These costs have
been deferred and are amortized over the life of the respective loans.
Pre-Opening Costs
The Company capitalizes compensation and other training-related costs
incurred prior to the opening of a property and amortizes such costs over a
period of twelve months. Pre-opening costs of $2,317,000 and $1,260,000 as of
December 31, 1998, and 1997, respectively, are included in other current assets,
net of accumulated amortization of $1,563,000 and $613,000, respectively.
Organization Costs
Organization costs are amortized over sixty months using the straight-line
method. As of December 31, 1998 and 1997, costs of $679,000 and $568,000,
respectively, reduced by accumulated amortization of $163,000 and $84,000,
respectively, are included in other assets.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and for operating loss and tax carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the related temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
35
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Room revenue and other revenue are recognized when earned.
Net Income Per Share
The Company determines earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards ("SFAS") Statement No. 128,
"Earnings Per Share". For the years ended December 31, 1998, 1997 and 1996, the
computation of diluted EPS does not include approximately 8,828,000, 3,180,000
and 165,000 weighted average shares, respectively, of Common Stock represented
by outstanding options because the exercise price of the options was greater
than the average market price of Common Stock during the period.
Business Segment
The Company operates principally in one business segment which is to
develop, own, and operate extended stay lodging facilities.
New Accounting Pronouncements
In April, 1998, the Accounting Standards Executive Committee released
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that start-up costs, including pre-opening and
organizational costs be expensed as incurred and is effective for financial
statements issued for periods beginning after December 15, 1998. At December 31,
1998, the Company had unamortized pre-opening and organization costs of
approximately $1.3 million. Under SOP 98-5, the Company would have reported an
increase in expenses of approximately $139,000 for the year ended December 31,
1998.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current presentation.
Note 3--Property and Equipment
Property and equipment consist of the following:
December 31,
------------
1998 1997
----------- -----------
Land and improvements, including land under current
development............................................... $ 408,767 $ 289,820
Buildings and improvements.................................. 961,063 449,782
Furniture, fixtures, equipment and supplies................. 211,320 128,104
Construction in progress.................................... 128,337 207,223
----------- -----------
1,709,487 1,074,929
Less: Accumulated depreciation............................. 72,153 32,188
----------- -----------
Total property and equipment................................ $ 1,637,334 $1,042,741
=========== ===========
The Company had commitments totaling approximately $120.0 million to
complete construction of additional extended stay properties at December 31,
1998.
For the years ended December 31, 1998, 1997 and 1996 the Company incurred
interest of $41,014,000, $1,731,000, and $332,000, respectively, of which
$17,617,000, $1,731,000, and $329,000, respectively, was capitalized and
included in the cost of buildings and improvements.
36
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Options to Purchase Property Sites
As of December 31, 1998, the Company had options to purchase parcels of
real estate in 30 locations in 14 states. The Company had paid approximately
$2.3 million in connection with these options as of December 31, 1998. If the
Company does not acquire these parcels, the amounts paid in connection with the
options may be forfeited under certain circumstances. These amounts are included
in property and equipment.
Note 5--Purchase Acquisitions of Extended Stay Properties
During 1996, the Company acquired ten (10) extended stay facilities from a
number of unrelated sellers (the "Acquisitions") for approximately $59.5
million, which was paid for by the issuance of approximately 4.5 million shares
of Common Stock valued at approximately $55.2 million and approximately $4.3
million in cash. As a part of the Acquisitions, the Company assumed and
subsequently retired liabilities aggregating approximately $470,000 under
certain leases for personal property.
The Acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of the properties are included in
the consolidated statements of income from the date of acquisition.
The following unaudited pro forma condensed statement of income of the
Company is presented as if the Company had completed the Acquisitions, excluding
one of the acquisitions which did not meet certain materiality standards (the
"Significant Acquisitions") on January 1, 1996. This pro forma information is
based in part upon the consolidated statements of income of each of the
Significant Acquisitions. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made. This pro forma
condensed consolidated statement of income is not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of January 1, 1996, nor does it purport to
represent the results of operations for future periods.
Pro Forma for the
Year Ended
December 31, 1996
-----------------
Total revenue............................ $ 44,022
Total costs and expenses................. 42,162
----------
Income from operations................... 1,860
Interest income.......................... 13,744
----------
Income before income taxes............... 15,604
Provision for income taxes............... 6,277
----------
Net income............................... $ 9,327
==========
Net income per share:
Basic................................ $ 0.13
==========
Diluted.............................. $ 0.12
==========
Weighted average shares:
Basic................................ 74,448
==========
Diluted.............................. 76,450
==========
Note 6--Long-Term Debt
In September 1997, the Company executed an agreement with various banks
establishing a credit facility that provided for up to $500 million of revolving
loans on a senior collateralized basis that had a maturity of December 31, 2002
to be used for general corporate purposes, including the construction and
acquisition of extended stay properties. Upon entering into the revolving credit
facility, the Company terminated two mortgage loan facilities, which had
provided for an aggregate of $400 million in mortgage loans. In March 1998, the
Company amended the
37
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
revolving credit facility and, as amended, it became the Credit Facility. The
Credit Facility was again amended in September 1998 and December 1998.
The Credit Facility provides for a $350 million revolving loan facility
(the "Revolving Facility"), a $150 million term loan facility (the "Tranche A
Facility"), a $200 million term loan facility (the "Tranche B Facility"), and a
$100 million term loan facility (the "Tranche C Facility"). As of December 31,
1998, the Company had outstanding loans of $105 million under the Revolving
Facility, $150 million under the Tranche A Facility and $200 million under the
Tranche B Facility. At least $275 million of loans must be outstanding under the
Revolving Facility on the date the Tranche C Facility is funded.
Loans under the Credit Facility bear interest, at the Company's option, at
either a prime-based rate ("Base Rate") or a LIBOR-based rate ("Eurodollar
Rate"), plus an applicable margin. The applicable margin is an annual rate that
fluctuates based on the Company's ratio of Consolidated Debt to Consolidated
EBITDA (as defined in the Credit Facility). The applicable margin for the
various loan facilities in the Credit Facility are shown in the table below:
Base Rate Eurodollar Rate
--------- ---------------
Revolving Facility............. 0-0.875% 1.00-1.875%
Tranche A Facility............. 0-0.875% 1.00-1.875%
Tranche B Facility............. 1.75% 2.75%
Tranche C Facility............. 2.50% 3.50%
The loans under the Revolving Facility and the Tranche A Facility mature on
December 31, 2002. The loans under the Tranche B Facility and the Tranche C
Facility mature on December 31, 2003 and 2004, respectively, but are subject to
principal payments of 1% of the initial loan amounts in each of the years 1999
through 2002 for the Tranche B Facility and 2000 through 2003 for the Tranche C
Facility. The remaining balances must be repaid in four equal quarterly
installments in the years of maturity.
The Company's obligations under the Credit Facility are guaranteed by each
of its subsidiaries. They are also collateralized by a first priority lien on
all stock owned by the Company and its subsidiaries and all other current and
future assets of the Company and its subsidiaries (other than mortgages on the
Company's and its subsidiaries' real property).
The Credit Facility contains a number of negative covenants, including,
among others, covenants that limit the Company's ability to incur debt, make
investments, pay dividends, prepay other indebtedness, engage in transactions
with affiliates, enter into sale-leaseback transactions, create liens, make
capital expenditures, acquire or dispose of assets, or engage in mergers or
acquisitions. In addition, the Credit Facility contains affirmative covenants,
including, among others, covenants that require the Company to maintain its
corporate existence, comply with laws, maintain its properties and insurance,
and deliver financial and other information to the lenders. The Credit Facility
also requires the Company to comply with certain financial tests and to maintain
certain financial ratios on a consolidated basis.
On March 10, 1998, the Company issued $200 million aggregate principal
amount of Senior Subordinated Notes (the "Notes"). The Notes bear interest at an
annual rate of 9.15%, payable semiannually on March 15 and September 15 of each
year and mature on March 15, 2008. The Company may redeem the Notes beginning on
March 15, 2003. The initial redemption price is 104.575% of their principal
amount, plus accrued interest. The redemption price declines each year after
2003 and is 100% of their principal amount, plus accrued interest, after 2006.
In addition, before March 15, 2001, the Company may redeem up to $70 million of
the Notes, using the proceeds from certain sales of the Company's stock, at
109.15% of their principal amount, plus accrued interest.
38
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Notes are uncollateralized and are subordinated to all of the Company's
senior indebtedness including the Credit Facility, and contain certain covenants
for the benefit of the holders of the Notes. These covenants, among other
things, limit the Company's ability to incur additional indebtedness, pay
dividends and make investments and other restricted payments, enter into
transactions with 5% stockholders or affiliates, create liens, and sell assets.
At December 31, 1998, aggregate maturities of long-term debt were as
follows:
1999 $ 2,000
2000 2,000
2001 2,000
2002 257,000
2003 192,000
Thereafter 200,000
-----------
$ 655,000
===========
An aggregate of $655 million and $135 million was outstanding at December
31, 1998 and 1997, respectively, with a weighted average interest rate of 7.88%
and 7.28%, respectively. The Company believes that there is no material
difference in the carrying amount (including the terms and conditions outlined
above) and the estimated fair value of the Credit Facility. The Notes had an
estimated fair value of approximately $187 million at December 31, 1998.
Note 7--Income Taxes
Income tax expense consists of the following:
Year Ended December 31,
-----------------------
1998 1997 1996
-------- ------- -------
Current income taxes:
U.S. federal........................ $ 10,642 $ 6 $ 2,137
State and local..................... 520
-------- ------- -------
10,642 6 2,657
-------- ------- -------
Deferred income taxes:
U.S. federal........................ 6,552 5,137 2,069
State and local..................... 1,499 695 505
-------- ------- -------
8,051 5,832 2,574
-------- ------- -------
Total income tax expense................ $ 18,693 $ 5,838 $ 5,231
======== ======= =======
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35.0% to pretax income as a result of the following:
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
Computed "expected" tax rate............................ 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit 4.9 4.8 4.9
Tax exempt interest income.......................... (5.0)
Merger expenses..................................... 32.1
Other............................................... 0.1 2.0 0.4
------- ------- -------
Annual effective income tax rate........................ 40.0% 68.9% 40.3%
======= ======= =======
39
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
1998 1997
---------- ----------
Deferred tax assets:
Net operating loss carryforward..................... $ 12,834 $ 4,029
Alternative minimum tax credit carryforward......... 9,396 6
Other............................................... 5,505 2,860
--------- ---------
Total deferred tax assets...................... 27,735 6,895
Deferred tax liability:
Property and equipment.............................. (46,490) (18,393)
---------- ---------
$ (18,755) $ (11,498)
========== =========
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $29,771,000, expiring in years 2011
through 2018, and alternative minimum tax credits of approximately $9,396,000,
which may be carried forward indefinitely.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax assets
will not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considered the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Note 8--Stockholders' Equity
In April, 1996, SPH closed a public offering of 4,855,347 shares of common
stock, and 319,653 shares sold by selling stockholders at $16.83 per share
(number of shares and price per share have not been adjusted for the Merger).
Net cash proceeds to SPH were approximately $76.8 million, which excluded any
proceeds received by the selling stockholders.
On May 9, 1996, the Board of Directors of ESA declared a 2-for-1 stock
split effected in the form of a stock dividend.
On June 5, 1996, ESA closed a public offering of 19,550,000 shares of its
Common Stock at a public offering price of $15.50 per share. The proceeds to ESA
of such offering were approximately $289.0 million, net of offering expenses.
On July 19, 1996, a three-for-two split of SPH common stock was effected in
the form of a stock dividend.
On February 6, 1997, the Company sold 11.5 million shares of Common Stock
in a private placement transaction resulting in net proceeds of approximately
$198.1 million.
On April 11, 1997, the Company's stockholders approved an Amendment of the
Restated Certificate of Incorporation increasing the number of authorized shares
of Common Stock, par value $.01, from 200 million to 500 million shares.
40
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 9, 1997, the Company announced that its Board of Directors had
approved a plan to have the Common Stock listed on the New York Stock Exchange,
Inc. ("NYSE") and to move trading in the Common Stock from the Nasdaq National
Market ("Nasdaq") to the NYSE. The Common Stock began trading on the NYSE on
June 30, 1997.
Shares of preferred stock may be issued from time to time, in one or more
series, as authorized by the Board of Directors. Prior to issuance of shares of
each series, the Board will designate for each such series, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption, as are permitted by law. No shares of preferred stock are
outstanding and the Company has no present plans to issue any shares of
preferred stock.
Note 9--Stock Option Plans
ESA has five stock option plans including the 1995, 1996, 1997 and 1998
Employee Stock Option Plans (the "Employee Plans") and the 1995 Stock Option
Plan for Non-Employee Directors (the "Directors' Plan"). The Employee Plans and
the Directors' Plan provide for grants to certain officers, directors and key
employees of stock options to purchase shares of Common Stock. Options granted
under the Employee Plans and the Directors' Plan expire ten years from the date
of grant. Options granted under the Employee Plans vest ratably over a four year
period, and options granted under the Directors' Plan vest six months from the
date of grant.
SPH had two stock option plans, the 1995 Stock Incentive Plan and the 1995
Non-Employee Directors' Stock Incentive Plan (collectively, the "SPH Plans").
Two types of options, incentive stock options and nonqualified stock options,
were granted under the SPH Plans. All options granted under the SPH Plans were
granted at an exercise price equal to the market price of the SPH common stock
on the date of grant and may not be exercised more than 10 years after the date
granted. Options granted under the SPH Plans to purchase 1,072,565 shares of SPH
common stock were converted into options to purchase 1,316,252 shares of Common
Stock (with a corresponding adjustment to the exercise price) upon completion of
the Merger. Because the Merger effected a "change of control" of SPH, each of
these options became immediately exercisable.
A summary of the status of the Employee Plans, the Directors' Plan, and
options granted under the SPH Plans (collectively the "Plans") as of December
31, 1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:
1998 1997 1996
----------------------- ------------------------ -----------------------
Number of Price Per Number of Price Per Number of Price Per
Shares Share Shares Share Shares Share
--------- ------------ --------- ------------- --------- -----------
Outstanding at beginning of year... 10,532 $2.38-22.38 7,128 $2.38-22.38 3,267 $ 2.38-12.49
Granted............................ 6,971 6.41-15.00 5,125 11.28-20.50 4,030 10.50-22.38
Exercised.......................... (534) 7.43-15.00 (402) 2.38-14.94 (21) 2.38
Forfeited.......................... (2,427) 2.38-20.88 (1,319) 2.38-20.63 (148) 2.38-14.44
------- ---------- ------ ------------- ------- ------------
Outstanding at end of year......... 14,542 $2.38-22.38 10,532 $2.38-22.38 7,128 $ 2.38-22.38
Options exercisable at year-end.... 4,882 $2.38-22.38 3,489 $2.38-22.38 1,489 $ 2.38-12.81
Available for future grants........ 6,338 5,183 3,240
Total shares reserved for issuance
as of December 31............... 20,880 15,715 10,368
Weighted average fair value of
options granted during the
year............................ $ 4.42 $ 6.93 $ 5.55
41
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation." As permitted by SFAS No. 123, the Company has chosen to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related interpretations in accounting for the Plans. Accordingly, no
compensation cost has been recognized for options granted under the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
date of grant for awards under the Plans consistent with the method of SFAS No.
123, the Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below.
1998 1997 1996
------------------ ------------------- -------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net income (loss).............................. $28,038 $20,582 $ 2,636 $(8,788) $ 7,756 $3,482
Net income (loss) per share:
Basic.................................... $ 0.29 $ 0.21 $ 0.03 $ (0.09) $ 0.11 $ 0.05
Diluted................................ $ 0.29 $ 0.21 $ 0.03 $ (0.09) $ 0.10 $ 0.05
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes multiple option-pricing model with the following assumptions
used for grants in 1998, 1997 and 1996: dividend yield of 0%, expected
volatility of 33.47%, risk-free interest rate of 6% and expected life of 5.5
years.
The following table summarizes information about the Company's stock
options at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Number Weighted Number
Outstanding Average Weighted Outstanding Weighted
as of Remaining Average as of Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
- --------------- ----------- ----------- ---------- ------------- ---------
$ 2.38-2.38............................. 1,018 6.64 $2.38 729 $2.38
$ 6.41-6.50............................. 915 6.91 6.49 721 6.50
$ 6.78-9.50............................. 3,894 9.84 9.46 370 8.15
$ 9.53-10.50............................. 859 1.06 10.46 800 10.50
$ 10.84-11.38............................. 2,670 8.97 11.36 173 11.35
$ 11.41-13.38............................. 1,235 7.34 13.15 577 13.18
$ 13.47-14.88............................. 875 8.06 14.07 556 14.03
$ 14.91-18.38............................. 587 8.26 15.67 243 15.73
$ 18.50-18.50............................. 2,332 7.98 18.50 621 18.50
$ 18.87-22.38............................. 157 7.97 20.28 92 20.40
------ ---- ----- ------ -----
$ 2.38-22.38............................. 14,542 8.00 $11.63 4,882 $10.87
====== ==== ======= ====== ======
Note 10--Related Party Transactions
In 1996, the Company entered into a ten year lease for a suite at Pro
Player Stadium for a base rental of $115,000 per year, and a 3-year lease for a
suite at Homestead Motorsports Complex for a base rental of approximately
$53,000 per year. In 1998, the Company entered into a three year lease for an
additional suite at Pro Player Stadium for a base rental of $83,000 per year and
a seven year lease for a suite at the Broward County Arena for a base rental of
$120,000 per year. The leases are subject to certain additional charges and
periodic escalation. The Chairman of the Company's Board of Directors owns Pro
Player Stadium and had an approximate 50% ownership interest (which was reduced
to approximately 10% in 1997) in Homestead Motorsports Complex. In addition, the
Chairman of the Company's Board of Directors is the Chairman of the Board of
Directors of a company which operates the Broward County Arena.
42
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1998, 1997, and 1996, the Company incurred charges of approximately
$1,726,000, $1,682,000, and $983,000 from a company controlled by the Chief
Executive Officer of the Company for the use of airplanes.
The Chief Executive Officer of the Company serves as chairman of the board
of a company from which the Company leases office space. The lease, which
expires December 31, 2001, provides for monthly payments of $4,635 and contains
a three year renewal option. A previous lease agreement for different office
space provided for monthly rent of $6,400 plus certain additional charges.
During 1998 and 1997, the Company incurred charges of approximately $75,000 and
$91,000 related to these agreements.
Two members of the Company's Board of Directors also serve on the board of
directors of a company which performs employment related services for the
Company. During 1998, 1997 and 1996, the Company incurred charges of
approximately $251,000, $126,000 and $23,000, respectively, for such services.
Note 11--Merger, Financing and Other Charges
The Company's normal operating procedures call for the investment of
varying amounts in our sites under option in terms of (1) earnest money which
would be applied to the purchase of a site, but that in certain circumstances
may not be refundable, (2) legal, environmental, engineering, and architectural
outlays needed to determine the feasibility of acquiring a site and constructing
a hotel on that site, and (3) salaries, wages, and travel costs of personnel
related to the sites. The Company capitalizes these expenses in accordance with
generally accepted accounting principles. In the quarter ended September 30,
1998, the Company announced a reduction in its development plans for 1999 and
2000 as a result of unfavorable capital market conditions. This meant that
certain sites under option would not be developed. As a result, a valuation
allowance of $12.0 million was established for the write-off of expenses related
to the sites . This resulted in a corresponding expense during the quarter ended
September 30, 1998. At December 31, 1998, a total of $10.5 million of those
costs, including $265,000 in termination payments to employees, had been charged
against the allowance and $1.5 million was included in other current
liabilities.
During 1997, the Company recorded merger, financing, and other charges
totaling $19.9 million. These pre-tax charges consisted of (i) $9.7 million of
merger expenses and costs associated with the integration of SPH's operations
following the Merger, (ii) the write-off of $9.7 million of deferred costs
associated with two mortgage loan facilities, which were terminated upon
execution of a revolving credit facility, and (iii) a charge of $500,000 in
connection with moving the listing of the Company's Common Stock to the NYSE
from Nasdaq.
43
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Quarterly Results (Unaudited)
The following is a summary of quarterly operations for the years ended December
31, 1998 and 1997:
1998
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Total revenue.............................................. $ 54,231 $ 70,044 $ 81,006 $ 77,807
Operating income........................................... 9,126 21,421 15,582 21,126
Net income................................................. 4,802 10,116 5,492 7,630
Net income per share:
Basic................................................ $ 0.05 $ 0.11 $ 0.06 $ 0.08
Diluted.............................................. $ 0.05 $ 0.10 $ 0.06 $ 0.08
1997
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Total revenue.............................................. $ 19,763 $ 29,028 $ 38,773 $ 43,236
Operating income (loss).................................... 117 (14,521) 7,961 5,675
Net income (loss).......................................... 2,470 (9,093) 5,644 3,615
Net income (loss) per share:
Basic................................................ $ 0.03 $ (0.10) $ 0.06 $ 0.04
Diluted.............................................. $ 0.03 $ (0.10) $ 0.06 $ 0.04
Note 13--Commitments and Contingencies
The Company is not a party to any significant litigation or claims, other
than routine matters incidental to the operation of the business of the Company.
To date, no claims have had a material adverse effect on the Company nor does
the Company expect that the outcome of any pending claims will have such an
effect.
The Company and its subsidiaries lease real property under various
operating leases with terms of one to seventeen years. Expenses under real
property leases for the years ended December 31, 1998, 1997 and 1996 were
$1,576,000, $1,012,000 and $708,000, respectively.
Future minimum lease obligations under noncancelable real property leases
with initial terms in excess of one year at December 31, 1998 are as follows:
Year Ending December 31:
1999....................... $ 1,447
2000....................... 1,453
2001....................... 1,230
2002....................... 668
2003....................... 667
Thereafter................. 2,089
---------
$ 7,554
=========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information appearing under the caption "Election of our Board of
Directors" in our Proxy Statement for the Annual Meeting of Stockholders to be
held May 19, 1999 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers
Our executive officers, their ages at December 31, 1998, and their
positions with us are set forth below. Our executive officers are elected by and
serve at the discretion of our Board of Directors.
Name Age Position
---- --- --------
H. Wayne Huizenga*.................. 61 Chairman of the Board of Directors
George D. Johnson, Jr.*............. 56 President, Chief Executive Officer, and Director
Robert A. Brannon................... 48 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Jay S. Witzel....................... 51 President and Chief Operating Officer of ESA
Management, Inc.
* Member of Executive Committee of the Board of Directors
H. Wayne Huizenga became one of our director's in August 1995 and serves as
the Chairman of our Board of Directors. Mr. Huizenga has also served as Chairman
of the Board of Republic Industries, Inc. ("Republic"), which owns the nation's
largest chain of franchised automotive dealerships, is building a chain of used
vehicle megastores, and owns National Car Rental and Alamo Rent-A-Car, since
August 1995. Since October 1996, Mr. Huizenga has served as Co-Chief Executive
Officer of Republic and from August 1995 until October 1996, Mr.Huizenga served
as Chief Executive Officer of Republic. Since June 1998, Mr. Huizenga has served
as a director of NationsRent, Inc. ("NationsRent"), a developing national
equipment rental company which markets products and services primarily to a
broad range of construction and industrial customers. Since May 1998, Mr.
Huizenga has served as Chairman of the Board and Chief Executive Officer of
Republic Services, Inc. ("Republic Services"), a leading provider of
non-hazardous solid waste collection and disposal services. Since September
1996, Mr. Huizenga has been Chairman of the Board of Florida Panthers Holdings,
Inc. ("FPHI"), a leisure-time, recreation, sports, and entertainment company
which owns and operates the Florida Panthers professional sports franchise and
certain resort and other facilities. From September 1994 until October 1995, Mr.
Huizenga served as the Vice-Chairman of Viacom Inc. ("Viacom"), a diversified
entertainment and communications company. During the same period, Mr. Huizenga
also served as the Chairman of the Board of Blockbuster Entertainment Group, a
division of Viacom. From April 1987 through September 1995, Mr. Huizenga served
as the Chairman of the Board and Chief Executive Officer of Blockbuster
Entertainment Corporation ("Blockbuster"), during which time he helped build
Blockbuster from a 19-store chain into the world's largest video rental company.
In September 1994, Blockbuster merged into Viacom. In 1971, Mr. Huizenga
co-founded Waste Management, Inc., which he helped build into the world's
largest integrated solid waste services company, and he served in various
capacities, including President, Chief Operating Officer and a director from its
inception until 1984. Mr. Huizenga also currently owns or controls the Miami
Dolphins, a professional sports franchise, as well as Pro Player Stadium, in
South Florida and is a director of theglobe.com, an internet on-line community.
George D. Johnson, Jr. has been our President, Chief Executive Officer, and
a director since January 1995. He is responsible for all aspects of our
development, operation, marketing, and personnel. Mr. Johnson is the former
President of the Consumer Products Division of Blockbuster Entertainment Group,
a division of Viacom. In this position he was responsible for all U.S. video and
music stores. Mr. Johnson has over 30 years of experience developing and
managing various businesses. He was formerly the managing general partner of WJB
Video, the largest Blockbuster franchisee which developed over 200 video stores
prior to a merger with Blockbuster in 1993. Mr. Johnson also is the managing
member of American Storage, LLC, a chain of 25 self-storage facilities located
in
45
the Carolinas and Georgia. He formerly served as a director of Viacom and
Chairman of the Board of Home Choice Holdings, Inc. and currently serves on the
board of directors of Republic, FPHI, and Duke Energy Corporation. He has been
the Chairman of the Board of Directors of Johnson Development Associates, Inc.
since its founding in 1986. Johnson Development Associates, Inc. is a real
estate management, leasing, and development company controlling approximately
four million square feet of commercial, retail, and industrial property located
in the Carolinas and Georgia which are owned by various partnerships controlled
by Mr. Johnson and his brother, Stewart H. Johnson. Mr. Johnson practiced law in
Spartanburg, South Carolina from 1967 until 1986 and served three terms in the
South Carolina House of Representatives.
Robert A. Brannon has been our Chief Financial Officer since February 1995
and our Senior Vice President, Secretary, and Treasurer since August 1995. He is
responsible for overseeing accounting procedures and controls, along with
financial reporting and cash management. Prior to joining our Company, he served
as Vice President-Finance for the Domestic Home Video division of the
Blockbuster Entertainment Group, where he was responsible for financial
management and control of over 2,000 video stores. Prior to joining Blockbuster
in 1993, Mr. Brannon was Chief Financial Officer for WJB Video and for American
Storage, LLC. In those capacities, Mr. Brannon was responsible for the financial
aspects of the development of over 200 video stores and 23 self-storage
facilities. Prior to his participation in these businesses, Mr. Brannon served
as a Certified Public Accountant in various management and staff positions with
local and national accounting firms.
Jay S. Witzel has been the President and Chief Operating Officer of ESA
Management, Inc. since August 1997. ESA Management, Inc. is our wholly-owned
subsidiary that develops properties and provides management services for all of
the lodging facilities we own. In this position, Mr. Witzel is responsible for
all aspects of operations and marketing of our brands. Mr. Witzel has over 20
years of experience in managing operations within the hospitality industry. Most
recently, Mr. Witzel served as President and Chief Operating Officer of Radisson
Hospitality Worldwide, a chain of over 350 hotels. Mr. Witzel began his career
in the hospitality industry in 1971 with Hyatt Hotels Corporation and served in
progressively more responsible positions with Hyatt and other organizations
before joining Radisson in 1987 as Vice-President-Operations.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the information set forth in Part II, Item 8 of this
Report, which information is incorporated herein by reference.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are not applicable, or the
information has been provided in the consolidated financial statements or the
notes thereto.
(a)(3) Exhibits
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
10.1 Amended and Restated 1995 Stock Option Plan of the Company
10.2 1995 Stock Option Plan for Non-Employee Directors of the
Company
10.3 Amended and Restated 1996 Employee Stock Option Plan of the
Company
10.8 1997 Stock Option Plan of the Company
10.9 1998 Employee Stock Option Plan
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1998.
(c) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3.1(a) Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1(a) to the Company's Registration
Statement on Form S-1, Registration No. 33-98452)
3.1(b) Certificate of Amendment of Restated Certificate of Incorporation of
the Company dated June 4, 1997 (incorporated by reference to Exhibit
3.1(b) to the Company's Report on Form 10-K for the year ended
December 31, 1997)
3.1(c) Conformed copy of Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1(c) to the
Company's Report on Form 10-K for the year ended December 31, 1997)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-98452)
4.1 Specimen certificate representing shares of Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-98452)
10.1 Amended and Restated 1995 Employee Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.3 to the Company's Report
on Form 10-Q for the quarter ended March 31, 1996)
10.2 1995 Stock Option Plan for Non-Employee Directors of the Company
(incorporated by reference to Exhibit 10.6 to the Company's Report
on Form 10-Q for the quarter ended March 31, 1996)
47
Exhibit
Number Description of Exhibit
------- ----------------------
10.3 Amended and Restated 1996 Employee Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.10 to the Company's Report
on Form 10-Q for the quarter ended March 31, 1996)
10.4 Aircraft Dry Lease dated April 5, 1996 between Morgan Corp. and the
Company (incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, Registration No. 333-03373)
10.5 Homestead Motorsports Complex Executive Suite License Agreement
dated February 14, 1996 among The Homestead Motorsports Joint
Venture, Miami Motorsports Joint Venture, and the Company
(incorporated by reference to Exhibit 10.13 to the Company's Report
on Form 10-Q for the quarter ended March 31, 1996)
10.6 Joe Robbie Stadium Executive Suite License Agreement dated March 18,
1996 between Robbie Stadium Corporation and the Company
(incorporated by reference to Exhibit 10.14 to the Company's Report
on Form 10-Q for the quarter ended March 31, 1996)
10.7 Aircraft Dry Lease dated December 28, 1996 between Wyoming
Associates, Inc. and the Company (incorporated by reference to
Exhibit 10.16 to the Company's Report on Form 10-K for the year
ended December 31, 1996)
10.8 1997 Stock Option Plan of the Company (incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1997)
10.9 1998 Employee Stock Option Plan
10.10(a) Credit Agreement, dated as of September 26, 1997 and Amended and
Restated as of March 10, 1998 (the "Credit Agreement"), by and among
the Company and Morgan Stanley Senior Funding, Inc., as Syndication
Agent and Arranger, The Industrial Bank of Japan, Limited, as
Administrative Agent, and various banks (incorporated by reference
to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter
ended March 31, 1998)
10.10(b) Amendment, dated as of September 18, 1998, to the Credit Agreement
(incorporated by reference to Exhibit 10.1 to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998)
10.10(c) Amendment, dated as of December 15, 1998, to the Credit Agreement
10.11(a) Sublease Agreement dated as of February 1997 by and between Johnson
Development Associates and ESA Management, Inc. (incorporated by
reference to Exhibit 10.19 to the Company's Report on Form 10-K for
the year ended December 31, 1997)
10.11(b) Lease Agreement dated as of November 30, 1998 by and between Bell
Hill, LLC and ESA Management, Inc.
10.12 Aircraft Dry Sub-Lease Agreement, dated as of July 2, 1998, between
the Company and Advance America Cash Advance Centers, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1998)
10.13 Pro Player Stadium Executive Suite License Agreement, dated as of
July 16, 1998, by and between South Florida Stadium Corporation
d/b/a Pro Player Stadium and the Company (incorporated by reference
to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter
ended September 30, 1998)
10.14 Broward County Arena Executive Suite License Agreement, by and
between Arena Operating Company, Ltd. and the Company (incorporated
by reference to Exhibit 10.3 to the Company's Report on Form 10-Q
for the quarter ended September 30, 1998)
21.1 List of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 24, 1999.
EXTENDED STAY AMERICA, INC.
By: /S/ GEORGE D. JOHNSON, JR.
---------------------------
George D. Johnson, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 24, 1999.
Signature Title
--------- -----
Principal Executive Officer:
/S/ GEORGE D. JOHNSON, JR. President and Chief Executive Officer
- --------------------------------
George D. Johnson, Jr.
Principal Financial Officer:
/S/ ROBERT A. BRANNON Senior Vice President, Chief Financial
- -------------------------------- Officer, Secretary, and Treasurer
Robert A. Brannon
Principal Accounting Officer:
/S/ GREGORY R. MOXLEY Vice President--Finance
- --------------------------------
Gregory R. Moxley
A Majority of the Directors:
/S/ H. WAYNE HUIZENGA Director
- --------------------------------
H. Wayne Huizenga
/S/ DONALD F. FLYNN Director
- --------------------------------
Donald F. Flynn
/S/ GEORGE D. JOHNSON Director
- --------------------------------
George D. Johnson
/S/ STEWART H. JOHNSON Director
- --------------------------------
Stewart H. Johnson
/S/ JOHN J. MELK Director
- --------------------------------
John J. Melk
/S/ PEER PEDERSEN Director
- --------------------------------
Peer Pedersen