REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Studio Plus Hotels, Inc.
Lexington, Kentucky
We have audited the accompanying consolidated balance sheets of Studio Plus
Hotels, Inc. and Subsidiary as of December 31, 1994 and 1995 and the related
consolidated statements of operations, capital and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Studio Plus
Hotels, Inc. and Subsidiary as of December 31, 1994 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
February 8, 1996
Page 1
STUDIO PLUS HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
1994 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................... $ 457,445 $ 2,556,744
Accounts receivable, net of allowance
of $61,894 and $70,654 in 1994
and 1995, respectively...................... 254,636 372,771
Refundable income taxes...................... 162,096
Other current assets......................... 24,762 163,887
----------- -----------
Total current assets...................... 736,843 3,255,498
----------- -----------
Property and equipment, net................... 34,002,239 59,355,184
Deferred loan costs, net of accumulated
amortization of $250,865 and $48,281
in 1994 and 1995, respectively............... 293,811 244,991
Non-compete agreement, net of
accumulated amortization of $56,250
and $125,000 in 1994 and 1995,
respectively................................. 93,750 25,000
Pre-opening costs, net of accumulated
amortization of $274,057 and
$390,989 in 1994 and 1995, respectively...... 116,316 209,974
Deferred public offering costs................ 743,124
Other assets.................................. 236,395 285,726
----------- -----------
$36,222,478 $63,376,373
=========== ===========
LIABILITIES AND CAPITAL (DEFICIT)
Current liabilities:
Accounts payable............................. $ 1,213,670 $ 1,876,622
Accrued expenses:
Property taxes............................. 323,548 322,584
Interest................................... 275,712 18,136
Compensation............................... 12,958 245,581
Other...................................... 213,951 364,986
Current portion of long-term debt............ 2,896,789
Current portion of payable for
non-compete agreement....................... 75,000 75,000
----------- -----------
Total current liabilities................. 5,011,628 2,902,909
----------- -----------
Long-term debt................................ 30,922,848 4,000,000
Notes payable to shareholders and
partners..................................... 1,383,500
Payable for non-compete agreement............. 75,000
Deferred income taxes......................... 4,827,410
Commitments
Third party investors' interest............... 76,959
----------- -----------
Total liabilities......................... 37,469,935 11,730,319
----------- -----------
Capital(deficit):
Preferred stock, par value $.01 per
share, 10,000,000 shares authorized,
none issued or outstanding
Common stock, par value $.01 per share,
50,000,000 shares authorized,
5,115,000 shares issued and outstanding..... 210,000 51,150
Additional paid-in capital................... 128,296 50,490,353
Treasury stock............................... (75,000)
Retained earnings (deficit).................. (1,209,108) 1,104,551
Partners' deficit............................ (301,645)
----------- -----------
Total capital (deficit)................... (1,247,457) 51,646,054
----------- -----------
$36,222,478 $63,376,373
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
Page 2
STUDIO PLUS HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995
----------- ------------ -----------
Revenue:
Room revenue........................................................... $ 9,984,966 $11,830,374 $15,308,835
Other revenue.......................................................... 324,135 322,159 581,416
----------- ----------- -----------
Total revenue..................................................... 10,309,101 12,152,533 15,890,251
----------- ----------- -----------
Costs and expenses:
Property operating expenses............................................ 4,457,662 5,256,359 6,374,355
Corporate operating expenses........................................... 792,295 880,511 2,113,731
Depreciation and amortization.......................................... 1,312,968 1,472,358 1,912,132
Interest expense, net of interest income of $161,591 in 1995........... 2,498,125 2,531,990 1,356,082
----------- ----------- -----------
Total costs and expenses.......................................... 9,061,050 10,141,218 11,756,300
----------- ----------- -----------
Income before third party investor's interests, income taxes
and extraordinary loss........................................ 1,248,051 2,011,315 4,133,951
Third party investors' interest........................................ (197,714) (358,432) (141,612)
----------- ----------- -----------
Income before income taxes and extraordinary loss.............. 1,050,337 1,652,883 3,992,339
Provision for income taxes............................................. -- -- 1,670,459
-----------
Income before extraordinary loss............................... 1,050,337 1,652,883 2,321,880
Extraordinary loss, net of tax benefit................................. (184,618)
-----------
Net income..................................................... $ 1,050,337 $ 1,652,883 $ 2,137,262
=========== =========== ===========
Pro forma income data: (Note 9)
Income before extraordinary loss....................................... $ 1,050,337 $ 1,652,883 $ 2,321,880
Pro forma adjustment for income taxes.................................. (390,725) (614,872) 176,458
----------- ----------- -----------
Pro forma income before extraordinary loss............................. 659,612 1,038,011 2,498,338
Extraordinary loss..................................................... -- -- (184,618)
-----------
Pro forma net income................................................... $ 659,612 $ 1,038,011 $ 2,313,720
=========== =========== ===========
Pro forma earnings per share: (Note 9)
Pro forma income before extraordinary loss............................. $0.75
Extraordinary loss..................................................... (0.06)
-----------
Pro forma net income................................................... $0.69
===========
Weighted average number of common shares outstanding..................... 3,330,069
The accompanying notes are an integral part of
the consolidated financial statements.
Page 3
STUDIO PLUS HOTELS, INC.
CONSOLIDATED STATEMENTS OF CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------
RETAINED
COMMON ADDITIONAL TREASURY EARNINGS PARTNERS'
STOCK PAID-IN CAPITAL STOCK (DEFICIT) DEFICIT TOTAL
------ --------------- -------- ---------- --------- -----------
Balance, January 1, 1993............ $ 190,000 $ 106,846 $(1,602,455) $(394,265) $(1,699,874)
Cash dividends.................... (890,548) (890,548)
Partners' draws................... (70,678) (70,678)
Net income........................ 885,398 164,939 1,050,337
--------- ----------- -------- ----------- --------- -----------
Balance, December 31, 1993.......... 190,000 106,846 (1,607,605) (300,004) (1,610,763)
--------- ----------- -------- ----------- --------- -----------
Issuance of stock................. 20,000 20,000
Cash dividends.................... (1,139,111) (1,139,111)
Partners' draws................... (116,916) (116,916)
Conversion of note payable
to stock......................... 21,450 21,450
Repurchase of treasury stock...... $(75,000) (75,000)
Net income........................ 1,537,608 115,275 1,652,883
--------- ----------- -------- ----------- --------- -----------
Balance, December 31, 1994.......... 210,000 128,296 (75,000) (1,209,108) (301,645) (1,247,457)
--------- ----------- -------- ----------- --------- -----------
Cash dividends.................... (1,747,956) (1,747,956)
Partners' draws................... (547,074) (547,074)
Reclassification of shareholders'
and partners' interest to paid-in
capital in connection with
S corporation and partnership
termination...................... (210,000) (1,631,115) 75,000 1,250,795 515,320
Purchase of minority
shareholders' interest........... 3,955,515 673,558 333,399 4,962,472
Proceeds from initial public
offering of stock, net.......... 51,150 48,037,657 48,088,807
Net income........................ 2,137,262 2,137,262
--------- ----------- -------- ----------- --------- -----------
Balance, December 31, 1995.......... $ 51,150 $50,490,353 $ -- $ 1,104,551 $ -- $51,646,054
========= =========== ======== =========== ========= ===========
The accompanying notes are an integral part of
the consolidated financial statements.
Page 4
STUDIO PLUS HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995
---- ---- ----
Cash flows from operating activities:
Net income................................................................ $ 1,050,337 $ 1,652,883 $ 2,137,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Third party investors' interest.......................................... 197,714 358,432 141,612
Depreciation............................................................. 1,135,611 1,305,119 1,648,780
Amortization............................................................. 177,357 167,239 263,352
Loss (gain) on sale of assets............................................ 12,812 2,746 (72,393)
Bad debt expense......................................................... 140,400 47,892
Deferred income tax expense.............................................. 593,186
Extraordinary loss....................................................... 184,618
Change in:
Accounts receivable..................................................... (49,160) (199,039) (166,027)
Other current assets.................................................... 12,394 (24,212) (139,125)
Other assets............................................................ (42,399) (171,680) (49,597)
Accounts payable........................................................ (10,718) (154,897) 167,354
Accrued expenses........................................................ 14,378 82,816 87,065
----------- ----------- ------------
Net cash provided by operating activities.............................. 2,498,326 3,159,807 4,843,979
----------- ----------- ------------
Cash flows from investing activities:
Purchase of land.......................................................... (409,220) (918,969) (4,902,413)
Expenditure for building and improvements................................. (1,398,463) (3,950,654) (8,273,199)
Purchase of furniture, fixtures and equipment............................. (921,522) (923,927) (2,493,270)
Sale of assets............................................................ 87,500 4,000 132,812
Additions to preopening costs............................................. (49,992) (101,175) (125,826)
Purchase of third party investors' interest............................... (1,500,000)
----------- ----------- ------------
Net cash used in investing activities.................................. (2,691,697) (5,890,725) (17,161,896)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from long-term debt.............................................. 5,521,492 4,319,832 6,916,222
Proceeds from notes payable to shareholders and partners.................. 560,000 875,000 1,727,500
Principal payments on long-term debt...................................... (3,831,133) (517,314) (36,810,859)
Principal payments on notes payable to shareholders and partners.......... (613,500) (567,675) (3,111,000)
Partners' draws........................................................... (70,678) (116,916)
Cash dividends............................................................ (890,548) (1,139,111) (2,295,030)
Distribution to third party investors..................................... (197,714) (281,473)
Proceeds from sale of stock............................................... 20,000
Proceeds from public offering, net of underwriting costs.................. 49,731,750
Additions to deferred loan costs.......................................... (97,821) (27,320) (336,250)
Additions to public offering costs........................................ (237,826) (1,405,117)
----------- ----------- ------------
Net cash provided by financing activities.............................. 380,098 2,327,197 14,417,216
----------- ----------- ------------
Net increase (decrease) in cash........................................ 186,727 (403,721) 2,099,299
Cash at beginning of periods............................................... 674,439 861,166 457,445
----------- ----------- ------------
Cash at end of periods..................................................... $ 861,166 $ 457,445 $ 2,556,744
----------- ----------- ------------
Supplemental cash flow disclosures:
Interest paid, net of amount capitalized.................................. $ 2,477,164 $ 2,539,213 $ 1,775,249
----------- ----------- ------------
Income taxes paid......................................................... $ 1,182,200
------------
Non-cash transactions:
Contract payable for non-compete agreement................................ $ 150,000
-----------
Additions to public offering costs included in accounts payable........... $ 505,298
-----------
Conversion of note payable to stock....................................... $ 21,450
-----------
Repurchase of treasury stock for note payable............................. $ 75,000
-----------
Public offering costs netted against offering proceeds.................... $ 1,642,943
------------
Purchase of minority shareholders' interest for stock and assumption of
deficit capital balances................................................. $ 4,962,472
=============
The accompanying notes are an integral part of
the consolidated financial statements.
Page 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Business
Studio Plus Hotels, Inc. and its wholly owned subsidiary, Studio Plus
Properties, Inc. (together, the "Company") own, develop and operate StudioPLUS
extended stay hotels and own the rights to the related trade name and service
marks for "StudioPLUS." StudioPLUS hotels are designed to combine the
convenience of a hotel with many of the comforts of an apartment in order to
provide affordable lodging for extended stay guests.
At December 31, 1995 the Company had 22 hotels in operation and 7 under
construction. The hotels open and under construction are located in eight states
in the Midwest and Southeast United States.
Corporate Organization and Initial Public Offering
The Company was formed on December 19, 1994, to acquire, through merger and
exchange of partnership interests all of the assets of Studio Plus, Inc. and the
corporations and partnerships (collectively, the "Predecessor Entities") which
owned and operated StudioPLUS extended stay hotels. On June 26, 1995, the
Company completed an initial public offering of 3,565,000 shares of Common
Stock, including shares issued as a result of the exercise of the underwriters'
over-allotment option, at $15.00 per share (the "IPO") and received net proceeds
of approximately $48 million, net of underwriting discounts and IPO expenses.
Just prior to completion of the IPO, the Company acquired through merger and
exchange of Common Stock for partnership interest, the assets of the Predecessor
Entities which owned and operated all of the StudioPLUS extended stay hotel
properties then in operation or under development (the "Corporate
Organization"). The Company issued an aggregate of 1,548,500 shares of Common
Stock and paid $1.5 million of cash to the partners and shareholders of the
Predecessor Entities. The acquisition of the interests of the controlling
shareholder or partner and affiliates of the Predecessor Entities, has been
accounted for as if it were a pooling of interests with no increase in the
carrying value for the interests acquired. The acquisition of the third party
investors' interests has been accounted for as a purchase which resulted in an
increase to the carrying value of the underlying assets acquired of $10,475,000.
Pro forma results of operations have not been presented as the effects of the
acquisition of the third party investors' interests were not significant.
Principles of Consolidation
The December 31, 1995 consolidated financial statements presented herein
reflect Studio Plus Hotels, Inc. and its wholly owned subsidiary Studio Plus
Properties, Inc. for the period subsequent to June 25, 1995 and combined
information of the Predecessor Entities for the period prior to June 26, 1995.
Page 6
The December 31, 1994 accompanying financial statements reflect combined
financial data for the Predecessor Entities.
All significant intercompany balances and transactions have been eliminated
in the consolidation and combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Estimates
The preparation of the consolidated 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
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost, including interest and salaries
and related expenses for site design and construction supervision incurred
during the construction period. Expenditures for replacements and improvements
are capitalized. Maintenance and repairs are charged to operations as incurred.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets. A summary of the estimated useful lives of the
assets are as follows:
Buildings and improvements......................................... 40 years
Furniture, fixtures and equipment.................................. 5-10 years
The carrying amounts of major assets sold, retired, or otherwise disposed
of, and the related accumulated depreciation amounts are eliminated from the
accounts. Any resulting gain or loss is included in income.
Deferred Loan Costs
The Company has incurred costs in obtaining financing. These costs have
been deferred and are being amortized over the life of the loan using the
straight-line method.
Page 7
Preopening Costs
The Company capitalizes compensation, promotional costs and other costs
relating to the opening of new properties. Amortization is provided using the
straight-line method over a five year period for costs incurred through December
31, 1993. Commencing January 1, 1994 these costs are amortized using the
straight-line method over a twelve-month period.
Concentration of Credit Risk
The Company maintained deposits totaling $239,940 and $619,239 at December
31, 1994 and 1995, respectively with one bank. Deposits in excess of $100,000
are not insured by the Federal Deposit Insurance Corporation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1994 1995
------------ ------------
Hotel property and equipment:
Land.................................. $ 5,696,635 $12,403,803
Building and improvements............. 24,851,450 40,824,006
Furniture, fixtures and equipment..... 5,829,445 8,242,087
Construction in process............... 2,510,876 4,249,605
----------- -----------
38,888,406 65,719,501
Less accumulated depreciation...... (5,089,078) (6,678,808)
----------- -----------
33,799,328 59,040,693
Corporate property and equipment:
Furniture, fixtures and equipment..... 353,858 473,067
----------- -----------
Less accumulated depreciation...... (150,947) (158,576)
----------- -----------
202,911 314,491
----------- -----------
Total property and equipment.. $34,002,239 $59,355,184
=========== ===========
Included in December 31, 1994 and 1995 accounts payable are amounts related
to purchases of property and equipment totaling approximately $677,000 and
$1,609,000, respectively. In addition, interest capitalized and included in the
cost of building and improvements for December 31, 1994 and 1995 was $152,679
and $157,592, respectively.
4. LONG-TERM DEBT
On May 23, 1995 the Company entered into a $30 million revolving credit
agreement (the "Line of Credit") maturing in June 1998 to fund future
development and construction of additional hotels and for working capital.
Outstanding indebtedness under the credit agreement bears interest at either a
rate based upon the London Interbank Offering Rate or the prime interest rate,
at the selection of the Company. The interest rate on the outstanding
indebtedness adjusts periodically based upon prevailing rates. Interest is
payable monthly with the unpaid principal due at maturity. The Line of Credit
contains certain financial covenants, including maintenance
Page 8
of a minimum debt service coverage ratio and a maximum ratio of debt to tangible
net worth and limitations upon the incurrence of additional debt without the
consent of the lender.
At December 31, 1995, long term debt consisted of two separate loan
segments totaling $4,000,000, with a weighted average interest rate of 8.15%.
Borrowings under the Line of Credit are collateralized by 17 hotels with a
carrying value of $34,359,564 at December 31, 1995 and rents, profits, leases
and intangible property at all properties now or hereafter owned by the Company.
In February 1996 the Company amended its Line of Credit to increase its
borrowing capacity to $50 million.
The Company used the net proceeds of the IPO to retire approximately $36.8
million of outstanding mortgage debt, which was guaranteed by the former
shareholders and partners of the Predecessor Entities, and approximately $3.1
million of loans from shareholders. In connection with the early extinguishment
of mortgage debt, the Company incurred an extraordinary loss of $184,618, net of
$123,079 in taxes, relating to the write-off of unamortized loan fees.
5. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax liabilities and assets for the
temporary differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities using currently enacted tax rates.
Deferred income taxes in the amount of $4,827,410 consists primarily of timing
differences relating to depreciation resulting from the increase in carrying
value of assets. The increase in the carrying value of assets is due to the
acquisition of third party investors' interests in connection with the Corporate
Organization.
The components of the provision for income taxes reflected in the
consolidated statement of operations for the year ended December 31, 1995 are as
follows:
Currently payable:
Federal........................................................... $ 929,183
State............................................................. 148,000
----------
1,077,183
----------
Deferred taxes:
Federal........................................................... 507,615
State............................................................. 85,661
----------
593,276
----------
Provision for income taxes.......................................... $1,670,459
==========
Prior to the Corporate Organization, the Company's operations were
conducted through S corporations and partnerships. Accordingly, the deferred tax
provision includes approximately $540,000 relating to recognition of a net
deferred tax liability representing temporary differences existing on the date
of the Corporate Organization. Prior to the Corporate Organization, income taxes
on earnings were paid by the shareholders and partners of the Predecessor
Entities.
Page 9
A reconciliation of the statutory federal tax rate to the company's
effective income tax rate follows:
Statutory federal tax rate.............................................. 34.0%
Effect of termination of S corporation
and partnership status with the
Corporate Organization................................................. 13.5
S corporation and partnership income
for which no current income taxes were
provided............................................................... (10.0)
State income taxes, net of federal
benefit................................................................ 2.5
Other................................................................... 1.8
------
41.8%
======
6. OPERATING LEASES
The Company leases office space under two operating leases expiring in 1996
and 1997. The leases are renewable for various periods. The future minimum
rental payments under the operating leases as of December 31, 1995 are as
follows:
1996................................................................... $155,164
1997................................................................... 138,964
--------
Total minimum payments required.................................... $294,128
========
Rent expense on the office lease and other leases expiring during 1995 was
$132,864, $135,876 and $149,228 for 1993, 1994 and 1995, respectively.
7. RIGHTS AGREEMENT
Under the terms of the Company's Rights Agreement, one right (a "Right") is
attached to each share of Common Stock. Initially, each Right will entitle the
registered holder to purchase from the Company one one-hundredth of a share (a
"Unit") of Class A Cumulative Participating Preferred Stock ("Class A Preferred
Stock"), of which 100,000 shares have been reserved for issuance pursuant to the
Rights Agreement. Each Unit of Class A Preferred Stock is structured to be the
economic equivalent of one share of Common Stock. The exercise price per Right
will be $56 subject to adjustment (the "Purchase Price").
The Rights Agreement also provides that if any person becomes an Acquiring
Person (as defined below), proper provision shall be made so that each holder of
a Right (except as set forth below) will thereafter have the right to receive,
upon exercise and payment of the Purchase Price, Class A Preferred Stock or
Common Stock at the option of the Company (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to twice the
amount of the Purchase Price.
The Rights will separate from the Common Stock and a distribution of Rights
Certificates will occur (the "Distribution Date") upon the earlier of (i) 10
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person")
Page 10
has acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding shares of Common Stock (the "Stock Acquisition Date"),
or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially becoming an
Acquiring Person.
Effective February 27, 1996, the Rights Agreement was amended to lower the
percentage of beneficial ownership required to be deemed an Acquiring Person
from 20% to 15% of the outstanding shares of Common Stock of the Company (the
"Ownership Reduction"), and to add a provision which permits a person who
becomes an Acquiring Person, solely because of the Ownership Reduction, to
reduce its beneficial ownership of Common Stock to less than 15% by the close of
business on the tenth business day following notice from the Company that such
person's beneficial ownership equals or exceeds 15% of the outstanding shares of
Common Stock to avoid classification as an Acquiring Person.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger, statutory share exchange, or other business
combination in which the Company is not the surviving corporation, or (ii) 50%
or more of the Company's assets or earning power is sold or transferred, each
holder of a Right (except as set forth below) shall thereafter have the right to
receive, upon exercise and payment of the Purchase Price, common stock of the
acquiring company having a value equal to twice the Purchase Price. The events
set forth in this paragraph and in the preceding paragraphs are referred to as
the "Triggering Events." The Rights are not exercisable until the Distribution
Date and will expire at the close of business on June 30, 2000, unless earlier
redeemed or exchanged by the Company as described below or unless such
expiration date is extended pursuant to the Rights Agreement.
The Purchase Price payable, and the number of shares of Class A Preferred
Stock, Common Stock or other securities or property issuable upon exercise of
the Rights, are subject to adjustment from time to time to prevent dilution.
At any time after any person becomes an Acquiring Person, the Company may
exchange all or part of the Rights (except as set forth below) for shares of
Common Stock (an "Exchange") at an exchange ratio of one share per Right, as
appropriately adjusted to reflect any stock split or similar transaction.
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $0.01 per
Right (the "Redemption Price").
8. STOCK OPTIONS
The Company has two stock option plans, the 1995 Stock Incentive Plan (the
"1995 Plan") and the 1995 Non-Employee Directors' Stock Incentive Plan (the
"Directors Plan"). Under the 1995 Plan, an aggregate of 500,000 shares of common
stock have been reserved for awards. Grants or awards are issued at the
discretion of the Compensation Committee of the Board of
Page 11
Directors and may be in the form of stock options, stock appreciation rights,
restricted stock awards or performance share awards. Options granted to date
under the 1995 Plan expire ten years from the grant date. Any vesting period is
at the discretion of the Compensation Committee. At December 31, 1995 options to
acquire an aggregate of 474,500 shares of Common Stock had been granted under
the 1995 Plan at exercise prices ranging from $15.00 to $23.00 per share.
Options to acquire an aggregate of 200,000 shares of Common Stock were
exercisable at December 31, 1995. No options under the 1995 Plan were exercised
in 1995.
Options granted under the Directors' Plan vest over a four year period from
the grant date and expire in ten years. The option price per share may not be
less than the fair market value of a share on the date the option is granted.
Under the Directors' Plan at December 31, 1995, options to acquire 30,000 and
10,000 shares had been granted at exercise prices per share of $15.00 and
$21.63, respectively. No options were exercisable under the Directors Plan at
year end or were exercised in 1995.
9. EARNINGS PER SHARE
Prior to June 26, 1995, the assets of the Company were owned and operated
by the Predecessor Entities. The outstanding shares or other equity interests of
the Predecessor Entities differ substantially from the shares of Common Stock of
the Company outstanding after the IPO. Accordingly, the Company believes that
the presentation of historical per share information for the periods prior to
the IPO is not meaningful.
The pro forma earnings per share for the year ended December 31, 1995 has
been calculated by dividing the pro forma net income by the weighted average
number of shares of Common Stock deemed to be outstanding. Income before
extraordinary loss has been adjusted to pro forma income before extraordinary
loss by reflecting the tax that would have been paid by the Company if it had
been subject to income tax for the full year, assuming a 37.2% effective tax
rate. Prior to June 26, 1995, the Company was not fully subject to income taxes
due to the election of S corporation and partnership tax status by the
Predecessor Entities. If the Company had been subject to tax, it would have
incurred income tax expense of approximately $391,000, $615,000 and $1,371,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
The Company has also computed supplemental net income per common share to
be $0.82 for the year ended December 31, 1995. Supplemental net income of
approximately $3,549,000 has been computed by adjusting historical net income
for: (i) the elimination of interest expense on the debt repaid with a portion
of the proceeds of the IPO; (ii) the elimination of third party investors'
interest in the Predecessor Entities; (iii) the elimination of the extraordinary
loss; and (iv) provision for income taxes based on an effective tax rate of
37.2%. Supplemental weighted average number of common shares outstanding
(4,309,958 shares) is based on outstanding common shares from the beginning of
the period comprised of the following: (i) 1,548,500 shares issued to the
controlling shareholder and other minority investors; (ii) 100,000 shares issued
to acquire a third party investor's interest; and (iii) 2,661,458 shares issued
to fund the retirement of debt.
Page 12
10. RELATED PARTY TRANSACTIONS
Borrowings from partners and shareholders of the Predecessor Entities were
$875,000 and $1,727,500 for 1994 and 1995, respectively. Principal repayments on
loans from shareholders and partners of the Predecessor Entities were $567,675
and $3,111,000 for 1994 and 1995, respectively. In addition, the Company
incurred interest expense of $73,625 and $156,851 for the same periods,
respectively, on shareholder debt.
Prior to the IPO, the Company distributed $2,295,030 to the shareholders of
the Predecessor Entities in accordance with the merger agreements.
11. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets" which is effective for
years beginning after December 15, 1995. The statement requires that long-lived
assets and certain intangibles to be held and used by entities be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If during the review the sum
of the expected future cash flows is less than the carrying amount of the asset,
an impairment loss is recognized. The Company believes that the adoption of this
standard will not have a material impact on its financial condition or results
of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for
transactions entered into after December 15, 1995. The pronouncement allows the
Company to continue its current method of accounting for stock options or use
the method prescribed in SFAS No. 123. The Company intends to continue its
current accounting method for stock options. Therefore, the impact of adopting
the statement will not materially affect the future reported results of
operations or the financial condition of the Company.
Page 13
Studio Plus Hotels, Inc.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 2
Condensed Consolidated Statements of Operations for the three
month periods ended September 30, 1996 and 1995 3
Condensed Consolidated Statements of Operations for the nine
month periods ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Page 1
Studio Plus Hotels, Inc.
Condensed Consolidated Balance Sheets
(Thousands)
ASSETS September 30, December 31,
1996 1995
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 31,663 $ 2,557
Investments available-for-sale 18,227
Accounts receivable, net of allowance of $75 and
$71, respectively 739 372
Refundable income taxes 162
Other current assets 502 164
---------- ---------
Total current assets 51,131 3,255
---------- ---------
Property and equipment, net 91,426 59,630
Deferred loan costs, net of accumulated amortization
of $166 and $48, respectively 383 245
Preopening costs, net of accumulated amortization
of $633 and $391, respectively 552 210
Other assets 6 36
---------- ---------
$143,498 $63,376
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,544 $ 1,877
Property tax 512 322
Compensation 522 246
Income taxes payable 1,139
Accrued expenses 641 458
---------- ---------
Total current liabilities 6,358 2,903
---------- ---------
Long-term debt 4,000
Deferred income tax 4,846 4,827
Shareholders' equity:
Common stock 125 51
Additional paid-in capital 127,207 50,490
Net unrealized gains on investments 29
Retained earnings 4,933 1,105
---------- ---------
Total shareholders' equity 132,294 51,646
---------- ---------
$143,498 $63,376
========== =========
See accompanying notes to financial statements
Page 2
Studio Plus Hotels, Inc.
Condensed Consolidated Statements of Operations
(Thousands, except earnings per share data)
(Unaudited)
Three Month Periods
Ended September 30,
--------------------------------
1996 1995
------------- ------------
Revenue:
Room revenue $6,303 $4,353
Other revenue 210 141
---------- ----------
Total revenue 6,513 4,494
---------- ----------
Costs and expenses:
Property operating expenses 2,477 1,660
Corporate operating expenses 1,010 705
Depreciation and amortization 876 450
Interest income, net (722) (89)
---------- ----------
Total costs and expenses 3,641 2,726
---------- ----------
Income before income taxes 2,872 1,768
Provision for income taxes 1,120 705
---------- ----------
Net income $1,752 $1,063
========== ==========
Earnings per common and common equivalent shares,
primary and fully diluted (Note 4) $0.14 $0.14
========== ==========
Weighted average number of common and common
equivalent shares outstanding (note 4) 12,816,903 7,672,500
See accompanying notes to financial statements
Page 3
Studio Plus Hotels, Inc.
Condensed Consolidated Statements of Operations
(Thousands, except earnings per share data)
(Unaudited)
Nine Month Periods
Ended September 30,
----------------------------
1996 1995
---------- -------------
Revenue:
Room revenue $16,087 $11,397
Other revenue 553 434
------- -------
Total revenue 16,640 11,831
------- -------
Costs and expenses:
Property operating expenses 6,862 4,635
Corporate operating expenses 2,766 1,450
Depreciation and amortization 2,312 1,293
Interest (income) expense, net (1,577) 1,422
------- -------
Total costs and expenses 10,363 8,800
Income before third party investors' interest and ------- -------
income taxes 6,277 3,031
Third party investors' interest (142)
------- -------
Income before income taxes 6,277 2,889
Provision for income taxes 2,448 1,280
------- -------
Income before extraordinary loss 3,829 1,609
Extraordinary loss (185)
------- -------
Net income $ 3,829 $ 1,424
======= =======
Pro forma income data: (Note 4)
Income before income taxes $ 1,609
Pro forma provision for income taxes 125
-------
Pro forma income before extraordinary loss 1,734
Extraordinary loss (185)
-------
Pro forma net income $ 1,549
=======
Earnings per common and common equivalent shares,
primary and fully diluted (Note 4) $ 0.34
=======
Pro forma earnings per share: (Note 4)
Income before extraordinary loss $ 0.44
Extraordinary loss (0.05)
-------
Net income $ 0.39
=======
Weighted average number of common and common
equivalent shares outstanding (Note 4) 11,180,562 3,968,570
See accompanying notes to financial statements
Page 4
Studio Plus Hotels, Inc.
Condensed Consolidated Statements of Cash Flows
(Thousands)
(Unaudited)
Nine Month Periods
Ended September 30,
------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net Income $ 3,829 $ 1,424
Adjustments to reconcile net income to net cash provided
by operating activities:
Third party investors' interest 142
Depreciation and amortization 2,312 1,293
Gain on sale of investments and other assets (9) (70)
Bad debt expense 61 32
Extraordinary loss 185
Deferred income tax liability 540
Change in:
Accounts receivable (428) (162)
Other current assets (338) (231)
Other assets 6 (200)
Accounts payable 94 139
Income taxes 1,301
Accrued expenses 724 408
---------- ----------
Net cash provided by operating activities 7,552 3,500
---------- ----------
Cash flows from investing activities:
Expenditures for land, buildings, improvements, furniture and
fixtures (32,150) (7,994)
Sale of assets 156
Purchase of available-for-sale investments (39,171)
Proceeds from sale/maturity of available-for-sale investments 21,000
Additions to preopening costs (584) (50)
Purchase of third party investors' interest (1,500)
---------- ----------
Net cash used in investing activities (50,905) (9,388)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 7,000 3,979
Proceeds from notes payable to shareholders and partners 1,728
Principal payments on long-term debt (11,075) (37,874)
Principal payments on notes to shareholders (3,111)
Cash dividends (2,295)
Proceeds from public offering, net of underwriting costs 77,236 49,732
Proceeds from the exercise of stock options 7
Additions to deferred loan costs (256) (334)
Public offering costs (453) (1,365)
---------- ----------
Net cash provided by financing activities 72,459 10,460
---------- ----------
Net increase in cash and cash equivalents 29,106 4,572
Cash and cash equivalents, at beginning of periods 2,557 457
---------- ----------
Cash and cash equivalents, at end of periods $ 31,663 $ 5,029
========== ==========
See accompanying notes to financial statements
Page 5
Studio Plus Hotels, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain information
and footnotes required by generally accepted accounting principles for complete
financial statements have been omitted. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, which are necessary for
a fair presentation of financial position and results of operations have been
made. These interim financial statements should be read in conjunction with the
Studio Plus Hotels, Inc. 1995 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
All significant intercompany balances and transactions have been
eliminated.
(2) Income Taxes
Net income for periods prior to the completion of the Company's initial
public offering on June 26, 1995 (the "IPO") excludes taxes on income. Prior to
the IPO, the Company was organized as S-corporations and partnerships (the
"Predecessor Entities"), and therefore, was not subject to income tax.
(3) Stock Split
On July 9, 1996, a three-for-two split of the Company's Common Stock was
effected in the form of a stock dividend of three shares of Common Stock for
each two shares of Common Stock outstanding at the close of business on June 20,
1996. Effective with the stock split, Common Stock outstanding increased from
8,351,898 to 12,527,833 shares. Accordingly, all applicable share and per share
data have been adjusted for the stock split.
(4) Earnings Per Share
The weighted average number of common and common equivalent shares used in
the computation of earnings per share for the three months ended September 30,
1996, are as follows:
Weighted average common shares issued 12,527,833
Dilutive effect of stock options 289,070
----------
Weighted average number of common and
common equivalent shares 12,816,903
The weighted average number of common and common equivalent shares used in
the computation of earnings per share for the nine months ended September 30,
1996, are as follows:
Weighted average common shares issued 10,873,823
Dilutive effect of stock options 306,739
----------
Weighted average number of common and
common equivalent shares 11,180,562
The pro forma earnings per share for the three month and nine month periods
ended September 30, 1995, have been calculated by dividing pro forma net income
by the weighted average number of shares of Common Stock deemed to be
outstanding. Net income has been adjusted to pro forma net income by reflecting
the tax that would have been paid by the Company if it had been subject to
income tax for the full period, assuming a 40.0% effective tax rate.
The Company believes that the earnings per share calculations discussed
above, required in accordance with Accounting Principles Board Opinion No. 15,
are not meaningful for periods prior to the IPO. Rather, if certain adjustments
are made to the combined historical operating results for the Predecessor
Entities and 7,672,500 shares are assumed outstanding the adjusted net income
per share for the nine months ended September 30, 1995 would be $0.32, compared
to $0.34 for the nine months ended September 30, 1996.
(5) Reclasssifications
Certain amounts within the prior year income statement captions have been
reclassified to provide consistency with current year presentation. These
reclassifications have no effect on net income of the prior year.
Page 6