ITEM 1. BUSINESS
Our Company
We develop, own, and operate extended stay lodging facilities which provide an affordable and attractive lodging alternative at a variety of price points for value-conscious guests. Our facilities are designed to offer a superior product at lower rates than most other lodging providers within their respective price segments. Our facilities feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers, professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. On April 11, 1997, we completed a merger (the "Merger") with Studio Plus Hotels, Inc. ("SPH"). The Merger was accounted for as a pooling of interests and our business development and historical financial statements have been restated to include the operations and accounts of SPH, which is now one of our wholly-owned subsidiaries. In this Annual Report on Form 10-K, the words "Extended Stay America", "Company", "we", "our", "ours", and "us" refer to Extended Stay America, Inc. and its subsidiaries (including SPH), unless the context suggests otherwise.
Our goal is to be a national provider of extended stay lodging. We believe that the first companies to do so will benefit from establishing a brand name and customer awareness. We intend to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for our guests, actively managing our properties to increase revenues and reduce operating costs, and increasing customer awareness of our products. Through December 31, 1999, we had developed 351 extended stay lodging facilities, acquired 11 others, and had 23 facilities under construction.
We expect we will have sufficient funds to open properties with total costs exceeding $350 million in 2000. Due to uncertainties regarding the availability of additional capital for projects opening in 2001, however, we plan to limit the development of properties opening in 2000 to approximately 30 properties with total costs of approximately $250 million. We believe that this strategy will permit us to develop properties in markets with higher barriers to entry that generally have longer development cycles, while prudently managing our capital structure. In the event we obtain additional capital, we will seek to increase property openings in future years.
Extended Stay America was formed in 1995 as a Delaware corporation and our executive offices are located at 450 E. Las Olas Boulevard, Fort Lauderdale, Florida 33301. Our telephone number is (954) 713-1600.
Our Brands
We own and operate three brands in the extended stay lodging market-- StudioPLUS Deluxe Studios/R/ ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency Studios/R/ ("EXTENDED STAY"), and Crossland Economy Studios ("Crossland"). Each brand is designed to appeal to different price points below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully- equipped kitchen or kitchenette; and a bathroom. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category, and StudioPLUS facilities serve the mid-price category and generally feature larger guest rooms, an exercise room, and a swimming pool.
Our Strategy
Our strategy is to maximize value to customers by providing a superior, newly-constructed, and well-maintained product at each price point while maintaining high operating margins. We attempt to achieve this goal through the following:
Create Brand Awareness. We believe that guests value a recognizable brand when selecting lodging accommodations. By positioning our brands as the first nationwide extended stay providers in their targeted price segments, we believe our brands will have a distinct advantage over their local and regional competitors. We also believe that our evolving national presence and high customer satisfaction ratings, coupled with
selective advertising and promotion, will establish StudioPLUS, EXTENDED STAY, and Crossland as desirable and well recognized brands.
Provide a Superior Product at a Lower Price. Our facilities are designed to offer a superior product at lower rates than most other lodging providers within their respective price segments. Each of our brands is targeted to a different price point: StudioPLUS--$299 to $399 per week (daily equivalent--$43 to $57); EXTENDED STAY--$199 to $299 per week (daily equivalent--$29 to $43); and Crossland--$159 to $199 per week (daily equivalent--$23 to $29). Room rates at our facilities vary significantly depending upon market factors affecting their locations. These rates contrast with average daily rates in 1999 of $65, $50, and $39 for the mid- price, economy, and budget segments, respectively, of the entire lodging industry.
Achieve Operating Efficiencies. We believe that the design and price level of our facilities attract guest stays of several weeks. This creates a more stable revenue stream which, together with low labor-cost amenities, should lead to reduced administrative and operational costs and higher operating margins. We also use sophisticated control and information systems to manage individual facility-specific factors, such as pricing, payroll, and occupancy levels, on a Company-wide basis.
Optimize Low Cost Amenities. We seek to provide the level of amenities needed to offer quality accommodations while maintaining high operating margins. Our facilities contain a variety of non-labor intensive features that are attractive to extended stay guests. These features include a fully-equipped kitchen or kitchenette, weekly housekeeping, color television with cable or satellite hook-up, coin-operated laundromat, and telephone service with voice mail messaging, and, at many StudioPLUS facilities, an exercise room and swimming pool. To help maintain affordability of room rates, labor-intensive services such as daily cleaning, room service, and restaurants are not provided.
Employ a Standardized Concept. We have developed standardized plans and specifications for our facilities. This provides for lower construction and purchasing costs and establishes uniform quality and operational standards. We also benefit from the experience of various members of our management team in rapidly developing and operating numerous commercial properties to a uniform set of design standards on a cost-effective basis.
Industry Overview
Traditional Lodging Industry
The U.S. lodging industry is estimated to have generated approximately $72 billion in annual room revenues in 1999 and had approximately 3.9 million rooms at the end of 1999. Industry statistics, which we believe to be reliable, indicate that the U.S. lodging industry's performance is strongly correlated to economic activity. Room supply and demand historically have been sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room and occupancy rates.
Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply of rooms. We believe this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. We believe that the lodging industry has since benefited from an improved supply and demand balance, as evidenced by the compound annual growth of 5% in revenue per available room from 1993 through 1999. The number of available rooms in the industry has grown at an average annual rate of 3.6% for the years 1996 through 1999, however, and the annual growth in revenue per available room has declined from 6.3% in 1996 to 3.1% in 1999. We believe that this decline in the growth rate of revenue per available room, along with concerns of a decline in the U.S. economy in general, resulted in a significant contraction in capital available for the development of new lodging products in 1998 and 1999. As a result, we expect the rate of growth of new hotel rooms to moderate for the next few years.
The lodging industry generally can be segmented by the level of service provided and the pricing of the rooms. Segmentation by level of service is divided into the following categories:
. full service hotels, which offer food and beverage services, meeting rooms, room service, and similar guest services;
. limited service hotels, which generally offer only rooms with amenities such as swimming pools, continental breakfast, or similar limited services; and
. all-suite hotels, which generally have limited public spaces but provide guests with two rooms or distinct partitioned areas and which may or may not offer food and beverage service to guests.
The lodging industry may also be segmented by price level and is generally divided into categories based on average daily room rates, which in 1999 were $39 for budget, $50 for economy, $65 for mid-price, $87 for upscale, and $139 for luxury.
The all-suite segment of the lodging industry is a relatively new segment. It is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all-suite hotels began to offer suites with additional space and, in some cases, an efficiency kitchen. In addition, guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. We believe the extended stay market in which we participate is an additional and emerging segment of the traditional lodging industry similar to the all-suite segment.
Extended Stay Market
We believe that extended stay hotels generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels. This is primarily a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. We also believe the extended stay market is one of the most rapidly growing and underserved segments of the U.S. lodging industry, with demand for extended stay lodging significantly exceeding the current and anticipated near-term supply of dedicated extended stay rooms.
In September 1998, we announced the results of a recently completed analysis of extended stay lodging demand which was performed for us by PricewaterhouseCoopers. Their analysis indicated an estimate of total U.S. demand for extended stay properties of approximately 300,000 rooms. As of December 31, 1999, the inventory of dedicated extended stay rooms based on data provided by Smith Travel Research for the following extended stay hotel chains totaled approximately 165,000 rooms.
We believe that these chains represent the majority of dedicated extended stay rooms available in the U.S. lodging industry.
An upscale extended stay room generally has a weekly rate of $500 or more. Our weekly room rates are generally less than $500. Approximately 39% of the supply of extended stay rooms were operated above our targeted price points and we owned approximately 38% of the rooms operated in our targeted price segments. The following table indicates the total rooms for the extended stay chains listed above, the total rooms for the upscale chains, and the total rooms owned by us at the end of each of the last three years.
We believe the continuing significant demand/supply imbalance and the longer average length of stay have caused occupancy rates for extended stay hotels to significantly exceed occupancy rates in the overall U.S. lodging industry. The table below shows that average occupancy rates for extended stay hotel chains have exceeded the rates in the overall U.S. lodging industry for each of the previous five years based on data provided by Smith Travel Research.
We believe the decline in occupancy rates for extended stay hotel chains since 1995 is in part the result of an increase in the proportion of newly- opened hotels, which generally experience lower occupancies during their pre- stabilization period. The table below shows that, while there has been rapid growth in available room nights for both the extended stay market in general and for us in particular, there has also been rapid growth in occupied room nights. This indicates that much of the new construction in the extended stay market has been absorbed.
As a segment of the total U.S. lodging industry, extended stay hotel chains experienced a significant contraction in the availability of capital during 1998 that continued through 1999. As a result, we expect the growth in available dedicated extended stay rooms to moderate for the next few years.
Property Development
Our goal is to become a national provider of extended stay facilities through a rapid development program. We believe that the first companies to do so will benefit from establishing a brand name and customer awareness. We expect that our primary means of expansion will be the construction and development of new extended stay lodging facilities. We have also acquired, and we may make additional acquisitions of, existing extended stay lodging facilities or other properties that we can convert to the extended stay concept.
Our strategy is to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.
We have approximately 15 real estate professionals and approximately 20 construction professionals who perform site selection, entitlement, and construction activities according to our established criteria and procedures
from offices throughout the United States. It generally takes us at least twenty-four months to identify a site and complete construction of a facility, but this process may be substantially longer in certain markets. We try to minimize our capital outlays incurred in this process until after the commencement of construction.
The site selection process includes assessing the characteristics of a market area based on our development standards, identifying sites for development within a qualified market area, and negotiating an option to purchase qualified sites. Although the time required to complete the selection process in a market varies significantly based on local market conditions, we typically need approximately six to eight months to assess a market and obtain an option to purchase a site in a qualified market.
After we obtain an option to purchase a site, our legal, environmental, and business due diligence begins. During this period, our real estate and construction professionals evaluate whether the site is financially suitable for development, obtain necessary approvals and permits, and negotiate construction contracts with third party general contractors. It generally takes us eight to ten months to complete this process, however, the time needed can vary significantly by market area due to local regulations and restrictions.
The site selection and due diligence processes are reviewed periodically by our senior management and our approval to begin construction is based on a detailed review of the demographic, physical, and financial qualifications of each site. Once our senior management approves the development of a site, it is purchased, the construction contract is executed, and construction generally begins immediately. We use a number of general contractors. The selection of a contractor for a specific site depends upon the geographic area, the negotiated construction costs, and the financial and physical capacities of the contractors. The construction process is regularly inspected by our construction professionals to monitor both the quality and timeliness of completion of construction. Although the construction period varies significantly based on local construction requirements and weather conditions, it generally takes us eight to ten months to complete construction once it has begun.
During 1999, we repositioned 14 StudioPLUS properties as EXTENDED STAY properties. All operating statistics reflect the repositioning of these properties as EXTENDED STAY properties for the entire periods presented. Our development status as of December 31, 1999 was as follows:
The design plans for our lodging facilities call for a newly-constructed apartment style complex. They generally consist of two- to four-story buildings with laundromat and office areas and use interior and exterior corridor building designs, depending primarily on local zoning and weather factors. All three of our brands offer the same core components: a living/sleeping area; a fully- equipped kitchen or kitchenette with a refrigerator, stovetop, microwave, and sink; and a bathroom. The typical building design criteria for each of our brands is shown in the table below:
The actual number of rooms and living space per room may vary significantly depending on location and date of construction. In addition, each facility may include certain non-standard room types.
Property Operations
Each of our facilities employs a property manager who is responsible for the operations of that particular property. The property manager shares duties with and oversees a staff typically consisting of an assistant manager, desk clerks, maintenance personnel, and a housekeeping/laundry staff of approximately 2-10 persons (many of whom are part-time employees). The office at each of our facilities is generally open daily as follows: Crossland--
from 8:00 a.m. to 7:00 p.m.; EXTENDED STAY--from 7:00 a.m. to 11:00 p.m.; and StudioPLUS--from 7:00 a.m. to 11:00 p.m., although an employee normally is on duty at all facilities twenty-four hours a day to respond to guests' needs.
The majority of daily operational decisions are made by the property managers. Each property manager is under the supervision of one of our district managers, who typically are responsible for five to seven facilities, depending on geographic location. Our district managers oversee the performance of our property managers in such areas as guest service, property maintenance, and payroll and cost control. The district managers report to a regional director who is responsible for the supervision of 8-10 district managers. The regional directors report to our Vice President of Operations, who is responsible for implementing all operational and strategic policies for our brands. Each facility is evaluated against a detailed revenue and expense budget, as well as against the performance of our other facilities. Our corporate offices use sophisticated information systems to support the district managers and regional directors.
Marketing Strategy
We believe that guests value a recognizable brand when selecting lodging accommodations. To date, we have created brand awareness primarily by increasing the number of hotels through a rapid national development program, with sites that typically are in highly-visible locations. We have established a toll free reservation number (1-800-EXT-STAY) and a web site (www.extstay.com) to provide information about our locations and to reserve rooms. With our growth to a recognizable national chain in 1999, we launched our first national consumer advertising campaign in USA Today, which was supplemented by a national direct mail campaign. We plan to expand both advertising initiatives in 2000. We think that we can increase demand for our facilities by building awareness for both the extended stay concept as well as our various brands.
Lodging Facilities
At December 31, 1999, we had 362 extended stay lodging facilities in operation (90 StudioPLUS, 233 EXTENDED STAY, and 39 Crossland) and 23 facilities under construction (1 StudioPLUS, and 22 EXTENDED STAY) in a total of 38 states. The following table shows certain information regarding those facilities.
Date Opened or Number City Brand Acquired of Rooms - ------------------ ------------- ------------------ -------- CALIFORNIA Alameda........... StudioPLUS July 1999 88 Alameda........... EXTENDED STAY Under Construction 121 Arcadia........... EXTENDED STAY April 1998 122 Bakersfield....... EXTENDED STAY November 1996 120 Dublin............ EXTENDED STAY Under Construction 122 Fremont........... StudioPLUS August 1999 82 Fremont........... EXTENDED STAY December 1998 119 Fresno............ Crossland November 1998 128 Fresno............ EXTENDED STAY July 1997 120 Gardena........... Crossland December 1998 137 Huntington Beach.. EXTENDED STAY December 1998 104 La Mirada......... EXTENDED STAY June 1998 104 Lake Forest....... EXTENDED STAY September 1997 119 Livermore......... EXTENDED STAY January 1998 122 Long Beach........ EXTENDED STAY November 1997 134 Los Angeles....... EXTENDED STAY May 1999 133 Los Angeles....... EXTENDED STAY August 1999 122 Milpitas.......... EXTENDED STAY January 1998 146 Morgan Hill....... EXTENDED STAY December 1998 92 Oceanside......... EXTENDED STAY January 1999 101 Ontario........... EXTENDED STAY May 1997 127 Pleasant Hill..... EXTENDED STAY August 1997 122 Rancho Cordova.... Crossland November 1998 129 Rancho Cordova.... EXTENDED STAY June 1997 132 Richmond.......... EXTENDED STAY Under Construction 101 Roseville......... EXTENDED STAY August 1998 122 Sacramento........ EXTENDED STAY March 1997 120 Sacramento........ EXTENDED STAY August 1997 120 San Diego......... EXTENDED STAY November 1999 166 San Dimas......... EXTENDED STAY February 1999 104 San Ramon......... EXTENDED STAY Under Construction 128 Santa Rosa........ EXTENDED STAY June 1997 114 Santa Rosa........ EXTENDED STAY Under Construction 94 Santa Barbara..... EXTENDED STAY January 1998 104 Torrance.......... EXTENDED STAY December 1997 122 Union City........ EXTENDED STAY December 1999 121 Valencia.......... EXTENDED STAY Under Construction 104 Woodland Hills.... EXTENDED STAY Under Construction 146
COLORADO Aurora............ Crossland December 1998 133 Colorado Springs.. Crossland November 1998 133 Colorado Springs.. EXTENDED STAY September 1998 104 Englewood......... StudioPLUS August 1998 72 Glendale.......... Crossland July 1998 129 Lakewood.......... EXTENDED STAY November 1996 120 Lakewood.......... EXTENDED STAY January 1997 147 Thornton.......... Crossland March 1999 133 Westminster....... EXTENDED STAY Under Construction 103
CONNECTICUT Farmington........ StudioPLUS December 1998 91
Date Opened or Number City Brand Acquired of Rooms - ----------------- ------------- ------------------ -------- FLORIDA Clearwater....... EXTENDED STAY March 1998 104 Daytona Beach.... StudioPLUS August 1998 73 Deerfield Beach.. EXTENDED STAY December 1997 104 Fort Lauderdale.. Crossland March 1999 129 Fort Lauderdale.. EXTENDED STAY March 1998 108 Fort Lauderdale.. EXTENDED STAY July 1999 117 Fort Lauderdale.. StudioPLUS April 1999 72 Gainesville...... EXTENDED STAY July 1997 120 Jacksonville..... EXTENDED STAY May 1997 122 Jacksonville..... EXTENDED STAY Under Construction 101 Jacksonville..... StudioPLUS July 1998 73 Maitland......... EXTENDED STAY June 1999 104 Maitland......... StudioPLUS Under Construction 81 Melbourne........ StudioPLUS October 1998 84 Miami............ EXTENDED STAY Under Construction 109 Orlando.......... Crossland January 1999 139 Orlando.......... EXTENDED STAY November 1997 119 Orlando.......... EXTENDED STAY February 1999 122 Orlando.......... StudioPLUS June 1998 83 Orlando.......... StudioPLUS October 1999 113 Pensacola........ EXTENDED STAY September 1997 101 Plantation....... EXTENDED STAY Under Construction 104 Tallahassee...... StudioPLUS January 1998 59 Tampa............ StudioPLUS March 1999 85 Temple Terrace... EXTENDED STAY August 1997 101 West Palm Beach.. StudioPLUS November 1998 73
GEORGIA Alpharetta....... EXTENDED STAY June 1999 101 Alpharetta....... StudioPLUS July 1997 91 Atlanta.......... EXTENDED STAY April 1998 104 Atlanta.......... EXTENDED STAY Under Construction 98 Atlanta.......... StudioPLUS December 1997 97 Columbus......... EXTENDED STAY January 1997 108 Columbus......... EXTENDED STAY Under Construction 92 Duluth........... EXTENDED STAY September 1997 119 Kennesaw......... EXTENDED STAY December 1998 104 Kennesaw......... StudioPLUS December 1997 84 Lawrenceville.... EXTENDED STAY June 1996 121 Macon............ StudioPLUS March 1998 72 Marietta......... EXTENDED STAY August 1995 121 Marietta......... EXTENDED STAY January 1998 113 Morrow........... EXTENDED STAY June 1998 104 Norcross......... EXTENDED STAY January 1996 199 Norcross......... EXTENDED STAY February 1996 133 Norcross......... StudioPLUS March 1997 72 Riverdale........ EXTENDED STAY February 1996 147
IDAHO Boise............ EXTENDED STAY January 1997 107
ILLINOIS Buffalo Grove.... EXTENDED STAY February 1998 122
Date Opened or Number City Brand Acquired of Rooms - ----------------- ------------- ------------------ -------- Burr Ridge....... EXTENDED STAY November 1996 119 Champaign........ EXTENDED STAY September 1998 89 Darien........... EXTENDED STAY March 1999 104 Des Plaines...... EXTENDED STAY March 1998 122 Des Plaines...... StudioPLUS April 1999 88 Downers Grove.... EXTENDED STAY May 1996 154 Elmhurst......... EXTENDED STAY August 1997 117 Gurnee........... EXTENDED STAY January 1997 101 Hanover Park..... EXTENDED STAY June 1999 104 Hillside......... EXTENDED STAY November 1999 122 Itasca........... EXTENDED STAY November 1996 125 Lansing.......... EXTENDED STAY November 1998 122 Lisle............ EXTENDED STAY Under Construction 98 Lombard.......... StudioPLUS March 1998 98 Naperville....... EXTENDED STAY November 1996 125 O'Fallon......... EXTENDED STAY September 1998 89 Rockford......... EXTENDED STAY September 1997 104 Rockford......... StudioPLUS November 1997 72 Rolling Meadows.. EXTENDED STAY October 1996 125 Romeoville....... EXTENDED STAY October 1998 101 Schaumburg....... EXTENDED STAY March 1999 104 Skokie........... EXTENDED STAY Under Construction 140 Waukegan......... Crossland November 1997 121
INDIANA Evansville....... StudioPLUS February 1997 71 Fort Wayne....... EXTENDED STAY September 1997 101 Fort Wayne....... StudioPLUS December 1996 71 Indianapolis..... EXTENDED STAY October 1998 107 Indianapolis..... EXTENDED STAY August 1990 72 Indianapolis..... EXTENDED STAY March 1991 72 Indianapolis..... EXTENDED STAY September 1999 101 Merrillville..... EXTENDED STAY November 1996 105 Mishawaka........ StudioPLUS September 1997 73
IOWA Des Moines....... StudioPLUS December 1997 86 Urbandale........ EXTENDED STAY January 1999 104
KANSAS Lenexa........... EXTENDED STAY May 1996 59 Overland Park.... EXTENDED STAY September 1997 119 Wichita.......... StudioPLUS December 1997 72
KENTUCKY Covington........ EXTENDED STAY December 1997 105 Florence......... EXTENDED STAY October 1997 101 Florence......... StudioPLUS September 1996 71 Lexington........ EXTENDED STAY September 1996 126 Lexington........ EXTENDED STAY July 1986 60 Lexington........ EXTENDED STAY August 1987 71 Louisville....... EXTENDED STAY October 1996 120 Louisville....... EXTENDED STAY December 1988 76 Louisville....... EXTENDED STAY April 1989 65
Competition
The lodging industry is highly competitive. This competition is based on a number of factors including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments and limited service hotels. All of our facilities are located in developed areas and compete with budget, economy, and mid-price segment hotels and other companies focusing on the extended stay market. The greater the number of competitive lodging facilities in a particular area, the more likely it is that those competitors may have a material adverse effect on the occupancy levels and average weekly room rates of our facilities.
We expect that competition within the budget, economy, and mid-price segments of the extended stay lodging market will continue to increase. Although we expect the contraction of capital available to the lodging industry that began during 1998 and continued through 1999 to slow the rate of growth of new lodging products in general, we expect our existing competitors to continue to develop extended stay facilities to the extent that their capital permits and we expect them to increase their development in the event that additional capital should become available in the future. Competitors may include new participants in the lodging industry generally and participants in other segments of the lodging industry that may enter the extended stay market. They may also include existing participants in the extended stay market that may increase their product offerings to include facilities in the budget, economy, or mid-price segments. Competition is for both quality locations to build new facilities and for guests to fill and pay for those facilities. A number of our competitors have greater financial resources than we do and better relationships with lenders and sellers, and may therefore be able to find and develop the best sites before we can. Also, we cannot assure you that our competitors will not reduce their rates, offer greater convenience, services, or amenities, or build new hotels in direct competition with our existing facilities, all of which could have a material adverse effect on our operations.
Environmental Matters
Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on such property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of those hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. These costs may be substantial, and the presence of hazardous substances, or the failure to properly remediate hazardous substances, may adversely affect the owner's ability to sell the real estate or to borrow using that real estate as collateral. We may be liable for any of these costs that occur in connection with our properties.
We have obtained Phase I environmental site assessments ("Phase I Surveys") on our existing properties and we intend to obtain Phase I Surveys before the purchase of any future properties. Phase I Surveys are intended to identify potential environmental contamination and regulatory compliance problems. A Phase I Survey generally includes an historical review of the relevant property, a review of certain public records, a preliminary investigation of the site and surrounding properties, and the preparation of a written report. A Phase I Survey generally does not include invasive procedures, such as soil sampling or ground water analysis.
None of our Phase I Surveys have revealed any environmental liability or compliance concern that we believe would have a material adverse effect on our business, assets, results of operations, or liquidity, and we are not aware of any such liability or concern. Nevertheless, it is possible that our Phase I Surveys did not reveal all environmental liabilities or compliance problems or that there are material environmental liabilities or compliance problems of which we will not be aware. Moreover, new or changed laws, ordinances, or regulations may impose material environmental liabilities. In addition, the environmental condition of our properties may also be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Governmental Regulation
A number of states regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. We believe that each of our facilities has the necessary permits and approvals to operate its respective business and we intend to continue to obtain such permits and approvals for our new facilities. We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could adversely affect our business. There are frequently proposals under consideration, at the federal and state level, to increase the minimum wage.
Under the Americans With Disabilities Act ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We attempt to satisfy ADA requirements in the designs for our facilities, but we cannot assure you that we will not be subjected to a material ADA claim. If that were to happen, we could be ordered to spend substantial sums to achieve compliance, fines could be imposed against us, and we could be required to pay damage awards to private litigants. The ADA and other regulatory initiatives could adversely affect our business as well as the lodging industry in general.
Insurance
We currently have the types and amounts of insurance coverage that we consider appropriate for a company in our business. While we believe that our insurance coverage is adequate, our business, results of operations, and financial condition could be materially and adversely affected if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside of the scope of our insurance coverage.
Employees
At December 31, 1999, we employed approximately 5,600 persons, of which approximately 3,200 were part-time employees. We expect that we will significantly increase the number of our employees as our business expands. Our employees are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good.
ITEM 2.
ITEM 2. PROPERTIES
In addition to our lodging facilities described in "Item 1. Business-- Lodging Facilities" above, our principal executive offices are located in Fort Lauderdale, Florida and we maintain regional offices throughout the United States. We generally rent our office space on a short-term basis, although we have five to seven year leases for our corporate headquarters. Our offices are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to us.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any significant litigation or claims, other than routine matters incidental to the operation of our business. To date, we have had no material claims and we do not expect that the outcome of any pending claims will have a material adverse effect on us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock ("Common Stock") is traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "ESA." On December 31, 1999, the last reported sale price of the Common Stock on the NYSE was $7.56 per share. At December 31, 1999, there were approximately 385 record holders of the Common Stock. The table below sets forth the high and low sales prices of shares of Common Stock on the NYSE for the periods indicated.
We have not paid any dividends on our Common Stock. We intend to continue to retain our earnings to finance our growth and for general corporate purposes. We do not anticipate paying any dividends in the foreseeable future. In addition, our credit facility and senior subordinated notes contain, and future financing agreements may contain, maximum debt to capitalization ratio covenants and limitations on payment of any cash dividends or other distributions of assets. These covenants and limitations could restrict our ability to pay dividends.
Market Information
Common Stock -------------- High Low ------ ------ Year Ended December 31, 1998: 1st Quarter.................. $15.00 $10.94 2nd Quarter.................. 14.75 10.75 3rd Quarter.................. 11.62 6.12 4th Quarter.................. 11.06 6.37 Year Ended December 31, 1999: 1st Quarter.................. 10.31 8.25 2nd Quarter.................. 12.63 9.50 3rd Quarter.................. 12.00 8.00 4th Quarter.................. 8.75 7.25
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited consolidated financial statements for the years ended December 31, 1995, 1996, 1997, 1998, and 1999. You should read this information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
- ------------ (1) Excludes interest of $256,000, $329,000, $1,731,000, $17,617,000, and $10,216,000 for 1995, 1996, 1997, 1998, and 1999, respectively, capitalized during the construction of our facilities under Statement of Financial Accounting Standards ("SFAS") Statement No. 34 "Capitalization of Interest Cost."
(2) On April 11, 1997, we completed the Merger with SPH. Historical financial information prior to SPH's initial public offering of common stock does not include a provision for income taxes because SPH's predecessor entities were S corporations or partnerships not subject to income taxes.
(3) Net income per share for the year ended December 31, 1995 is presented on a pro forma basis as if all of our income for the period was subject to income taxes.
(4) Average occupancy rates are determined by dividing the rooms occupied on a daily basis by the total number of rooms. Due to our rapid expansion, our overall average occupancy rate has been negatively impacted by the lower occupancy typically experienced during the pre-stabilization period for newly opened facilities. We expect the negative impact on overall average occupancy to decline as the ratio of newly opened properties to total properties in operation declines.
(5) Weighted average rooms available is calculated by dividing total room nights available during the year by 365.
(6) EBITDA represents earnings before the cumulative effect of an accounting change, interest, income taxes, depreciation, and amortization. EBITDA is provided because it is a measure commonly used in the lodging industry. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of performance or to cash flow as a measure of liquidity. EBITDA is not necessarily comparable with similarly titled measures for other companies.
(7) Adjusted EBITDA for 1999 and 1998 means EBITDA before pre-tax charges associated with establishing a $12.0 million valuation allowance in 1998 and a $1.1 million reduction of that valuation allowance in 1999. We established the valuation allowance for charges relating to a reduction in our development plans for 1999 and 2000 as a result of unfavorable capital market conditions. Adjusted EBITDA for 1997 means EBITDA before $19.9 million of pre-tax charges consisting of (i) $9.7 million of merger expenses and costs associated with the integration of SPH's operations following the Merger, (ii) the write-off of $9.7 million of debt issuance costs associated with terminating two mortgage loan facilities upon execution by us of a revolving credit facility, and (iii) a $500,000 charge in connection with the listing of our Common Stock on the NYSE. We believe these charges are non-recurring in nature and will not affect our future results of operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Extended Stay America, Inc. was organized on January 9, 1995 as a Delaware corporation to develop, own, and operate extended stay lodging facilities. Studio Plus Hotels, Inc. was formed in December 1994 and acquired all of the assets of the SPH predecessor entities, which owned and operated StudioPLUS(TM) extended stay facilities since 1986. The acquisition of the interests of the SPH predecessor entities was accounted for as if it were a pooling of interests.
On April 11, 1997, we completed a merger with SPH. The 12,557,786 shares of SPH common stock that were outstanding on the closing date were converted into 15,410,915 shares of our Common Stock and options to purchase 1,072,565 shares of SPH common stock were converted into options to purchase 1,316,252 shares of our Common Stock. As a result of the Merger, SPH became one of our wholly-owned subsidiaries. Our accompanying consolidated financial statements give effect to the Merger, which has been accounted for as a pooling of interests.
We own and operate three brands in the extended stay lodging market-- StudioPLUS(TM) Deluxe Studios, EXTENDED STAYAMERICA Efficiency Studios, and Crossland Economy Studios/SM/. Each brand is designed to appeal to different price points below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category, and StudioPLUS facilities serve the mid- price category and generally feature larger guest rooms, an exercise room, and a swimming pool.
During 1999, we repositioned 14 StudioPLUS properties as EXTENDED STAY properties. All operating statistics reflect the repositioning of these properties as EXTENDED STAY properties for the entire periods presented. The table below provides a summary of our selected development and operational results for 1997, 1998, and 1999.
Average occupancy rates are determined by dividing the rooms occupied on a daily basis by the total number of rooms. Due to our rapid expansion, our overall average occupancy rate has been negatively impacted by the lower occupancy typically experienced during the pre-stabilization period for newly- opened facilities. We expect the negative impact on overall average occupancy to decline as the ratio of newly-opened properties to total properties in operation declines. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates are generally greater than standard room rates because of (1) stays of less than one week, which are charged at a higher nightly rate, (2) higher weekly rates for rooms that are larger than the standard rooms, and (3) additional charges for more than one person per room. We expect that our future occupancy and room rates will be impacted by a number of factors, including the number and geographic location of new facilities as well as the season in which we open those facilities. We also cannot assure you that we can maintain our occupancy and room rates.
The following is a summary of our development status as of December 31, 1999, by brand. We expect to complete the construction of the facilities currently under construction generally within the next twelve months, however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors including final permitting and obtaining certificates of occupancy, as well as weather-induced construction delays.
Results of Operations
1999 Compared to 1998
Property Operations
The following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:
Because newly opened properties typically experience lower occupancies during their pre-stabilization period, average occupancy rates are impacted by the ratio of newly opened properties to total properties. The average occupancy rate in 1999 for the 185 properties we owned and operated as of January 1, 1998 was 77%. Similarly, the average occupancy rate in 1998 for the 75 properties we owned and operated as of January 1, 1997 was 80%. The decline in the average occupancy rate for properties open for at least one year at the beginning of each year is primarily attributable to an increase during those periods in the supply of available rooms in the lodging industry generally and specifically in certain of the markets in which we operate. We expect that this increase in supply, particularly in certain markets in Texas and North Carolina, will continue to impact our occupancies until incremental demand is sufficient to compensate for the additional supply of available rooms. The impact of the additional supply of available rooms was offset by the impact of a decline in the ratio of newly opened properties to total properties for each of our brands, resulting in overall average occupancy rates of 74% for 1999 compared to 73% for 1998.
The increase in overall average weekly room rates for 1999 as compared to 1998 reflects the geographic dispersion of properties opened during 1999 and the higher standard weekly room rates in certain of those markets. The increase also is due in part to increases in rates charged at previously opened properties. The average weekly room rate for the 185 properties that we owned and operated throughout both periods increased by 2% in 1999. The increase in our overall average weekly room rates for 1999 as compared to 1998 is diluted by an increase in the percentage of total occupied rooms attributable to the lower priced Crossland brand. Occupied rooms attributable to the Crossland brand were 13% of total occupied room nights for 1999 compared to 6% for 1998. The decrease in the average weekly room rate for the StudioPLUS brand is primarily the result of lower rates experienced in certain markets in Texas and North Carolina in response to an increase in the supply of available rooms in those markets.
We recognized total revenue of $417.7 million in 1999 and $283.1 million in 1998. This is an increase of $134.6 million, or 48%. Approximately $130.4 million of the increased revenue was attributable to properties that we opened during 1999 and 1998, and approximately $4.2 million was attributable to an increase in revenue for the 185 properties that we owned and operated throughout both periods.
Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, or interest were $180.4 million (43% of total revenue) for 1999 compared to $122.5 million (43% of total revenue) for 1998. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to occupancy
rate increases or decreases because the majority of these expenses do not vary based on occupancy. Our overall occupancy rates were 74% for 1999 and 73% for 1998 and our property operating margins were 57% for both years.
The provisions for depreciation and amortization for the lodging facilities were $58.8 million for 1999 and $40.8 million for 1998. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for 1999 increased compared to 1998 because we operated 57 additional facilities in 1999 and because we operated for a full year the 120 properties that were opened in 1998.
Corporate Operations
Corporate operating and property management expenses include all expenses not directly related to the development or operation of lodging facilities. These expenses consist primarily of personnel and certain marketing costs, as well as development costs that are not directly related to a site that we will develop. We incurred corporate operating and property management expenses of $42.0 million (10% of total revenue) in 1999 and $39.1 million (14% of total revenue) in 1998. The increase in the amount of these expenses for 1999 as compared to 1998 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase in the future.
Depreciation and amortization was $1.4 million for 1999 and $1.5 million for 1998. These provisions were computed using the straight-line method over the estimated useful lives of the assets for assets not directly related to the operation of our facilities. These assets were primarily office furniture and equipment.
We realized $700,000 of interest income during 1999 and $2.9 million of interest income during 1998. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $67.0 million during 1999 and $41.0 million during 1998. Of these amounts, $10.2 million during 1999 and $17.6 million during 1998 was capitalized and included in the cost of buildings and improvements.
We recognized income tax expense of $32.0 million (40% of income before taxes) for 1999 and $18.7 million (40% of income before taxes) for 1998. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes. We expect that our annualized effective income tax rate for 2000 will be approximately 40%.
Other Charges (Income)
In 1998, unfavorable capital market conditions resulted in a reduction in our development plans for 1999 and 2000. As a result, we established a valuation allowance of $12.0 million for the write-off of costs related to sites that would not be developed. The operating results for 1999 reflect the reversal of $1.1 million of this valuation allowance resulting from the renegotiation of the terms of a number of the optioned sites.
Cumulative Effect of a Change in Accounting
Pursuant to the Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" issued by the Accounting Standards Executive Committee, effective January 1, 1999, we changed our method of accounting for compensation and other training related costs incurred prior to the opening of a property to expense them as they are incurred. Accordingly, we recorded an expense of $779,000, net of income tax benefit of $520,000, as the cumulative effect of this change in accounting.
1998 Compared to 1997
Property Operations
The following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:
The average occupancy rate in 1998 for the 75 properties that we owned and operated as of January 1, 1997 was 80%. Similarly, the average occupancy rate in 1997 for the 24 properties that we owned and operated as of January 1, 1996 was 83%. The decline in the average occupancy rate for properties open for at least one year at the beginning of each year is primarily attributable to an increase during those periods in the supply of available rooms in the lodging industry and specifically in certain of the markets in which we operate. The impact of the additional supply of rooms was offset by the impact of a decline in the ratio of newly opened properties to total properties. For the EXTENDED STAY brand, occupancy rates increased for 1998 as compared to 1997 primarily due to a decrease in the ratio of newly-opened properties to total properties for that brand. Occupancy rates decreased for the Crossland brand primarily due to an increase in the number of newly-opened properties for that brand. Occupancy rates for the StudioPLUS brand were also diluted by an increase in the number of newly-opened properties for that brand. In addition, the 21 StudioPLUS properties opened before 1997 experienced average declines in occupancy rates of approximately five percentage points. We believe that this decline was due to a number of factors, including primarily a change in the pricing policies for the StudioPLUS brand during 1998 to eliminate certain rate discounts, changes in personnel as a result of management restructuring following the Merger with SPH, and additional competition from new properties that we and our competitors have opened in the markets served by these properties.
The increase in overall average weekly room rates for 1998 compared to 1997 reflects the geographic dispersion of properties opened during 1998 and the higher standard weekly room rates in certain of those markets. The increase also is due in part to increases in rates charged in previously opened properties. The average weekly room rate for the 75 properties that we owned and operated throughout both periods increased by 2% in 1998. The increase in our overall average weekly room rates for 1998 as compared to 1997 is diluted by an increase in the percentage of total occupied rooms attributable to the lower priced Crossland brand. Occupied rooms attributable to the Crossland brand were 6% of total occupied room nights for 1998 compared to 2% for 1997.
We recognized total revenue of $283.1 million in 1998 and $130.8 million in 1997. This is an increase of $152.3 million, or 116%. Approximately $150.2 million of the increased revenue was attributable to properties that we opened during 1998 and 1997, and approximately $2.1 million was attributable to an increase in revenue for the 75 properties that we owned and operated throughout both periods.
Property operating expenses were $122.5 million (43% of total revenue) for 1998 compared to $60.4 million (46% of total revenue) for 1997. The decrease in property operating expenses as a percentage of total revenue for 1998 as compared to 1997 was primarily a result of a decrease in the ratio of newly opened properties to total properties. As a result, our property operating margins were 57% for 1998 and 54% for 1997.
The provisions for depreciation and amortization for the lodging facilities were $40.8 million for 1998 and $19.9 million for 1997. Depreciation and amortization for 1998 increased compared to 1997 because we operated 120 additional facilities in 1998 and because we operated for a full year the 110 properties that were opened in 1997.
Corporate Operations
We incurred corporate operating and property management expenses of $39.1 million (14% of total revenue) in 1998 and $30.0 million (23% of total revenue) in 1997. The increase in the amount of these expenses for 1998 as compared to 1997 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated and sites we developed.
Depreciation and amortization for assets not directly related to operation of our facilities was $1.5 million for 1998 and $1.4 million for 1997.
We realized $2.9 million of interest income during 1998 and $9.2 million during 1997. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities and funds received from an offering of Common Stock in 1997. The decrease in interest income for 1998 as compared to 1997 was due to the decrease in our average cash and cash equivalent balances as a result of our continued investments in property and equipment during 1998. We incurred interest charges of $41.0 million during 1998 and $1.7 million during 1997. Of these amounts, $17.6 million during 1998 and $1.7 million during 1997 was capitalized and included in the cost of buildings and improvements.
We recognized income tax expense of $18.7 million (40% of income before taxes) for 1998 and $5.8 million (69% of income before taxes) for 1997. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes and, for 1997, due to permanent tax differences relating to merger expenses and tax exempt interest income.
Other Charges (Income)
Our normal operating procedures call for us to invest varying amounts in our sites under option in terms of (1) earnest money which would be applied to the purchase of a site, but that in certain circumstances may not be refundable, (2) legal, environmental, engineering, and architectural outlays needed to determine the feasibility of acquiring a site and constructing a hotel on that site, and (3) salaries, wages, and travel costs of our personnel related to the sites. We capitalize these expenses in accordance with generally accepted accounting principles. In the quarter ended September 30, 1998, we announced a reduction in our development plans for 1999 and 2000 as a result of unfavorable capital market conditions. This meant that certain sites we had under option would not be developed. As a result, we established a valuation allowance of $12.0 million for the write-off of expenses related to these sites. This resulted in a corresponding expense during the quarter ended September 30, 1998. At December 31, 1998, a total of $10.5 million of those costs, including $265,000 in termination payments to employees, had been charged against the allowance and $1.5 million was included in other current liabilities. We believe that these charges are non-recurring in nature and will not affect the future results of operations.
During 1997, we recorded merger, financing, and other charges totaling $19.9 million. These pre-tax charges consisted of (i) $9.7 million of merger expenses and costs associated with the integration of SPH's operations following the Merger, (ii) the write-off of $9.7 million of deferred costs associated with two mortgage loan facilities, which were terminated upon execution of a revolving credit facility, and (iii) a charge of $500,000 in connection with moving the listing of our Common Stock to the NYSE from the National Market tier of the Nasdaq Stock Market. We believe that these charges are non-recurring in nature and will not affect the future results of operations.
Liquidity and Capital Resources
We had net cash and cash equivalents of $6.4 million at December 31, 1999 and $0.6 million as of December 31, 1998. At December 31, 1999 we had approximately $45,000 invested and at December 31, 1998 we had approximately $5.9 million invested in short-term demand notes having credit ratings of A1/Pl or equivalent using domestic commercial banks and other financial institutions. We also deposited excess funds during these periods in an overnight sweep account with a commercial bank which in turn invested those funds in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these investments, we did not take possession of the securities, which were instead held by the financial institutions. The market value of the securities held pursuant to these arrangements approximates the carrying amount. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation.
Our operating activities generated cash of $124.1 million in 1999, $118.1 million in 1998, and $50.3 million in 1997.
We used $320.2 million to acquire land and develop and furnish 80 sites opened or under construction in 1999, $630.3 million for 171 sites in 1998, and $607.6 million for 194 sites in 1997.
Our cost to develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the resultant cash flow from these properties will vary significantly but generally are expected to be in proportion to the development costs. For the 329 properties we opened from January 1, 1996 through December 31, 1999, the average development cost was approximately $5.3 million with an average of 107 rooms. In 1999, we opened a number of properties in the Northeast and West where average development costs are higher, resulting in average development costs for 1999 of $6.5 million per property. We expect our average development cost per property for 2000 to continue to increase to approximately $8.3 million per property as we continue to expand in the Northeast and West.
We received net proceeds from the exercise of options to purchase Common Stock totaling $5.5 million in 1999, $4.5 million in 1998, and $4.0 million in 1997. Additionally, in 1997, we sold 11.5 million shares of Common Stock in a private placement transaction resulting in net proceeds of approximately $198.1 million.
We made open market repurchases of 549,300 shares of Common Stock for approximately $4.3 million in 1999 and 169,900 shares of Common Stock for approximately $1.3 million in 1998.
In September 1997, we executed an agreement with various banks establishing a credit facility that provided for up to $500 million of revolving loans on a senior collateralized basis that had a maturity of December 31, 2002 to be used for general corporate purposes, including the construction and acquisition of extended stay properties. Upon entering into the revolving credit facility, we terminated two mortgage loan facilities, which had provided for an aggregate of $400 million in mortgage loans. We recorded a pre-tax charge of $9.7 million at that time, which represented the write-off of debt issuance costs associated with the mortgage loan facilities. In March 1998, we amended the revolving credit facility and, as amended, it became the Credit Facility. The Credit Facility was again amended in September 1998 and December 1998.
The Credit Facility provides for a $350 million revolving loan facility (the "Revolving Facility"), a $150 million term loan facility (the "Tranche A Facility"), a $200 million term loan facility (the "Tranche B Facility"), and a $100 million term loan facility (the "Tranche C Facility"). As of December 31, 1999, we had outstanding loans of $208 million under the Revolving Facility and $448 million, net of scheduled principal repayments of $2 million in 1999, under the term loans, leaving $142 million available and committed under the Credit Facility. Availability of the Revolving Facility is dependent, however, upon us satisfying certain financial ratios of debt and interest compared to earnings before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility.
Loans under the Credit Facility bear interest, at our option, at either a prime-based rate ("Base Rate") or a LIBOR-based rate ("Eurodollar Rate"), plus an applicable margin. The applicable margin is an annual rate that fluctuates based on our ratio of Consolidated Debt to Consolidated EBITDA (as defined in the Credit Facility). The applicable margin for the various loan facilities in the Credit Facility are shown in the table below:
The loans under the Revolving Facility and the Tranche A Facility mature on December 31, 2002. The loans under the Tranche B Facility and the Tranche C Facility mature on December 31, 2003 and 2004, respectively, but are subject to principal payments of 1% of the initial loan amounts in each of the years 1999 through 2002 for the Tranche B Facility and 2000 through 2003 for the Tranche C Facility. The remaining balances must be repaid in four equal quarterly installments in the years of maturity.
Our obligations under the Credit Facility are guaranteed by each of our subsidiaries. They are also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our subsidiaries (other than mortgages on our real property).
The Credit Facility contains a number of negative covenants, including, among others, covenants that limit our ability to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests and to maintain certain financial ratios on a consolidated basis.
Our primary market risk exposures result from the variable nature of the interest rates on borrowings under the Credit Facility. We entered into the Credit Facility for purposes other than trading. We do not own derivative financial instruments or derivative commodity instruments. Based on the levels of borrowings under the Credit Facility at December 31, 1999, if interest rates changed by 1.0%, our annual cash flow and net income would change by $3.9 million. We manage our market risk exposures by periodic evaluation of such exposures relative to the costs of reducing the exposures by entering into interest rate swaps or by refinancing the underlying obligations with longer term fixed rate debt obligations.
On March 10, 1998, we issued $200 million aggregate principal amount of Senior Subordinated Notes (the "Notes"). The Notes bear interest at an annual rate of 9.15%, payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. We may redeem the Notes beginning on March 15, 2003. The initial redemption price is 104.575% of their principal amount, plus accrued interest. The redemption price declines each year after 2003 and is 100% of their principal amount, plus accrued interest, after 2006. In addition, before March 15, 2001, we may redeem up to $70 million of the Notes, using the proceeds from certain sales of our stock, at 109.15% of their principal amount, plus accrued interest.
The Notes are uncollateralized and are subordinated to all of our senior indebtedness including the Credit Facility, and contain certain covenants for the benefit of the holders of the Notes. These covenants, among other things, limit our ability to incur additional indebtedness, pay dividends and make investments and other restricted payments, enter into transactions with 5% stockholders or affiliates, create liens, and sell assets.
In connection with the Credit Facility and the Notes, we incurred additions to deferred loan costs of $345,000 during 1999, $14.0 million during 1998, and $8.3 million during 1997.
We had commitments not reflected in our financial statements at December 31, 1999 totaling approximately $100 million to complete construction of extended stay properties. We expect we will have sufficient funds to open properties with total costs exceeding $350 million in 2000. Due to uncertainties regarding the availability of additional capital for projects opening in 2001, however, we plan to limit the development of properties opening in 2000 to approximately 30 properties with total costs of approximately $250 million. We believe that this strategy will permit us to develop properties in markets with higher barriers to entry that generally have longer development cycles, while prudently managing our capital structure. In the event we obtain additional capital, we will seek to increase property openings in future years. We believe that the remaining availability under the Credit Facility, together with cash on hand and cash flows from operations, will provide sufficient funds to continue our expansion as presently planned and to fund our operating expenses through 2000. We may need additional capital depending on a number of factors, including the number of properties we construct or acquire, the timing of that development, and the cash flow generated by our properties. Also, if capital markets provide favorable opportunities, our plans or assumptions change or prove to be inaccurate, our existing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions, we may seek additional capital sooner than currently anticipated. Sources of capital may include public or private debt or equity financing. We cannot assure you that we will be able to obtain additional financing on acceptable terms, if at all. Our failure to raise additional capital could result in the delay or abandonment of some or all of our development and expansion plans, and could have a material adverse effect on us.
Seasonality and Inflation
Based upon the operating history of our facilities, we believe that extended stay lodging facilities are not as seasonal in nature as the overall lodging industry. We do expect, however, that our occupancy rates and revenues will be lower than average during the first and fourth quarters of each calendar year. Because many of our expenses do not fluctuate with changes in occupancy rates, declines in occupancy rates may cause fluctuations or decreases in our quarterly earnings.
The rate of inflation as measured by changes in the average consumer price index has not had a material effect on our revenue or operating results during any of the periods presented. We cannot assure you, however, that inflation will not affect our future operating or construction costs.
Special Note on Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements. Words such as "expects", "intends", "plans", "projects", "believes", "estimates", and similar expressions are used to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors which may cause our actual results, performance, or achievements to be materially different. These factors include, among other things:
. our limited operating history and uncertainty as to our future profitability;
. our ability to meet construction and development schedules and budgets;
. our ability to develop and implement the operational and financial systems needed to manage rapidly growing operations;
. uncertainty as to the consumer demand for extended stay lodging;
. increasing competition in the extended stay lodging market;
. our ability to integrate and successfully operate acquired properties and the risks associated with such properties;
. our ability to obtain financing on acceptable terms to finance our growth; and
. our ability to operate within the limitations imposed by financing arrangements.
Other matters set forth in this Annual Report may also cause our actual future results to differ materially from these forward-looking statements. We cannot assure you that our expectations will prove to be correct. In addition, all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-looking statements. All of these forward-looking statements are based on our expectations as of the date of this Annual Report. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*****
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Extended Stay America, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for start-up activities.
PricewaterhouseCoopers LLP
Spartanburg, South Carolina January 27, 2000
EXTENDED STAY AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
See notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
See notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000's omitted in all tables except per share data)
Note 1--Organization, Operations and Basis of Presentation
Extended Stay America, Inc. ("ESA") was organized on January 9, 1995, as a Delaware corporation to develop, own, and operate extended stay lodging facilities.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), a wholly-owned subsidiary of ESA, and Studio Plus Hotels, Inc. ("SPH") consummated a merger (the "Merger") pursuant to which SPH was merged with and into Merger Sub and the 12,557,786 shares of SPH common stock issued and outstanding on such date were converted into the right to receive 15,410,915 shares of common stock, par value $.01 per share, of ESA ("Common Stock") and options to purchase 1,072,565 shares of SPH common stock were converted into options to purchase 1,316,252 shares of Common Stock. The Merger was accounted for using the pooling of interests method of accounting. The accompanying consolidated financial statements of ESA and SPH (together the "Company") give effect to the Merger as if it had been consummated as of the beginning of the periods presented.
Note 2--Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at the respective balance sheet date.
At December 31, 1999 and 1998, we had invested approximately $45,000 and $5.9 million, respectively, in short-term demand notes. In addition, during these periods we invested excess funds in an overnight sweep account with a commercial bank which invested in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these investments, we did not take possession of the securities, which were instead held by the financial institution. The market value of the securities held pursuant to the agreements approximates the carrying amount. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation.
Property and Equipment
Property and equipment is stated at cost. We capitalize salaries and related costs for site selection, design and construction supervision. We also capitalize construction period interest.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated useful lives of the assets are as follows:
Building and improvements........... 40 years Furniture, fixtures and equipment... 3-10 years
Preacquisition Costs
We incur costs related to the acquisition of property sites. These costs are capitalized when it is probable that a site will be acquired. These costs are included in property and equipment. In the event the acquisition of the site is not consummated, the costs are charged to corporate operating expenses.
Deferred Loan Costs
We have incurred costs in obtaining financing. These costs have been deferred and are amortized over the life of the respective loans.
Other Charges (Income)
In 1998, unfavorable capital market conditions resulted in a reduction in our development plans for 1999 and 2000. As a result, we established a valuation allowance of $12.0 million for the write-off of costs related to sites that would not be developed. This valuation allowance was reduced by $1.1 million in 1999 due to the renegotiation of the terms of a number of the optioned sites.
During 1997, we recorded merger, financing, and other charges totaling $19.9 million. These pre-tax charges consisted of (i) $9.7 million of merger expenses and costs associated with the integration of SPH's operations following the Merger, (ii) the write-off of $9.7 million of deferred costs associated with two mortgage loan facilities, which were terminated upon execution of a revolving credit facility, and (iii) a charge of $500,000 in connection with moving the listing of our Common Stock to the NYSE from Nasdaq.
Cumulative Effect of a Change in Accounting
Pursuant to the Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" issued by the Accounting Standards Executive Committee, effective January 1, 1999, we changed our method of accounting for start-up activities, including pre-opening and organizational costs, to expense them as they are incurred. Accordingly, we recorded an expense of $779,000, net of income tax benefit of $520,000, as the cumulative effect of this change in accounting.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and for operating loss and tax carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
Room revenue and other revenue are recognized when earned.
Net Income Per Share
We determine earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") Statement No. 128, "Earnings Per Share". For the years ended December 31, 1999, 1998 and 1997, the computation of diluted EPS does not include approximately 10,820,000, 8,828,000 and 3,180,000 weighted average shares, respectively, of Common Stock represented by outstanding options because the exercise price of the options was greater than the average market price of Common Stock during the period.
Business Segment
We operate principally in one business segment which is to develop, own, and operate extended stay lodging facilities.
Reclassification
Certain previously reported amounts have been reclassified to conform with the current presentation.
Note 3--Property and Equipment
Property and equipment consist of the following:
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We had commitments totaling approximately $100 million to complete construction of additional extended stay properties at December 31, 1999.
For the years ended December 31, 1999, 1998 and 1997 we incurred interest of $66,957,000, $41,014,000, and $1,731,000, respectively, of which $10,216,000, $17,617,000, and $1,731,000, respectively, was capitalized and included in the cost of buildings and improvements.
Note 4--Options to Purchase Property Sites
As of December 31, 1999, we had paid approximately $4.4 million in connection with options to purchase parcels of real estate in 33 locations in 11 states. If we do not acquire these parcels, the amounts paid in connection with the options may be forfeited under certain circumstances. These amounts are included in property and equipment.
Note 5--Long-Term Debt
In September 1997, we executed an agreement with various banks establishing a credit facility that provided for up to $500 million of revolving loans on a senior collateralized basis that had a maturity of December 31, 2002 to be used for general corporate purposes, including the construction and acquisition of extended stay properties. Upon entering into the revolving credit facility, we terminated two mortgage loan facilities, which had provided for an aggregate of $400 million in mortgage loans. In March 1998, we amended the revolving credit facility and, as amended, it became the Credit Facility. The Credit Facility was again amended in September 1998 and December 1998.
The Credit Facility provides for a $350 million revolving loan facility (the "Revolving Facility"), a $150 million term loan facility (the "Tranche A Facility"), a $200 million term loan facility (the "Tranche B Facility"), and a $100 million term loan facility (the "Tranche C Facility"). As of December 31, 1999, we had outstanding loans of $208 million under the Revolving Facility and $448 million, net of scheduled principal repayments of $2 million in 1999, under the term loans, leaving $142 million available and committed under the Credit Facility. Availability of the Revolving Facility is dependent, however, upon us satisfying certain financial ratios of debt and interest compared to earnings before interest, taxes, depreciation and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility.
Loans under the Credit Facility bear interest, at our option, at either a prime-based rate ("Base Rate") or a LIBOR-based rate ("Eurodollar Rate"), plus an applicable margin. The applicable margin is an annual rate that fluctuates based on our ratio of Consolidated Debt to Consolidated EBITDA (as defined in the Credit Facility). The applicable margin for the various loan facilities in the Credit Facility are shown in the table below:
The loans under the Revolving Facility and the Tranche A Facility mature on December 31, 2002. The loans under the Tranche B Facility and the Tranche C Facility mature on December 31, 2003 and 2004, respectively, but are subject to principal payments of 1% of the initial loan amounts in each of the years 1999 through 2002 for the Tranche B Facility and 2000 through 2003 for the Tranche C Facility. The remaining balances must be repaid in four equal quarterly installments in the years of maturity.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Our obligations under the Credit Facility are guaranteed by each of our subsidiaries. The Credit Facility is also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our subsidiaries (other than mortgages on our real property).
The Credit Facility contains a number of negative covenants, including, among others, covenants that limit our ability to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests and to maintain certain financial ratios on a consolidated basis.
On March 10, 1998, we issued $200 million aggregate principal amount of Senior Subordinated Notes (the "Notes"). The Notes bear interest at an annual rate of 9.15%, payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. We may redeem the Notes beginning on March 15, 2003. The initial redemption price is 104.575% of their principal amount, plus accrued interest. The redemption price declines each year after 2003 and is 100% of their principal amount, plus accrued interest, after 2006. In addition, before March 15, 2001, we may redeem up to $70 million of the Notes, using the proceeds from certain sales of our stock, at 109.15% of their principal amount, plus accrued interest.
The Notes are uncollateralized and are subordinated to all of our senior indebtedness including the Credit Facility, and contain certain covenants for the benefit of the holders of the Notes. These covenants, among other things, limit our ability to incur additional indebtedness, pay dividends and make investments and other restricted payments, enter into transactions with 5% stockholders or affiliates, create liens, and sell assets.
At December 31, 1999, aggregate maturities of long-term debt were as follows:
An aggregate of $856 million and $655 million was outstanding at December 31, 1999 and 1998, respectively, with a weighted average interest rate of 8.14% and 7.88%, respectively. The fair value of long-term debt is based on quoted market prices. The Credit Facility had an estimated fair value of approximately $645 million at December 31, 1999 and $455 million at December 31, 1998. The Notes had an estimated fair value of approximately $178 million at December 31, 1999 and $187 million at December 31, 1998.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Income Taxes
Income tax expense before the cumulative effect of a change in accounting consists of the following:
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35.0% to pretax income as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
At December 31, 1999, we had net operating loss carryforwards for federal income tax purposes of approximately $27.3 million, expiring in years 2012 through 2018, and alternative minimum tax credits of approximately $19.7 million, which may be carried forward indefinitely.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not we will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Note 7--Stockholders' Equity
On February 6, 1997, we sold 11.5 million shares of Common Stock in a private placement transaction resulting in net proceeds of approximately $198.1 million.
On April 11, 1997, our stockholders approved an Amendment of the Restated Certificate of Incorporation increasing the number of authorized shares of Common Stock, par value $.01, from 200 million to 500 million shares.
On June 9, 1997, we announced that our Board of Directors had approved a plan to have the Common Stock listed on the New York Stock Exchange, Inc. ("NYSE") and to move trading in the Common Stock from the Nasdaq National Market ("Nasdaq") to the NYSE. The Common Stock began trading on the NYSE on June 30, 1997.
Shares of preferred stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Prior to issuance of shares of each series, the Board will designate for each such series, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by law. No shares of preferred stock are outstanding and we have no present plans to issue any shares of preferred stock.
Note 8--Stock Option Plans
We have five stock option plans including the 1995, 1996, 1997 and 1998 Employee Stock Option Plans (the "Employee Plans") and the 1995 Stock Option Plan for Non-Employee Directors (the "Directors' Plan"). The Employee Plans and the Directors' Plan provide for grants to certain officers, directors and key employees of stock options to purchase shares of Common Stock. Options granted under the Employee Plans and the Directors' Plan expire ten years from the date of grant. Options granted under the Employee Plans vest ratably over a four year period, and options granted under the Directors' Plan vest six months from the date of grant.
SPH had two stock option plans, the 1995 Stock Incentive Plan and the 1995 Non-Employee Directors' Stock Incentive Plan (collectively, the "SPH Plans"). Two types of options, incentive stock options and nonqualified stock options, were granted under the SPH Plans. All options granted under the SPH Plans were granted at an exercise price equal to the market price of the SPH common stock on the date of grant and may not be exercised more than 10 years after the date granted. Options granted under the SPH Plans to purchase 1,072,565 shares of SPH common stock were converted into options to purchase 1,316,252 shares of Common Stock (with a corresponding adjustment to the exercise price) upon completion of the Merger. Because the Merger effected a "change of control" of SPH, each of these options became immediately exercisable.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Employee Plans, the Directors' Plan, and options granted under the SPH Plans (collectively the "Plans") as of December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is presented below:
On January 1, 1996, we adopted SFAS No. 123, "Accounting for Stock Based Compensation." As permitted by SFAS No. 123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for the Plans. Accordingly, no compensation cost has been recognized for options granted under the Plans. Had compensation cost for the Plans been determined based on the fair value at the date of grant for awards under the Plans consistent with the method of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes multiple option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997: dividend yield of 0%, risk-free interest rate of 6% and expected life of 5.5 years. In addition, the expected volatility was 42% in 1999 and 33% in 1998 and 1997.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock options at December 31, 1999:
Note 9--Related Party Transactions
In 1996, we entered into a ten year lease for a suite at Pro Player Stadium for a base rental of $115,000 per year, and a 3-year lease for a suite at Homestead Motorsports Complex for a base rental of approximately $53,000 per year. In 1998, we entered into a three year lease for an additional suite at Pro Player Stadium for a base rental of $83,000 per year, which was terminated in 1999, and a seven year lease for a suite at the National Car Rental Center for a base rental of $120,000 per year. The leases are subject to certain additional charges and periodic escalation. The Chairman of our Board of Directors owns Pro Player Stadium and had an approximate 50% ownership interest (which was reduced to approximately 10% in 1997) in Homestead Motorsports Complex. In addition, the Chairman of our Board of Directors is the Chairman of the Board of Directors of a company which operates the National Car Rental Center.
We incurred charges of approximately $2.2 million in 1999, $1.7 million in 1998, and $1.7 million in 1997 from a company controlled by our Chief Executive Officer for the use of airplanes. We charged approximately $136,000 in 1999 to our Chief Executive Officer and other companies controlled by him for their use of those airplanes.
Our Chief Executive Officer serves as chairman of the board of a company from which we lease office space under various lease agreements. During 1999, 1998, and 1997, we incurred charges of approximately $73,000, $76,000, and $74,000, respectively, related to these agreements.
Two members of our Board of Directors also serve on the board of directors of a company which performs employment related services for us. During 1999, 1998 and 1997, we incurred charges of approximately $336,000, $251,000, and $126,000, respectively, for such services.
EXTENDED STAY AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Quarterly Results (Unaudited)
The following is a summary of quarterly operations for the years ended December 31, 1999 and 1998:
We are not a party to any significant litigation or claims, other than routine matters incidental to the operation of our business. To date, no claims have had a material adverse effect on us nor do we expect that the outcome of any pending claims will have such an effect.
We lease real property under various operating leases with terms of one to sixteen years. Rental expense under real property leases for the years ended December 31, 1999, 1998, and 1997 were $1,511,000, $1,576,000, and $1,012,000, respectively.
Future minimum lease obligations under noncancelable real property leases with initial terms in excess of one year at December 31, 1999 are as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information appearing under the caption "Election of our Board of Directors" in our Proxy Statement for the Annual Meeting of Stockholders to be held May 2, 2000 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers
Our executive officers, their ages at December 31, 1999, and their positions with us are set forth below. Our executive officers are elected by and serve at the discretion of our Board of Directors.
- -------------- * Member of Executive Committee of the Board of Directors
H. Wayne Huizenga became one of our directors in August 1995 and serves as the Chairman of our Board of Directors. Mr. Huizenga has also served as Chairman of the Board of AutoNation, Inc., which owns the nation's largest chain of franchised automotive dealerships, since August 1995. Since June 1998, Mr. Huizenga has served as a director of NationsRent, Inc., a national chain providing equipment rental primarily to a broad range of construction and industrial customers. Since May 1998, Mr. Huizenga has served as Chairman of the Board and Chief Executive Officer of Republic Services, Inc., a leading provider of non-hazardous solid waste collection and disposal services. Since September 1996, Mr. Huizenga has been Chairman of the Board of Boca Resorts, Inc., which owns and operates luxury resort properties as well as the Florida Panthers professional hockey franchise. From September 1994 until October 1995, Mr. Huizenga served as the Vice-Chairman of Viacom Inc., a diversified entertainment and communications company. During the same period, Mr. Huizenga also served as the Chairman of the Board of Blockbuster Entertainment Group, a division of Viacom. From April 1987 through September 1995, Mr. Huizenga served as the Chairman of the Board and Chief Executive Officer of Blockbuster Entertainment Corporation ("Blockbuster"), during which time he helped build Blockbuster from a 19-store chain into the world's largest video rental company. In September 1994, Blockbuster merged into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc., which he helped build into the world's largest integrated solid waste services company, and he served in various capacities, including President, Chief Operating Officer and a director from its inception until 1984. Mr. Huizenga also currently owns or controls the Miami Dolphins, a professional sports franchise, as well as Pro Player Stadium, the home of the Miami Dolphins and is a director of theglobe.com, an internet on-line community.
George D. Johnson, Jr. has been our President, Chief Executive Officer, and a director since January 1995. He is responsible for all aspects of our development, operation, marketing, and personnel. Mr. Johnson is the former President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom. In this position he was responsible for all U.S. video and music stores. Mr. Johnson has over 30 years of experience developing and managing various businesses. He was formerly the managing general partner of WJB Video, the largest Blockbuster franchisee which developed over 200 video stores prior to a merger with Blockbuster in 1993. Mr. Johnson also is the managing member of American Storage, LLC, a chain of 26 self-storage facilities located in the Carolinas and Georgia. He formerly served as a director of Viacom and Chairman of the Board of Home Choice
Holdings, Inc. and currently serves on the board of directors of AutoNation, Boca Resorts, and Duke Energy Corporation. He has been the Chairman of the Board of Directors of Johnson Development Associates, Inc. since its founding in 1986. Johnson Development Associates is a real estate management, leasing, and development company controlling approximately four million square feet of commercial, retail, and industrial property located in the Carolinas and Georgia which are owned by various partnerships controlled by Mr. Johnson and his brother, Stewart H. Johnson. Mr. Johnson practiced law in Spartanburg, South Carolina from 1967 until 1986 and served three terms in the South Carolina House of Representatives.
Robert A. Brannon has been our Chief Financial Officer since February 1995 and our Senior Vice President, Secretary, and Treasurer since August 1995. He is responsible for overseeing accounting procedures and controls, along with financial reporting and cash management. Prior to joining our Company, he served as Vice President-Finance for the Domestic Home Video division of the Blockbuster Entertainment Group, where he was responsible for financial management and control of over 2,000 video stores. Prior to joining Blockbuster in 1993, Mr. Brannon was Chief Financial Officer for WJB Video and for American Storage, LLC. In those capacities, Mr. Brannon was responsible for the financial aspects of the development of over 200 video stores and 23 self-storage facilities. Prior to his participation in these businesses, Mr. Brannon served as a Certified Public Accountant in various management and staff positions with local and national accounting firms.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes thereto.
(a)(3) Exhibits
The exhibits to this report are listed in the Exhibit Index included elsewhere herein. Included in the exhibits listed therein are the following exhibits which constitute management contracts or compensatory plans or arrangements:
10.1 Amended and Restated 1995 Employee Stock Option Plan of the Company
10.2 1995 Stock Option Plan for Non-Employee Directors of the Company
10.3 Amended and Restated 1996 Employee Stock Option Plan of the Company
10.8 1997 Employee Stock Option Plan of the Company
10.9 1998 Employee Stock Option Plan of the Company
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of 1999.
(c) Exhibits
Exhibit Number Description of Exhibit - ------ ----------------------
3.1(a) Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(a) to the Company's Registration Statement on Form S-1, Registration No. 33-98452)
3.1(b) Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 4, 1997 (incorporated by reference to Exhibit 3.1(b) to the Company's Report on Form 10-K for the year ended December 31, 1997)
3.1(c) Conformed copy of Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1(c) to the Company's Report on Form 10-K for the year ended December 31, 1997)
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-98452)
4.1 Specimen certificate representing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-98452)
10.1 Amended and Restated 1995 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended March 31, 1996)
10.2 1995 Stock Option Plan for Non-Employee Directors of the Company (incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q for the quarter ended March 31, 1996)
Exhibit Number Description of Exhibit - ------ ----------------------
10.3 Amended and Restated 1996 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-Q for the quarter ended March 31, 1996)
10.4 Aircraft Dry Lease dated April 5, 1996 between Morgan Corp. and the Company (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, Registration No. 333-03373)
10.5 Homestead Motorsports Complex Executive Suite License Agreement dated February 14, 1996 among The Homestead Motorsports Joint Venture, Miami Motorsports Joint Venture, and the Company (incorporated by reference to Exhibit 10.13 to the Company's Report on Form 10-Q for the quarter ended March 31, 1996)
10.6 Joe Robbie Stadium Executive Suite License Agreement dated March 18, 1996 between Robbie Stadium Corporation and the Company (incorporated by reference to Exhibit 10.14 to the Company's Report on Form 10-Q for the quarter ended March 31, 1996)
10.7 Aircraft Dry Lease dated December 28, 1996 between Wyoming Associates, Inc. and the Company (incorporated by reference to Exhibit 10.16 to the Company's Report on Form 10-K for the year ended December 31, 1996)
10.8 1997 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997)
10.9 1998 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.9 to the Company's Report on Form 10-K for the year ended December 31, 1998)
10.10(a) Credit Agreement, dated as of September 26, 1997 and Amended and Restated as of March 10, 1998 (the "Credit Agreement"), by and among the Company and Morgan Stanley Senior Funding, Inc., as Syndication Agent and Arranger, The Industrial Bank of Japan, Limited, as Administrative Agent, and various banks (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended March 31, 1998)
10.10(b) Amendment, dated as of September 18, 1998, to the Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1998)
10.10(c) Amendment, dated as of December 15, 1998, to the Credit Agreement (incorporated by reference to Exhibit 10.10(c) to the Company's Report on Form 10-K for the year ended December 31, 1998)
10.11(a) Lease Agreement dated as of November 30, 1998 by and between Bell Hill, LLC and ESA Management, Inc. (incorporated by reference to Exhibit 10.11(b) to the Company's Report on Form 10-K for the year ended December 31, 1998)
10.11(b) Sublease Agreement dated as of July 1, 1999 by and between Johnson Development Associates, Inc. and ESA Management, Inc.
10.12 Aircraft Dry Sub-Lease Agreement, dated as of July 2, 1998, between the Company and Advance America Cash Advance Centers, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1998)
10.13 Pro Player Stadium Executive Suite License Agreement, dated as of July 16, 1998, by and between South Florida Stadium Corporation d/b/a Pro Player Stadium and the Company (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended September 30, 1998)
10.14 Broward County Arena Executive Suite License Agreement, by and between Arena Operating Company, Ltd. and the Company (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended September 30, 1998)
10.15 Aircraft Dry Lease, dated as of July 12, 1999, by and between Wyoming Associates, Inc. and ESA Management, Inc. (Learjet, Serial No. 132) (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999)
Exhibit Number Description of Exhibit - ------ ----------------------
10.16 Aircraft Dry Lease, dated as of July 12, 1999, by and between Wyoming Associates, Inc. and ESA Management, Inc. (Challenger, Serial No. 3042) (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999)
10.17 Time Sharing Agreement, dated as of July 20, 1999, by and between ESA Management, Inc. and George Dean Johnson, Jr. (Challenger, Serial No. 3042) (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999)
10.18 Time Sharing Agreement, dated as of August 10, 1999, by and between Advance America Cash Advance Centers, Inc. and Extended Stay America, Inc. (incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999)
10.19 Time Sharing Agreement, dated as of August 30, 1999, by and between ESA Management, Inc. and Advance America, Cash Advance Centers, Inc. (incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999)
10.20 Time Sharing Agreement, dated as of November 29, 1999, by and between ESA Management, Inc. and George Dean Johnson, Jr. (Learjet, Serial No. 132)
21.1 List of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 2000.
Extended Stay America, Inc.
By: /s/ George D. Johnson, Jr. ---------------------------- George D. Johnson, Jr. President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 2000
Signature Title --------- -----
Principal Executive Officer:
/s/ George D. Johnson, Jr. President and Chief Executive Officer --------------------------- George D. Johnson, Jr.
Principal Financial Officer:
/s/ Robert A. Brannon Senior Vice President, Chief ---------------------- Financial Officer, Secretary, Robert A. Brannon and Treasurer
Principal Accounting Officer:
/s/ Gregory R. Moxley Vice President--Finance ---------------------- Gregory R. Moxley
A Majority of the Directors:
/s/ H. Wayne Huizenga Director ---------------------- H. Wayne Huizenga
/s/ Donald F. Flynn Director -------------------- Donald F. Flynn
/s/ George D. Johnson Director ---------------------- George D. Johnson
/s/ Stewart H. Johnson Director ----------------------- Stewart H. Johnson
/s/ John J. Melk Director ----------------- John J. Melk
/s/ Peer Pedersen Director ------------------ Peer Pedersen