ITEM 1. BUSINESS
OVERVIEW
BridgeStreet is a leading provider of flexible accommodation services in metropolitan markets located domestically in the Midwest, Mid-Atlantic, Southwest and Western regions of the United States, and internationally in London, England and Toronto, Canada. The Company offers high-quality, fully-furnished apartments, townhouses, condominiums and to a lesser extent, houses (collectively, "accommodations"), primarily for individuals traveling on business and company executives relocating to new communities who require lodging for one week to several months.
As a provider of flexible accommodation services, BridgeStreet leases substantially all of its accommodations on a short-term basis from property managers, and then rents them to its clients. This enables the Company to (i) adjust the quantity, mix and location of its accommodations as client needs dictate and local economic conditions warrant, (ii) expand and enter new markets without the costs and lead times associated with investing in "bricks and mortar" and (iii) avoid the fixed costs associated with ownership or long-term leasing of real estate. The Company also leases the furniture for its accommodations on a short-term basis from furniture rental companies. These furniture leasing arrangements enable BridgeStreet to maintain well appointed, modern and attractive accommodations, upgrade and replace furniture as needed, and satisfy specific furnishing requests. BridgeStreet's leasing strategy distinguishes it from fixed-location lodging providers, such as all-suite or extended-stay hotels, that own their lodging facilities and furnishings or lease them on a long-term basis.
Traditionally, travelers on extended trips have stayed in hotels and motels. The Company believes that business travelers on extended trips increasingly desire alternatives to conventional hotel and motel rooms, which typically lack the spaciousness and amenities of home. The Company believes that this has been an important factor in the recent growth in the extended-stay segment of the lodging industry. Participants in this segment include flexible accommodation service providers, all-suite hotels and extended-stay hotels.
By providing flexible accommodation services, the Company can satisfy client requests for accommodations in a variety of locations and neighborhoods, as well as requests for accommodations of specific types and sizes. The substantial majority of the Company's accommodations are located within high-quality property complexes that typically feature, among other things, in-unit washers and dryers, dedicated parking and access to fitness facilities (including, in many cases, pools, saunas and tennis courts). In addition, at a guest's request, BridgeStreet can upgrade an accommodation by providing specialized amenities such as office furniture, fax machines and computers. The Company's accommodations generally are priced competitively with all-suite and upscale extended-stay hotel rooms even though, on average, the Company believes its accommodations are substantially larger.
BridgeStreet was founded in August 1996, combined by merger in the first quarter of 1997 (the "Combination") five regional providers of flexible accommodation services (collectively, the "Founding Companies") and subsequently acquired during 1997 and 1998 ten additional providers.
GROWTH STRATEGY
The Company plans to achieve its goal of becoming a leading national provider of flexible accommodation services by implementing an acquisition program and a national operating strategy designed to increase internal revenue growth, cost efficiencies and profitability. Key elements of the Company's business strategy include:
Growth Through Acquisitions. The Company believes that the flexible accommodation services industry is highly fragmented, with over 400 geographically dispersed companies in the United States, few of which have more than a regional presence. BridgeStreet plans to take advantage of the fragmented nature of the industry by selectively acquiring flexible accommodation service companies in metropolitan areas frequented by business travelers. BridgeStreet intends to implement its business model at each acquired company as soon as practicable after the acquisition is completed. BridgeStreet's acquisition strategy is to:
- Enter New Geographic Markets and Establish Nationwide Coverage. In selected new markets, the Company intends to target for acquisition one local or regional flexible accommodation services provider having the size and quality of operations suitable for serving as the Company's base for expansion in the market. Acquisitions in new markets will enable BridgeStreet to (i) gain local or regional market share rapidly, (ii) increase sales to existing clients by meeting their needs for accommodations in other regions, (iii) increase sales to the acquired company's clients by providing them with access to BridgeStreet's growing national network and (iv) establish the BridgeStreet brand name in new regions and enhance its nationwide recognition. The Company also may expand into new markets by establishing new operations. Since the Combination, the Company has entered 10 new markets, consisting of: Dallas, Fort Worth, Austin and Houston, Texas; Phoenix, Arizona; Denver, Colorado; Raleigh-Durham and Charlotte, North Carolina; Toronto, Canada; London, England; and Santa Clara, California.
- Expand Within Existing Markets. Once the Company has established operations in a new region, it may seek to expand its market share by acquiring other flexible accommodation service providers within that region. The Company believes that it can achieve operating efficiencies by incorporating the businesses of smaller acquired companies into the Company's operations without any significant increase in infrastructure. On June 30, 1997, the Company acquired in such a "tuck-in" acquisition the assets of a flexible accommodation services provider in Memphis, Tennessee with 135 units under lease.
Growth Through Network Partner Relationships. The Company has developed a Network Partner relationship with flexible accommodation service providers in the United States and in 22 countries worldwide. Through Network Partner agreements, the Company has expanded the number of locations where it can better serve its clients needs. In certain markets, the Company intends to enter into Network Partner agreements with a local or regional flexible accommodation service providers having the size and quality of operations suitable for serving the Company's client base. Network Partner agreements in new markets will enable BridgeStreet to (i) gain local or regional market share rapidly, (ii) increase sales to existing clients by meeting their needs for accommodations in other regions, (iii) direct sales from the local network partner to BridgeStreet's national network, (iv) establish the BridgeStreet brand name in new regions and enhance its nationwide recognition and (v) earn referral fee income for providing reservation agent services.
The Company contracts with a Network Partner to provide flexible accommodations to BridgeStreet clients in the cities served by the Network Partner. The Company utilizes its Central Reservation Center to book reservations into cities served by a Network Partner. Network Partner agreements expand the Company's geographical presence without the investment required for an acquisition or, start-up costs of a new operation. The Company believes that increasing the number of cities served through Network Partner agreements is a cost-effective approach to achieving incremental revenue growth from existing clients.
National Operating Strategy. The Company has begun to implement a national operating strategy with the following components:
- Maximize Sales to Existing and New Clients. The Company plans to maximize sales to existing corporate clients and to obtain new clients through a national sales and marketing program which highlights the Company's expanding national network. Many of the Company's clients are Fortune 2000 companies with significant, national employee lodging requirements. These corporate clients generally have numerous key decision makers (such as human resource directors, relocation managers or training directors) who both establish and administer company travel and accommodation policies. The Company plans to obtain a greater share of each client's lodging requirements by establishing relationships with additional key decision makers and emphasizing the Company's expanding national presence.
- Achieve Cost Efficiencies. The Company believes it should be able to reduce total operating expenses of acquired companies by consolidating certain functions (including sales, marketing and purchasing operations) performed separately by such companies. In addition, the Company believes that as a large, national flexible accommodation services company, it should be able to achieve lower costs (as a percentage of revenues) compared to those of acquired companies in such areas as leasing accommodations and furniture, purchasing certain hard and soft goods, and obtaining financing arrangements, employee benefits and insurance.
- Adopt Best Practices. The Company will continue reviewing its operations at the local and regional operating levels in order to identify "best practices" that can be implemented throughout its operations. Areas where "best practices" may be utilized include accommodation pricing, occupancy management and cash flow management. BridgeStreet believes the implementation of these practices will enable the Company to provide superior customer service and maximize sales opportunities.
- Implement Management Information System. BridgeStreet is developing and implementing a centrally-controlled, computerized management information system that will integrate the Company's customer contact, sales, marketing, finance, telephone, property management, internet access, lease management and reservation functions. BridgeStreet believes that the proposed system will enable it to deliver superior customer service, more efficiently manage its operations and achieve cost savings.
ACQUISITION AND EXPANSION STRATEGY
Given the highly fragmented nature of the flexible accommodation services industry, the Company believes that there are numerous potential acquisition and Network Partner targets in major metropolitan areas not currently served by the Company. The Company has implemented an acquisition and expansion program aimed primarily at metropolitan markets not currently served by the Company, and also at acquiring selected other flexible accommodation service providers in its existing markets to enhance its market position.
In new markets, the Company generally has targeted and will continue to target for acquisition or as a Network Partner, one or more leading local or regional flexible accommodation service providers. Generally, these companies will be run by successful entrepreneurs and will be of sufficient size to provide the basis for the Company's future expansion within the new markets. Each of the Company's acquisition and Network Partner candidates will be expected to demonstrate potential for increased revenues and profitability. The Company also will evaluate certain qualitative characteristics of acquisition and Network Partner candidates, including their reputations in their respective geographic regions, the size and strength of their customer bases, the quality and experience levels of their operational management, and their operating histories.
In selected existing markets, the Company will seek to acquire flexible accommodation service providers that meet the Company's criteria with respect to reputation, customer base, management and operating history. Some of the companies acquired within existing markets will be large enough to retain much of their own operating and management infrastructures. Other, generally smaller acquired companies will be combined with BridgeStreet's existing operations to eliminate redundant functions and improve profitability. Acquisitions in existing markets should improve revenues and profitability by enhancing regional brand name recognition and leveraging the economies of scale associated with a larger business enterprise.
The Company believes that acquisition by BridgeStreet is attractive to many smaller independent operators because of (i) the Company's strategy to create a large, professionally-managed company with national brand name recognition and a reputation for quality service and customer satisfaction, (ii) the experience of its officers with industry consolidations, (iii) the Company's decentralized operating strategy, (iv) the Company's increased visibility and access to financial resources as a public company, (v) the potential for increased profitability due to centralized administrative functions, enhanced systems capabilities and access to increased marketing resources, (vi) the ability of the acquired companies to participate in the Company's growth and expansion, and (vii) the strong desire of the owners of many privately-held companies for liquidity and a return on their investments in their companies.
As consideration for future acquisitions, the Company intends to use various combinations of cash, notes and Common Stock. The consideration paid for each future acquisition will depend on such factors as the acquired company's historical operating results and future prospects and the ability of the acquired company's business to complement the services offered by the Company. The timing, size and success of the Company's acquisition efforts and the associated capital commitments cannot be readily predicted.
ACCOMMODATIONS AND SERVICES
Accommodations
BridgeStreet offers high-quality, fully-furnished one-, two- and three-bedroom accommodations that, together with the specialized amenities offered by the Company, are intended to provide guests with a "home away from home." BridgeStreet selects its accommodations based on location, general condition and basic amenities, with the goal of providing accommodations that meet each guest's particular needs. As a flexible accommodation services provider, the Company can satisfy client requests for accommodations in a variety of locations and neighborhoods, including requests for proximity to an office, school or area attraction, as well as requests for accommodations of specific types and sizes. The substantial majority of the Company's accommodations are located within high-quality property complexes that typically feature in-unit washers and dryers, dedicated parking, and access to fitness facilities (including, in many cases, pools, saunas and tennis courts). Standard furnishings typically include, among other things, cable televisions, answering machines and clock radios. BridgeStreet also is able to customize its accommodations at a guest's request with items such as office furniture, fax machines and computers.
The Company's accommodations generally are priced competitively with all-suite or upscale extended-stay hotel rooms even though, on average, the Company believes its accommodations are substantially larger. The Company believes it generally is able to price its accommodations competitively due to (i) the high quality of its accommodations, (ii) its relatively low operating cost structure and (iii) its ability to lease accommodations in accordance with demand and leave unfavorable markets quickly. The length of a guest's stay can range from a few nights to a few years, with the typical stay ranging from 30 to 45 days.
Corporate Client Services
The Company believes that it provides valuable, cost-effective services to its corporate clients, many of which have human resource directors, relocation managers or training directors with significant, national employee lodging requirements. In particular, the Company aims to relieve its clients of the administrative burden often associated with relocating employees and/or providing them with temporary housing. In addition to providing clients with a diverse range of accommodation types and sizes in a variety of locations, the Company believes it satisfies its clients' needs for (i) a high degree of local market knowledge, (ii) special accommodation requests (such as last-minute location switches), (iii) accurate, customized billing options and (iv) other ancillary services such as assistance in locating permanent housing and school systems. The Company believes that existing and potential clients will increasingly turn to outside providers such as BridgeStreet to satisfy their employee lodging requirements as their awareness of BridgeStreet and the flexible accommodation services industry increases.
Guest Services
The Company strives to provide the highest quality of customer service by coordinating in advance all aspects of a guest's lodging experience. Prior to a guest's arrival, BridgeStreet arranges to have keys and directions sent to the guest, along with other information relating to the guest's interests (as discerned through prior communications), such as literature on local golf courses or other forms of entertainment. The Company typically makes at least one follow-up telephone call to the guest before the guest moves in to ensure that the guest will feel comfortable in his or her new accommodation from the moment of arrival. Immediately prior to the guest's arrival, BridgeStreet's professional housekeeping staff cleans and inventories the accommodation to ensure that it is prepared for the guest.
During a guest's stay, BridgeStreet keeps in touch with the guest to confirm that he or she is satisfied, and to encourage the guest to call whenever the Company can be of assistance. In addition, the Company maintains a representative in each city in which it operates to be responsive to guests' needs. The Company's guest services department offers guests comprehensive information services before and during their stays to help guests acclimate themselves to their new surroundings. A guest can obtain information concerning, among other things, local schools, day care providers and area playgrounds, by placing a single telephone call. Similarly, the guest services department can identify local entertainment and cultural events, and help coordinate automobile rentals, grocery shopping and other miscellaneous activities.
BridgeStreet also oversees the moving-out process. The guest is asked either to mail the keys to the Company in a self-addressed, stamped envelope or simply to leave the keys in the accommodation. The guest also is asked to complete a form evaluating his or her stay, and is encouraged to contact the Company whenever the guest needs accommodations in other locations where BridgeStreet provides services. The guest's evaluation form is thoroughly reviewed, and (if applicable) a copy is sent to the corporate client.
CLIENT BASE
BridgeStreet's diverse customer base centers on Fortune 2000 corporations, professional firms and travel-wise individuals. In 1998 Andersen Consulting accounted for approximately 11.4%, or $11 million, of the Company's consolidated revenues. No client accounted for more than 5% of the Company's 1997 revenues.
SALES AND MARKETING
BridgeStreet focuses primarily on business-to-business selling. At the local level, each of the Company's operating subsidiaries has corporate account specialists that call on local companies (including local branches of regional or national companies) to solicit business. The account specialist focuses his or her efforts on the key decision makers at each company responsible for establishing and administering travel and accommodation policies, typically human resource directors, relocation managers or training directors. By aggressively pursuing relationships with potential clients and expanding services to existing clients, BridgeStreet seeks to become each client's primary or sole provider of flexible accommodation services nationwide. Since operations have expanded, BridgeStreet has opened a global sales office to begin to market its nationwide capabilities to its local corporate clients.
The Company tailors its marketing strategy to the needs of particular clients. For example, BridgeStreet markets itself to a corporation with relocating employees by focusing on its ability to situate large families in houses and apartments with three or more bedrooms, its access to accommodations in both metropolitan and suburban settings, and its access to accommodations that allow pets. In contrast, when marketing to a potential corporate client having consultants in need of short-term housing, the Company emphasizes its flexible lease terms and its ability to customize an accommodation with amenities such as office equipment (including computers), additional telephone lines and other work-related items.
The Company intends to implement an advertising program designed to enhance the "BridgeStreet" name both inside and outside the flexible accommodation services industry and broaden its client base. In addition, the Company intends to promote its brand name by advertising in trade publications, Chamber of Commerce listings, local visitor magazines and telephone directories and the Internet, and through periodic direct mail campaigns.
INTERNET STRATEGY
The Internet has emerged during the past two years as a worldwide medium for electronic commerce. The Company expanded its Internet site in 1998 to include: a complete listing of all cities served, expanded list of services and amenities provided, virtual tours of actual apartment accommodations, the capability to book reservations on-line and to obtain feedback from visitors to its web site. In 1999 the Company will invest to improve its current Internet presence and utilize the Internet to supplement traditional marketing strategies and to better serve its customers.
LEASING ARRANGEMENTS
BridgeStreet leases substantially all of its accommodations through flexible, short-term leasing arrangements in order to match its supply of accommodations with client demand. The Company believes that its flexible leasing strategy allows it to react to changes in market demand for particular geographic locations and types of accommodations. The Company's strategy also provides it flexibility to address cyclicality in particular markets. During the 12 months ended December 31, 1998, BridgeStreet's average occupancy rate was approximately 89%. The Company seeks to maintain high occupancy rates by staggering its lease expiration dates within a geographic area, allowing it to adjust its inventory of accommodations in a given market to reflect fluctuations in overall demand and demand for particular types of accommodations.
The Company strives to develop strong relationships with property managers to ensure that it has a reliable supply of high-quality, conveniently-located accommodations. The Company believes that it can provide property managers with numerous direct benefits, including (i) higher overall occupancy levels, (ii) simplified lease agreements (with one lease often covering numerous individual units), (iii) convenient, timely payment (with one check for all units under lease in a complex) and (iv) maintenance by BridgeStreet of the accommodations it leases.
BridgeStreet leases the furniture for its accommodations on a short-term basis ordinarily from major furniture rental companies. Furniture leases range from three to 18 months, but may be terminated by the Company prior to expiration. Through its short-term furniture leasing approach, the Company is able to maintain well-appointed, modern and attractive accommodations, upgrade and replace furniture as needed and satisfy specific furnishing requests.
BridgeStreet's average daily lease rate during 1998 (including costs of accommodations, furnishings, utilities and housekeeping) was approximately $43, while its average daily rental rate charged to clients during the same period was approximately $65.
COMPETITION
Flexible accommodation service providers compete primarily on the basis of location, availability, price and quality of accommodations, quality and scope of service and brand name recognition. The Company believes that, while it currently competes against all lodging providers, in the future its primary competition will come from other flexible accommodation service providers and, to a lesser extent, all-suite hotels and upscale extended-stay hotels.
The Company intends to compete by maintaining a loyal customer base and offering a client-oriented approach with convenient locations, large and high-quality customized accommodations, and personalized customer service.
The Company expects its business to become more competitive as existing competitors expand and additional companies enter the flexible accommodation services industry. The Company believes that the largest providers of flexible accommodation services currently are Oakwood, Gables Corporate Accommodations, ExecuStay Corporation and Globe Business Resources, Inc., some of which are larger (in terms of number of available accommodations) than BridgeStreet. Certain of the Company's existing competitors have, and any new competitors that enter the industry may have, access to significantly greater resources than the Company. In particular, Oakwood is affiliated with R&B Realty Group, the nation's tenth largest apartment management company. This affiliation gives Oakwood access to apartment communities and capital that may be unavailable to the Company.
REGULATION AND TAX
The Company is subject to employment laws, including minimum wage, overtime, working condition and work permit requirements. The Company believes that it is in compliance with all applicable employment laws, and intends to continue to comply with such laws.
In addition, the Company is subject to the Americans with Disabilities Act (the "ADA") as a private entity providing public accommodations. All public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While the Company believes that all of the units it leases are substantially in compliance with these requirements, a determination that such units are not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants.
As a lessee of its accommodations, BridgeStreet believes that it and its employees are either outside the purview of, exempted from or in compliance with laws in the jurisdictions in which the Company operates requiring real estate brokers to hold licenses. However, there can be no assurance that the Company's position in any jurisdiction where it believes itself to be excepted or exempted would be upheld if challenged or that any such jurisdiction will not amend its laws to require the Company and/or one or more of its employees to be licensed brokers. Moreover, there can be no assurance that the Company will not operate in the future in additional jurisdictions requiring such licensing.
In some of the jurisdictions in which the Company operates, the Company believes that it is not required to charge certain guests the sales and "bed" taxes that are applicable to establishments furnishing rooms to transient guests. There can be no assurance, however, that the tax laws in particular jurisdictions will not change or that a tax collection agency will not successfully challenge the Company's position regarding the applicability of such taxes. The Company believes that it properly charges and remits such taxes in all jurisdictions where it is required to do so.
INSURANCE
The Company purchases general liability, comprehensive property damage, automobile, workers' compensation and other insurance coverages that management considers adequate for the protection of the Company's assets and operations, although there can be no assurance that the coverage limits of such policies will be adequate. A successful claim against the Company beyond the scope of its insurance coverage or in excess of its limits could have a material adverse effect on the Company's business, financial condition and results of operations. Claims against the Company, regardless of their merit or outcome, also may have an adverse effect on the Company's reputation and business.
EMPLOYEES
As of December 31, 1998 the Company had approximately 450 employees. The Company's employees are not subject to any collective bargaining agreements, and management believes that its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES
The Company plans to relocate its corporate headquarters to Twinsburg, Ohio in April, 1999 pursuant to a lease that expires in May 2009. The Company has the option to extend the lease for one additional five-year period following expiration. The Company can terminate the lease, any time after five years, with a termination fee equal to the unamortized cost of build out improvements and commissions. In addition, the Company currently leases administrative offices in the majority of its markets. The Company believes that its corporate and administrative facilities are adequate to serve its current level of operations. If additional facilities are required, the Company believes that suitable additional or alternative space will be available as needed on commercially reasonable terms.
ACCOMMODATIONS
The Company leases all of its accommodations (with the exception of 19 condominium units which are owned). The Company has no plans to purchase or own any additional properties. The Company's accommodations include one-, two- and three-bedroom apartments, condominiums, townhouses, and, to a lesser extent, houses. As of December 31, 1998, the Company had approximately 4,100 accommodations under lease, with approximately 90% of such leases being for one year or less. The terms of the Company's leases generally range from one to 18 months.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the ordinary course of business. There can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities arising out of such litigation. Management believes that any liability that the Company might incur upon the resolution of any existing litigation will not have a material adverse effect upon the Company's business, financial condition and results of operations.
ITEM 4(a). SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 1998.
ITEM 4(b). EXECUTIVE OFFICERS OF THE REGISTRANT
John E. Danneberg, age 52, has been President, Chief Executive Officer and a director of the Company since June 1998. He also is Chief Executive Officer and sole director of each of the Company's wholly-owned subsidiaries. From 1996 to 1997, Mr. Danneberg was Chief Executive Officer of Sonitrol Security, a division of ADT Security Services, Inc. From 1988 to 1995 Mr. Danneberg was owner and Chief Executive Officer of Foliage Plant Systems, a large commercial plant sales and services company. From 1981 to 1988, Mr. Danneberg was President of the security division of Hawley Group Limited, predecessor of ADT. Prior to 1981, Mr. Danneberg held various management positions with several companies.
Mark D. Gagne, CPA, age 38, has been Chief Financial Officer and Treasurer of the Company since January 1997. From January 1996 until January 1997, Mr. Gagne was a consultant to American Business Partners LLC, a business development company. Previously, from February 1992 to December 1995, Mr. Gagne was Chief Financial Officer and Treasurer of CMG Information Services Inc. and subsidiaries, a publicly-traded information technology company. From April 1988 to January 1992, Mr. Gagne was Vice President and Chief Financial Officer of the Trodella Companies, three privately-held construction services companies. From 1982 to 1988, Mr. Gagne served in a number of positions as a Certified Public Accountant for Kennedy & Lehan, P.C. and Arthur Andersen LLP.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRICE RANGE OF COMMON STOCK
Since November 1998, the Common Stock has been quoted on The American Stock Exchange under the symbol "BDS." Previously, from September 1997 until November 1998, the Common Stock was quoted on the Nasdaq National Market under the symbol "BEDS". The following table sets forth for each period indicated the high and low sale prices for the Common Stock as reported by The American Stock Exchange or the Nasdaq National Market as the case may be.
As of March 17, 1999, there were 83 holders of record of Common Stock.
DIVIDEND POLICY
The Company intends to retain all earnings to finance the growth and development of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Any future determination as to the payment of dividends on the Common Stock will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's future earnings, if any, the operating and financial condition of the Company, its capital requirements, general business conditions and other factors the Board of Directors of the Company may consider. The Company's revolving credit facility currently prohibits dividend payments.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See below.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was incorporated in August 1996 with the goal of becoming a leading national provider of flexible accommodation services. The Company has implemented an acquisition program and a national operating strategy designed to increase internal revenue growth, cost efficiencies and profitability. In the first quarter of 1997, BridgeStreet commenced its operations by acquiring, in separate merger transactions (the "Combination"), five flexible accommodation service providers (the "Founding Companies"). Since the Combination of the Founding Companies, the Company has acquired (by merger with or purchase of substantially all assets) ten additional flexible accommodation service providers, three in 1997 and seven in 1998.
The Company's revenues are derived primarily from renting accommodations to guests for extended periods. Revenues depend on the number of accommodations the Company has available under lease, the occupancy rate and the rate charged. The rate charged is a function of, among other factors, (i) the type, size and location of the accommodation being rented, (ii) the rental period and (iii) any additional amenities made available to the guest during his or her stay. As of December 31, 1998, the Company had approximately 4,100 accommodations under lease compared to 3,000 and 625 accommodations under lease at December 31, 1997 and 1996, respectively. During 1998, the Company operated at an occupancy rate of approximately 89% compared to 89% and 86% in 1997 and 1996, respectively.
Cost of services consists primarily of lease payments for accommodations and their furnishings, and expenses associated with cleaning, maintaining and providing utilities to accommodations. Selling, general and administrative expense consists primarily of compensation and related benefits for management and key employees, administrative salaries and benefits, office rents and utilities, professional fees and advertising.
As discussed in Note 1 to the consolidated financial statements, in the first quarter of 1997, the Company merged with five flexible accommodation operating companies in stock for stock tax-free mergers. The mergers were accounted for using the purchase method of accounting with Temporary Corporate Housing Columbus, Inc. ("TCH") designated as the accounting acquirer and the other operating companies designated as "acquired companies." The results of operations of the "acquired companies" have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The purchase price and allocation of the purchase price of the four "acquired companies," including the value of stock issued to the founders of BridgeStreet as a transaction fee, was approximately $17.7 million based on an independent appraisal of the net assets acquired. The aggregate cost of the acquisitions exceeded the estimated fair value of assets and liabilities of the acquired companies by $17.5 million which is being amortized as goodwill over 35 years.
For financial reporting purposes, TCH is presented as the accounting acquirer of the other Founding Companies. Consequently, the Company's historical financial statements for periods ended on or before December 31, 1996, are the historical financial statements of TCH.
RESULTS OF OPERATIONS
BridgeStreet's Consolidated Statement of Operations for the year ended December 31, 1998 includes a full year of operating results of TCH, Corporate Lodgings, Inc. ("CLI"), Exclusive Interim Properties, Ltd. ("EIP"), Temporary Housing Experts, Inc. ("THEI"), HAI Acquisition Corp. ("HAI"), BridgeStreet Texas, L.P. and BridgeStreet Arizona, Inc. The operating results for the year ended December 31, 1998 also include the operating results of the following wholly-owned operating subsidiaries from the indicated dates on which they acquired (by merger with or purchase of substantially all of the assets of) flexible accommodation service providers: BridgeStreet North Carolina, Inc. (January 2, 1998); BridgeStreet Raleigh, Inc. (January 2, 1998); BridgeStreet Colorado, Inc. (January 2, 1998); BridgeStreet Texas L.P. ("Austin", January 2, 1998); BridgeStreet Accommodations Limited (February 19, 1998); BridgeStreet Canada, Inc. (March 2, 1998), and BridgeStreet California, Inc. (June 1, 1998).
BridgeStreet's Consolidated Statement of Operations for the year ended December 31, 1997, includes the operating results of TCH, CLI, EIP and THEI, all of which were acquired on January 2, 1997. The operating results for the year ended December 31, 1997 also include the operations of the following wholly-owned operating subsidiaries from the indicated dates on which they acquired (by merger with or purchase of substantially all of the assets of) flexible accommodation service providers: HAI (March 31, 1997); BridgeStreet Texas, L.P. ("Dallas", December 1, 1997); and BridgeStreet Arizona, Inc. ("Arizona", December 1, 1997).
The Statement of Operations of BridgeStreet for the year ended December 31, 1996 consists of the accounts of only TCH, the designated accounting acquirer. Consequently, the 1996 and 1997 periods are not comparable, and the comparison of the periods below is not indicative of future results of operations.
The Company's Consolidated Balance Sheets as of December 31, 1998 and 1997 reflect the accounts of TCH, CLI, EIP, THEI, HAI, Dallas and Arizona. The Company's Consolidated Balance Sheet as of December 31, 1998 also includes the accounts of BridgeStreet North Carolina, Inc., BridgeStreet Raleigh, Inc., BridgeStreet Colorado, Inc., Austin, BridgeStreet Accommodations Limited, BridgeStreet Canada, Inc., and BridgeStreet California, Inc.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues increased $45.6 million, or 90%, from $50.8 million for the year ended December 31, 1997 to $96.4 million for the year ended December 31, 1998. The increase in revenues was primarily the result of an increase in the number of accommodations rented during the year due to the acquisitions of seven flexible accommodation service providers, plus a full year of revenues for the 1997 acquisitions and growth in existing markets.
Cost of Services. Cost of services increased $33.6 million, or 89%, from $37.7 million for the year ended December 31, 1997 to $71.3 million for the year ended December 31, 1998. Cost of services, as a percentage of revenues, decreased from 74.4% for the year ended December 31, 1997 to 74.0% for the year ended December 31, 1998. The dollar increase in cost of services was primarily related to the acquisitions of the flexible accommodation service providers, as discussed above. As a percentage of revenues, cost of services decreased slightly from 1997 primarily due to higher gross margins from the Company's Canadian and U.K. subsidiaries. The Company's occupancy rate during 1998 and 1997 was 89%.
Selling, General and Administrative Expense. Selling, general and administrative expense increased $10.1 million, or 102%, from $9.9 million for the year ended December 31, 1997 to $20.0 million for the year ended December 31, 1998. Selling, general and administrative expense, as a percentage of revenues, increased from 19.5% for the year ended December 31, 1997 to 20.8% for the year ended December 31, 1998. The dollar increase in selling, general and administrative expense was primarily a result of the acquisitions of flexible accommodation service providers, as discussed above, and increased corporate overhead. The increase, as a percentage of revenues, is primarily from increased corporate overhead. The increase in corporate overhead is a direct result of incurring a full year of costs in 1998 for a corporate management team and other costs associated with creating a public company infrastructure. In 1997, these costs primarily were incurred during the second half of the year.
The Statement of Operations for the year ended December 31, 1997 includes $1.2 million of non-recurring, non-cash compensation expense relating to the accelerated vesting of restricted stock held by executive officers. The compensation charge represents the difference between the value of stock issued to officers and the amount paid. The Statement of Operations for the year ended December 31, 1998 includes a restructuring charge of $1.3 million on a pretax basis ($732,000 after tax). This second quarter charge of $1.3 million represented an accrual of $962,000 for severance and other employee benefits for five employees and an accrual of $368,000 for lease termination costs, the write-off of certain software and marketing costs and professional fees associated with the management realignment. The accounting for the restructuring charge is in compliance with the Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." During 1998, $664,000 was charged against the reserve consisting of severance and benefit expenses of $341,000, the write-off of marketing materials and software of $202,000 and professional fees and other expenses of $121,000. The Company expects all costs, with the exception of severance related expenses for two employees, to be incurred by the end of the second quarter of 1999, and no material incremental costs are expected to be recognized in future periods. See footnote 10 in the Notes to the Consolidated Financial Statements for additional information.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues increased $38.4 million, or 309%, from $12.4 million for the year ended December 31, 1996 to $50.8 million for the year ended December 31, 1997. The increase in revenues primarily was the result of an increase in the number of accommodations rented during the year due to the acquisitions of flexible accommodation service providers and growth in existing markets.
Cost of Services. Cost of services increased $28.7 million, or 317%, from $9.1 million for the year ended December 31, 1996 to $37.8 million for the year ended December 31, 1997. Cost of services as a percentage of revenues increased from 73.0% for the year ended December 31, 1996 to 74.4% for the year ended December 31, 1997. The dollar increase in cost of services was primarily related to the acquisitions of the flexible accommodation service providers. Cost of services increased as a percentage of revenues primarily as a result of lower occupancy rates experienced during the Company's fourth quarter.
Selling, General and Administrative Expense. Selling, general and administrative expense increased $7.6 million, or 325%, from $2.3 million for the year ended December 31, 1996 to $9.9 million for the year ended December 31, 1997. Selling, general and administrative expense as a percentage of revenues increased from 18.8% for the year ended December 31, 1996 to 19.5% for the year ended December 31, 1997. The dollar increase in selling, general and administrative expense primarily was a result of the acquisitions of the flexible accommodation service providers, hiring of a corporate management team and other costs associated with creating a public company infrastructure. The increase in such expense as a percentage of revenues resulted from hiring corporate personnel and acquiring certain companies that had higher selling, general and administrative expenses as a percentage of revenues. The Statement of Operations for the year ended December 31, 1997 includes $1.2 million of non-recurring, non-cash compensation expense relating to the accelerated vesting of restricted stock held by executive officers. The compensation charge represents the difference between the value of stock issued to officers and the amount paid.
OTHER INCOME, NET. The components of other income (expense) are as follows for the years ended December 31:
Interest income increased $149,000 in 1997, as a result of the investment of the cash proceeds from the Company's initial public offering. The net proceeds, after repayment of debt, were invested in short-term, interest bearing, investment grade securities at December 31, 1997, and subsequently were used for acquisitions during 1998, resulting in a decrease of $50,000 in interest income in 1998. Interest expense increased by $120,000 in 1997 as a result of borrowings against the line of credit to fund working capital needs. Interest expense increased $331,000 in 1998 due to increased borrowings against the line of credit to fund acquisitions and working capital needs. Other income, consisting primarily of referral fees, increased $64,000 and $214,000 in 1998 and 1997, respectively. Included in other income for 1998 is a gain on the sale of assets of $32,000.
INCOME TAX PROVISION. For the year ended December 31, 1998, the Company recorded a tax provision of $1.3 million on pretax income of $2.7 million, compared to a tax provision of approximately $1.4 million on pretax income of $1.8 million in 1997. The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The tax provisions are based on the Company's consolidated effective tax rate after considering nondeductible expenses, such as amortization of goodwill, officers' stock compensation in 1997 and foreign taxes for 1998. The effective tax rates are as follows for the years ended December 31:
The increase in the 1997 effective tax rate is attributable to the effect of the nonrecurring nondeductible officers' stock compensation charge recognized in 1997.
The Company does not provide deferred income taxes on unremitted earnings of foreign subsidiaries, as such funds are deemed indefinitely reinvested in those operations. It is not practicable to calculate the deferred taxes associated with these unremitted earnings.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, net cash provided by operating activities totaled $561,000. Net cash used in investing activities was $15.5 million, primarily for acquisitions (as described below), the purchase of operating stock and equipment required in the Company's business, and costs associated with implementing a company-wide fully integrated management information system. Net cash provided by financing activities was $7.7 million, primarily due to borrowings against the revolving line of credit. Cash and cash equivalents decreased by $7.3 million during the period and totaled $1.7 million at December 31, 1998.
In September 1997, the Company completed its initial public offering of 3,007,250 common shares, of which 2,092,250 shares were issued by the Company and 915,000 shares were sold by certain stockholders of the Company at a public offering price of $9.00 per share (the "Offering"). The net proceeds to the Company (after deducting underwriting discounts and commissions and expenses incurred in connection with the Offering) of approximately $14.8 million were used to repay $1.0 million of certain indebtedness of the Founding Companies assumed in connection with the Combination (see Note 1 in the Notes to the Consolidated Financial Statements), $2.8 million (of which $1.0 million related to acquisitions) of indebtedness outstanding under the Company's revolving credit facility, $28,000 of the outstanding amount due under a loan made to the Company by the spouse of one of the Company's directors, and approximately $3.6 million for acquisitions and expenses associated with acquisitions. The remaining net proceeds were invested in short-term, interest bearing, investment grade securities at December 31, 1997, and subsequently were used for acquisitions during 1998.
The Company has a revolving credit facility that provides the Company with up to $25.0 million, secured by guarantees by certain material subsidiaries of the Company and a pledge of the capital stock of all of the Company's wholly-owned operating subsidiaries. The credit facility may be used for refinancing of the Company's subsidiaries' indebtedness, acquisitions, working capital and to repurchase up to $1.0 million of the Company's stock. Loans made under the credit facility bear interest, at the Company's option, at 0.25% to 0.5% above the bank's prime lending rate, or 1.75% to 2.0% above the Eurodollar or LIBOR rates. The credit facility will terminate on March 31, 2002, or sooner at the discretion of the Company, and all amounts outstanding thereunder (if any) will be due upon such termination. The credit facility (i) prohibits the payment of dividends and other distributions by the Company, (ii) generally will not permit the Company to incur or assume other indebtedness, (iii) requires the bank's approval for certain acquisitions and (iv) requires the Company to comply with certain financial covenants. The Company had $0 and $7.5 million outstanding under the facility at December 31, 1997 and December 31, 1998, respectively. At December 31, 1998, the Company's weighted average interest rate was 6.75%.
Subsequent to the Combination through December 31, 1997, the Company made three additional acquisitions. The acquisitions were accounted for using the purchase method of accounting. The aggregate cost of these acquisitions was $6.75 million, consisting of $4.4 million of cash and $2.35 million of stock. The preliminary purchase price allocation of these acquisitions resulted in goodwill of approximately $7.4 million that is being amortized over 35 years.
During 1998, the Company acquired seven companies. The acquisitions have been accounted for using the purchase method of accounting. The total aggregate cost of these acquisitions was approximately $16.3 million, consisting of cash and promissory notes of $12.1 million and $4.2 million in common stock or securities exchangeable for common stock. The preliminary purchase price allocation of these acquisitions resulted in goodwill of approximately $17.0 million that is being amortized over 35 years. Details regarding these acquisitions are noted below.
On January 2, 1998, the Company acquired all the assets of Home on the Road, Inc. of Charlotte, a North Carolina flexible accommodation company servicing Charlotte and surrounding cities. The purchase consideration consisted of cash, funded from the proceeds of the Offering, and a promissory note. Home on the Road, Inc. had revenues of $2.2 million in 1997.
On January 2, 1998, the Company acquired all the outstanding stock of Home on the Road-Raleigh, a North Carolina flexible accommodation company servicing several markets including Raleigh, Durham, Research Triangle Park, Winston-Salem and Greensboro. The purchase consideration of the acquisition was the issuance of 75,000 shares of common stock. Home on the Road-Raleigh had revenues of $1.3 million in 1997.
On January 2, 1998, the Company acquired certain assets of Accommodations by Apple-Denver and Accommodations by Apple-Austin, two flexible accommodation companies servicing several markets in the Denver metropolitan area including Colorado Springs, Boulder and Fort Collins, and in Austin, Texas, and surrounding cities. The purchase consideration of the two acquisitions was cash, funded from the proceeds of the Offering, and promissory notes. The acquisitions had revenues of approximately $2.6 million in 1997.
On February 19, 1998, the Company acquired all the issued and outstanding stock of London Life Apartments, Inc. ("London Life"), a flexible accommodation company servicing London, U.K. The purchase consideration consisted of cash and the issuance of approximately 165,000 shares of common stock. London Life had revenues of approximately $10.0 million in 1997.
On March 2, 1998, the Company acquired all the issued and outstanding stock of Global Travel Apartments, Inc. ("GTA"), one of Canada's largest providers of flexible accommodation services. GTA services the Toronto, Montreal, Ottawa, Edmonton, Regina, Vancouver and Victoria markets. The purchase consideration consisted of cash and the issuance of approximately 139,000 shares of the stock of a Canadian subsidiary that is exchangeable for an equal number of shares of common stock of the Company. GTA had revenues of approximately $7.7 million for the eleven months ended January 31, 1998.
On June 1, 1998, the Company acquired for cash certain assets of Gracious Corporate Lodging, a California flexible accommodation company servicing Santa Clara, Palo Alto and San Jose, California, and Austin, Texas. The purchase consideration of the acquisition was cash, funded from borrowings against the Company's revolving line of credit. Gracious Corporate Lodging had revenues of approximately $6.4 million in 1997.
The Company intends to continue to pursue growth through the acquisition of selected flexible accommodation service providers as well as increasing the number of affiliations with its Network Partners throughout the United States, Canada and Europe. The Company's primary sources of funding to date have been cash flow from operations, proceeds from the Offering and its revolving credit facility. The Company anticipates that cash flow from operations and funds from its revolving credit facility will be its principal future sources of funding. The Company's principal future uses of cash, in addition to cash used in operating activities, include funding of acquisitions and investment in the Company's management information systems. The Company does not plan to make any material capital expenditures for leasehold improvements. Capital expenditure requirements in 1999 are anticipated to be approximately $3.5 million, primarily related to the Company's management information systems. For the year ended December 31, 1998, the Company had capital expenditures of $4.1 million. While there can be no assurance, management believes that cash flow from operations and funds from the revolving credit facility will be adequate to meet the Company's capital requirements for the next 12 months, depending on the size and methods of financing potential acquisitions.
EFFECTS OF FOREIGN CURRENCY AND INFLATION
With the acquisitions of London Life and GTA in 1998, the Company now operates internationally and enters into transactions denominated in foreign currencies. As a result, the Company is subject to the volatility that is associated with exchange rate movements. The effects of foreign currency on operating results in the current year were not material to the Company.
Due to the relatively low levels of inflation experienced in 1998, 1997 and 1996, inflation did not have a significant effect on the results of the Company or TCH during these periods.
SEASONALITY
Quarterly earnings may be affected by the timing of certain holidays, business and vacation patterns, weather conditions, economic factors and other considerations affecting travel. Corporate relocation activity peaks in the summer months and declines significantly during the fourth quarter and the first part of the first quarter. Long-term consulting activity tends to follow a similar pattern, but not to the same extent. The Company expects to realize lower revenues, operating income and net income during the first and fourth quarters.
MANAGEMENT INFORMATION SYSTEMS AND YEAR 2000 ISSUES
The Company was formed in August 1996 and during 1997 and 1998 has acquired fifteen flexible accommodation companies. The acquired companies each had different computer hardware and software systems. As a result, the Company has undertaken a complete review and assessment of its information technology ("IT") systems. The Company has determined that all accounting and property management systems will be replaced with a single integrated system. Year 2000 ("Y2K") compliance is a requirement for all new systems the Company has acquired and will acquire or develop internally. The Company is in the process of analyzing all other non-information technology systems such as security, electrical, fire protection, voice and data communication systems, which may contain embedded technology microprocessors or other similar circuitry, to adequately address Year 2000 issues. The Company expects to complete this review by the end of the third quarter of 1999.
STATE OF READINESS. During the fourth quarter of 1997, the Company evaluated several major accounting software vendors. Key criteria evaluated included: Y2K compliance; meeting company functional requirements; reporting capabilities; software flexibility and scalability; vendor stability, growth and support; ease of use; and cost. In the first quarter of 1998, based on these criteria and extensive review of the software vendors, the Company selected an accounting software vendor. During the second and third quarters of 1998, the Company undertook phase one of its financial systems implementation. Phase one included: analyzing accounting requirements; purchasing and setting up hardware and application software; conducting a conference room pilot; and application documentation and training. In August of 1998, the Company began the roll out phase in the Company's Cleveland Region. The Company is in the process of rolling out the accounting software application to each of its regions with planned completion during the second quarter of 1999. By the end of the first quarter of 1999, the software was fully implemented in seven regions. All remaining regions are scheduled to undergo the conversion process in the second quarter of 1999. The Company also is implementing a wide area network (WAN) to connect all offices to the central computer system.
During the first quarter of 1998, the Company evaluated several major property management software vendors. Key criteria evaluated included: Y2K compliance; meeting company functional requirements; reporting capabilities; software flexibility and scalability; vendor stability, growth and support; ease of use; and cost. Based on this review the Company determined that there was no one software application that entirely met the key needs of the Company. In the second quarter of 1998, the Company made the decision to internally develop its property management systems. The system will be developed within the accounting software package discussed above. This will provide the Company with a fully integrated accounting and property management system. During 1997 the Company had developed a prototype property management system which will be the underlying design framework for the first phase of the property management system.
During the third quarter of 1998, the Company undertook phase one of its property management systems implementation. Phase one included: analyzing property management requirements; purchasing and setting up hardware and application software; conducting a conference room pilot; and, application documentation and training. This phase was completed and during the fourth quarter of 1998 and the Company began programming of the system. The Company expects to begin the pilot installation of the system at the end of the first quarter, 1999. Full implementation to all Company offices will begin at the end of the second quarter with completion during the third quarter of 1999.
The total cost to replace existing software, hardware and the cost of implementing the new accounting and property management systems is estimated to be $3.0 million, which will be capitalized as incurred.
CONTINGENCY PLANS AND RISKS OF THE COMPANY'S Y2K ISSUES. The Company believes it has the internal controls and manual systems in place to prevent any material interruption in its business operations due to Y2K problems. Prior to the complete implementation of the new accounting and property management systems, the Company's operating subsidiaries that do not have the new systems will continue to operate primarily in a manual environment. The Company's contingency plan is to rely on these manual systems and controls at each operating subsidiary until each subsidiary has fully implemented the new systems.
The Company is working with its processing banks to ensure their systems are Y2K compliant. All of these costs will be borne by the processing banks. In the event some of the processing banks are unable to convert their systems, the Company will switch to banks that are able to perform the processing requirements of the Company. While the Company does not have a relationship with any particular third-party vendors (property owners, houseware and furniture companies, utility providers) which is material to its operations, there can be no assurances that the systems of other companies on which the Company relies will be Y2K compliant on a timely manner, or that their failure to achieve Y2K compliance will not have an adverse impact on the Company's operations. Costs associated with any such failure cannot be reasonably estimated.
Factors To Be Considered
The information set forth above contains forward-looking statements, which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements. Readers should refer to the discussion under "Risk Factors" contained in the Company's Registration Statement on Form S-4 (No. 333-39187) filed with the Securities and Exchange Commission, which is incorporated herein by reference, concerning certain factors which could cause the Company's actual results to differ materially from the results anticipated in the forward-looking statements contained herein.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
BRIDGESTREET ACCOMMODATIONS, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
Non-Cash Transaction: During the first quarter of 1997, the Company exchanged 4,301,000 shares of Common Stock of the Company for all of the outstanding stock of the five Founding Companies. Additionally, during the fourth quarter, the Company exchanged approximately 222,000 shares of Common Stock of the Company for the assets of two flexible accommodation providers. In the first quarter of 1998, the Company issued approximately 380,000 shares of Common Stock of the Company or securities convertible into Common Stock of the Company as consideration for acquisitions.
See accompanying notes to consolidated financial statements.
BRIDGESTREET ACCOMMODATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was incorporated on August 19, 1996, to create a leading national provider of flexible accommodation services through the acquisition and consolidation of the operations of flexible accommodation service companies. During the first quarter of 1997, the Company acquired all the outstanding stock of five flexible accommodation service providers (the "Founding Companies"), in exchange for 4,301,000 shares of Common Stock of the Company (the "Combination"). The Company conducted no operations prior to January 2, 1997, except in connection with its initial public offering and the Combination. For financial reporting purposes, the largest Founding Company, Temporary Corporate Housing Columbus, Inc. ("TCH") was designated as the accounting acquirer, and its acquisition of the remaining four Founding Companies was accounted for using the purchase method of accounting.
The consolidated financial statements presented herein have been prepared by the Company and include the accounts of TCH, Corporate Lodgings, Inc., Exclusive Interim Properties, Ltd. and Temporary Housing Experts, Inc. all of which (together with certain affiliated companies) were merged with and into subsidiaries of the Company on January 2, 1997, as well as the accounts of the following wholly-owned operating subsidiaries from the indicated dates on which they acquired (by merger with or purchase of substantially all of the assets of) flexible accommodation service providers: HAI Acquisition Corp. (March 31, 1997); BridgeStreet Texas, L.P. (Dallas, December 1, 1997); BridgeStreet Arizona, Inc. (December 1, 1997); BridgeStreet North Carolina, Inc. (January 2, 1998); BridgeStreet Raleigh, Inc. (January 2, 1998); BridgeStreet Texas, L.P. (Austin, January 2, 1998); BridgeStreet Colorado, Inc. (January 2, 1998); BridgeStreet Accommodations Limited (February 19, 1998); BridgeStreet Canada, Inc. (March 2, 1998); and BridgeStreet California, Inc. (June 1, 1998). All intercompany accounts and transactions have been eliminated.
The financial position at December 31, 1996, and the results of operations and cash flows for the year ended December 31, 1996, presented herein are of TCH, the designated accounting acquirer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the preparation of these financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Investments in short-term marketable securities are deemed to be available-for-sale, and accordingly, are stated at their fair value. Other financial instruments consisting of trade and other receivables, and long-term debt, are considered to have a fair value which approximates carrying value at December 31, 1998 and 1997.
Concentration of Credit Risk
Concentration of credit risk is limited to accounts receivable. The Company may require collateral or other security to support their receivables. The Company conducts periodic reviews of its clients' financial condition and payment practices to minimize collection risks on accounts receivable.
Deferred Acquisition Costs
Deferred acquisition costs consist primarily of legal, accounting and other professional fees incurred in connection with the acquisitions of flexible accommodation service providers. All the costs associated with the acquisitions will be included as a component of the purchase price pursuant to the purchase method of accounting. At December 31, 1998 and 1997, the Company had deferred acquisition costs of $0 and $56,000, respectively, relating to acquisitions which had not closed at December 31, 1997, and are included in other current assets in the accompanying consolidated balance sheets.
Operating Stock
Operating stock to furnish new units, including linen, glassware, silverware, utensils and minor appliances, is capitalized as it is purchased and amortized over a three year period to a residual value of 50% of the original cost. Additional purchases of operating stock for units already established are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the consolidated statements of operations. Depreciation is determined using the straight-line method for financial reporting purposes over the estimated useful lives of the respective assets. The double-declining balance method is used for tax purposes. Estimated useful lives are as follows:
Repairs and maintenance are charged to expense as incurred. General and administrative costs associated with the opening of new Company offices are expensed as incurred.
Revenue Recognition
The Company recognizes revenues on the rentals of accommodations to its clients on a pro rata basis over the length of the client's stay. Amounts received relating to periods after the balance sheet date are reported as deferred revenue in the accompanying consolidated balance sheets. Security deposits received from guests are classified as a current liability, and security deposits paid to landlords are classified as current assets in the accompanying consolidated balance sheets.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets acquired and all
transaction costs incurred in connection with the acquisitions. The amortization of goodwill is provided on a straight-line basis over a 35-year period. Goodwill amortization totaled $1,098,000 and $489,000 in 1998 and 1997, respectively. Accumulated amortization of goodwill totaled $1,587,000 and $489,000 at December 31, 1998 and 1997, respectively.
Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability, and believes that the asset is realizable and the amortization period appropriate.
Accommodation and Furniture Leases
The Company leases substantially all of its accommodations on a short-term basis with lease terms typically ranging from one month to one year. Furniture for the accommodations is substantially all leased on a monthly basis from various furniture rental companies.
Reclassification
Certain items in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation.
3. COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which requires disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as changes in stockholders' equity from non-owner sources and for the Company, includes net income and changes in the foreign currency translation adjustment. The adoption of this statement had no impact on the Company's net income or stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of this statement.
4. BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." This statement requires companies to identify segments consistent with the manner in which management makes decisions about allocating resources to segments and measuring their performance. It also requires disclosure of products and services, geographic areas and major customers. The following disclosures have been made in accordance with this new statement.
In 1998, Andersen Consulting accounted for approximately $11 million, or 11.4% of the Company's consolidated 1998 revenues. No client accounted for more than 10% of the Company's 1997 revenues.
No single country outside of the United States comprised more than 10% or more of the Company's revenue from external customers. The Company had revenues of approximately $16.1 million, or 16.7% of total consolidated revenues from its Canadian and U.K. subsidiaries. Pre-tax income from these subsidiaries totaled $2.3 million, or 26.2% of total consolidated pretax income, before corporate expenses, in 1998. The Company had revenues of approximately $80.3 million, or 83.3% of total consolidated revenues from its United States operations. Pre-tax income from United States operations before corporate expenses was $6.5 million, or 73.8% of total consolidated pretax income.
Long-term assets located outside the United States are as follows:
Property and equipment $ 574,000 Goodwill 11,339,000 ----------- $11,913,000 ===========
All remaining long-term assets are located in the United States.
5. INCOME TAXES
The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
The components of income before provision for income taxes follow:
Total income tax payments, net of refunds, were $1.1 million, $1.3 million and $0.8 million in 1998, 1997 and 1996, respectively.
A reconciliation of the federal statutory income tax rate of 34% and the effective income tax rate for the year ended December 31 follows:
Deferred tax assets (liabilities) at December 31, 1998 and 1997 follow:
The company does not provide deferred income taxes on unremitted earnings of foreign subsidiaries, as such funds are deemed indefinitely reinvested in those operations. It is not practicable to calculate the deferred taxes associated with these unremitted earnings.
6. ACQUISITIONS
As discussed in Note 1, in the first quarter of 1997, the Company merged with five flexible accommodation operating companies in stock-for-stock tax-free mergers. The mergers have been accounted for using the purchase method of accounting with TCH designated as the accounting acquirer and the other operating companies designated as "acquired companies." The results of operations of the "acquired companies" have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The purchase price and allocation of the purchase price of the four "acquired companies," including the value of stock issued to the founders of BridgeStreet as a transaction fee, was approximately $17.7 million based on an independent appraisal of the net assets acquired. The aggregate cost of the acquisitions exceeded the estimated fair value of assets and liabilities of the acquired companies by $17.5 million which is being amortized as goodwill over 35 years.
Subsequent to March 31, 1997, the Company made three additional acquisitions during 1997. The cost of these acquisitions was $6.75 million, consisting of $4.40 million of cash and $2.35 million of stock. The preliminary purchase price allocation of these acquisitions resulted in goodwill of approximately $7.4 million.
Subsequent to December 31, 1997, the Company acquired seven companies. The acquisitions have been accounted for using the purchase method of accounting. The total aggregate cost of these acquisitions was approximately $16.3 million, consisting of cash and notes of $12.1 million and $4.2 million in common stock or securities exchangeable for common stock. The preliminary purchase price allocation of these acquisitions resulted in goodwill of approximately $17.0 million that is being amortized over 35 years.
The following table presents unaudited selected financial information for the Company, the five Founding Companies, and the acquisitions of ABA, Inc. of Dallas, ABA, Inc. of Phoenix, Home on the Road, Inc. of Charlotte, Home on the Road-Raleigh, London Life, GTA and Gracious Corporate Lodging on a pro forma basis, assuming the companies had been combined and the initial public offering had occurred as of the beginning of 1997.
The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made at the beginning of 1998 and 1997, respectively.
7. PROPERTY AND EQUIPMENT, AND OPERATING STOCK
Property and equipment, and operating stock consist of the following at December 31:
Depreciation expense was $829,003, $259,730 and $30,526 in 1998, 1997 and 1996, respectively. Operating stock amortization expense was $596,354, $241,468 and $29,807 in 1998, 1997 and 1996, respectively.
8. ACCRUED EXPENSES, OTHER
Accrued expenses, other includes the following at December 31:
9. RELATED PARTY TRANSACTIONS
An operating subsidiary of the Company purchases advertising space from City Visitor Publications, Inc., ("City Visitor"), an entity that publishes a travel magazine and is 100% owned by a former executive officer and beneficial shareholder of the Company. Included in the accompanying consolidated statements of operations for the years ended December 31, 1998 and 1997 are $22,500 and $16,000 of advertising expenses paid to City Visitor. In addition, during 1997 the Company from time to time paid expenses on behalf of City Visitor which are subsequently repaid to the Company by City Visitor. Included in accounts receivable in the accompanying consolidated balance sheet is $3,300 for the period ended December 31, 1997. In addition, through June 1997, the Company performed certain general and administrative functions, such as accounting and finance, on behalf of City Visitor. In connection with these services, the Company billed City Visitor approximately $1,900 for the year ended December 31, 1997.
For the period September 12, 1995, through December 12, 1997, TCH had an exclusive furniture lease agreement with Integrity Furniture, Inc., which is 49% owned by SLD Partnership ("SLD"), an Ohio general partnership and a beneficial owner of more than 5% of the Company's common stock. The agreement provided the lessor with the exclusive right to furnish all of TCH's leased accommodations in Pittsburgh, Pennsylvania, at agreed upon prices. In management's opinion, the lease terms and rental amounts were comparable to other agreements that TCH has entered into with unaffiliated entities.
TCH leases televisions, VCRs and microwave ovens from Saturn Enterprises, Inc. ("Saturn"), which is owned by the spouse of one of the Company's directors. The original agreement commenced on January 1, 1989, and was renewed on December 28, 1995, for a three-year period beginning on January 1, 1996. These items are rented at rates that are comparable to those charged by unaffiliated companies. Included in accounts payable in the accompanying consolidated balance sheets at December 31, 1998 and 1997, are amounts owed to Saturn of approximately $18,000 and $17,500, respectively.
An operating subsidiary of the Company leases office space from ABA Office Corporation, Inc. which is 100% owned by a senior manager of the Company. Included in the accompanying consolidated statements of operations for the periods ended December 31, 1998 and 1997, is $24,100 and $1,900 of rent expense related to the office space, respectively. Included in accounts payable in the accompanying consolidated balance sheets at December 31, 1998 and 1997 are amounts due ABA Office Corporation of $0 and $1,900, respectively. In management's opinion, the lease terms and rental amounts are comparable to amounts charged by unaffiliated entities.
10. RESTRUCTURING CHARGE
During the second quarter of 1998, the Company announced a realignment of its senior management, which was primarily responsible for a charge of $1.33 million on a pretax basis ($732,000 after tax). The second quarter charge to earnings of $1.33 million represents an accrual of $962,000 for severance and other employee benefits for five employees and an accrual of $368,000 for lease termination costs, the write-off of certain software and marketing costs and professional fees associated with the realignment. The accounting for the restructuring charge is in compliance with the Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." During 1998, $664,000 was charged against the reserve consisting of severance and benefit expenses of $341,000, the write-off of marketing materials and software of $202,000 and professional fees and other expenses of $121,000. The Company expects all costs, with the exception of severance related expenses for two employees, to be incurred by the end of the second quarter of 1999, and no material incremental costs are expected to be recognized in future periods.
11. COMMITMENTS AND CONTINGENCIES
Employment Contracts. During the first quarter of 1997, the Company entered into three-year employment contracts with three officers requiring minimum base salaries aggregating $450,000 per year. The contracts also provide severance benefits of up to the longer of 12 months pay or the remaining contract term for two of the officers. During the second quarter of 1998 the Company announced a management restructuring and entered into severance agreements with two of the officers. See footnote 10, above, for additional information. During 1998, the Company entered into a three year employment contract with its Chief Executive Officer. The contract expires in June of 2001. Also subsequent to December 31, 1998, the company amended the employment contract of its Chief Financial Officer to extend the contract for an additional year. The contract now expires in May of 2001.
Lease Commitments. The Company leases administrative offices, accommodations and furniture at several locations through July, 2004. Rent expense for the years ended December 31, 1998 and 1997 was $56,031,000 and $30,941,000, respectively. Minimum future rental payments on non-cancelable leases at December 31, 1998, are as follows:
The Company is party to litigation in the ordinary course of business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition or results of operations.
12. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share", which is effective for periods ending after December 15, 1997. The standard requires the presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS replaces the primary EPS calculation required under APB Opinion No. 15. Basic EPS excludes dilution and is calculated using the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The share amounts used to calculate 1998, 1997 and 1996 earnings per share amounts are as follows:
The weighted average number of common shares outstanding in 1996 is the number of shares issued by the Company on January 2, 1997, in exchange for all the issued and outstanding capital stock of TCH.
There were no dilutive stock options outstanding at December 31, 1998 as all stock options were anti-dilutive. There are no adjustments to the reported amounts of net income for purposes of computing diluted EPS.
13. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
During the first quarter of 1998 the Company amended its revolving credit facility agreement increasing the line from $10 million to $25 million. The revolving credit agreement, secured by the capital stock of the Company's operating subsidiaries, extends to March 31, 2002. During the first quarter of 1999, the Company amended certain terms of its revolving credit facility agreement. Interest is payable, at the Company's option, at 0.25 to 0.5% above the bank's prime lending rate, or 1.75% to 2.0% above the Eurodollar or LIBOR rates. A commitment fee is payable on the average unused credit at a rate of 0.375% to 0.45%. The revolving credit agreement contains certain restrictive covenants with which the Company must comply. The credit facility (i) prohibits the payment of dividends and other distributions by the Company, (ii) generally will not permit the Company to incur or assume other indebtedness, (iii) requires the bank's approval for acquisitions meeting certain cash and total acquisition consideration and (iv) requires the Company to comply with certain financial covenants. The Company was in compliance with these convenants at December 31, 1998. The Company had $7.5 million and $0 outstanding under the facility at December 31, 1998 and 1997. At December 31, 1998, the Company's weighted average interest rate was 6.75%.
At December 31, 1998, the Company had two non-interest bearing promissory notes payable totaling $730,000 resulting from two acquisitions. Of the notes, one note for $100,000 is due and payable on February 1, 1999 and the other note for $630,000 is payable on June 1, 1999. The Company also has term notes and capitalized leases, which are secured by fixed assets, totaling approximately $157,000. These notes and leases are payable in various installments through May 2002.
14. CAPITAL STOCK
The Company's authorized capital stock consists of 35,000,000 shares of Common Stock, $.01 par value per share, and since April 10, 1997, 5,000,000 shares of Preferred Stock, $0.01 par value per share.
Common Stock. On September 24, 1997, the Company completed its initial public offering of 3,007,250 common shares, of which 2,092,250 shares were issued by the Company and 915,000 shares were sold by certain stockholders of the Company at a public offering price of $9.00 per share (the "Offering"). The net proceeds to the Company (after deducting underwriting discounts and commissions and expenses incurred in connection with the Offering) of approximately $14.8 million were used to repay $1.0 million of certain indebtedness of the Founding Companies assumed in connection with the Combination, $2.8 million (of which $1.0 million related to acquisitions) of indebtedness outstanding under the Company's revolving credit facility, $28,000 of the outstanding amount due under a loan made to the Company by the spouse of one of the Company's directors, and approximately $3.6 million for acquisitions and expenses associated with acquisitions. The remaining net proceeds were invested in short-term, interest bearing, investment grade securities at December 31, 1997, and subsequently used for acquisitions, working capital and general corporate purposes.
At December 31, 1998 and 1997, there were 8,169,835 and 7,789,345 shares of Common Stock outstanding, respectively. Holders of Common Stock are entitled to one vote for each share held of record on all matters to be submitted to a vote of the stockholders, and do not have cumulative voting rights. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and after liquidation payments to holders of outstanding shares of Preferred Stock, if any.
Preferred Stock. At December 31, 1998 and 1997, there were no shares of Preferred Stock outstanding. Holders of Preferred Stock would have priority over the holders of Common Stock with respect to dividends, and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of Preferred Stock in one or more series and to fix terms, limitations, relative rights and preferences and variations as among series.
15. RESTRICTED STOCK COMPENSATION
In 1996, the CEO and CFO purchased 250,000 shares of restricted Common Stock for nominal value. The restrictions were originally scheduled to lapse upon the earlier to occur of five years from the date of purchase or upon the successful completion of an initial public offering of the Company's Common Stock or a change in control of the Company, as long as the individuals holding the stock were the CEO and CFO on the date the restrictions lapsed. As part of the negotiations involving these officers' employment agreements during the first quarter of 1997, the Company's Board of Directors removed all restrictions on the stock as of March 31, 1997, and all of the restricted shares became fully vested. In connection with this vesting, the Company recognized non-recurring, non-cash compensation expense of approximately $1,210,000, which was charged to operations with an offsetting credit to additional paid-in capital in the first quarter of 1997. The compensation charge of approximately $1,210,000 represented the difference between the value of the stock issued and the amount paid by the officers, measured by an independent appraisal as of the date the individuals were appointed to be the CEO and CFO.
16. STOCK OPTION PLANS
The Company adopted the 1997 Equity Incentive Plan (the "Equity Incentive Plan") which provides for the award of incentive stock options ("ISOs"), non-qualified stock options, stock appreciation rights, performance shares, restricted stock and stock units to all directors and employees of (including directors and employees of the founding companies) and consultants and advisors to the Company. The number of shares authorized and reserved for issuance under the Equity Incentive Plan is 1,500,000. In general, options are granted at the market price on the date of grant, vest in equal increments over 3 years, and expire 10 years from the date of grant. During 1998, the Company granted options under the Equity Incentive Plan to purchase 452,600 shares at prices ranging from $3.50 to $7.50. Of this amount 200,000 options were granted to the Company's Chief Executive Officer and President, of which 125,000 options were immediately vested and the remaining 75,000 will vest over a two-year period. As of December 31, 1998, the Company had outstanding options to purchase 830,784 shares of Common Stock under the Equity Incentive Plan at prices ranging from $3.50 to $9.00. Of this amount, options to purchase 250,000 shares were granted and remained outstanding as of December 31, 1998, pursuant to employment agreements at a price of $9.00 per share.
In 1998, the Company granted additional options to its Chief Executive Officer and President to purchase 300,000 shares of Common Stock. Although, these options were not granted pursuant to the Equity Incentive Plan, they are subject to the same terms and conditions contained in that plan as discussed above. The options were granted at a price of $7.50 per share. The market value of the Company's common stock on the date of grant was $5.25. Of these options, 175,000 will vest over a two year period on a pro rata basis. The remaining 125,000 options will vest in full after eight years with accelerated vested occurring upon certain conditions being met as follows: One-third of the options will vest if the Company's closing stock price averages $9.75 per share for ten consecutive trading days. Another one-third will vest if the Company's closing stock price averages $14.625 per share for ten consecutive trading days. The final one-third will vest if the Company's closing stock price averages $19.50 per share for ten consecutive trading days. Subsequent to December 31, 1998, the Company granted options, under the Equity Incentive Plan, to purchase 100,000 shares at a price per share of $4.75 to the Company's Chief Financial Officer.
The Company has adopted the Stock Plan for Non-Employee Directors (the "Directors' Plan"). During 1997, each director who was not an employee of the Company or one of its subsidiaries and neither a holder of five percent or more of the Company's Common Stock nor a stockholder of the Company prior to the Company's initial public offering ( a "non-employee director"), and each director nominee, received options to purchase 12,500 shares of Common Stock with a per-share exercise price equal to the offering price. Thereafter, each such non-employee director will be granted, on every third anniversary of the final Prospectus (provided he or
she still is a non-employee director at such time), an option to acquire an additional 7,500 shares of Common Stock, and each non-employee director initially elected following the offering also will be granted an option to purchase 7,500 shares of Common Stock having a per-share exercise price equal to the fair market value of the Common Stock on the date of such grant. The number of shares authorized and reserved for issuance under the Directors' Plan is 100,000. During 1998, the Company granted options to purchase 15,000 shares at prices ranging from $3.50 to $4.25. As of December 31, 1998 the Company had outstanding options to purchase 27,500 shares of Common Stock at prices ranging from $3.50 to $9.00 per share, under the Directors' Plan.
The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. SFAS No. 123, "Accounting for Stock-Based Compensation" established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected to remain on its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123. Had compensation expense for the Company's stock-based compensation plans been determined based upon fair values at the grant dates for awards under those plans in accordance with SFAS No. 123, the Company's net income per share would have been reduced to the pro forma amounts indicated below.
The weighted average fair value of options granted during 1998 and 1997 estimated on the date of grant using the Black-Scholes option pricing model was $1.93 and $4.78, respectively. The fair value of 1998 and 1997 options granted is estimated on the date of grant using the following assumptions: expected volatility of 30%, risk-free interest rate of 5.0%, an expected life ranging from 8 to 10 years, annual forfeitures ranging from 0.0% to 10.0%, and an expected dividend yield of 0.0%.
Summary information about the Company's stock options outstanding at December 31, 1998 is as follows.
On August 17, 1998, the Company reset the price of 140,984 stock options to $4.00.
Detailed information about the Company's stock options outstanding at December 31, 1998 is as follows.
DEFINED CONTRIBUTION PLANS
The Company and its subsidiaries have a defined contribution (401k ) plan for substantially all employees. Employees may contribute up to 15% of their pay. Currently, the Company contributes, in cash, amounts equal to 30 percent of the employee's contributions up to 5 percent of the employee's pay. The employee vests in the Company match over a three-year period on a pro rata basis. The amount expensed for the Company's matching contribution to the plan was $51,800 and $0 in 1998 and 1997, respectively.
18. SELECTED QUARTERLY DATA
The following is a summary of unaudited quarterly results for years ended December 31, 1998, and 1997. (Amounts in thousands, except per share amounts.)
Results for the second quarter of 1998 include expense of $1.33 million on a pretax basis ($732,000 after tax) for a restructuring charge. The one-time charge reduced earnings in the second quarter, and for the year, by $0.09 per share.
Results for the first quarter of 1997 include $1.2 million of non-recurring, non-cash compensation expense relating to the accelerated vesting of restricted stock held by executive officers. The one-time non-deductible charge reduced earnings in the first quarter and for the year ended December 31, 1997, by $0.24 and $0.20 per share, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
SELECTED FINANCIAL DATA) (IN THOUSANDS, EXCEPT SHARE AND FOOTNOTE DATA)
For financial reporting purposes, TCH is presented as the acquirer of all of the other companies acquired by BridgeStreet in the Combination. Consequently, the Company's historical combined financial statements for periods ended on or before December 31, 1996, are the historical combined financial statements of TCH. The historical financial statements as of December 31, 1998 and 1997 and for the years then ended are of the Company and include the accounts of each of the Founding Companies and all other acquisitions from their respective dates of acquisition. The following selected historical financial data of the Company for the years ended December 31, 1998 and 1997 and of TCH as of December 31, 1996 and 1995, and for each year in the three-year period ended December 31, 1996, have been derived from the applicable audited financial statements of the Company and TCH. The remaining selected historical financial data of TCH has been derived from unaudited financial statements of TCH, which have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of that data.
(1)Certain amounts have been reclassified to conform to the 1998 presentation. (2)Consists of a management restructuring charge. This represents a reduction of $0.09 per share in 1998. (3)Consists of non-recurring, non-cash compensation expense recorded in connection with the accelerated vesting of restricted stock. This represents a reduction of $0.20 per share in 1997. (4)The weighted average number of common shares outstanding in 1992 through 1996 is the number of shares issued by the Company on January 2, 1997, in exchange for all the issued and outstanding capital stock of TCH.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of BridgeStreet Accommodations, Inc.
We have audited the accompanying consolidated balance sheets of BridgeStreet Accommodations, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BridgeStreet Accommodations, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(1) and (2) and Item 14(d) of Form 10-K are the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio, February 17, 1999
SCHEDULE II
BRIDGESTREET ACCOMMODATIONS, INC. VALUATION AND QUALIFYING ACCOUNTS
Note: The amounts for the periods ended on or before December 31, 1996, are the historical combined financial statements of TCH.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item will be contained in the Company's Proxy Statement, which the Company intends to file within 120 days following the end of its fiscal year ended December 31, 1998, and such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item will be contained in the Company's Proxy Statement, which the Company intends to file within 120 days following the end of its fiscal year ended December 31, 1998, and such information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item will be contained in the Company's Proxy Statement, which the Company intends to file within 120 days following the end of its fiscal year ended December 31, 1998, and such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item will be contained in the Company's Proxy Statement, which the Company intends to file within 120 days following the end of its fiscal year ended December 31, 1998, and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company and its subsidiaries are included pursuant to Item 8.
(A)(3) EXHIBITS
* Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-26647). + Filed herewith.
(b) The Company filed no reports on Form 8-K during the last quarter of its fiscal year ended December 31, 1998.
(c) See item 14(a) (3) above
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGESTREET ACCOMMODATIONS, INC.
Date: March 25, 1999 By:/s/ John E. Danneberg ------------------------------------- John E. Danneberg President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.