SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 0-27360
_____________
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 EAST LAS OLAS BOULEVARD, FORT LAUDERDALE, FL 33301
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (954) 713-1600
_____________
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
----- -----
At November 7, 1997, the registrant had issued and outstanding an aggregate of
95,570,621 shares of Common Stock.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
ASSETS
September 30, December 31,
1997 1996 (1)
--------------- -----------------
Current assets:
Cash and cash equivalents............................................................... $ 32,848 $ 224,325
Accounts receivable..................................................................... 6,003 1,665
Prepaid expenses........................................................................ 1,582 796
Deferred income taxes................................................................... 410 1,143
Other current assets.................................................................... 466 1,580
--------------- -----------------
Total current assets ............................................................... 41,309 229,509
Property and equipment, net............................................................... 842,981 428,749
Deferred loan costs....................................................................... 7,504 9,519
Other assets.............................................................................. 1,449 658
--------------- -----------------
$ $893,243 $ $668,435
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ $ 23,887 $ 14,827
Accrued salaries and related expenses................................................... 3,634 1,694
Due to related parties.................................................................. 7 204
Other accrued expenses.................................................................. 6,195 3,463
Accrued retainage....................................................................... 17,252 11,371
Deferred revenue........................................................................ 1,075 179
--------------- -----------------
Total current liabilities............................................................ 52,050 31,738
--------------- -----------------
Deferred income taxes..................................................................... 12,683 7,983
--------------- -----------------
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, 95,378,490 and 83,666,383
shares issued and outstanding, respectively............................................ 954 837
Additional paid-in capital.............................................................. 820,528 619,870
Retained earnings....................................................................... 7,028 8,007
--------------- -----------------
Total stockholders' equity........................................................... 828,510 628,714
--------------- -----------------
$ 893,243 $ 668,435
=============== =================
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
1
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- --------------
Revenue....................................................... $ 38,773 $ 11,923 $ 87,564 $ 25,552
--------- --------- --------- ---------
Property operating expenses................................... 17,436 4,727 39,923 10,451
Corporate operating and property management expenses.......... 8,102 4,610 20,846 11,772
Merger, financing and other charges........................... 19,895
Depreciation and amortization................................. 5,274 1,760 13,344 3,742
--------- --------- --------- ---------
Total costs and expenses................................. 30,812 11,097 94,008 25,965
--------- --------- --------- ---------
Income (loss) from operations................................. 7,961 826 (6,444) (413)
Interest income............................................... 1,446 5,204 8,880 9,633
--------- --------- --------- ---------
Income before income taxes.................................... 9,407 6,030 2,436 9,220
Provision for income taxes.................................... 3,763 2,411 3,415 3,687
--------- --------- --------- ---------
Net income (loss)............................................. $ 5,644 $ 3,619 $ (979) $ 5,533
========= ========= ========= =========
Net income (loss) per common share............................ $ 0.06 $ 0.04 $ (0.01) $ 0.08
========= ========= ========= =========
Weighted average common equivalent shares outstanding......... 96,793 84,794 93,786 69,629
========= ========= ========= =========
See notes to the unaudited condensed consolidated financial statements
2
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
----------------------------------
September 30, September 30,
1997 1996
--------------- -------------
Cash flows from operating activities:
Net income (loss).............................................................. $ (979) $ 5,533
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................................. 13,344 3,742
Bad debt expense.......................................................... 253 61
Merger costs.............................................................. 9,727
Deferred loan costs....................................................... 9,667
Write off of site deposits and preacquisition costs....................... 2,363 743
Deferred income taxes..................................................... 5,433 1,239
Changes in operating assets and liabilities............................... (5,516) 1,296
-------------- ------------
Net cash provided by operating activities.............................. 34,292 12,614
-------------- ------------
Cash flows from investing activities:
Acquisitions of extended stay properties..................................... (4,271)
Additions to property and equipment.......................................... (409,650) (145,830)
Payments for merger costs.................................................... (9,242)
Purchase of investments available for sale................................... (39,171)
Proceeds from sale of investments available for sale......................... 21,000
Payments for other assets.................................................... (1,179)
-------------- ------------
Net cash used in investing activities.................................. (418,892) (169,451)
-------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt................................................. 7,000
Payments of long-term debt and note payable.................................. (11,705)
Proceeds from issuance of common stock....................................... 200,775 365,729
Additions to deferred loan costs............................................. (7,652) (3,989)
Payments for prepaid registration costs...................................... (52)
-------------- ------------
Net cash provided by financing activities.............................. 193,123 356,983
-------------- ------------
Increase (decrease) in cash and cash equivalents.................................. (191,477) 200,146
Cash and cash equivalents at beginning of period.................................. 224,325 125,915
-------------- ------------
Cash and cash equivalents at end of period........................................ $ 32,848 $ 326,061
============== =============
Noncash investing and financing transactions:
Issuance of common stock for acquisition of extended stay
properties................................................................. $ $ 55,272
============== ============
Capitalized or deferred items included in accounts payable
and accrued liabilities.................................................... $ 39,655 $ 5,848
============== ============
Supplemental cash flow disclosures:
Cash paid for income taxes................................................... $ 1,129 $
============== ============
See notes to the unaudited condensed consolidated financial statements
3
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Extended Stay America, Inc. ("ESA") was organized on January 9, 1995 as a
Delaware corporation to develop, own and manage 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 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 unaudited condensed 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
significant intercompany accounts and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The condensed consolidated balance sheet data at December 31, 1996 was derived
from the audited consolidated financial statements of the Company but does not
include all disclosures required by generally accepted accounting principles.
Operating results for the three-month and nine-month periods ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in the Company's
supplemental financial statements included on Form S-3 filed July 29, 1997,
ESA's Annual Report on Form 10-K and SPH's Annual Report on Form 10-K for the
year ended December 31, 1996.
On May 9, 1996, the Board of Directors of the Company declared a 2-for-1 stock
split effected in the form of a stock dividend payable on July 19, 1996 to
shareholders of record as of the close of business on July 5, 1996. Accordingly,
Common Stock outstanding or issued, the weighted average number of common and
common equivalent shares and per share amounts have been retroactively adjusted
to give effect to the stock split.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per share" ("SFAS
128"). This statement establishes standards for computing and presenting
earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings per
share". SFAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS which excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. This statement also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement for all periods
presented. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15, with some modifications. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. Early adoption is
not permitted and restatement of all prior period EPS data presented after the
effective date is required.
Certain previously reported amounts have been reclassified to conform with the
current period's presentation.
4
NOTE 2 -- ACQUISITION 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 part of the Acquisitions, the Company assumed liabilities
aggregating approximately $470,000 under certain leases for personal property
which were subsequently paid.
The Acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of the properties are included in
the condensed consolidated statements of operations from the dates of
acquisition.
The following unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1996 is presented as if the
acquisition of all properties acquired during 1996 and the related issuances of
shares of Common Stock had occurred on January 1, 1996. The pro forma condensed
consolidated statement of operations 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.
Actual Pro forma
for the nine months for the nine months
ended ended
September 30, September 30,
1997 1996
--------------------- ------------------------
(in thousands, except per share data)
Total revenue.................................................. $ 87,564 $ 30,765
Total costs and expenses....................................... 94,008 28,261
--------------------- ------------------------
Income (loss) from operations................................. (6,444) 2,504
Interest income................................................ 8,880 9,633
--------------------- ------------------------
Income before income taxes 2,436 12,137
Provision (benefit) for income taxes 3,415 4,855
--------------------- ------------------------
Net (loss) income............................................. $ (979) $ 7,282
===================== ========================
Net income (loss) per common share........................... $ (0.01) $ 0.10
===================== ========================
Weighted average common shares outstanding................... 93,786 73,212
===================== ========================
NOTE 3 -- 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 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 those 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.
Income tax expense for the three-month and nine-month periods ended September
30, 1997 and 1996 differed from the amounts computed by applying the U.S.
Federal income tax rate of 35% primarily as a result of the impact of state and
local income taxes and as a result of nondeductible expenses associated with the
Merger recognized in the second quarter of 1997.
5
NOTE 4 -- LONG-TERM FINANCING
Effective September 26, 1997 the Company executed a credit agreement with
various banks pursuant to which the banks have agreed to provide a revolving
credit facility (the "Revolving Facility") of up to $500 million to the Company,
subject to the terms and conditions set forth, to be used for general corporate
purposes, including the construction and acquisition of extended stay hotel
properties. Availability under the Revolving Facility is dependent upon the
Company satisfying certain financial ratios, but in no event will availability
under the Revolving Facility be less than $200 million at any time.
The Revolving Facility will mature on December 31, 2002. Under the Revolving
Facility the Company will be required to repay indebtedness outstanding with the
net cash proceeds from certain sales of assets, from issuances of debt or equity
by the Company, and from insurance recovery events (subject to certain
reinvestment rights). The Company will also be required to repay indebtedness
outstanding under the Revolving Facility annually in an amount equal to 50% of
the Company's excess cash flow as defined in the credit agreement. In addition,
amounts borrowed under the Revolving Facility are secured by substantially all
of Company's assets.
Upon effectiveness of the Revolving Facility, the Company terminated two
mortgage loan facilities, which provided for an aggregate of $400 million in
available mortgage loans. Accordingly, the Company recorded a one-time pre-tax
charge of $9.7 million in the quarter ended June 30, 1997 which represented
deferred costs associated with the mortgage facilities.
NOTE 5 -- OTHER MATTERS
On April 11, 1997, the Company's shareholders 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.
In connection with the Merger, the Company recorded in the quarter ended June
30, 1997 a one-time pre-tax charge of $9.7 million representing merger expenses
and costs associated with the integration of SPH operations following the
Merger.
During the quarter ended June 30, 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 to the NYSE. The Common Stock began trading on the NYSE
on June 30, 1997. The Company recorded a one-time, pre-tax charge of $500,000 in
connection with listing of the Common Stock on the NYSE in the quarter ended
June 30, 1997.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Extended Stay America, Inc. ("ESA"), was organized on January 9, 1995, as a
Delaware corporation to develop, own, and manage extended stay lodging
facilities. Studio Plus Hotels, Inc. ("SPH") was formed in December 1994 and
acquired, through merger and exchange of SPH common stock for partnership
interests immediately prior to completion of the SPH initial public offering in
June 1995, all of the assets of Studio Plus, Inc. and the SPH predecessor
entities, which owned and operated StudioPLUS(TM) extended stay facilities. The
acquisition of the interests of the controlling shareholder or partner and
affiliates of the predecessor entities was accounted for as a pooling of
interests.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), and SPH
consummated a merger pursuant to which SPH was merged with and into Merger Sub
(the "Merger") and the 12,557,786 shares of SPH common stock that were
outstanding on the closing date were converted into 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. As a result of the Merger, SPH became a
wholly-owned subsidiary of ESA. The accompanying unaudited condensed
consolidated financial statements of ESA and SPH (together, the "Company") give
effect to the Merger, which has been accounted for as a pooling of interests.
The Company owns and operates three brands in the extended stay lodging
market--StudioPLUS hotels ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland Economy Studios(SM) ("Crossland"), each
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 guest rooms are typically smaller
than EXTENDED STAY rooms and are targeted for the budget category, while
StudioPLUS facilities serve the mid-price category and generally feature larger
guest rooms and also generally offer an exercise facility and a swimming pool.
The following is a summary of the Company's selected development and
operational results for the three months and the nine months ended September 30,
1997 and 1996.
Three months ended Nine months ended
September 30 September 30
---------------------------- -------------------------------
1997 1996 1997 1996
---------- ----------- ------------ ------------
Total Facilities Open (at Period End)...... 151 53 151 53
Total Facilities Developed................. 35 14 76 19
Total Facilities Acquired.................. 4 10
Average Occupancy Rate..................... 80% 79% 75% 81%
Average Weekly Room Rate................... $ 264 $ 276 $ 262 $ 264
Average occupancy rates are determined by dividing the guest rooms occupied on
a daily basis by the total number of guest rooms. Due to the Company's rapid
expansion, its overall average occupancy rate has been negatively impacted by
the lower occupancy typically experienced during the pre-stabilization period
for newly opened facilities. This negative impact on occupancy is expected to
diminish as the ratio of new property openings during a period to total
properties in operation at the end of the period decreases. 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 vary from standard room rates due primarily to (i) stays of
less than one week, which are charged at a higher nightly rate, (ii) higher
weekly rates for rooms which are larger than the standard rooms, and (iii)
additional charges for more than one person per room. Future occupancy and room
rates may be impacted by a number of factors including the number and geographic
location of new facilities, as well as the season in which such facilities
commence operations. There can be no assurance that the foregoing occupancy and
room rates can be maintained.
7
The following is a summary of the Company's development status as of
September 30, 1997, by brand. The Company expects to complete the construction
of the facilities currently under construction generally within the next twelve
months and to commence construction on the majority of the sites under option at
various dates in the future. There can be no assurance, however, that the
Company will complete the acquisition of the sites under option or, if acquired,
commence and complete construction within time periods historically experienced
by the Company. The Company's ability to complete development of sites under
construction and under option may be materially impacted by various factors
including zoning, permitting and environmental issues as well as weather-induced
construction delays.
EXTENDED
Crossland STAY StudioPLUS Total
---------------- ----------------- ----------------- -------------
Operating Facilities.................. 3 99 49 151
Facilities Under Construction......... 8 45 28 81
Sites Under Option.................... 43 50 26 119
Results of Operations
For the three months ended September 30, 1997 and 1996
Property Operations
The following is a summary of the properties operated during the specified
periods and the related average occupancy and weekly rates:
For the three months ended
-------------------------------------------------------------------------------
September 30, 1997 September 30, 1996
------------------------------------- -------------------------------------
Average Average
Facilities Average Weekly Facilities Average Weekly
Open Occupancy Rate Open Occupancy Rate
---------- --------- ------- ---------- --------- -------
Crossland.............. 3 72% $183 N/A N/A N/A
EXTENDED STAY.......... 99 79% $251 24 71% $257
StudioPLUS............. 49 84% $308 29 88% $293
---------- --------- ------- ---------- --------- -------
Total................ 151 80% $264 53 79% $276
========== ========= ======= ========== ========= =======
Because the 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. For both the EXTENDED
STAY brand and the combined brands, occupancy rates increased for the three
months ended September 30, 1997 as compared to the same period in 1996 primarily
due to a decrease in the ratio of newly opened properties to total properties.
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 changes in average weekly rates for the three months ended September 30,
1997 as compared with the same period for 1996 reflect primarily the geographic
dispersion of facilities opened since September 30, 1996 and the standard weekly
rates in those markets. In the case of the EXTENDED STAY properties, however,
average weekly rates for 1996 were abnormally high for properties located in the
Atlanta market in connection with the Olympic games. As a result, average weekly
rates for the EXTENDED STAY properties declined for the three months ended
September 30, 1997 as compared with the comparable period in 1996. Overall
average weekly rates declined for the three months ended September 30, 1997 as
compared to the same period in 1996 as a result of an increase in the lower
priced EXTENDED STAY and Crossland properties to 68% of all properties from 45%
for the same period in 1996.
The Company recognized total revenues for the three months ended September 30,
1997 of $38.8 million, compared with $11.9 million during the same period in
1996, an increase of $26.9 million. Approximately $27.0 million of the increased
revenue was generated by new or acquired properties and a decrease of
approximately
8
$98,000 in revenue was attributable to the 35 properties that were in operation
throughout both periods. The decrease in revenue was primarily attributable to
the EXTENDED STAY properties in the Atlanta area which experienced abnormally
high revenues during the Olympic games in 1996. Property operating expenses,
consisting of all expenses directly allocable to the operation of the facilities
but excluding any allocation of corporate operating expenses and depreciation,
were $17.4 million (45% of total revenue) for the three months ended September
30, 1997, compared to $4.7 million (40% of total revenue) for the three months
ended September 30, 1996. The increase in property operating expenses as a
percentage of total revenue for the third quarter of 1997 as compared to the
same period in 1996 was primarily a result of the lower occupancies and revenue
typically experienced by properties in the pre-stabilization period. As a
result, the Company realized property operating margins of 55% and 60% for the
three-month periods ended September 30, 1997 and 1996, respectively.
The provision for depreciation and amortization of lodging facilities of $5.1
million for the three months ended September 30,1997, and $1.6 million for the
same period in 1996, was provided 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 for the
three months ended September 30, 1997 as compared to the prior year period is
due to the operation of 98 additional facilities 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 expenses, professional and
consulting fees, and related travel expenses including costs that are not
directly related to a site that will be developed by the Company. The Company
incurred corporate operating and property management expenses of $8.1 million
(21% of total revenue) for the three months ended September 30, 1997 and $4.6
million (39% of total revenue) for the three months ended September 30, 1996.
The increases in the amount of these expenses for the three-month period ending
in 1997 as compared to the prior year period reflect the impact of additional
personnel and related expenses in connection with the Company's increased level
of operating facilities and site development. Management expects these expenses
to increase in total amount but to decline as a percentage of revenue with the
development of additional facilities in the future.
Depreciation and amortization in the amount of $200,000 for the quarter ended
September 30, 1997 and $170,000 for the comparable period in 1996 were provided
using the straight-line method over the estimated useful lives of the assets for
assets not directly related to the operation of the facilities, including
primarily office furniture and equipment.
The Company realized interest income of $1.4 million for the quarter ended
September 30, 1997 and $5.2 million for the same period in 1996. Interest income
is primarily attributable to the investment of funds received from offerings of
the Company's Common Stock. The decrease in interest income for the three months
ended September 30, 1997 as compared to the prior year period was due to the
decrease in the average cash and cash equivalent balances resulting from
investments in property and equipment during 1997.
The Company recognized income tax expense at an effective rate of 40% of
income before income taxes for the three months ended September 30, 1997 and
1996. Income tax expense differs from the Federal income tax rate of 35%
primarily due to state and local income taxes.
9
For the nine months ended September 30, 1997 and 1996
Property Operations
The following is a summary of the properties operated during the specified
periods and the related average occupancy and weekly rates:
For the nine months ended
------------------------------------------------------------------------------
September 30, 1997 September 30, 1996
------------------------------------- -----------------------------------
Average Average
Facilities Average Weekly Facilities Average Weekly
Open Occupancy Rate Open Occupancy Rate
---------- --------- ----- ---------- --------- -------
Crossland.............. 3 79% $179 N/A N/A N/A
EXTENDED STAY.......... 99 73% $248 24 76% $237
StudioPLUS............. 49 82% $303 29 84% $281
--- -- ---- -- -- ----
Total................ 151 75% $262 53 81% $264
=== == ==== == == ====
The decline in average occupancy for the nine months ended September 30, 1997
compared to the same period in 1996 reflects primarily the lower occupancy
typically experienced during the pre-stabilization periods for the 76 facilities
(50% of all open facilities) that commenced operations during the first nine
months of 1997 and the 22 facilities (42% of all open facilities) that commenced
operations during the last three months of 1996. The increase in average weekly
room rates for the EXTENDED STAY and StudioPLUS properties for the nine months
ended September 30, 1997 compared to the same period in 1996 reflects primarily
the geographic dispersion of facilities opened and the standard weekly rates in
those markets. Overall average weekly rates declined for the nine months ended
September 30, 1997 as compared to the same period in 1996 primarily as a result
of the increase in the lower priced EXTENDED STAY and Crossland properties to
68% of all properties in 1997 from 45% for the same period in 1996.
The Company recognized total revenues of $87.6 million for the nine months
ended September 30, 1997, compared with $25.6 million during the same period in
1996, an increase of $62 million. This increase was attributable to $61.5
million of additional revenue generated by new or acquired facilities and
approximately $539,000 of additional revenue from the 24 properties that were in
operation during both periods. Property operating expenses for the nine months
ended September 30, 1997 were $39.9 million (46% of total revenue) compared to
$10.5 million (41% of total revenue) for the nine months ended September 30,
1996. The increase in property operating expenses in relation to total revenue
for the nine months of 1997 as compared to the same period in 1996 was primarily
a result of lower occupancies and revenue for the pre-stabilization period of
the 76 facilities that commenced operations during the first nine months of
1997. As a result, the Company realized property operating margins of 54% and
59% for the nine-month periods ended September 30, 1997 and 1996, respectively.
The provision for depreciation and amortization of lodging facilities was
$13.0 million for the nine months ended September 30,1997 and $3.4 million for
the same period in 1996. The increase in depreciation for the nine months ended
September 30, 1997 as compared to the prior year period is due to the operation
of 98 additional facilities 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 expenses, professional and
consulting fees, and related travel expenses including costs that are not
directly related to a site that will be developed by the Company. Corporate
operating and property management expenses for the nine months ended September
30, 1997 and 1996 were $20.8 million and $11.8 million, respectively, or 24% and
46% of total revenue, respectively. The increases in the amount of these
expenses for the nine-month period ending in 1997 as compared to the prior year
period reflect the impact of additional personnel and related expenses in
connection with the Company's increased level of operating facilities and site
development. Management expects these expenses to increase in total amount but
to decline as a percentage of revenue with the development of additional
facilities in the future.
Depreciation and amortization was $340,000 for the nine months ended September
30, 1997 and $315,000 for the comparable period in 1996.
10
The Company realized interest income of $8.9 million for the nine months ended
September 30, 1997 and $9.6 million for the same period in 1996. Interest income
is primarily attributable to the investment of funds received from offerings of
the Company's Common Stock. The decrease in interest income for the nine months
ended September 30, 1997 as compared to the prior year was due to the decrease
in the average cash and cash equivalent balances resulting from investments in
property and equipment during 1997.
The Company recognized income tax expense of $3.4 million or 140% of income
before taxes for the nine months ended September 30, 1997 and $3.7 million or
40% of income before taxes for the comparable period in 1996. Income tax expense
differs from the Federal income tax rate of 35% due to state and local income
taxes and, for 1997 due to permanent tax differences relating to non-deductible
merger expenses. Management expects that the annualized effective income tax
rate, not inclusive of the effect of the permanent differences associated with
the Merger, will be approximately 40%.
Merger, Financing, and Other Charges
During the nine months ended September 30, 1997, the Company recorded merger,
financing, and other charges totaling $19.9 million. These one-time, 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 the Company's $400 million
mortgage facilities which were terminated upon execution of a revolving credit
agreement with various banks, and (iii) a charge of $500,000 in connection with
moving the listing of the Company's Common Stock to the New York Stock Exchange,
Inc. ("NYSE") from the Nasdaq National Market. Management believes that these
charges are non-recurring in nature and will not affect the future results of
operations.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $32.8 million and $224.3 million
as of September 30, 1997 and December 31, 1996, respectively. Substantially all
of the cash balances were invested, utilizing domestic commercial banks and
other financial institutions, in short-term commercial paper and other
securities having credit ratings of A1/P1 or equivalent. The market value of the
securities held approximates the carrying amount. During 1996 SPH temporarily
invested proceeds from an offering of its common stock in investments with
maturities greater than 90 days. Accordingly, these investments in a mutual fund
(primarily in municipal bonds) and in United States Government obligations have
been classified as investments available-for-sale in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". During the nine months ended September 30, 1996,
purchases of such investments available-for-sale aggregated $39.2 million and
proceeds from the sale of such investments aggregated $21 million.
During the nine months ended September 30, 1997 and 1996, the Company
generated cash from operating activities of $34.3 million and $12.6 million,
respectively.
During the nine-month period ended September 30, 1997, approximately $409.7
million was used to acquire, develop, and furnish the 155 sites under
construction during that period as compared to the approximately $145.8 million
that was used to acquire land and develop and furnish the 72 sites under
construction during the nine months ended September 30, 1996. During the nine-
month period ended September 30, 1996, the Company also acquired 10 extended
stay facilities from a number of unrelated sellers for approximately $59.5
million, which was paid for with approximately $4.3 million in cash and by the
issuance of approximately 4.5 million shares of Common Stock valued at
approximately $55.2 million.
During the nine months ended September 30, 1997, the Company made payments of
$9.2 million for costs associated with the Merger. Management believes that
these costs are not recurring and that they will not have an impact on future
earnings.
The Company received net proceeds from Common Stock offerings totaling $200.8
million and $365.7 million in the nine months ended September 30, 1997 and 1996,
respectively.
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In May 1995, SPH entered into a $30 million revolving credit agreement (the
"SPH Line of Credit") to fund future development and construction of additional
hotels and for working capital. In February 1996, SPH increased the SPH Line of
Credit to $50 million, maturing in 1998. During the nine months ended September
30, 1996, SPH received proceeds of $7.0 million and made payments of $11.7
million on the SPH Line of Credit. The SPH Line of Credit was terminated upon
consummation of the Merger.
Effective September 26, 1997, the Company executed an agreement (the "Credit
Agreement") with various banks pursuant to which the banks, subject to the terms
and conditions set forth, will provide a revolving credit facility (the
"Revolving Facility") of up to $500 million to the Company to be used for
general corporate purposes, including the construction and acquisition of
extended stay hotel properties. Availability under the Revolving Facility is
dependent upon the Company satisfying certain financial ratios of debt or
interest compared to property level earnings before interests, taxes,
depreciation, and amortization ("EBITDA") for qualifying properties, less
corporate operating expenses. In no event, however, will availability under the
Revolving Facility be less than $200 million at any time. Upon execution of the
Credit Agreement, the Company terminated its two mortgage loan facilities, which
provided for an aggregate of $400 million in available mortgage loans.
Accordingly, the Company recorded a one-time pre-tax charge of $9.7 million in
the quarter ended June 30, 1997 which represented deferred costs associated with
the previous mortgage facilities. During the three months ended September 30,
1997, the Company paid $7.7 million in deferred loan costs associated with the
Revolving Facility.
The Revolving Facility will mature on December 31, 2002. Under the Revolving
Facility the Company will be required to repay indebtedness outstanding with the
net cash proceeds from certain sales of assets, from issuances of debt or equity
by the Company, and from insurance recovery events (subject to certain
reinvestment rights). The Company will also be required to repay indebtedness
outstanding under the Revolving Facility annually in an amount equal to 50% of
the Company's excess cash flow as defined in the Credit Agreement.
Amounts drawn under the Revolving Facility bear interest, at the Company's
option, at either a prime rate or a London Interbank Borrowing Rate ("LIBOR"),
plus an applicable margin as defined in the Credit Agreement. The applicable
margin is an annual rate which fluctuates based on the Company's ratio of total
debt to total EBITDA and which is between 1.375% and 0% for prime rate loans and
2.375% and 1% for LIBOR rate loans. If at least $200 million of gross cash
proceeds are received by the Company on or before September 25, 1998 from the
issuance of certain debt instruments or Common Stock, the applicable margin will
be between .875% and 0% for prime rate loans and between 1.875% and 1% for LIBOR
rate loans.
The Company's obligations under the Revolving Facility are guaranteed by each
of the Company's subsidiaries (the "Guarantors") and are collateralized by a
first priority lien on all stock owned by the Company and the Guarantors and all
other current and future assets of the Company and the Guarantors (other than
mortgages on the Company's and the Guarantors' real property).
The Credit Agreement contains a number of covenants that limit, among other
things, the ability of the Company and its subsidiaries 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 Agreement contains affirmative covenants
that require, among other things, maintenance of corporate existence, compliance
with laws, maintenance of properties and insurance, and the delivery of
financial and other information. The Company is also required to comply with
certain financial covenants, including a maximum leverage ratio, minimum
interest coverage ratio, and minimum net worth. The Credit Agreement includes
customary events of default, including, without limitation, a cross-default to
other indebtedness, undischarged judgments, bankruptcy, and a change of control.
The Company expects to continue to rapidly expand its operations. The Company
had commitments to complete construction of additional extended stay properties
with a total cost of approximately $410 million at September 30, 1997. The
Company believes that the net proceeds from the Revolving Facility, together
with cash on hand and cash flows from operations, will provide sufficient funds
for the Company to develop the properties currently planned to open in 1998 and
to fund its operating expenses through 1998. The Company expects it will require
additional funding to continue its expansion beyond the planned openings in
1998. The timing and amount of
12
financing needed will depend on a number of factors, including the number of
properties the Company constructs or acquires, the timing of such development,
and the cash flow generated by its properties. In the event that the capital
markets provide favorable opportunities, the Company's plans or assumptions
change or prove to be inaccurate, or the foregoing sources of funds prove to be
insufficient to fund the Company's growth and operations, or if the Company
consummates acquisitions, the Company may seek additional capital sooner than
currently anticipated. Sources of financing may include public or private debt
or equity financing. There can be no assurance that such additional financing
will be available to the Company or, if available, that it can be obtained on
acceptable terms or within the limitations contained in the Company's financing
arrangements. Failure to obtain such financing could result in the delay or
abandonment of some or all of the Company's development and expansion plans and
expenditures and could have a material adverse effect on the Company.
Seasonality and Inflation
Based upon the operating history of the Company's facilities, management
believes that extended stay lodging facilities are not as seasonal in nature as
the overall lodging industry. Management does expect, however, that occupancy
and revenues may be lower than average during the first and fourth quarters of
each calendar year. Because many of the Company's expenses do not fluctuate with
occupancy, such declines in occupancy may cause fluctuations or decreases in the
Company's quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenue or operating results of the
Company during any of the periods presented. There can be no assurance, however,
that inflation will not effect future operating or construction costs.
Special Note on Forward-Looking Statements
The statements contained in this Report on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. A number of important factors could
cause the Company's actual results for future periods to differ materially from
those expressed or implied in any forward-looking statements made by, or on
behalf of, the Company. These factors include, among other things: the Company's
limited operating history and uncertainty as to the Company's future
profitability; the ability to meet construction and development schedules and
budgets; the ability to develop and implement operational and financial systems
to manage rapidly growing operations; the uncertainty as to the consumer demand
for extended stay lodging; increasing competition in the extended stay lodging
market; the ability to integrate and successfully operate acquired properties
and the risks associated with such properties; the ability to obtain financing
on acceptable terms to finance the Company's growth strategy; the ability of the
Company to operate within the limitations imposed by financing arrangements; and
general economic conditions as they may impact the overall lodging industry.
13
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-k
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Credit Agreement dated as of September 26, 1997 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.
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule (for EDGAR filings only)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 1997.
EXTENDED STAY AMERICA, INC.
/s/ Robert A. Brannon
--------------------------------------
Robert A. Brannon
Senior Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
/s/ Gregory R. Moxley
--------------------------------------
Gregory R. Moxley
Vice President Finance
(Principal Accounting Officer)
15