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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 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 May 8, 1998, the registrant had issued and outstanding an aggregate of
95,888,570 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
------
March 31, December 31,
1998 1997 (1)
----------- -------------
Current assets:
Cash and cash equivalents................................................................ $ 38,021 $ 3,213
Accounts receivable...................................................................... 4,505 3,651
Prepaid expenses......................................................................... 7,140 3,869
Deferred income taxes.................................................................... 8,377 6,895
Other current assets..................................................................... 667 1,430
---------- ----------
Total current assets................................................................. 58,710 19,058
Property and equipment, net................................................................. 1,167,307 1,042,177
Deferred loan costs......................................................................... 18,251 8,167
Other assets................................................................................ 1,466 1,489
---------- ----------
$1,245,734 $1,070,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................................................... $ 39,444 $ 51,309
Accrued retainage........................................................................ 18,796 19,951
Accrued property taxes................................................................... 5,936 3,417
Accrued salaries and related expenses.................................................... 2,439 2,018
Other accrued expenses................................................................... 14,950 6,144
---------- ----------
Total current liabilities............................................................ 81,565 82,839
---------- ----------
Deferred income taxes....................................................................... 22,178 18,393
---------- ----------
Long-term debt.............................................................................. 300,000 135,000
---------- ----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and
outstanding.............................................................................
Common stock, $.01 par value, 500,000,000 shares authorized, 95,824,271 and 95,604,208
shares issued and outstanding, respectively............................................. 958 956
Additional paid-in capital............................................................... 825,588 823,060
Retained earnings........................................................................ 15,445 10,643
---------- ----------
Total stockholders' equity........................................................... 841,991 834,659
---------- ----------
$1,245,734 $1,070,891
========== ==========
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
1
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three Months Ended
---------------------------
March 31, March 31,
1998 1997
--------- ---------
Revenue.............................................................................. $ 54,231 $ 19,763
Property operating expenses.......................................................... 26,282 10,180
Corporate operating and property
management expenses............................................................ 9,393 5,755
Depreciation and amortization........................................................ 9,430 3,712
Total costs and expenses 45,105 19,647
Income from operations.............................................................. 9,126 116
Interest expense (income), net....................................................... 1,122 (3,987)
Income before income taxes.......................................................... 8,004 4,103
Provision for income taxes........................................................... 3,202 1,633
Net income........................................................................... $ 4,802 $ 2,470
========= =========
Net income per common share--Basic and Diluted....................................... $ 0.05 $ 0.03
========= =========
Weighted average shares:
Basic......................................................................... 95,698 90,641
Effect of dilutive options.................................................... 1,390 2,259
Diluted....................................................................... 97,088 92,900
========= =========
See notes to the unaudited condensed consolidated financial statements
2
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
-------------------------
March 31, March 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income................................................................. $ 4,802 $ 2,470
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 9,430 3,712
Write-offs and reserve adjustments..................................... 955 704
Deferred income taxes.................................................. 2,903 949
Changes in operating assets and liabilities............................ (1,130) (901)
--------- ---------
Net cash provided by operating activities............................. 16,960 6,934
--------- ---------
Cash flows from investing activities:
Additions to property and equipment....................................... (139,464) (103,432)
Payments for merger costs................................................. (1,967)
Other assets.............................................................. (5) (86)
--------- ---------
Net cash used in investing activities................................. (139,469) (105,485)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.............................................. 200,000
Repayments of revolving credit facility................................... (35,000)
Proceeds from issuance of common stock.................................... 2,262 199,729
Additions to deferred loan costs.......................................... (9,945) (1,147)
--------- ---------
Net cash provided by (used in) financing activities................... 157,317 198,582
--------- ---------
Increase in cash and cash equivalents....................................... 34,808 100,031
Cash and cash equivalents at beginning of period............................ 3,213 224,325
--------- ---------
Cash and cash equivalents at end of period.................................. $ 38,021 $ 324,356
========= =========
Noncash investing and financing transactions:
Capitalized or deferred items included in accounts payable and
accrued liabilities...................................................... $ 51,191 $ 15,344
========= =========
Conversion of amounts due under revolving credit facility to term loan.... $ 100,000 $
========= =========
Capitalization of amortized deferred loan costs........................... $ 511 $
========= =========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes............................................................ $ 2,533 $ 625
========= =========
Interest expense, net of amounts capitalized............................ $ 1,457 $
========= =========
See notes to the unaudited condensed consolidated financial statements
3
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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, 1997 was derived
from audited financial statements of the Company but does not include all
disclosures required by generally accepted accounting principles.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
In April, 1998, the Accounting Standards Executive Committee released
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that start-up costs, including pre-opening and
organizational costs be expensed as incurred and is effective for financial
statements issued for periods beginning after December 15, 1998. At March 31,
1998, the Company had unamortized pre-opening and organization costs of
approximately $1.1 million. Under SOP 98-5, the Company would have reported a
reduction of expenses of approximately $206,000 for the three months ended March
31, 1998.
For the three months ended March 31, 1998 and 1997, the computation of diluted
earnings per share does not include approximately 5,803,000 and 247,000 weighted
average shares, respectively, of Common Stock represented by outstanding options
because the exercise price of the options was greater than the average market
price of Common Stock during the period.
Certain previously reported amounts have been reclassified to conform with the
current period's presentation.
4
NOTE 2 -- INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases and for operating
loss and tax carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which 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 periods ended March 31, 1998 and 1997
differed from the amounts computed by applying the U.S. Federal income tax rate
of 35 percent primarily as a result of the impact of state and local income
taxes and, in 1997, tax exempt interest income.
NOTE 3 -- LONG-TERM DEBT
Effective March 10, 1998, the Company issued $200 million Senior Subordinated
Notes (the "Notes"). The Notes contain certain redemption features, bear
interest at an annual rate of 9.15%, and mature on March 15, 2008. The Notes
are uncollateralized and are subordinated to all senior indebtedness of the
Company and contain certain covenants for the benefit of the holders of the
Notes. These covenants, among other things, restrict in certain circumstances
the Company's ability to incur additional indebtedness, pay dividends and make
investments and other restricted payments, enter into transactions with 5%
stockholders or affiliates, create liens, and sell assets.
Effective March 10, 1998, the Company amended its existing credit facility
(the "Amended Credit Facility"). The Amended Credit Facility provides for up to
$350 million in term loans (the "Term Loans") and $350 million in a revolving
loan facility (the "Revolving Facility"). The Revolving Facility and up to $150
million of the Term Loans mature December 31, 2002 and bear interest, at the
Company's option, at either the Base Rate (as defined) or the Eurodollar rate,
plus an applicable margin which will be between .875% and 0% for Base Rate loans
and 1.875% and 1% for Eurodollar loans. Up to $200 million of the Term Loans
mature December 31, 2003, subject to maximum principal amortization of 1% in
each of the years 1999 through 2002 and payment of the balance in four equal
quarterly payments in 2003. They will bear interest, at the Company's option, at
either the Base Rate plus 1.75% or the Eurodollar plus Rate plus 2.75%. At March
31, 1998, $100 million was borrowed and $600 million remained available and
committed under the Amended Credit Facility.
5
Availability under the Amended Credit Facility is dependent upon the Company
satisfying certain financial ratios of debt and interest compared to property-
level EBITDA for qualifying properties, less corporate operating expenses. In no
event, however, is availability under the Amended Credit Facility less than $200
million at any time.
The Amended Credit Facility contains a number of covenants, including, among
others, covenants limiting in certain circumstances 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
Amended Credit Facility contains affirmative covenants, including, among others,
covenants requiring maintenance of corporate existence, compliance with laws,
maintenance of properties and insurance, and the delivery of financial and other
information. The Amended Credit Facility also specifies events of default,
including a change of control, and requires the Company to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis. The Company's obligations under the Amended Credit Facility are
guaranteed by each of the Company's subsidiaries and are collateralized by a
first priority lien on all stock of such subsidiaries owned by the Company and
all other current and future assets of the Company and its subsidiaries (other
than mortgages on the Company's and its subsidiaries' real property).
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 since
1986. 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"), a wholly-owned
subsidiary of ESA, 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(TM) Deluxe Studios ("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 guestrooms 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 guestrooms, 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 ended March 31, 1998 and 1997.
Three Months
Ended March 31,
---------------
1998 1997
---- ----
Total Facilities Open (at Period End)......................... 218 93
Total Facilities Developed.................................... 33 18
Average Occupancy Rate........................................ 68% 65%
Average Weekly Room Rate...................................... $278 $256
Average occupancy rates are determined by dividing the guestrooms occupied on
a daily basis by the total number of guestrooms. 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
7
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.
The following is a summary of the Company's development status as of March 31,
1998, 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................... 7 138 73 218
Facilities Under Construction.......... 21 37 17 75
Sites Under Option..................... 25 79 58 162
Results of Operations
Property Operations
The following is a summary of the properties operated during the specified
periods and the related average occupancy and weekly room rates:
For the Three Months Ended
----------------------------------------------------------------------
March 31, 1998 March 31, 1997
---------------------------------- ----------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- --------- ----------- ---------- --------- -----------
Crossland...... 7 59% $190 1 73% $171
EXTENDED STAY.. 138 70 271 54 60 241
StudioPLUS..... 73 62 317 38 76 290
--- -- ---- -- -- ----
Total........ 218 68% $278 93 65% $256
=== == ==== == == ====
Because newly opened properties typically experience lower occupancies during
their pre-stabilization period, average occupancy rates are impacted by the
ratio of newly opened properties to total properties. A total of 33 properties
commenced operations in the first quarter of 1998 compared to 18 which were
opened in the first quarter of 1997. The average occupancy rate in the first
quarter of 1998 for the 75 properties that were owned and operated by the
Company as of December 31, 1996 was 75%. For the EXTENDED STAY brand,
occupancy rates increased for the first quarter of 1998 as compared to the first
quarter of 1997 primarily due to a decrease in the ratio of newly opened
properties to total properties for that brand. Occupancy rates decreased for
the StudioPLUS and Crossland brands primarily due to an increase in the number
of newly opened properties for each of these brands.
The increase in overall average weekly room rates for the first quarter of
1998 compared to the first quarter of 1997 reflects the geographic dispersion of
properties opened since March 31, 1997 and the higher standard weekly room rates
in certain of those markets, in addition to increases in rates charged in
previously opened properties. These increases were partially offset by an
increase in the percentage of total facilities (as of the end of the quarter)
represented by lower priced EXTENDED STAY and Crossland facilities from 59% for
1997 to 67% for 1998. The Company expects that its average weekly room rate
will continue to be impacted as EXTENDED STAY and Crossland facilities increase
as a percentage of the Company's total facilities. The average weekly room rate
for the 75 properties that were owned and operated throughout both periods
increased by 1% in the first quarter of 1998.
The Company recognized total revenues for the first quarter of 1998 and 1997
of $54.2 million and $19.8 million, respectively, an increase of $34.4 million.
Approximately $32.3 million of the increased revenue was
8
attributable to properties opened subsequent to December 31, 1996 and
approximately $2.1 million was attributable to an increase in revenue for the 75
properties that were owned and operated throughout both periods.
Property operating expenses, consisting of all expenses directly allocable to
the operation of the facilities but excluding any allocation of corporate
operating and property management expenses and depreciation, were $26.3 million
(48% of total revenue) for the first quarter of 1998, compared to $10.2 million
(52% of total revenue) for the first quarter of 1997. The decrease in property
operating expenses as a percentage of total revenue for the first quarter of
1998 as compared to the first quarter of 1997 was primarily a result of a
decrease in the ratio of newly opened properties to total properties. As a
result of the foregoing, the Company realized property operating margins of 52%
and 48% for the first quarter of 1998 and 1997, respectively.
The provision for depreciation and amortization for the lodging facilities of
$9.0 million and $3.5 million for the first quarter of 1998 and 1997,
respectively, 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 and amortization for
the first quarter of 1998 as compared to the first quarter of 1997 is due to the
operation of 125 additional facilities in 1998.
Corporate Operations
Corporate operating and property management expenses include all expenses not
directly related to the development or operation of 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 $9.4 million (17% of total
revenue) and $5.8 million (29% of total revenue) in the first quarter of 1998
and 1997, respectively. The increase in the amount of these expenses for the
first quarter of 1998 as compared to 1997 reflects 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 continue to decline as a percentage of
revenue with the development of additional facilities in the future.
Depreciation and amortization in the amount of $403,000 for the quarter ended
March 31, 1998 and $204,000 for the comparable period in 1997 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 $4.0 million of interest income during the first quarter
of 1997, which was primarily attributable to the investment of funds received
from offerings of Common Stock. Approximately $300,000 of interest income was
realized in the first quarter of 1998 primarily resulting from the temporary
investment of funds drawn under the Company's credit facilities. The Company
incurred interest charges of $5.2 million during the first quarter of 1998, $3.8
million of which was capitalized and included in the cost of buildings and
improvements.
The Company recognized income tax expense at estimated annual effective rates
of 40% and 39.8% for the first quarter of 1998 and 1997, respectively. Income
tax expense differs from the federal income tax rate of 35% primarily due to
state and local income taxes and, in 1997, tax exempt interest income.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $38.0 million and $3.2 million as
of March 31, 1998 and December 31, 1997, respectively. At March 31, 1998,
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. In
addition, at March 31, 1998 and December 31, 1997, the Company invested excess
funds in an overnight sweep account with a commercial bank which invested in
short-term, interest-bearing reverse repurchase agreements. Due to the short-
term nature of these investments, the Company did not take possession of the
9
securities, which were instead held by the financial institution. The market
value of the securities held pursuant to the agreements approximates the
carrying amount. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
During the three months ended March 31, 1998, and 1997 the Company generated
cash from operating activities of $17.0 million and $6.9 million, respectively.
The Company used $139.5 million and $103.4 million to acquire land and
develop and furnish a total of 108 and 96 sites, respectively, in the three
months ended March 31, 1998 and 1997.
During the three months ended March 31, 1997, the Company made payments of
$2.0 million for costs associated with the Merger.
On February 6, 1997, the Company completed a private placement of 11.5 million
shares of its Common Stock at a purchase price of $17.625 per share, for an
aggregate amount of approximately $203 million. Net proceeds received by the
Company from that private placement were approximately $198 million. The
Company received net proceeds from the exercise of Company stock options
totaling $2.3 million and $1.5 million in the three months ended March 31,
1998 and 1997, respectively.
Effective September 26, 1997, the Company executed an agreement with various
banks establishing a revolving credit facility (the "Credit Facility") for $500
million to be used for general corporate purposes, including the construction
and acquisition of extended stay hotel properties. The Credit Facility had a
maturity of December 31, 2002. Upon execution of the agreement establishing the
Credit Facility, the Company terminated two mortgage loan facilities, which
provided for an aggregate of $400 million in available mortgage loans.
On March 10, 1998 (the "Effective Date"), the Company amended the Credit
Facility (the "Amended Credit Facility"). The Amended Credit Facility converted
$150 million of the amounts available under the Credit Facility into a term loan
facility (the "Converted Term Loans"), with the $350 million balance of the
amounts available under the Credit Facility remaining as a revolving loan
facility (the "Revolving Facility" and, together with the Converted Term Loans,
the "Converted Facilities"). With respect to the Converted Term Loans, $100
million was drawn on the Effective Date and the balance may be drawn no later
than July 31, 1998.
The Amended Credit Facility also provides for up to $300 million in additional
term loans (the "Additional Term Loans"), $200 million of which were committed
as of the Effective Date. The amount of that commitment may be reduced on each
monthly anniversary of the Effective Date if certain amounts are not drawn. The
loans drawn pursuant to the commitment must be borrowed prior to July 10, 1998
(as drawn, the "Committed Loans"). Additional Term Loans in excess of Committed
Loans may be borrowed at any time after the Effective Date, provided that the
total Additional Term Loans cannot exceed $200 million before January 1, 1999.
Further, to the extent that the Additional Term Loans exceed $200 million, at
least $275 million must be outstanding under the Revolving Facility on the date
the Additional Term Loans are incurred.
The Company is required to repay indebtedness outstanding under the Amended
Credit Facility 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 is also required to repay
indebtedness outstanding under the Amended Credit Facility annually in an amount
equal to 50% of the Company's excess cash flow (as defined).
Amounts drawn under the Converted Facilities bear interest, at the Company's
option, at either the Base Rate (as defined) or the Eurodollar rate, plus an
applicable margin. The applicable margin is an annual rate which fluctuates
based on the Company's ratio of consolidated debt to consolidated EBITDA and
which will be between .875% and 0% for Base Rate loans and 1.875% and 1% for
Eurodollar loans.
10
Committed Loans will bear interest, at the Company's option, at either the
Base Rate plus 1.75% or the Eurodollar Plus Rate plus 2.75%. Additional Term
Loans that are not Committed Loans will bear interest at rates to be agreed
upon.
The Converted Facilities mature on December 31, 2002. Additional Term Loans
will mature no earlier than December 31, 2003, subject to maximum principal
amortization of 1% of the initially funded amounts in each of the years 1999
through 2002 and payment of the balance due in four equal quarterly payments in
2003.
Availability under the Amended Credit Facility is dependent upon the Company
satisfying certain financial ratios of debt and interest compared to property-
level EBITDA for qualifying properties, less corporate operating expenses. In
no event, however, is availability under the Amended Credit Facility less than
$200 million at any time.
The Company's obligations under the Converted Facilities 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
obligations of the Company and the Guarantors under the Additional Term Loans
are collateralized on a pari passu basis by way of perfected first priority
security interest in the assets securing the Converted Facilities.
The Amended Credit Facility contains a number of covenants, including, among
others, covenants limiting in certain circumstances 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
Amended Credit Facility contains affirmative covenants, including, among others,
covenants requiring maintenance of corporate existence, compliance with laws,
maintenance of properties and insurance, and the delivery of financial and other
information. The Amended Credit Facility also specifies events of default,
including a change of control, and requires the Company to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis.
As of March 31, 1998, $100 million was borrowed and $600 million remained
available and committed under the Amended Credit Facility.
In addition, effective March 10, 1998, the Company issued $200 million Senior
Subordinated Notes, (the "Notes"). The Notes bear interest at an annual rate of
9.15%, payable semiannually on March 15 and September 15 of each year,
commencing September 15, 1998, and mature on March 15, 2008. The Notes are
redeemable, in whole or in part, any time on or after March 15, 2003, initially
at 104.575% of their principal amount, plus accrued interest, declining ratably
to 100% of their principal amount, plus accrued interest, on or after March 15,
2006. Additionally, at any time prior to March 15, 2001, the Company may redeem
up to 35% of the principal amount of the Notes with the proceeds of one or more
public equity offerings by the Company of its Common Stock, at a redemption
price of 109.15% of their principal amount, plus accrued interest, provided that
at least $130 million aggregate principal amount of Notes remains outstanding
after each such redemption.
The Notes are uncollateralized and are subordinated to all senior indebtedness
of the Company and contain certain covenants for the benefit of the holders of
the Notes. These covenants, among other things, restrict in certain
circumstances the Company's ability to incur additional indebtedness, pay
dividends and make investments and other restricted payments, enter into
transactions with 5% stockholders or affiliates, create liens, and sell assets.
In connection with the Amended Credit Facility and the Notes, the Company
incurred additions to deferred loan costs of $9.9 million during the three
months ended March 31, 1998.
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 $392 million at March 31, 1998. The Company
believes that the remaining availability under the Amended Credit Facility,
together
11
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. The
timing and amount of 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.
Impact of the Year 2000 Issue and Accounting Releases
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Based on its recent
assessment, management of the Company does not anticipate that any significant
modification or replacement of the Company's software will be necessary for its
computer systems to properly utilize dates beyond December 31, 1999 or that the
Company will incur significant operating expenses to make any such computer
system improvements. The Company is not able to determine, however, whether any
of its suppliers, lenders, or service providers will need to make any such
software modifications or replacements or whether the failure to make such
software corrections will have an effect on the Company's operations or
financial condition.
In April 1998, the Accounting Standards Executive Committee released Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5").
SOP 98-5 requires that start-up costs, including pre-opening and organizational
costs be expensed as incurred and is effective for financial statements issued
for periods beginning after December 15, 1998. At March 31, 1998, the Company
had unamortized pre-opening and organization costs of approximately $1.1
million. Under SOP 98-5, the Company would have reported a reduction of expenses
of approximately $206,000 for the three months ended March 31, 1998.
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 affect future operating or construction costs.
Special Note on Forward-Looking Statements
Certain statements in this Form 10-Q constitute "forward-looking statements."
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such 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. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligations to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, or otherwise.
12
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 and Amended and
Restated as of March 10, 1998, 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
27.1 Financial Data Schedule (for EDGAR filings only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated February 20, 1998, relating to
the intent to commence an offering of $200 million of Senior Subordinated Notes.
The Company filed a report on Form 8-K dated March 10, 1998, announcing the
completion of the private placement of $200 million of 9.15% Senior Subordinated
Notes Due 2008.
13
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 May 13, 1998.
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)
14
EXTENDED STAY AMERICA, INC.
---------------------------
Exhibit Index
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.1 Credit Agreement, dated as of September 26, 1997 and Amended and
Restated as of March 10, 1998, 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
27.1 Financial Data Schedule (for EDGAR filings only)
15