-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dh5trxFCKGx/HM5s+oTKZmgRpdxmSraXqdT1lGq+N4HnhDBt3VAfqxQvAHwtHHmK UuK8p4O9yF9Dh4ko179AyA== 0000950135-97-003663.txt : 19970912 0000950135-97-003663.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950135-97-003663 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970829 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIDGESTREET ACCOMMODATIONS INC CENTRAL INDEX KEY: 0001038078 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 043327773 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-26647 FILM NUMBER: 97673235 BUSINESS ADDRESS: STREET 1: 1896 GEORGETWON ROAD STREET 2: 617-261-1610 CITY: HUDSON STATE: OH ZIP: 44236 BUSINESS PHONE: 6172611600 MAIL ADDRESS: STREET 1: 67 BATTERYMARCH STREET SUITE 500 CITY: BOSTON STATE: MA ZIP: 02110 S-1/A 1 BRIDGESTREET ACCOMMODATIONS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997 REGISTRATION NO. 333-26647 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BRIDGESTREET ACCOMMODATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 7021 04-3327773 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
30670 BAINBRIDGE ROAD SOLON, OH 44139 (216) 248-3005 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ WILLIAM N. HULETT, III BRIDGESTREET ACCOMMODATIONS, INC. 30670 BAINBRIDGE ROAD SOLON, OH 44139 (216) 248-3005 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES OF COMMUNICATIONS TO: CONSTANTINE ALEXANDER, ESQUIRE MARTIN CARMICHAEL III, P.C. NUTTER, MCCLENNEN & FISH, LLP GOODWIN, PROCTER & HOAR LLP ONE INTERNATIONAL PLACE EXCHANGE PLACE BOSTON, MA 02110 BOSTON, MA 02109 (617) 439-2000 (617) 570-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the Form is a post-effective amendment filed pursuant to Rule 426(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 29, 1997 PROSPECTUS 2,615,000 SHARES LOGO: BRIDGESTREET ACCOMMODATIONS COMMON STOCK ------------------------ Of the 2,615,000 shares of Common Stock offered hereby, 1,700,000 shares are being issued and sold by BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") and 915,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. See "Use of Proceeds." Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $7.00 and $9.00 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Officers, directors and principal stockholders of the Company and their affiliates, some of whom are Selling Stockholders, will receive an aggregate of approximately $6.8 million, or 39.0%, of the net proceeds of this offering (assuming an initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses), and upon the completion of the offering will beneficially own an aggregate of 53.8% of the outstanding shares of Common Stock. As a result, these stockholders, if acting together, will have the ability to influence the outcome of corporate actions requiring stockholder approval, including the election of directors. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "BEDS." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================================================================= Proceeds to Price to Underwriting Proceeds to Selling Public Discount(1) Company(2) Stockholders - ------------------------------------------------------------------------------------------------------- Per Share.............................. $ $ $ $ - ------------------------------------------------------------------------------------------------------- Total(3)............................... $ $ $ $ =======================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses of the offering estimated at $2,000,000, payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 392,250 additional shares of Common Stock from the Company on the same terms and conditions as set forth above solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, subject to their right to reject any order in whole or in part and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject offers in whole or in part. It is expected that delivery of certificates for the shares of the Common Stock will be made at the offices of Legg Mason Wood Walker, Incorporated, Baltimore, Maryland on or about , 1997. ------------------------ LEGG MASON WOOD WALKER MCDONALD & COMPANY INCORPORATED SECURITIES, INC. ------------------------ , 1997 3 [MAP DEPICTING THE COMPANY'S EXISTING AND TARGETED EXPANSION MARKETS, AND PICTURES OF AN APARTMENT COMPLEX AND THE INTERIOR AREAS OF CERTAIN ACCOMMODATIONS] The accommodations and furnishings pictured in this Prospectus are leased by the Company. ------------------------ THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------------------ The Company intends to furnish its stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm, and with quarterly reports for the first three quarters of each fiscal year containing unaudited interim consolidated financial information. The Company has filed an application with the United States Patent and Trademark Office to register the service mark "BridgeStreet." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and pro forma and historical financial statements, including the notes thereto, appearing elsewhere in this Prospectus. BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was incorporated in 1996, and in January and March 1997 acquired by merger (the "Combination") five flexible accommodation service providers (the "Founding Companies"). See "Combination." Unless otherwise indicated, the information contained in this Prospectus (i) gives effect to the Combination and (ii) assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY BridgeStreet is a leading provider of flexible accommodation services in 16 metropolitan areas located in the Midwest and Mid-Atlantic regions of the United States. The Company offers high-quality, fully-furnished apartments, townhouses, condominiums and to a lesser extent, houses (collectively, "accommodations"), primarily for individuals traveling on business and company executives relocating to new communities who require lodging for one week to several months. Together with the specialized amenities offered by the Company, these accommodations are intended to provide guests with a "home away from home." As of June 30, 1997, BridgeStreet had more than 2,700 units under lease, and for the six months ended June 30, 1997, BridgeStreet's average occupancy rate was approximately 90%. As a provider of flexible accommodation services, BridgeStreet leases substantially all of its accommodations on a short-term basis from property managers, and then rents them to its clients. This enables the Company to (i) adjust the quantity, mix and location of its accommodations as client needs dictate and local economic conditions warrant, (ii) expand and enter new markets without the costs and lead times associated with investing in "bricks and mortar" and (iii) avoid the fixed costs associated with ownership or long-term leasing of real estate. The Company also leases the furniture for its accommodations on a short-term basis from furniture rental companies. These furniture leasing arrangements enable BridgeStreet to maintain well-appointed, modern and attractive accommodations, upgrade and replace furniture as needed, and satisfy specific furnishing requests. BridgeSteet's leasing strategy distinguishes it from fixed-location lodging providers, such as all-suite or extended-stay hotels, that own their lodging facilities and furnishings or lease them on a long-term basis. Traditionally, travelers on extended trips have stayed in hotels and motels. According to the American Hotel and Motel Association, in 1995, business travelers staying three or more nights represented approximately 37% of total domestic hotel stays during that year. The Company believes that business travelers on extended trips increasingly desire alternatives to conventional hotel and motel rooms, which typically lack the spaciousness and amenities of home. The Company believes that this has been an important factor in the recent growth in the extended-stay segment of the lodging industry. Participants in this segment include flexible accommodation service providers, all-suite hotels and extended-stay hotels. By providing flexible accommodation services, the Company can satisfy client requests for accommodations in a variety of locations and neighborhoods, as well as requests for accommodations of specific types and sizes. The substantial majority of the Company's accommodations are located within high-quality property complexes that typically feature, among other things, in-unit washers and dryers, dedicated parking and access to fitness facilities (including, in many cases, pools, saunas and tennis courts). In addition, at a guest's request, BridgeStreet can upgrade an accommodation by providing specialized amenities such as office furniture, fax machines and computers. The Company's accommodations generally are priced competitively with all-suite and upscale extended-stay hotel rooms even though, on average, the Company believes its accommodations are substantially larger. BridgeStreet was founded in August 1996, and in the first quarter of 1997 combined by merger five regional providers of flexible accommodation services. The Company has achieved significant growth in recent years. On a combined basis, units available for rent increased from 1,041 units on December 31, 1994 to 1,936 3 5 - -------------------------------------------------------------------------------- units on December 31, 1996, representing a compound annual growth rate of 36%. In addition, combined net revenues increased from $18.9 million in 1994 to $37.6 million in 1996, representing a compound annual growth rate of 41%. The Company plans to achieve its goal of becoming a leading national provider of flexible accommodation services by implementing an aggressive acquisition program and a national operating strategy designed to increase internal revenue growth, cost efficiencies and profitability. Key elements of the Company's business strategy include: Growth Through Acquisitions. The Company believes that the flexible accommodation services industry is highly fragmented, with over 400 geographically dispersed companies in the United States, few of which have more than a regional presence. BridgeStreet plans to take advantage of the fragmented nature of the industry by acquiring flexible accommodation service companies in major metropolitan areas frequented by business travelers. BridgeStreet intends to implement its business model at each acquired company as soon as practicable after the acquisition is completed. BridgeStreet's acquisition strategy is to: - Enter New Geographic Markets and Establish Nationwide Coverage. In each new market, the Company intends to target for acquisition one local or regional flexible accommodation services provider having the size and quality of operations suitable for serving as the Company's base for expansion in the market. Acquisitions in new markets will enable BridgeStreet to (i) gain local or regional market share rapidly, (ii) increase sales to existing clients by meeting their needs for accommodations in other regions, (iii) increase sales to the acquired company's clients by providing them with access to BridgeStreet's growing national network and (iv) establish the BridgeStreet brand name in new regions and enhance its nationwide recognition. The Company also may expand into new markets by establishing new operations. - Expand Within Existing Markets. Once the Company has established operations in a new region, it may seek to expand its market share by acquiring other flexible accommodation service providers within that region. The Company believes that it can achieve operating efficiencies by incorporating the businesses of smaller acquired companies into the Company's operations without any significant increase in infrastructure. On June 30, 1997, the Company acquired the assets of a flexible accommodation services provider in Memphis, Tennessee with 135 units under lease. National Operating Strategy. The Company has begun to implement a national operating strategy with the following components: - Maximize Sales to Existing and New Clients. The Company plans to maximize sales to existing corporate clients and to obtain new clients through a national sales and marketing program which highlights the Company's expanding national network. Many of the Company's clients are Fortune 1000 companies with significant, national employee lodging requirements. These corporate clients generally have numerous key decision makers (such as human resource directors, relocation managers or training directors) who both establish and administer company travel and accommodation policies. The Company plans to obtain a greater share of each client's lodging requirements by establishing relationships with additional key decision makers and emphasizing the Company's expanding national presence. - Achieve Cost Efficiencies. The Company believes it should be able to reduce total operating expenses of the Founding Companies and any additional acquired companies by consolidating certain functions (including sales, marketing and purchasing operations) performed separately by such companies. In addition, the Company believes that as a large, national flexible accommodation services company, it should be able to achieve lower costs (as a percentage of revenues) compared to those of the individual Founding Companies and other acquired companies in such areas as leasing accommodations and furniture, purchasing certain hard and soft goods, and obtaining financing arrangements, employee benefits and insurance. - Adopt Best Practices. The Company will continue reviewing its operations at the local and regional operating levels in order to identify "best practices" that can be implemented throughout its operations. Areas where "best practices" may be utilized include accommodation pricing, occupancy management - -------------------------------------------------------------------------------- 4 6 and cash flow management. BridgeStreet believes the implementation of these practices will enable the Company to provide superior customer service and maximize sales opportunities. - Implement Management Information System. BridgeStreet intends to develop and implement a centrally-controlled, computerized management information system that will integrate the Company's customer contact, sales, marketing, finance, telephone, property management, internet access, lease management and reservation functions. BridgeStreet believes that the proposed system will enable it to deliver superior customer service, more efficiently manage its operations and achieve cost savings. The Company is a Delaware corporation. Its principal executive offices are located at 30670 Bainbridge Road, Solon, Ohio 44139 and its telephone number is (216) 248-3005. As used herein, unless the context otherwise requires, "BridgeStreet" or the "Company" refers to BridgeStreet Accommodations, Inc. and its wholly-owned subsidiaries. THE OFFERING Common Stock offered by the Company.......... 1,700,000 shares Common Stock offered by the Selling Stockholders............................... 915,000 shares Common Stock to be outstanding after the offering................................... 7,175,000 shares (1) Use of proceeds.............................. To repay certain indebtedness, including indebtedness of the Founding Companies assumed by the Company in connection with the Combination, the outstanding principal amount under the Company's revolving credit facility and certain advances made to the Company by an affiliated party, to implement an enhanced management information system and for general corporate purposes, including working capital and future acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... BEDS
- --------------- (1) Excludes an aggregate of 1,100,000 shares of Common Stock reserved for issuance under the Company's 1997 Equity Incentive Plan and Stock Plan for Non-Employee Directors. Of this amount, 482,667 and 37,500 shares of Common Stock will be issuable upon exercise of outstanding options under the 1997 Equity Incentive Plan and Stock Plan for Non-Employee Directors, respectively. See "Management -- Director Compensation" and " -- Executive Compensation; Equity Incentive Plan." 5 7 SUMMARY UNAUDITED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND FOOTNOTE DATA) The following summary unaudited financial data presents certain data of the Company, as adjusted (a) in the case of the Pro Forma Statement of Operations Data, for (i) the effects of the Combination on a historical basis, (ii) the effects of certain pro forma adjustments to the historical financial statements of the Founding Companies and (iii) the consummation of this offering, and (b) in the case of the As Adjusted Consolidated Balance Sheet Data, for the consummation of this offering. See the Company's Unaudited Pro Forma Combined Financial Statements and Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus.
PRO FORMA PRO FORMA ACTUAL YEAR ENDED SIX MONTHS ENDED THREE MONTHS DECEMBER 31, JUNE 30, ENDED 1996(1) 1997(1)(2) JUNE 30, 1997 ------------ ---------------- ------------- STATEMENT OF OPERATIONS DATA: Revenues.......................................... $ 37,566 $ 22,924 $12,655 Operating income (3).............................. 1,797 15 1,124 Income before income taxes(4)..................... 1,790 107 1,113 Net income (loss)(5).............................. $ 878 $ (486) 613 ======= ======= ======== Net income (loss) per share....................... $ 0.12 $ (0.07) $ 0.11 ======= ======= ======== Weighted average shares outstanding............... 7,175,000 7,175,000 5,475,000
JUNE 30, 1997 --------------------------------- ACTUAL AS ADJUSTED(6) -------------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................... $ 1,271 $ 8,575 Total assets.................................................. 28,930 35,209 Long-term debt, net of current maturities..................... 3,344 -- Total stockholders' equity.................................... 19,385 30,033
- --------------- (1) The Pro Forma Statement of Operations Data assumes that the Combination and this offering took place at the beginning of the period. This data is not necessarily indicative of the results the Company would have had if these events actually then occurred or of the Company's future results. The Pro Forma Statement of Operations Data for the year ended December 31, 1996 excludes (i) any adjustments for the compensation to be paid in 1997 for services to be rendered in 1997 by the Company's Chief Executive Officer and Chief Financial Officer pursuant to their employment agreements, and (ii) non-recurring, non-cash compensation expense recorded in the first quarter of 1997 in connection with the accelerated vesting of restricted stock. The Pro Forma Statement of Operations Data for the six months ended June 30, 1997 assumes the acquisition of Home Again occurred at the beginning of the period. See "Combination." The pro forma data is based on preliminary estimates, available information and certain assumptions that management deems appropriate, and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. (2) Includes non-recurring, non-cash compensation expense of $1,210,000 recorded in connection with the accelerated vesting of restricted stock. This represents a reduction of $0.17 per share in the Pro Forma Statement of Operations. (3) Reflects (i) for the year ended December 31, 1996, the reduction of $552,000 in salary and benefits to executives of the Founding Companies and the amortization of $490,000 of goodwill to be recorded as a result of the Combination, assuming a 35-year amortization period, and (ii) for the six months ended June 30, 1997, an increase of $30,000 in such salary and benefits and the amortization of $16,000 of goodwill in connection with the acquisition of Home Again. (4) Reflects an interest expense reduction of $158,000 for the year ended December 31, 1996 and $97,000 for the six months ended June 30, 1997 related to bank debt and notes payable to be repaid from the net proceeds of this offering. (5) Reflects an increase in the Company's historical provision for income taxes of $373,000 for the year ended December 31, 1996 to account for the Company's estimated consolidated effective tax rate subsequent to the Combination, after considering nondeductible goodwill amortization, and an increase of $75,000 in the historical provision for income taxes for the six months ended June 30, 1997 to account for the estimated consolidated 1997 effective tax rate, after considering nondeductible goodwill. (6) Reflects the issuance of 1,700,000 shares of Common Stock by the Company in this offering and the application of the net proceeds as described under "Use of Proceeds." 6 8 SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS) The following table presents summary data for each of the Founding Companies (including their respective affiliates, if any) for the three most recent fiscal years.
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ------ ------ ------- Temporary Corporate Housing Columbus, Inc. Revenues........................................................ $8,309 $9,754 $12,502 Operating income................................................ 206 336 1,087 Number of units leased at end of year........................... 510 539 624 Corporate Lodgings, Inc. Revenues........................................................ $4,069 $6,067 $ 8,820 Operating income................................................ 87 39 195 Number of units leased at end of year........................... 213 301 434 Exclusive Interim Properties, Ltd.(1) Revenues........................................................ $4,015 $5,521 $ 8,626 Operating income................................................ 104 300 213 Number of units leased at end of year(2)........................ 125 302 441 Home Again, Inc. Revenues........................................................ $ 532 $1,570 $ 4,035 Operating income................................................ 49 74 315 Number of units leased at end of year........................... 40 100 198 Temporary Housing Experts, Inc. Revenues........................................................ $2,000 $3,086 $ 3,583 Operating income (loss)......................................... 115 30 (73) Number of units leased at end of year........................... 153 214 239
- --------------- (1) Prior to the Combination, Exclusive Interim Properties, Ltd.'s fiscal year end was March 31. The 1994 and 1995 data presents data for that company's fiscal years ended March 31, 1995 and 1996, respectively. The 1996 data presents 12 months of data derived from the unaudited three-month period ended March 31, 1996 and the audited nine-month period ended December 31, 1996. (2) Includes 19 condominium units owned by Exclusive Interim Properties, Ltd. for all periods presented. 7 9 RISK FACTORS The following factors should be considered, together with the other information in this Prospectus, in evaluating an investment in the Company. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements as a result of any number of factors, including the risk factors set forth below and other factors discussed elsewhere in this Prospectus. LIMITED COMBINED OPERATING HISTORY BridgeStreet was founded in August 1996 to acquire flexible accommodation service providers and has only conducted combined operations since the Combination in the first quarter of 1997. Prior to the Combination, each of the Founding Companies operated (together with any affiliates) as a separate, independent entity. The Company intends to continue to operate the Founding Companies under their current management, although it will integrate some sales, marketing and purchasing operations, implement centralized financial and management information systems and controls, and implement "best practices" throughout its operations. The Company's senior management group has been assembled only recently, and there can be no assurance that this group will be successful in the Company's integration and implementation efforts, in managing the combined operations of the Founding Companies or in implementing the Company's business strategy. Any failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management." RISKS ASSOCIATED WITH ACQUISITION STRATEGY AND PLANNED RAPID EXPANSION As part of its strategy to establish a nationwide presence, the Company initially has targeted the following markets within which to expand its operations: Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, New York, Philadelphia, Phoenix, San Francisco, Seattle, Tampa, Toronto and Vancouver. BridgeStreet intends to grow in part through the acquisition of additional flexible accommodation service providers in these and other major metropolitan markets throughout the United States. However, in cases where the Company seeks to enter a new market but is unable to acquire a suitable existing provider on terms the Company deems acceptable, the Company may elect to establish a new operation or strategic alliance in that market. The Company also intends to pursue rapid internal growth through expansion of existing and acquired operations. See "Business -- Growth Strategy" and "-- Acquisition and Expansion Strategy." There can be no assurance that the Company will be successful in entering any market which it has targeted for expansion. There also can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses in existing or targeted expansion markets or successfully integrate any acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Certain risks inherent in an acquisition strategy, such as increasing leverage and debt service requirements (to the extent that the Company elects to finance its acquisitions with debt) and difficulties associated with combining disparate company systems and cultures, could adversely affect the Company's ability to integrate acquired businesses. The process of integrating acquired companies may involve unforeseen difficulties and may require a disproportionate amount of management's attention and financial and other resources. Moreover, increased competition for acquisition candidates may develop, in which event fewer acquisition opportunities may be available to the Company and acquisition costs for the opportunities that are available may be higher. There can be no assurance that any business acquired in the future will achieve anticipated revenues and earnings. In addition, the size, timing and integration of such acquisitions may cause substantial fluctuations in the Company's operating results from quarter to quarter. To the extent that the Company chooses to enter particular markets by establishing new operations, its results may be adversely affected by the increased time required for such operations to achieve profitability. Future internal growth will depend on a number of factors, including the effective and timely initiation and development of client relationships, the availability of additional accommodations on acceptable terms, the maintenance of the high quality of services the Company provides to its guests, and the recruitment, training, motivation and retention of qualified employees. 8 10 Sustaining the Company's growth and expansion will require substantial enhancements to the Company's operational and financial systems and controls as well as additional administrative, operational and financial resources. There can be no assurance that the Company will be able to manage its expanding operations successfully or that it will be able to maintain or accelerate its growth, and any failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATED TO ACQUISITION FINANCING The Company may choose to finance future acquisitions by issuing shares of Common Stock for a portion or all of the consideration to be paid. In the event that the Common Stock does not maintain a sufficient market value, or potential acquisition candidates otherwise are unwilling to accept Common Stock as part of the consideration for the sale of their businesses, the Company might not be able to utilize Common Stock as consideration for acquisitions and would be required to utilize more of its cash resources, if available, in order to maintain its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it could obtain additional capital through debt or equity financings. While the Company currently has a $10 million revolving credit facility to finance acquisitions, there can be no assurance that this credit facility will be sufficient for the Company's acquisition financing needs in the near term, or that additional financing will be available if and when needed or on terms acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- BridgeStreet." The inability of the Company to use its Common Stock as consideration for future acquisitions or to obtain additional financing for acquisitions could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that future issuances of Common Stock in connection with acquisitions will not be dilutive to the Company's stockholders. MARKET ACCEPTANCE OF BRAND NAME BridgeStreet has yet to complete the integration of the Founding Companies and, as a result, has limited history upon which to gauge client acceptance of its combined operations. Further, the Company will compete against other companies with substantially greater brand name recognition, and there can be no assurance that the Company will be able to persuade clients of such competitors to use the Company's services. The failure of the Company to successfully establish and promote "BridgeStreet" as a recognized brand name capable of attracting sufficient numbers of clients, or the receipt of adverse publicity relating to the Company's brand name, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing" and "-- Competition." DEPENDENCE ON THIRD PARTIES BridgeStreet generally leases its accommodations from residential property managers. The Company's profitability largely depends on its ability to lease accommodations on favorable terms, and local or regional declines in either vacancy rates or new apartment construction could lead to an increase in leasing costs or an inability to satisfy client demand. The Company also leases the furniture used in its accommodations from furniture rental companies, which may increase their prices, restrict the Company's flexibility in renting greater or lesser amounts of furniture, or otherwise impose unfavorable conditions on the Company's ability to customize the furnishings in its accommodations. The Company's reliance on third party vendors, assuming the occurrence of any of the events described above, would negatively affect the Company's operating margins and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Properties" and " -- Accommodations and Services." MARKET CONDITIONS MAY AFFECT PROFITABILITY The Company's operating results depend primarily on the difference, or "spread," between the rental rates it charges its clients for accommodations and the lease amounts it pays to the owners or managers of such accommodations. The rates that the Company is able to charge its clients in a given market can be expected to fluctuate based in part on conditions existing within the lodging industry as a whole, including the 9 11 occupancy rates of, and average daily rates being charged by, hotels and other competitors. To the extent competitors in a given market were to exert downward pressure on the rates that the Company is able to charge its clients, the Company's aggregate "spread" could decrease. In addition, while the Company seeks to manage the risks of fluctuating rates by "matching" its rental obligations with the length of its clients' stays through flexible lease arrangements, competitive rental market conditions could force the Company to enter into longer-term, fixed rate leases in order to establish or protect its unit inventory. The fixed rates in such leases also might lead to a reduction in the Company's "spread" in the event of downward trends in lodging prices. A reduction in the Company's "spread," as a result of either lower average daily rates charged by competitors or longer-term leases entered into by the Company, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry Overview" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." FACTORS AFFECTING TRAVEL, SEASONALITY AND CYCLICALITY The Company's operations are subject to events generally affecting levels of business and leisure travel, including business cycles, political changes and technological advances. The Company cannot predict the likelihood of occurrence of any such events. To the extent any such event significantly reduces travel, there could be a material adverse effect on the Company's business, financial condition and results of operations. The Company typically experiences a decline in earnings during its first quarter due to a decrease in business travel following the holiday season and travel disruptions caused by winter weather. As a general matter, due to (i) the Company's reliance on corporate clients and (ii) the strong correlation between the lodging industry's performance and macroeconomic conditions, the Company may be subject to cyclical changes in revenues and profits in response to changes in the national economy or the economies of the regions in which it operates. See "Management's Discussion of Financial Condition and Results of Operations -- Seasonality." COMPETITION The lodging industry generally, and the flexible accommodation services industry in particular, is highly competitive. Providers of flexible accommodation services compete with each other and with traditional hotels, motels, and all-suite and extended-stay hotels, primarily on the basis of location, availability, price and quality of accommodations, brand name recognition, and quality and scope of service. The Company competes with other flexible accommodation service providers both for clients and for possible acquisitions. The Company expects its business to become more competitive as existing competitors expand and new competitors enter the industry. Moreover, because the financial barriers to entry are relatively low in the flexible accommodation services industry, entities that maintain a vendor-vendee relationship with companies in this industry, such as real estate managers or furniture rental businesses, have entered the industry and more such entities may decide to enter the industry in the future. Certain of the Company's existing competitors have, and any new competitors that enter the industry may have, access to significantly greater financial resources than the Company. In particular, Oakwood Corporate Housing, Inc. ("Oakwood"), a flexible accommodation services provider which currently rents a substantially larger number of accommodations than the Company, is affiliated with R&B Realty Group, the nation's tenth largest apartment management company. This affiliation gives Oakwood access to apartment communities and capital that may be unavailable to the Company. Competitive market conditions could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL BridgeStreet's day-to-day operations depend on the continuing efforts of its executive officers and the senior management of the Company's operating subsidiaries. In particular, the Company depends on: William N. Hulett, III, its President and Chief Executive Officer; Rocco A. Di Lillo, its Vice President and Chief Operating Officer; and Mark D. Gagne, its Chief Financial Officer and Treasurer. While the Company has entered into employment agreements with these individuals, there can be no assurance that the Company will be able to retain the services of any of them. If any of these individuals does not continue in his management role following this offering and if the Company is unable to attract and retain qualified replacements, there 10 12 could be a material adverse effect on the Company's business, financial condition and results of operations. Each of the employment agreements with these individuals contains non-competition covenants with the Company. See "Management." LICENSING AND TAX ISSUES As a lessee of its accommodations, BridgeStreet believes that it and its employees are either outside the purview of, exempted from or in compliance with laws in the jurisdictions in which the Company operates requiring real estate brokers to hold licenses. However, there can be no assurance that the Company's position in any jurisdiction where it believes itself to be excepted or exempted will be upheld if challenged or that any such jurisdiction will not amend its laws to specifically require the Company and/or one or more of its employees to be licensed brokers. Moreover, there can be no assurance that the Company will not operate in the future in additional jurisdictions requiring such licensing. If the Company were found to have failed to comply with brokerage licensing laws, there could be a material adverse effect upon the Company's business, financial condition and results of operations. The Company provides flexible accommodation services for extended periods in leased as opposed to fixed-location accommodations. As a result, in some of the jurisdictions in which the Company operates, the Company believes that it is exempt from charging certain guests the sales and "bed" taxes that many jurisdictions require fixed-location lodging providers to charge their overnight guests. The imposition of a sales or "bed" tax requirement on the Company in instances where the Company currently does not charge such taxes, or the pursuit by taxing authorities of arrearages and penalties with respect to prior periods during which the Company did not collect and remit such taxes, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Regulation and Tax." CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS Upon completion of this offering, the Company's directors, executive officers and principal stockholders, together with their affiliates, will beneficially own approximately 53.8% of the Company's outstanding shares of Common Stock (approximately 51.0% if the Underwriters exercise their over-allotment option in full). As a result, these stockholders, if acting together, will have the ability to influence the outcome of corporate actions requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as a merger or sale of substantially all of the Company's assets, irrespective of how other stockholders of the Company may vote. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Management" and "Principal and Selling Stockholders." POSSIBLE FUTURE SALES OF SHARES Sales of substantial amounts of Common Stock in the public market after this offering under Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or otherwise, or the perception that such sales could occur, may adversely affect prevailing market prices of the Common Stock and could impair the future ability of the Company to raise capital through an offering of its equity securities or to effect acquisitions using shares of its Common Stock. Prior to this offering, the Company had outstanding 5,475,000 shares of Common Stock, of which 915,000 are being offered by the Selling Stockholders in this offering. The remaining 4,560,000 shares are "restricted securities" within the meaning of Rule 144. Subject to the contractual lockup provisions discussed below and unless the resale of the shares is registered under the Securities Act, these shares may not be sold in the open market until after the first anniversary of the transaction in which they were acquired, and then only in compliance with the applicable requirements of Rule 144. See "Shares Eligible for Future Sale." The Company and each of its directors, director nominees, executive officers and existing stockholders have agreed with the Representatives of the Underwriters not to sell or otherwise dispose of any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for shares of Common Stock (subject, in the case of the Company, to an exception for the grant of options under the Company's Equity Incentive Plan and Directors' Plan (both as defined herein) or in connection with acquisitions), for a period of 11 13 180 days after the date of this Prospectus without the written consent of the Representatives. See "Shares Eligible for Future Sale" and "Underwriting." CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and By-Laws require that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and require reasonable advance notice by a stockholder with respect to a proposal or director nomination such stockholder desires to present at any such meeting. Special meetings of stockholders may be called only by the President or Chairman of the Company or by the Board of Directors. In addition, the Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue up to 5,000,000 shares of, Preferred Stock. These provisions and other provisions of the Certificate of Incorporation and By-Laws may have the effect of deterring unsolicited acquisition proposals or hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares of Common Stock over the then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. The Company also is subject to Section 203 of the Delaware General Corporation Law (the "DGCL") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder. See "Description of Capital Stock." NO PRIOR MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or continue after this offering. The initial public offering price of the Common Stock was determined by negotiations between the Company and the Representatives of the Underwriters, and may not be indicative of the market price for the Common Stock after this offering. See "Underwriting" for a description of the factors considered in determining the initial public offering price. From time to time after this offering, there may be significant volatility in the market price for the Common Stock. Quarterly operating results of the Company, changes in general conditions in the economy or the lodging industry, or other developments affecting the Company or the Company's competitors could cause the market price of the Common Stock to fluctuate substantially. The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies' securities and have been unrelated to the operating performance of those companies. Any such fluctuations following completion of this offering may adversely affect the prevailing market price of the Common Stock. IMMEDIATE AND SUBSTANTIAL DILUTION The purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their shares of Common Stock in the amount of $6.37 per share, and may experience further dilution in that value from issuances of Common Stock in connection with future acquisitions. See "Dilution." ABSENCE OF DIVIDENDS The Company has never paid dividends on the Common Stock and does not anticipate paying any dividends in the foreseeable future. Declarations of dividends on the Common Stock will depend upon, among other things, future earnings, if any, the operating and financial condition of the Company, its capital requirements and general business conditions. The Company's credit facility currently prohibits dividend payments. See "Dividend Policy." 12 14 COMBINATION The Company was incorporated in August 1996 to become a leading national provider of flexible accommodation services. In the Combination, the Company acquired the Founding Companies through stock-for-stock mergers and issued 4,301,000 shares of Common Stock to their former stockholders. For a description of the transactions pursuant to which these companies were merged into BridgeStreet, see "Certain Transactions -- Organization of the Company; The Combination." Certain of such stockholders are Selling Stockholders in the offering. See "Principal and Selling Stockholders." Set forth below is a brief description of each of the Founding Companies: Temporary Corporate Housing Columbus, Inc.: Temporary Corporate Housing Columbus, Inc. (together with three affiliates, "TCH") was founded by Lynda D. Clutchey and Max Holzer in 1983. TCH is headquartered in Columbus, Ohio and, prior to its acquisition by the Company, operated its flexible accommodation services business in the following metropolitan areas: Cincinnati, Cleveland and Columbus, Ohio; and Pittsburgh, Pennsylvania. During its fiscal year ended December 31, 1996, TCH had combined revenues of approximately $12.5 million, and during December 1996 TCH's average occupancy rate was approximately 79%. Corporate Lodgings, Inc.: Corporate Lodgings, Inc. (together with four affiliates, "CLI") was founded by Rocco A. Di Lillo in 1987. CLI is headquartered in Hudson, Ohio and, prior to its acquisition by the Company, operated its flexible accommodation services business in the following metropolitan areas: Akron, Canton and Cleveland, Ohio; Lexington and Louisville, Kentucky; Minneapolis, Minnesota; Milwaukee, Wisconsin; Pittsburgh, Pennsylvania; and Detroit, Michigan. During its fiscal year ended December 31, 1996, CLI had combined revenues of approximately $8.8 million, and during December 1996 CLI's average occupancy rate was approximately 80%. Exclusive Interim Properties, Ltd.: Exclusive Interim Properties, Ltd. (together with an affiliate, "EIP") was founded by Melanie R. Sabelhaus in 1987. EIP is headquartered in Baltimore, Maryland and, prior to its acquisition by the Company, operated its flexible accommodation services business in the Baltimore, Maryland and District of Columbia metropolitan areas. During its 12 months ended December 31, 1996, EIP had combined revenues of approximately $8.6 million, and during December 1996 EIP's average occupancy rate was approximately 88%. Home Again, Inc.: Home Again, Inc. (together with two affiliates, "Home Again") was founded by Sandra A. Brown in 1993. Home Again is headquartered in Minneapolis, Minnesota and, prior to its acquisition by the Company, operated its flexible accommodation services business in the Minneapolis, Minnesota and Oklahoma City, Oklahoma metropolitan areas. During its fiscal year ended December 31, 1996, Home Again had combined revenues of approximately $4.0 million. Temporary Housing Experts, Inc.: Temporary Housing Experts, Inc. ("THEI") was founded in 1991 by Connie F. and Thomas W. O'Briant. THEI is headquartered in Memphis, Tennessee and, prior to its acquisition by the Company, operated its flexible accommodation services business in the Memphis, Tennessee and Jackson, Mississippi metropolitan areas. During its fiscal year ended December 31, 1996, THEI had revenues of approximately $3.6 million, and during December 1996 THEI's average occupancy rate was approximately 75%. 13 15 USE OF PROCEEDS The total net proceeds from this offering are estimated to be approximately $17.5 million (approximately $20.4 million if the Underwriters' over-allotment option is exercised in full), of which $10.7 million will be received by the Company and $6.8 million will be received by the Selling Stockholders (assuming an initial public offering price of $8.00 per share and after (i) deducting estimated underwriting discounts and commissions and (ii) reimbursing American Business Partners, LLC ("ABP") for offering expenses paid by ABP (estimated at $2.0 million), see "Certain Transactions--Organization of the Company; ABP"). ABP is an affiliate of Paul M. Verrochi, Chairman of the Company. The Company currently intends to use approximately (i) $1.1 million of the net proceeds to repay certain indebtedness of the Founding Companies assumed in connection with the Combination (which indebtedness bears interest at a weighted average interest rate of 9.3% and matures at various dates through December 2008), (ii) $2.5 million of the net proceeds to repay amounts the Company estimates will be outstanding under its revolving credit facility with Fleet National Bank at the closing of this offering (which amounts bear interest at a weighted average interest rate of 7.02% as of August 15, 1997) and (iii) $210,000 of the net proceeds to repay indebtedness incurred to repay certain other indebtedness of the Founding Companies (which indebtedness bears interest at a rate of 7.6%). The Company also intends to use approximately $1.5 million of the net proceeds to enhance its management information system capabilities. While the Company intends to repay all amounts borrowed under its revolving credit facility upon the closing of this offering, which amounts have been used to fund the $1.0 million purchase price in connection with the Company's acquisition on June 30, 1997 of the assets of a flexible accommodation services company in Memphis, Tennessee and to fund short-term working capital requirements, it will be able to continue to borrow funds from this facility following the offering, subject to the terms of the credit facility agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- BridgeStreet." In addition, the Company intends to use approximately $223,000 of the net proceeds to repay (i) all outstanding amounts due under a loan made to the Company by the spouse of one of the Company's directors (which loan bears interest at a rate of 8.0% and had a principal balance of approximately $37,000 as of July 31, 1997), (ii) the outstanding balance under a personal line of credit maintained by one of the Company's directors that was used to finance certain working capital requirements of one of the Founding Companies (which balance bears interest at a rate of 8.25% and aggregated approximately $11,000 as of July 31, 1997), and (iii) approximately $175,000 to ABP for expenses advanced in connection with the Combination. See "Certain Transactions--Organization of the Company; ABP" and "--Transactions Involving Officers and Directors." The balance of the net proceeds to the Company from this offering, approximately $5.1 million, will be used for working capital and general corporate purposes, including possible acquisitions. Although the Company regularly reviews strategic acquisition opportunities, the Company at this time has no binding agreements with respect to any material acquisitions. Pending the use of the net proceeds of this offering for the purposes described above, the Company will invest such proceeds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY Following this offering, the Company intends to retain all earnings to finance the growth and development of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Any future determination as to the payment of dividends on the Common Stock will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's future earnings, if any, the operating and financial condition of the Company, its capital requirements, general business conditions and any other factors the Board of Directors of the Company may consider. The Company's revolving credit facility currently prohibits dividend payments. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of 1997 (i) on an actual basis and (ii) as adjusted to reflect the sale of the 1,700,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the Company's Unaudited Consolidated Financial Statements as of and for the three and six months ended June 30, 1997 and the related notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) DEBT: Current maturities of long-term debt................................. $ 49 $ -- ======= ======= Long-term debt, net of current maturities............................ $ 3,344 $ -- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value: 5,000,000 shares authorized, none issued or outstanding, actual and as adjusted..................... -- -- Common Stock, $.01 par value: 35,000,000 shares authorized, 5,475,000 shares issued and outstanding, actual; 7,175,000 shares issued and outstanding, as adjusted(1)....................................... 55 72 Additional paid-in capital........................................... 18,750 29,381 Retained earnings.................................................... 580 580 -------- ------- Total stockholders' equity........................................ 19,385 30,033 -------- ------- Total capitalization......................................... $22,729 $30,033 ======= =======
- --------------- (1) Excludes an aggregate of 1,100,000 shares of Common Stock reserved for issuance under the Company's 1997 Equity Incentive Plan and Stock Plan for Non-Employee Directors. Of this amount, 482,667 and 37,500 shares of Common Stock will be issuable upon exercise of outstanding options under the 1997 Equity Incentive Plan and Stock Plan for Non-Employee Directors, respectively, as of the date of this Prospectus. See "Management -- Director Compensation" and " -- Executive Compensation; Stock Option Plan." 15 17 DILUTION The net tangible book value of the Company as of June 30, 1997 was approximately $1.0 million, or $0.19 per share. Net tangible book value per share represents the book value of the Company's total tangible assets less total liabilities divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 1,700,000 shares of Common Stock in this offering at an assumed initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the net tangible book value at June 30, 1997 would have been approximately $11.7 million, or $1.63 per share. This represents an immediate increase in net tangible book value per share of $1.44 to the existing stockholders, and an immediate dilution in net tangible book value per share of $6.37 to new investors. The following table illustrates this per share dilution: Assumed initial public offering price................................ $8.00 Net tangible book value before offering............................ $0.19 Increase attributable to new investors............................. 1.44 ----- Net tangible book value after offering............................... 1.63 ----- Dilution to new investors............................................ $6.37 =====
The following table sets forth, as of June 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the Company's existing stockholders and by investors purchasing shares of Common Stock offered hereby (assuming an initial public offering price of $8.00 per share and before deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing stockholders......... 5,475,000 76.3% $ 1,790,000 11.6% $ 0.33 New investors................. 1,700,000 23.7 13,600,000 88.4 $ 8.00 --------- ------ ----------- ------ Total............... 7,175,000 100.0% $15,390,000 100.0% ========= ===== =========== =====
16 18 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND FOOTNOTE DATA) For financial reporting purposes, TCH is presented as the acquiror of all of the other companies acquired by BridgeStreet in the Combination. Consequently, the Company's historical combined financial statements for periods ended on or before December 31, 1996 are the historical combined financial statements of TCH. The historical financial statements as of June 30, 1997 and for the period then ended are of the Company and include the accounts of each of the Founding Companies from its date of acquisition. The following selected historical financial data of TCH as of December 31, 1995 and 1996 and for each year in the three-year period ended December 31, 1996 has been derived from the audited financial statements of TCH included elsewhere herein. The remaining selected historical financial data of TCH and the Company has been derived from unaudited financial statements of TCH and the Company, which have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of that data.
HISTORICAL HISTORICAL (TCH ONLY) PRO FORMA (TCH ONLY) HISTORICAL PRO FORMA ------------------------------------------- COMBINED ------------ ------------- ------------- YEAR ENDED DECEMBER 31, YEAR ENDED SIX MONTHS ENDED JUNE 30, ------------------------------------------- DECEMBER 31, -------------------------------------------- 1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1) ------ ------ ------ ------ ------- ------------ ------------ ------------- ------------- STATEMENT OF OPERATIONS DATA: Revenues............ $5,627 $6,803 $8,309 $9,754 $12,502 $37,566 $5,641 $21,757 $22,924 Cost of services.... 4,520 5,312 6,475 7,354 9,088 27,945 4,186 15,974 16,797 Selling, general and administrative expense........... 1,328 1,373 1,628 2,064 2,327 7,334(2) 1,026 4,397 4,657(2) Officers' stock compensation...... -- -- -- -- -- -- -- 1,210(3) 1,210(3) Goodwill amortization...... -- -- -- -- -- 490(4) -- 229 245(4) ------ ------ ------ ------ ------- ------- ------ ------- ------- Operating income (loss)............ (221) 118 206 336 1,087 1,797 429 (53) 15 Interest and other income (expense), net............... 11 5 21 53 89 (7)(5) 38 (6) 92(5) ------ ------ ------ ------ ------- ------- ------ ------- ------- Income (loss) before provision for income taxes...... (210) 123 227 389 1,176 1,790 467 (59) 107 Provision (benefit) for income taxes............. (84) 49 114 178 512 912(6) 204 518 593(6) ------ ------ ------ ------ ------- ------- ------ ------- ------- Net income (loss)... $ (126) $ 74 $ 113 $ 211 $ 664 $ 878 $ 263 $ (577) $ (486) ====== ====== ====== ====== ======= ======= ====== ======= ======= Net income (loss) per share......... $ 0.12 $ (0.11) $ (0.07) ======= ======= ======= Weighted average shares outstanding....... 7,175,000 5,238,812 7,175,000
HISTORICAL (TCH ONLY) ---------------------------------------- DECEMBER 31, JUNE 30, 1997 ---------------------------------------- ----------------------------- 1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(7) ---- ------ ------ ------ ------ ------------ -------------- BALANCE SHEET DATA: Working capital................................ $499 $ 592 $ 496 $ 563 $ 986 $ 1,271 $ 8,575 Total assets................................... 901 1,209 1,672 2,510 2,013 28,930 35,209 Long-term debt, less current maturities........ 16 10 67 -- -- 3,344 -- Total stockholders' equity..................... 471 545 658 869 1,184 19,385 30,033
See accompanying notes on following page. 17 19 (1) The Pro Forma Combined Statement of Operations Data assumes that the Combination and this offering took place at the beginning of the period. This data is not necessarily indicative of the results the Company would have had if these events had actually then occurred or of the Company's future results. The Pro Forma Combined Statement of Operations Data for the year ended December 31, 1996 excludes (i) any adjustments for the compensation to be paid in 1997 for services to be rendered in 1997 by the Company's Chief Executive Officer and Chief Financial Officer pursuant to their employment agreements and (ii) non-recurring, non-cash compensation expense recorded in the first quarter of 1997 in connection with the accelerated vesting of restricted stock. The Pro Forma Statement of Operations Data for the six months ended June 30, 1997 assumes the acquisition of Home Again occurred at the beginning of the period. The pro forma data presented herein is based on preliminary estimates, available information and certain assumptions that management deems appropriate and should be read in conjunction with the Company's Unaudited Pro Forma Financial Statements and the other financial statements and notes thereto included elsewhere in this Prospectus. (2) Reflects the reduction of $552,000 in salary and benefits to executives of the Founding Companies for the year ended December 31, 1996 and an increase of $30,000 in salary and benefits for the six months ended June 30, 1997. (3) Consists of non-recurring, non-cash compensation expense recorded in connection with the accelerated vesting of restricted stock. This represents a reduction of $0.23 per share in the historical consolidated statement of operations and $0.17 per share in the pro forma statement of operations. (4) Reflects the $490,000 and $16,000 amortization of goodwill to be recorded as a result of the Combination for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, assuming a 35-year amortization period. (5) Reflects an interest expense reduction of $158,000 for the year ended December 31, 1996 and $97,000 for the six months ended June 30, 1997 related to bank debt and notes payable to be repaid from the net proceeds of this offering. (6) Reflects (i) an increase of $373,000 in the Company's historical provision for income taxes for the year ended December 31, 1996 to account for the Company's estimated consolidated effective tax rate subsequent to the Combination, after considering nondeductible goodwill amortization, and (ii) an increase of $75,000 in the historical provision for income taxes for the six months ended June 30, 1997 to account for the estimated consolidated 1997 effective tax rate, after considering nondeductible goodwill. (7) Reflects the issuance of 1,700,000 shares of Common Stock by the Company in this offering and the application of the net proceeds as described under "Use of Proceeds." 18 20 SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS) The selected historical and pro forma financial data presented below for the individual Founding Companies (including their respective affiliates, if any) is derived from, and should be read in conjunction with, their respective audited financial statements and related notes thereto appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ------ ------ ------- Temporary Corporate Housing Columbus, Inc. Revenues........................................................ $8,309 $9,754 $12,502 Operating income................................................ 206 336 1,087 Number of units leased at end of year........................... 510 539 624 Corporate Lodgings, Inc. Revenues........................................................ $4,069 $6,067 $ 8,820 Operating income................................................ 87 39 195 Number of units leased at end of year........................... 213 301 434 Exclusive Interim Properties, Ltd.(1) Revenues........................................................ $4,015 $5,521 $ 8,626 Operating income................................................ 104 300 213 Number of units leased at end of year(2)........................ 125 302 441 Home Again, Inc. Revenues........................................................ $ 532 $1,570 $ 4,035 Operating income................................................ 49 74 315 Number of units leased at end of year........................... 40 100 198 Temporary Housing Experts, Inc. Revenues........................................................ $2,000 $3,086 $ 3,583 Operating income (loss)......................................... 115 30 (73) Number of units leased at end of year........................... 153 214 239
- --------------- (1) Prior to the Combination, Exclusive Interim Properties, Ltd.'s fiscal year end was March 31. The 1994 and 1995 data presents data for that company's fiscal years ended March 31, 1995 and 1996, respectively. The 1996 data presents 12 months of data derived from the unaudited three-month period ended March 31, 1996 and the audited nine-month period ended December 31, 1996. (2) Includes 19 condominium units owned by Exclusive Interim Properties, Ltd. for all periods presented. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Unaudited Pro Forma Combined Financial Statements and Consolidated Financial Statements and the Founding Companies' Financial Statements and the related notes thereto appearing elsewhere in this Prospectus. INTRODUCTION BridgeStreet was incorporated in August 1996 with the goal of becoming a leading national provider of flexible accommodation services. The Company plans to achieve this goal by implementing an aggressive acquisition program and a national operating strategy designed to increase internal revenue growth, cost efficiencies and profitability. In the first quarter of 1997, BridgeStreet acquired by merger the five Founding Companies in the Combination. The Company's revenues are derived primarily from renting accommodations to guests for extended periods. Revenues depend on the number of accommodations the Company has available under lease, the occupancy rate and the rate charged. The rate charged is a function of, among other factors, (i) the type, size and location of the accommodation being rented, (ii) the rental period and (iii) any additional amenities made available to the guest during his or her stay. Cost of services consists primarily of lease payments for accommodations and their furnishings, and expenses associated with cleaning, maintaining and providing utilities to accommodations. Selling, general and administrative expense consists primarily of compensation and related benefits for management and key employees, administrative salaries and benefits, office rents and utilities, professional fees and advertising. Prior to their acquisition by BridgeStreet, the Founding Companies were managed as independent private businesses. As such, their historical results of operations reflect different tax structures (i.e., S corporations and C corporations) which have influenced, among other things, their historical levels of owners' compensation and benefits. Certain Founding Company owners agreed to reductions in their compensation and benefits in connection with the Combination. BridgeStreet currently is in the process of integrating the Founding Companies and their operations and administrative functions. This integration process may present opportunities to (i) enhance revenues through the geographic cross-sell capabilities that each of the Founding Companies can provide to its existing clients and (ii) reduce costs through, among other things, the elimination of duplicative functions and the receipt of greater volume discounts from vendors. However, integration also will necessitate additional costs and expenditures related to corporate management and administration, public company operations, systems integration and facilities expansion. As a result of these possible cost savings and various additional costs, historical operating results may not be comparable to, or indicative of, future performance. There can be no assurance that the Company's integration efforts will be successful. See "Risk Factors -- Limited Combined Operating History." For financial reporting purposes, Temporary Corporate Housing Columbus, Inc. (together with its three affiliates) is presented as the acquiror of the other Founding Companies. Consequently, the Company's historical financial statements for periods ended on or before December 31, 1996 are the historical financial statements of TCH. RESULTS OF OPERATIONS - BRIDGESTREET INTERIM RESULTS Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30, 1996 BridgeStreet's Consolidated Statements of Operations for the three and six months ended June 30, 1997 contained in this Prospectus include the unaudited accounts of TCH, CLI, EIP and THEI, all of which were acquired on January 2, 1997. In addition, the operating results for the three months ended June 30, 1997 include the unaudited accounts of Home Again, which was acquired on March 31, 1997. The Statement of Operations of BridgeStreet for the three and six months ended June 30, 1996 included in this Prospectus consist of the unaudited accounts of only TCH, the designated accounting acquiror. Consequently, the 1996 20 22 and 1997 three- and six-month periods are not comparable, and the comparison of the periods below is not indicative of future results of operations. The Company's Consolidated Balance Sheet as of June 30, 1997 reflects the accounts of all the Founding Companies and Corporate Housing Services, Inc. ("CHS"), a flexible accommodation services provider acquired on June 30, 1997. The acquisition of CHS has been accounted for as a purchase. Accordingly, the Statement of Operations for the three and six months ended June 30, 1997 do not include the operating results of CHS. Revenues. Revenues increased $16.2 million, or 286%, from $5.6 million for the six months ended June 30, 1996 to $21.8 million for the six months ended June 30, 1997. For the three months ended June 30, revenues increased $9.7 million, or 321%, from $3.0 million in 1996 to $12.7 million in 1997. The increase in revenues primarily was the result of an increase in the number of accommodations rented during the periods due to the acquisition in the Combination of four flexible accommodation service providers and the growth in existing markets. Three of the providers were acquired on January 2, 1997 and the fourth was acquired on March 31, 1997. Cost of Services. Cost of services increased $11.8 million, or 282%, from $4.2 million for the six months ended June 30, 1996 to $16.0 million for the six months ended June 30, 1997. For the three months ended June 30, cost of services increased $6.8 million, or 308%, from $2.2 million in 1996 to $9.0 million in 1997. Cost of services as a percentage of revenues decreased from 74.2% for the six months ended June 30, 1996 to 73.4% for the six months ended June 30, 1997. Cost of services as a percentage of revenues for the three months ended June 30 decreased from 73.2% in 1996 to 70.8% in 1997. The dollar increase in cost of services was primarily related to the acquisition of four flexible accommodation service providers in the Combination. Cost of services decreased as a percentage of revenues primarily as a result of increased rental rates and higher occupancy rates. Selling, General and Administrative Expense. Selling, general and administrative expense increased $3.4 million, or 329%, from $1.0 million for the six months ended June 30, 1996 to $4.4 million for the six months ended June 30, 1997. For the three months ended June 30, selling, general and administrative expense increased $1.9 million, or 350%, from $543,000 in 1996 to $2.4 million in 1997. Selling, general and administrative expense as a percentage of revenues increased from 18.2% for the six months ended June 30, 1996 to 20.2% for the six months ended June 30, 1997. Selling, general and administrative expense as a percentage of revenues for the three months ended June 30 increased from 18.1% in 1996 to 19.3% in 1997. The dollar increase in selling, general and administrative expense primarily was a result of the Combination. The increase in such expense as a percentage of revenues resulted from hiring corporate personnel and acquiring in the Combination certain companies that had higher selling, general and administrative expenses as a percentage of revenues. The Statement of Operations for the six months ended June 30, 1997 includes $1.2 million of non-recurring, non-cash compensation expense relating to the accelerated vesting of restricted stock held by executive officers. The compensation charge represents the difference between the value of stock issued to officers and the amount paid. Income Tax Provision. For the six months ended June 30, 1997, the Company recorded a tax provision of $518,000 on a pre-tax loss of $59,000 compared to a tax provision of $204,000 on pre-tax income of $467,000 for the six months ended June 30, 1996. The tax provision for the six months ended June 30, 1997 is based on the Company's estimated consolidated effective tax rate for the 1997 fiscal year after considering nondeductible goodwill. LIQUIDITY AND CAPITAL RESOURCES - BRIDGESTREET For the six months ended June 30, 1997, net cash provided by operating activities totaled $1.1 million. Net cash used in investing activities during the six months ended June 30, 1997 was $1.6 million, primarily for acquisitions (as described below) and the purchase of operating stock and equipment required in the Company's business. Net cash provided by financing activities during the six months ended June 30, 1997 was $1.6 million, primarily from an increase in borrowings under the line of credit partially offset by repayments of amounts due stockholders, long-term debt and costs associated with this offering. Cash, cash equivalents and 21 23 investments in short-term marketable securities increased by $1.1 million during the period and totaled $2.0 million at June 30, 1997. The Company has a revolving credit facility with Fleet National Bank, the material terms of which are summarized as follows. The facility provides the Company with a revolving line of credit of up to $10.0 million, secured by guarantees by certain material subsidiaries of the Company and a pledge of the capital stock of all of the Company's wholly-owned operating subsidiaries. The credit facility may be used for refinancing of the Company's subsidiaries' indebtedness, post-offering acquisitions and working capital. Loans made under the credit facility bear interest, at the Company's option, at the bank's prime lending rate, 1.25% above the Eurodollar rate or a 30-day LIBOR rate. The credit facility will terminate on March 31, 2002, or sooner at the discretion of the Company, and all amounts outstanding thereunder (if any) will be due upon such termination. The credit facility (i) prohibits the payment of dividends and other distributions by the Company, (ii) generally will not permit the Company to incur or assume other indebtedness and (iii) requires the Company to comply with certain financial covenants. The Company had $2.1 million and $2.2 million outstanding at June 30, 1997 and July 28, 1997, respectively. On March 31, 1997 the Company acquired Home Again in a stock-for-stock merger and issued 475,000 shares of Common Stock as merger consideration. The acquisition has been accounted for using the purchase method of accounting. The Company has recorded approximately $2.3 million of goodwill related to the transaction that will be amortized over a period of 35 years. Home Again had combined revenues of approximately $4.0 million for the year ended December 31, 1996 and approximately $1.2 million for the three months ended March 31, 1997. Home Again's results of operations for the three months ended June 30, 1997 are reflected in the Company's Consolidated Statements of Operations for the three- and six-month periods ended June 30, 1997. On June 30, 1997 the Company acquired for cash all the assets of CHS, a provider of flexible accommodation services in the Memphis, Tennessee metropolitan area. CHS had revenues of approximately $2.5 million for the year ended December 31, 1996. The cost of the acquisition was $1.0 million and was funded through borrowings from the Company's revolving line of credit. The acquisition price was allocated to net assets of $100,000 and to goodwill of $900,000. The results of operations for CHS are not reflected in the Company's Consolidated Statements of Operations for the 1997 periods. The Company's primary sources of funding to date have been cash flow from operations, commercial credit facilities and loans from affiliates. The Company anticipates that in addition to the net proceeds from this offering, cash flow from operations and borrowings under its credit facility will be its principal future sources of funding. The Company's principal future uses of cash, in addition to cash used in operating activities, are likely to be repayment of debt, investment in the Company's management information systems, funding of acquisitions and expansion into new markets. See "Use of Proceeds." The Company does not plan to make any material capital expenditures for leasehold improvements. While there can be no assurance, management believes that cash flow from operations, funds from the revolving credit facility and the net proceeds to the Company from this offering will be adequate to meet the Company's capital requirements for the next 12 months, depending on the size and methods of financing potential acquisitions. SEASONALITY Quarterly earnings may be affected by the timing of certain holidays, business and vacation patterns, weather conditions, economic factors and other considerations affecting travel. Corporate relocation activity peaks in the summer months and declines significantly during the first part of the first quarter. Long-term consulting activity tends to follow a similar pattern, but not to the same extent. The Company expects to realize lower revenues, operating income and net income during the first quarter. For example, revenues at TCH for the three months ended March 31, 1996, represented approximately 21.1% of its revenues for the year ended December 31, 1996. Likewise, TCH's operating income and net income for this three-month period represented approximately 15.3% and 16.4% of 1996 operating income and net income, respectively. 22 24 RESULTS OF OPERATIONS -- COMBINED The Combined Founding Company Statements of Operations data for the years ended December 31, 1994, 1995 and 1996 do not purport to present the combined Founding Companies in accordance with generally accepted accounting principles, but represent merely a summation of the data of the individual Founding Companies on a historical basis and do not include the effects of pro forma adjustments. This data will not be comparable to and may not be indicative of the Company's post-Combination results of operations because (i) the Founding Companies historically were not under common control or management and had different tax structures during the periods presented, (ii) the Company used the purchase method of accounting to reflect the Combination and (iii) the Founding Companies were not all acquired at the same time. The following table sets forth certain unaudited combined data of the Founding Companies and that data as a percentage of revenues on a historical basis and excludes the effects of pro forma adjustments for the periods indicated (dollars in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1994 1995 1996(1) ----------------- ----------------- ----------------- Revenues..................... $18,925 100.0% $25,998 100.0% $37,566 100.0% Cost of services............. 14,048 74.2 19,121 73.5 27,945 74.4 Selling, general and administrative expense..... 4,413 23.3 6,099 23.5 7,883 21.0 ------- ----- ------- ----- ------- ----- Operating income............. $ 464 2.5% $ 778 3.0% $ 1,738 4.6% ======= ===== ======= ===== ======= =====
- --------------- (1) Data for the period ending December 31, 1996 includes data derived from EIP's unaudited three-month period ended March 31, 1996 and the audited nine-month period ended December 31, 1996. Data for 1995 and 1994 includes data for EIP's fiscal years ended March 31, 1996 and March 31, 1995, respectively. 1996 Compared to 1995 Revenues. Revenues increased $11.6 million, or 44.5%, from $26.0 million in 1995 to $37.6 million in 1996. Revenues for each of the Founding Companies increased during this period. The increase primarily was a result of an increase in the number of accommodations rented during the year, both in existing markets and in new markets. Cost of Services. Cost of services increased $8.8 million, or 46.1%, from $19.1 million in 1995 to $27.9 million in 1996. Cost of services as a percentage of revenues increased slightly from 73.5% in 1995 to 74.4% in 1996. The dollar increase in cost of services resulted primarily from an increase in the number of accommodations leased during the year. Cost of services as a percentage of revenues was adversely affected by certain pricing practices at one of the Founding Companies, which since have been discontinued, as well as higher leasing and maintenance costs and lower occupancy rates resulting from the entry by another Founding Company into new markets. Selling, General and Administrative Expense. Selling, general and administrative expense increased $1.8 million, or 29.3%, from $6.1 million in 1995 to $7.9 million in 1996, primarily as a result of an increase in staffing required to support the increased number of accommodations, higher compensation paid to owners of the Founding Companies and increased overhead costs associated with entering new markets. Selling, general and administrative expense decreased as a percentage of revenues from 23.5% in 1995 to 21.0% in 1996, generally as a result of spreading the fixed costs of the Founding Companies' operations over a larger revenue base. 23 25 1995 Compared to 1994 Revenues. Revenues increased $7.1 million, or 37.4%, from $18.9 million in 1994 to $26.0 million in 1995. Revenues for each of the Founding Companies increased during this period. The increase primarily was a result of an increase in the number of accommodations rented during the year, both in existing markets and in new markets. In addition, Home Again initiated operations in mid-1993, and as a result did not have its operations fully implemented during 1994. Cost of Services. Cost of services increased $5.1 million, or 36.1%, from $14.0 million in 1994 to $19.1 million in 1995 as a result of the increase in the number of accommodations leased during the year. Cost of services as a percentage of revenues decreased slightly from 74.2% in 1994 to 73.5% in 1995. Selling, General and Administrative Expense. Selling, general and administrative expense increased $1.7 million, or 38.2%, from $4.4 million in 1994 to $6.1 million in 1995, and increased slightly as a percentage of revenues from 23.3% in 1994 to 23.5% in 1995. The increase both in dollars and as a percentage of revenues primarily was a result of an increase in staffing required to support the increased number of accommodations, higher compensation paid to certain owners of the Founding Companies and increased overhead costs associated with entering new markets. LIQUIDITY AND CAPITAL RESOURCES -- COMBINED On a combined basis, the Founding Companies generated $1.6 million and $700,000 of net cash from operating activities during 1995 and 1996, respectively. TCH and EIP generated the most cash flow from operating activities in 1995 (approximately $620,000 and $403,000, respectively); and Home Again and EIP generated the most cash flow from operating activities in 1996 (approximately $562,000 and $293,000, respectively). Net cash used in investing activities by the Founding Companies was $791,000 during each of 1995 and 1996. Cash used in investing activities primarily was for the purchase of operating stock and property and equipment. EIP and THEI used the most cash for investing activities in 1995 (approximately $333,000 and $138,000, respectively); and EIP and Home Again used the most cash for investing activities in 1996 (approximately $337,000 and $335,000, respectively). Net cash used in financing activities by the Founding Companies on a combined basis was approximately $146,000 and $341,000 during 1995 and 1996, respectively. Net cash used in financing activities primarily was for the repayment of notes to stockholders, payment of long-term debt and distributions to stockholders. TCH and EIP used the most cash for financing activities in 1995 (approximately $156,000 and $74,000, respectively); and TCH and Home Again used the most cash for financing activities in 1996 (approximately $270,000 and $96,000, respectively). The combined cash and cash equivalents of the Founding Companies decreased by $400,000, from $1.4 million in 1995 to $1.0 million in 1996. At December 31, 1996, three of the Founding Companies had a working capital deficit aggregating approximately $700,000. IMPACT OF INFLATION Due to the low levels of inflation experienced in 1994, 1995 and 1996, inflation did not have a significant effect on the combined results of the Founding Companies in those years. INDIVIDUAL FOUNDING COMPANIES RESULTS OF OPERATIONS -- TEMPORARY CORPORATE HOUSING 1996 Compared to 1995 and 1995 Compared to 1994 Revenues. Revenues increased $2.7 million, or 28.2%, from $9.8 million in 1995 to $12.5 million in 1996. This increase was a result of an increase in the number of accommodations rented during the year, an improvement in the occupancy rate and an increase in the rates realized by TCH. Revenues increased $1.4 million, or 17.4%, from $8.3 million in 1994 to $9.8 million in 1995. This increase was a result of an increase in the number of accommodations rented during the year, an improvement in the occupancy rate and an increase in the rates realized by TCH. 24 26 Cost of Services. Cost of services increased $1.7 million, or 23.6%, from $7.4 million in 1995 to $9.1 million in 1996, primarily as a result of an increase in the number of accommodations leased and the cost of furnishing such accommodations during the year. Cost of services as a percentage of revenues decreased from 75.4% in 1995 to 72.7% in 1996 as a result of an improved occupancy rate and an increase in the rates realized by TCH. Cost of services increased $879,000, or 13.6%, from $6.5 million in 1994 to $7.4 million in 1995, primarily as a result of an increase in the number of accommodations leased and the cost of furnishing such accommodations during the year. Cost of services as percentage of revenues decreased from 77.9% in 1994 to 75.4% in 1995 as a result of an improved occupancy rate and an increase in the rates realized by TCH. Selling, General and Administrative Expense. Selling, general and administrative expense increased $263,000, or 12.7%, from $2.1 million in 1995 to $2.3 million in 1996, primarily as a result of increased compensation to the stockholders, administrative payroll and sales commissions. Selling, general and administrative expense as a percentage of revenues decreased from 21.2% in 1995 to 18.6% in 1996, primarily as a result of spreading the fixed costs of the company's operations over a larger revenue base. Selling, general and administrative expense increased $436,000, or 26.8%, from $1.6 million in 1994 to $2.1 million in 1995. Selling, general and administrative expense increased as a percentage of revenues increased from 19.6% in 1994 to 21.2% in 1995. This increase both in dollars and as a percentage of revenues primarily was a result of increased compensation to the stockholders, administrative payroll and sales commissions. LIQUIDITY AND CAPITAL RESOURCES -- TEMPORARY CORPORATE HOUSING For the three years ended December 31, 1996, TCH generated $873,000 in net cash flow from operating activities. Increases in cash flow primarily were generated from net income plus depreciation and amortization of $1.2 million, while reductions in cash flow were due to increases in accounts receivable balances of $401,000 attributable to TCH's increased sales levels. TCH also expended $374,000 during this period, primarily for purchases of operating stock and property and equipment. Cash used in financing activities was $432,000 during this period and primarily was attributable to loans to stockholders and a dividend to stockholders of $349,000. At December 31, 1996, TCH had working capital of $986,000. TCH historically has funded its operations from cash provided by operating activities. At December 31, 1996, TCH had cash and cash equivalents of $598,000 with no outstanding indebtedness. RESULTS OF OPERATIONS -- CORPORATE LODGINGS 1996 Compared to 1995 and 1995 Compared to 1994 Revenues. Revenues increased $2.7 million, or 45.4%, from $6.1 million in 1995 to $8.8 million in 1996. This increase was a result of an increase in the number of accommodations rented during the year, an improvement in the occupancy rate and an increase in the rates realized by CLI. Revenues increased $2.0 million, or 49.1%, from $4.1 million in 1994 to $6.1 million in 1995. This increase was a result of an increase in the number of accommodations rented during the year and an increase in the rates realized by CLI. Cost of Services. Cost of services increased $2.1 million, or 50.9%, from $4.0 million in 1995 to $6.1 million in 1996. Cost of services as percentage of revenues also increased, from 66.7% in 1995 to 69.2% in 1996. The increase both in dollars and as a percentage of revenues primarily was a result of an increase in the cost to lease, furnish and clean a unit. Cost of services increased $1.3 million, or 47.4%, from $2.7 million in 1994 to $4.0 million in 1995, primarily as a result of an increase in the number of accommodations leased and the cost of furnishing such accommodations during the year. Cost of services as percentage of revenues decreased from 67.5% in 1994 to 66.7% in 1995 primarily as a result of an increase in the rates realized by CLI. Selling, General and Administrative Expense. Selling, general and administrative expense increased $537,000, or 27.1%, from $2.0 million in 1995 to $2.5 million in 1996, primarily as a result of increased compensation to the majority stockholder, increased sales and administrative payroll, and general office expenses. Selling, general and administrative expense as a percentage of revenues decreased from 32.7% in 25 27 1995 to 28.6% in 1996, primarily as a result of spreading the fixed costs of the company's operations over a larger revenue base. Selling, general and administrative expense increased $745,000, or 60.2%, from $1.2 million in 1994 to $2.0 million in 1995. Selling, general and administrative expense as a percentage of revenues increased from 30.4% in 1994 to 32.7% in 1995. The increase both in dollars and as a percentage of revenues primarily was a result of costs associated with entering the Milwaukee, Wisconsin market and expansion within the Lexington, Kentucky market. RESULTS OF OPERATIONS -- EXCLUSIVE INTERIM PROPERTIES Twelve Months Ended December 31, 1996 Compared to Fiscal Year Ended March 31, 1996 and Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995 Revenues. Revenues increased $3.1 million, or 56.2%, from $5.5 million in the fiscal year ended March 31, 1996 to $8.6 million in the 12 months ended December 31, 1996. This increase was a result of an increase in the number of accommodations rented. Revenues increased $1.5 million, or 37.5%, from $4.0 million in the fiscal year ended March 31, 1995 to $5.5 million in the fiscal year ended March 31, 1996, as a result of an increase in the number of accommodations rented during the year. Cost of Services. Cost of services increased $2.8 million, or 65.8%, from $4.2 million in the fiscal year ended March 31, 1996 to $7.0 million in the 12 months ended December 31, 1996, primarily as a result of an increase in the number of accommodations leased. Cost of services as a percentage of revenues increased from 76.9% in the fiscal year ended March 31, 1996 to 81.6% in the 12 months ended December 31, 1996. The increase in cost of services as a percentage of revenues primarily was attributable to the effect of certain pricing practices, which since have been discontinued. Cost of services increased $1.2 million, or 40.8%, from $3.0 million in the fiscal year ended March 31, 1995 to $4.2 million in the fiscal year ended March 31, 1996, as a result of an increase in the number of accommodations leased during the year. Cost of services as a percentage of revenues increased from 75.1% in the fiscal year ended March 31, 1995 to 76.9% in the fiscal year ended March 31, 1996. Selling, General and Administrative Expense. Selling, general and administrative expense increased $399,000, or 40.9%, from $975,000 in the fiscal year ended March 31, 1996 to $1.4 million in the 12 months ended December 31, 1996. Selling, general and administrative expense as a percentage of revenues decreased from 17.7% in the fiscal year ended March 31, 1996 to 15.9% in the 12 months ended December 31, 1996, primarily as a result of spreading the fixed costs of the company's operations over a larger revenue base. Selling, general and administrative expense increased $80,000, or 8.9%, from $895,000 in the fiscal year ended March 31, 1995 to $975,000 in the fiscal year ended March 31, 1996. Selling, general and administrative expense as a percentage of revenues decreased from 22.3% in the fiscal year ended March 31, 1995 to 17.7% in the fiscal year ended March 31, 1996, primarily as a result of spreading the fixed costs of the company's operations over a larger revenue base. RESULTS OF OPERATIONS -- HOME AGAIN 1996 Compared to 1995 Revenues. Revenues increased $2.5 million, or 157.0%, from $1.6 million in 1995 to $4.0 million in 1996. This increase was a result of an increase in the number of accommodations rented during the year. Cost of Services. Cost of services increased $1.9 million, or 144.1%, from $1.3 million in 1995 to $3.1 million in 1996, as a result of an increase in the number of accommodations leased during the year. Cost of services as percentage of revenues decreased from 81.8% in 1995 to 77.7% in 1996, primarily as a result of spreading the fixed costs of the company's operations over a larger revenue base. Selling, General and Administrative Expense. Selling, general and administrative expense increased $374,000, or 176.4%, from $212,000 in 1995 to $586,000 in 1996. The increase both in dollars and as a percentage of revenues primarily was a result of increased compensation to the stockholder and an increase in administrative payroll. 26 28 RESULTS OF OPERATIONS -- TEMPORARY HOUSING EXPERTS 1996 Compared to 1995 Revenues. Revenues increased $500,000, or 16.1%, from $3.1 million in 1995 to $3.6 million in 1996. This increase was a result of an increase in the number of accommodations rented during the year. Cost of Services. Cost of services increased $388,000, or 17.7%, from $2.2 million in 1995 to $2.6 million in 1996. The increase both in dollars and as a percentage of revenues primarily was a result of an increase in the number of accommodations leased during the year and a lower occupancy rate due to entering a new market in August 1995. Selling, General and Administrative Expense. Selling, general and administrative expense increased $212,000, or 24.5%, from $866,000 to 1995 to $1.1 million in 1996. The increase both in dollars and as a percentage of revenues primarily was a result of increased compensation to the stockholders and an increase in administrative payroll. 27 29 BUSINESS OVERVIEW BridgeStreet is a leading provider of flexible accommodation services in 16 metropolitan areas located in the Midwest and Mid-Atlantic regions of the United States. The Company offers high-quality, fully-furnished apartments, townhouses, condominiums and to a lesser extent, houses (collectively, "accommodations"), primarily for individuals traveling on business and company executives relocating to new communities who require lodging for one week to several months. Together with the specialized amenities offered by the Company, these accommodations are intended to provide guests with a "home away from home." As of June 30, 1997, BridgeStreet had more than 2,700 units under lease, and for the six months ended June 30, 1997, BridgeStreet's occupancy rate was approximately 90%. As a provider of flexible accommodation services, BridgeStreet leases substantially all of its accommodations on a short-term basis from property managers, and then rents them to its clients. This enables the Company to (i) adjust the quantity, mix and location of its accommodations as client needs dictate and local economic conditions warrant, (ii) expand and enter new markets without the costs and lead times associated with investing in "bricks and mortar" and (iii) avoid the fixed costs associated with ownership or long-term leasing of real estate. The Company also leases the furniture for its accommodations on a short-term basis from furniture rental companies. These furniture leasing arrangements enable BridgeStreet to maintain well-appointed, modern and attractive accommodations, upgrade and replace furniture as needed, and satisfy specific furnishing requests. BridgeSteet's leasing strategy distinguishes it from fixed-location lodging providers, such as all-suite or extended-stay hotels, that own their lodging facilities and furnishings or lease them on a long-term basis. Traditionally, travelers on extended trips have stayed in hotels and motels. According to the American Hotel and Motel Association, in 1995, business travelers staying three or more nights represented approximately 37% of total domestic hotel stays during that year. The Company believes that business travelers on extended trips increasingly desire alternatives to conventional hotel and motel rooms, which typically lack the spaciousness and amenities of home. The Company believes that this has been an important factor in the recent growth in the extended-stay segment of the lodging industry. Participants in this segment include flexible accommodation service providers, all-suite hotels and extended-stay hotels. By providing flexible accommodation services, the Company can satisfy client requests for accommodations in a variety of locations and neighborhoods, as well as requests for accommodations of specific types and sizes. The substantial majority of the Company's accommodations are located within high-quality property complexes that typically feature, among other things, in-unit washers and dryers, dedicated parking and access to fitness facilities (including, in many cases, pools, saunas and tennis courts). In addition, at a guest's request, BridgeStreet can upgrade an accommodation by providing specialized amenities such as office furniture, fax machines and computers. The Company's accommodations generally are priced competitively with all-suite and upscale extended-stay hotel rooms even though, on average, the Company believes its accommodations are substantially larger. BridgeStreet was founded in August 1996, and in the first quarter of 1997 combined by merger five regional providers of flexible accommodation services. The Company has achieved significant growth in recent years. On a combined basis, units available for rent increased from 1,041 units on December 31, 1994 to 1,936 units on December 31, 1996, representing a compound annual growth rate of 36%. In addition, pro forma net revenues increased from $18.9 million in 1994 to $37.6 million in 1996, representing a compound annual growth rate of 41%. GROWTH STRATEGY The Company plans to achieve its goal of becoming a leading national provider of flexible accommodation services by implementing an aggressive acquisition program and a national operating strategy designed to 28 30 increase internal revenue growth, cost efficiencies and profitability. Key elements of the Company's business strategy include: Growth Through Acquisitions. The Company believes that the flexible accommodation services industry is highly fragmented, with over 400 geographically dispersed companies in the United States, few of which have more than a regional presence. BridgeStreet plans to take advantage of the fragmented nature of the industry by acquiring flexible accommodation service companies in major metropolitan areas frequented by business travelers. BridgeStreet intends to implement its business model at each acquired company as soon as practicable after the acquisition is completed. BridgeStreet's acquisition strategy is to: - Enter New Geographic Markets and Establish Nationwide Coverage. In each new market, the Company intends to target for acquisition one local or regional flexible accommodation services provider having the size and quality of operations suitable for serving as the Company's base for expansion in the market. Acquisitions in new markets will enable BridgeStreet to (i) gain local or regional market share rapidly, (ii) increase sales to existing clients by meeting their needs for accommodations in other regions, (iii) increase sales to the acquired company's clients by providing them with access to BridgeStreet's growing national network and (iv) establish the BridgeStreet brand name in new regions and enhance its nationwide recognition. The Company also may expand into new markets by establishing new operations. - Expand Within Existing Markets. Once the Company has established operations in a new region, it may seek to expand its market share by acquiring other flexible accommodation service providers within that region. The Company believes that it can achieve operating efficiencies by incorporating the businesses of smaller acquired companies into the Company's operations without any significant increase in infrastructure. On June 30, 1997, the Company acquired the assets of a flexible accommodation services provider in Memphis, Tennessee with 135 units under lease. National Operating Strategy. The Company has begun to implement a national operating strategy with the following components: - Maximize Sales to Existing and New Clients. The Company plans to maximize sales to existing corporate clients and to obtain new clients through a national sales and marketing program which highlights the Company's expanding national network. Many of the Company's clients are Fortune 1000 companies with significant, national employee lodging requirements. These corporate clients generally have numerous key decision makers (such as human resource directors, relocation managers or training directors) who both establish and administer company travel and accommodation policies. The Company plans to obtain a greater share of each client's lodging requirements by establishing relationships with additional key decision makers and emphasizing the Company's expanding national presence. - Achieve Cost Efficiencies. The Company believes it should be able to reduce total operating expenses of the Founding Companies and any additional acquired companies by consolidating certain functions (including sales, marketing and purchasing operations) performed separately by such companies. In addition, the Company believes that as a large, national flexible accommodation services company, it should be able to achieve lower costs (as a percentage of revenues) compared to those of the individual Founding Companies and other acquired companies in such areas as leasing accommodations and furniture, purchasing certain hard and soft goods, and obtaining financing arrangements, employee benefits and insurance. - Adopt Best Practices. The Company will continue reviewing its operations at the local and regional operating levels in order to identify "best practices" that can be implemented throughout its operations. Areas where "best practices" may be utilized include accommodation pricing, occupancy management and cash flow management. BridgeStreet believes the implementation of these practices will enable the Company to provide superior customer service and maximize sales opportunities. - Implement Management Information System. BridgeStreet intends to develop and implement a centrally-controlled, computerized management information system that will integrate the Company's 29 31 customer contact, sales, marketing, finance, telephone, property management, internet access, lease management and reservation functions. BridgeStreet believes that the proposed system will enable it to deliver superior customer service, more efficiently manage its operations and achieve cost savings. ACQUISITION AND EXPANSION STRATEGY Given the highly fragmented nature of the flexible accommodation services industry, the Company believes that there are numerous potential acquisition targets both within markets currently served by the Company and in other major metropolitan areas. The Company intends to implement an aggressive acquisition program aimed at (i) expanding into major metropolitan markets not currently served by the Company and (ii) acquiring other flexible accommodation service providers in its existing markets to enhance its market position. In new markets, the Company will target for acquisition one or more leading local or regional flexible accommodation service providers. Generally, these companies will be run by successful entrepreneurs, whom BridgeStreet will endeavor to retain after the acquisitions, and will be of sufficient size to provide the basis for the Company's future expansion within the new markets. Each of the Company's acquisition candidates will be expected to demonstrate potential for increased revenues and profitability. The Company also will evaluate certain qualitative characteristics of acquisition candidates, including their reputations in their respective geographic regions, the size and strength of their customer bases, the quality and experience levels of their operational management, and their operating histories. In addition, the Company may enter a new market by establishing a new operation or forming a strategic alliance. In existing markets, the Company will seek to acquire flexible accommodation service providers that meet the Company's criteria with respect to reputation, customer base, management and operating history. Some of the companies acquired within existing markets will be large enough to retain much of their own operating and management infrastructures. Other, generally smaller acquired companies will be combined with BridgeStreet's existing operations to eliminate redundant functions and improve profitability. Acquisitions in existing markets should improve revenues and profitability by enhancing regional brand name recognition and leveraging the economies of scale associated with a larger business enterprise. The Company believes that acquisition by BridgeStreet will be attractive to many smaller independent operators because of (i) the Company's strategy to create a large, professionally-managed company with national brand name recognition and a reputation for quality service and customer satisfaction, (ii) the experience of its officers with industry consolidations, (iii) the Company's decentralized operating strategy, (iv) the Company's increased visibility and access to financial resources as a public company, (v) the potential for increased profitability due to centralized administrative functions, enhanced systems capabilities and access to increased marketing resources, (vi) the ability of the acquired companies to participate in the Company's growth and expansion, and (vii) the strong desire of the owners of many privately-held companies for liquidity and a return on their investments in their companies. Based on BridgeStreet's experience in the Combination, BridgeStreet believes the senior executives of the Founding Companies will be instrumental in establishing new markets for BridgeStreet and in identifying and completing future acquisitions. Prior to the Combination, the Founding Companies' senior executives led their companies' successful expansion into 11 new markets: Cleveland, Cincinnati, Detroit, Jackson, Lexington, Louisville, Milwaukee, Minneapolis, Oklahoma City, Pittsburgh and Washington, DC. Several of these executives had leadership roles in founding and directing the National Interim Housing Network ("NIHN"), the flexible accommodation services industry's leading trade association. The Company believes that the visibility of these individuals within NIHN and within the industry in general will increase the industry's awareness of the Company and its acquisition program, thereby attracting interest from owners of other flexible accommodation service companies. As consideration for future acquisitions, the Company intends to use various combinations of cash, notes and Common Stock. The consideration paid for each future acquisition will depend on such factors as the acquired company's historical operating results and future prospects and the ability of the acquired company's business to complement the services offered by the Company. The Company currently has no binding 30 32 acquisition agreements. The timing, size and success of the Company's acquisition efforts and the associated capital commitments cannot be readily predicted. The Company initially has targeted the following markets within which to expand by making acquisitions, establishing new operations or arranging strategic alliances: Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, New York, Philadelphia, Phoenix, San Francisco, Seattle, Tampa, Toronto and Vancouver. The Company also is considering other markets for expansion. See "Risk Factors -- Risks Associated with Acquisition Strategy and Planned Rapid Expansion." ACCOMMODATIONS AND SERVICES Accommodations BridgeStreet offers high-quality, fully-furnished one-, two- and three-bedroom accommodations that, together with the specialized amenities offered by the Company, are intended to provide guests with a "home away from home." BridgeStreet selects its accommodations based on location, general condition and basic amenities, with the goal of providing accommodations that meet each guest's particular needs. As a flexible accommodation services provider, the Company can satisfy client requests for accommodations in a variety of locations and neighborhoods, including requests for proximity to an office, school or area attraction, as well as requests for accommodations of specific types and sizes. The substantial majority of the Company's accommodations are located within high-quality property complexes that typically feature in-unit washers and dryers, dedicated parking, and access to fitness facilities (including, in many cases, pools, saunas and tennis courts). Standard furnishings typically include, among other things, cable televisions, answering machines and clock radios. BridgeStreet also is able to customize its accommodations at a guest's request with items such as office furniture, fax machines and computers. The Company's accommodations generally are priced competitively with all-suite or upscale extended-stay hotel rooms even though, on average, the Company believes its accommodations are substantially larger. The Company believes it generally is able to price its accommodations competitively due to (i) the high quality of its accommodations, (ii) its relatively low operating cost structure and (iii) its ability to lease accommodations in accordance with demand and leave unfavorable markets quickly. The length of a guest's stay can range from a few nights to a few years, with the typical stay ranging from 30 to 45 days. Corporate Client Services The Company believes that it provides valuable, cost-effective services to its corporate clients, many of which have human resource directors, relocation managers or training directors with significant, national employee lodging requirements. In particular, the Company aims to relieve its clients of the administrative burden often associated with relocating employees and/or providing them with temporary housing. In addition to providing clients with a diverse range of accommodation types and sizes in a variety of locations, the Company believes it satisfies its clients' needs for (i) a high degree of local market knowledge, (ii) special accommodation requests (such as last-minute location switches), (iii) accurate, customized billing options and (iv) other ancillary services such as assistance in locating permanent housing and school systems. The Company believes that existing and potential clients will increasingly turn to outside providers such as BridgeStreet to satisfy their employee lodging requirements as their awareness of BridgeStreet and the flexible accommodation services industry increases. Guest Services The Company strives to provide the highest quality of customer service by coordinating in advance all aspects of a guest's lodging experience. Prior to a guest's arrival, BridgeStreet arranges to have keys and directions sent to the guest, along with other information relating to the guest's interests (as discerned through prior communications), such as literature on local golf courses or other forms of entertainment. The Company makes at least one follow-up telephone call to the guest before the guest moves in to ensure that the guest will feel comfortable in his or her new accommodation from the moment of arrival. Immediately prior to the 31 33 guest's arrival, BridgeStreet's professional housekeeping staff cleans and inventories the accommodation to ensure that it is prepared for the guest. During a guest's stay, BridgeStreet keeps in touch with the guest to confirm that he or she is satisfied, and to encourage the guest to call whenever the Company can be of assistance. In addition, the Company maintains a representative in each city in which it operates to be responsive to guests' needs. The Company's guest services department offers guests comprehensive information services before and during their stays to help guests acclimate themselves to their new surroundings. A guest can obtain information concerning, among other things, local schools, day care providers and area playgrounds, by placing a single telephone call. Similarly, the guest services department can identify local entertainment and cultural events, and help coordinate automobile rentals, grocery shopping and other miscellaneous activities. BridgeStreet also oversees the moving-out process. The guest is asked either to mail the keys to the Company in a self-addressed, stamped envelope or simply to leave the keys in the accommodation. The guest also is asked to complete a form evaluating his or her stay, and is encouraged to contact the Company whenever the guest needs accommodations in other locations where BridgeStreet provides services. The guest's evaluation form is thoroughly reviewed, and (if applicable) a copy is sent to the corporate client. CLIENT BASE BridgeStreet has a diverse client base composed primarily of domestic Fortune 1000 corporations, business professionals and professional firms. Among the Company's clients are Ameritech Corporation, Andersen Consulting, members of the Baltimore Orioles, Cargill Inc., Ernst & Young LLP, KPMG Peat Marwick LLP, Maybelline, Inc. and United Healthcare Corporation. The Company's guests include corporate employees, consultants, legal and accounting professionals, sales representatives, traveling health care workers, visiting professors, professional athletes, artistic performers, medical patients and their relatives, and people between homes. No client accounted for more than 5% of the Company's pro forma 1996 revenues. SALES AND MARKETING BridgeStreet focuses primarily on business-to-business selling. At the local level, each of the Company's operating subsidiaries has corporate account specialists that call on local companies (including local branches of regional or national companies) to solicit business. The account specialist focuses his or her efforts on the key decision makers at each company responsible for establishing and administering travel and accommodation policies, typically human resource directors, relocation managers or training directors. By aggressively pursuing relationships with potential clients and expanding services to existing clients, BridgeStreet seeks to become each client's primary or sole provider of flexible accommodation services nationwide. As its operations expand, BridgeStreet increasingly will market its nationwide capabilities to its local corporate clients. The Company tailors its marketing strategy to the needs of particular clients. For example, BridgeStreet markets itself to a corporation with relocating employees by focusing on its ability to situate large families in houses and apartments with three or more bedrooms, its access to accommodations in both metropolitan and suburban settings, and its access to accommodations that allow pets. In contrast, when marketing to a potential corporate client having consultants in need of short-term housing, the Company emphasizes its flexible lease terms and its ability to customize an accommodation with amenities such as office equipment (including computers), additional telephone lines and other work-related items. The Company intends to implement an advertising program designed to enhance the "BridgeStreet" name both inside and outside the flexible accommodation services industry and broaden its client base. In addition, the Company intends to promote its brand name by advertising in trade publications, Chamber of Commerce listings, local visitor magazines and telephone directories, on the radio and the Internet, and through periodic direct mail campaigns. 32 34 LEASING ARRANGEMENTS BridgeStreet leases substantially all of its accommodations through flexible, short-term leasing arrangements in order to match its supply of accommodations with client demand. The Company believes that its flexible leasing strategy allows it to react quickly to changes in market demand for particular geographic locations and types of accommodations. The Company's strategy also provides it flexibility to address cyclicality in particular markets. During the six months ended June 30, 1997, BridgeStreet's average occupancy rate was approximately 90%. The Company seeks to maintain high occupancy rates by staggering its lease expiration dates within a geographic area, allowing it to adjust its inventory of accommodations in a given market to reflect fluctuations in overall demand and demand for particular types of accommodations. The Company strives to develop strong relationships with property managers to ensure that it has a reliable supply of high-quality, conveniently-located accommodations. The Company believes that it can provide property managers with numerous direct benefits, including (i) higher overall occupancy levels, (ii) simplified lease agreements (with one lease often covering numerous individual units), (iii) convenient, timely payment (with one check for all units under lease in a complex) and (iv) maintenance by BridgeStreet of the accommodations it leases. BridgeStreet leases the furniture for its accommodations on a short-term basis ordinarily from major furniture rental companies. Furniture leases range from three to 18 months, but may be terminated by the Company prior to expiration. Through its short-term furniture leasing approach, the Company is able to maintain well-appointed, modern and attractive accommodations, upgrade and replace furniture as needed and satisfy specific furnishing requests. PROPERTIES BridgeStreet leases all of its accommodations (with the exception of 19 condominium units which are owned). The Company has no plans to purchase or own any additional properties. The Company's accommodations include one-, two- and three-bedroom apartments, condominiums, townhouses, and, to a lesser extent, houses. As of June 30, 1997, the Company had approximately 2,700 accommodations under lease, with approximately 93% of such leases being for one year or less. As of December 31, 1996, over 90% of the Founding Companies' aggregate leases of accommodations were for periods of one year or less. The terms of the Company's leases generally range from one to 18 months. The following table indicates as of that date the number of units under lease in each metropolitan area in which BridgeStreet operates:
50 OR FEWER 51 TO 150 GREATER THAN 150 - --------------------- --------------------- ---------------------------- Canton, OH Akron, OH Baltimore, MD Detroit, MI* Cincinnati, OH Cleveland, OH Oklahoma City, OK* Jackson, MS Columbus, OH Lexington, KY Memphis, TN Louisville, KY Minneapolis/St. Paul, MN** Milwaukee, WI Pittsburgh, PA** Washington, DC
- --------------- * BridgeStreet has operated in this metropolitan area for less than 12 months. ** The operations of two Founding Companies have been integrated in this metropolitan area. INDUSTRY OVERVIEW United States Lodging Industry Overview According to Smith Travel Research, in 1996, the United States lodging industry posted record profits of approximately $12.5 billion on approximately $56.3 billion in room revenues and hotel occupancies reached 65%, representing their highest level since 1987. In 1996, there was overall domestic supply of approximately 3.4 million rooms per night. 33 35 The Company believes that the domestic lodging industry has benefited from a gradually improving supply and demand balance, evidenced by increasing average daily room and occupancy rates in recent years. Room supply growth in the lodging industry slowed in the early 1990s and has rebounded in recent years, but demand nonetheless continues to grow faster than supply. According to Smith Travel Research, supply growth was 0.3% in 1993, 1.0% in 1994, 1.2% in 1995 and 2.1% in 1996. This slow supply growth, coupled with 1.7%, 3.0%, 1.7% and 2.3% increases in demand (measured by occupied rooms) in 1993, 1994, 1995 and 1996, respectively, reflects an improved supply and demand balance in the industry. The Company believes that new hotels and lodging concepts are emerging to compete with older hotels by offering newer and more contemporary facilities. New concepts in the lodging industry are focusing more closely on customer needs and are offering modern amenities such as microwave ovens, voice mail and computers. Lodgings for Stays of Three Nights or Longer According to the American Hotel and Motel Association, in 1995, business travelers staying three or more consecutive nights in a hotel accounted for more than 37% of all hotel rooms rented. Based on 1995 room demand of 2.2 million rooms per night, this data shows an implied demand of nearly 800,000 rooms for such stays. According to a Smith Travel Research survey of 11 extended-stay hotel chains (representing the majority of currently-operating extended-stay hotels), in April 1997 these chains offered approximately 60,000 rooms per night. From January 1, 1995 to December 31, 1996, supply growth in these chains of 21.5% exceeded demand growth of 19.1%, but for the first four months of 1997, compound monthly supply growth of 0.7% was exceeded by demand growth of 5.6%. The Company believes that business travelers on extended trips desire alternatives to conventional hotel and motel rooms, and that this desire has led to the recent growth in the extended-stay segment of the lodging industry. According to data compiled by Smith Travel Research, room revenues in the 11 extended-stay hotel chains referred to above increased at a 17.9% compound annual growth rate over the last 10 years. The extended-stay segment of the lodging industry includes the following accommodation concepts: All-Suite Hotels. All-suite hotels constitute a relatively new segment of the lodging industry, having developed largely over the past 10 years. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers and temporary assignments, and principally are oriented toward business travelers willing to pay rates in the mid- to upper-price levels. All-suite hotel rooms are larger than traditional hotel rooms and, in some cases, contain efficiency kitchens. All-suite hotels typically offer discounts to guests staying for extended periods. Extended-Stay Hotels. Extended-stay hotels are an extension of the all-suites concept, generally providing more space, rooms and "home-like" conveniences to the traveler. Extended-stay hotel units typically are larger than traditional hotel rooms and, in some cases, include kitchen facilities with a stove, refrigerator and microwave, a work desk, laundry facilities, and a separate bedroom. According to Smith Travel Research, from 1992 through 1996, the compound annual growth rate in occupied rooms in the selected extended-stay hotel chains described above was approximately 10.1%, compared to approximately 1.8% for the overall domestic lodging industry, while the compound annual growth rate in room supply in such hotel chains was approximately 9.6%, compared to approximately 0.9% for the overall domestic lodging industry. Flexible Accommodation Service Providers. Flexible accommodation service providers utilize a substantially different business model than fixed-location providers (such as all-suite and extended-stay hotels) with respect to sourcing of inventory (i.e., accommodations and furnishings), unit economics, and sales and marketing. Companies in the flexible accommodation services industry typically do not own real estate but instead lease apartments, condominiums, townhouses and even houses on a short-term basis. These companies then rent the leased accommodations, primarily for business travelers. The Company believes that travelers on extended trips desire accommodations that better approximate their everyday living environment. Accommodations in this segment typically are the most "home-like" in the lodging industry, offering full-sized, fully- equipped kitchens, bedrooms, bathrooms and living rooms. Flexible accommodation service providers focus 34 36 primarily on employees in the corporate workforce, from entry-level to executive. Due to their short-term leasing strategy, flexible accommodation service providers are less capital- and labor-intensive, and have a more variable cost structure, than fixed-location providers. The industry information in this Prospectus for which Smith Travel Research and the American Hotel and Motel Association are the indicated sources is publicly-available. Smith Travel Research has provided authorization to be named as the source of the information attributed to it; such authorization has not been sought from the American Hotel and Motel Association. It should be noted that neither Smith Travel Research nor the American Hotel and Motel Association has provided any form of consultation, advice or counsel regarding any aspects of, or is associated with, this offering. COMPETITION Flexible accommodation service providers compete primarily on the basis of location, availability, price and quality of accommodations, quality and scope of service and brand name recognition. The Company believes that, while it currently competes against all lodging providers, in the future its primary competition will come from other flexible accommodation service providers and, to a lesser extent, all-suite hotels and upscale extended-stay hotels. The Company intends to compete by maintaining a loyal customer base and offering a client-oriented approach with convenient locations, large and high-quality customized accommodations, and personalized customer service. The Company expects its business to become more competitive as existing competitors expand and additional companies enter the flexible accommodation services industry. The Company believes that the largest providers of flexible accommodation services currently are Oakwood, Gables Corporate Accommodations, Accommodations America, Inc., ExecuStay Corporation and Globe Furniture Rentals, Inc., some of which are larger (in terms of number of available accommodations) than BridgeStreet. Certain of the Company's existing competitors have, and any new competitors that enter the industry may have, access to significantly greater resources than the Company. In particular, Oakwood is affiliated with R&B Realty Group, the nation's tenth largest apartment management company. This affiliation gives Oakwood access to apartment communities and capital that may be unavailable to the Company. See "Risk Factors -- Competition." REGULATION AND TAX The Company is subject to employment laws, including minimum wage, overtime, working condition and work permit requirements. The Company believes that it is in compliance with all applicable employment laws, and intends to continue to comply with such laws. In addition, the Company is subject to the Americans with Disabilities Act (the "ADA") as a private entity providing public accommodations. All public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While the Company believes that all of the units it leases are substantially in compliance with these requirements, a determination that such units are not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. As a lessee of its accommodations, BridgeStreet believes that it and its employees are either outside the purview of, exempted from or in compliance with laws in the jurisdictions in which the Company operates requiring real estate brokers to hold licenses. However, there can be no assurance that the Company's position in any jurisdiction where it believes itself to be excepted or exempted would be upheld if challenged or that any such jurisdiction will not amend its laws to require the Company and/or one or more of its employees to be licensed brokers. Moreover, there can be no assurance that the Company will not operate in the future in additional jurisdictions requiring such licensing. See "Risk Factors -- Licensing and Tax Issues." In some of the jurisdictions in which the Company operates, the Company believes that it is not required to charge certain guests the sales and "bed" taxes that are applicable to establishments furnishing rooms to transient guests. There can be no assurance, however, that the tax laws in particular jurisdictions will not change or that a tax collection agency will not successfully challenge the Company's position regarding the 35 37 applicability of such taxes. The Company believes that it properly charges and remits such taxes in all jurisdictions where it is required to do so. See "Risk Factors -- Licensing and Tax Issues." INSURANCE The Company purchases general liability, comprehensive property damage, automobile, workers' compensation and other insurance coverages that management considers adequate for the protection of the Company's assets and operations, although there can be no assurance that the coverage limits of such policies will be adequate. A successful claim against the Company beyond the scope of its insurance coverage or in excess of its limits could have a material adverse effect on the Company's business, financial condition and results of operations. Claims against the Company, regardless of their merit or outcome, also may have an adverse effect on the Company's reputation and business. INTELLECTUAL PROPERTY The Company has filed an application with the United States Patent and Trademark Office to register the service mark "BridgeStreet." HEADQUARTERS AND REGIONAL OFFICES The Company's corporate headquarters is located in Solon, Ohio and is occupied pursuant to a lease that expires in July 2000. The Company has the option to extend the lease for an additional three years. In addition, the Company currently leases regional offices in Columbus, Ohio; Hudson, Ohio; Baltimore, Maryland; Memphis, Tennessee; and Minneapolis, Minnesota. EMPLOYEES As of June 30, 1997 the Company had approximately 300 employees, of which approximately 290 are full-time. BridgeStreet expects that it will increase the number of its employees as it expands its business. The Company's employees are not subject to any collective bargaining agreements, and management believes that its relationship with its employees is good. LEGAL PROCEEDINGS The Company is from time to time a party to litigation arising in the ordinary course of business. There can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities arising out of such litigation. Management believes that any liability that the Company might incur upon the resolution of any existing litigation will not have a material adverse effect upon the Company's business, financial condition and results of operations. 36 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information as of July 31, 1997 concerning the Company's current directors, executive officers and director nominees. The director nominees have agreed to become directors of the Company upon the closing of this offering.
NAME AGE CURRENT POSITIONS -------------------------------------- --- -------------------------------------- William N. Hulett, III................ 53 President, Chief Executive Officer and Director Rocco A. Di Lillo..................... 45 Vice President, Chief Operating Officer and Director, and President of Corporate Lodgings, Inc. Mark D. Gagne, CPA.................... 36 Chief Financial Officer and Treasurer Paul M. Verrochi...................... 48 Chairman of the Board James M. Biggar....................... 68 Director nominee Lynda D. Clutchey..................... 39 Director, and President of Temporary Corporate Housing, Inc. Robert R. Mesel....................... 61 Director nominee Connie F. O'Briant.................... 38 Director, and President of Temporary Housing Experts, Inc. Melanie R. Sabelhaus.................. 49 Director, and President of Exclusive Interim Properties, Ltd. Jerry Sue Thornton.................... 50 Director nominee
William N. Hulett, III has been President, Chief Executive Officer and a director of the Company since January 1997. He also is Chief Executive Officer and sole director of each of the Company's wholly-owned subsidiaries. Prior to the commencement in June 1997 of his employment with the Company under his employment agreement, Mr. Hulett served from January 1997 through May 1997 as a consultant to the Company. Mr. Hulett's career in the hotel industry has spanned 33 years, from 1960 to 1993. During 21 years with Westin Hotels ("Westin") (from 1960 to 1981), Mr. Hulett managed some of the best known hotels in America, including the St. Francis in San Francisco and The Mayflower in Washington, D.C., served as the Managing Director for all Westin Hotels in Hawaii, and also served as Vice President for Operations and Development, during which time Westin built the Westin in Cincinnati and the Westin O'Hare in Chicago. In 1981, Mr. Hulett joined the Nestle Corporation as President of the Stouffer Hotel Company ("Stouffer"). During his 12 years as President of Stouffer, Stouffer built, acquired or joint ventured over 35 hotels. In 1993, when Stouffer was sold, he devoted his time to fund raising and building the Rock and Roll Hall of Fame and Museum, which opened in Cleveland, Ohio in 1995. He served as Chairman and Chief Executive Officer of that facility until joining BridgeStreet in 1997. Mr. Hulett is a director of the Travel Industry Association of America and of Developers Diversified Realty Corporation, and has served the American Hotel and Motel Association in various capacities, including Vice Chairman of its Educational Institute. Rocco A. Di Lillo has been Vice President, Chief Operating Officer and a director of the Company, and President and Chief Operating Officer of one of the Company's five operating subsidiaries, since January 1997. Mr. Di Lillo also is President of City Visitor Publications, Inc., a leading publisher of travel and visitor guides in the Midwest. Until the Combination in January 1997, Mr. Di Lillo was President of CLI, which he founded in March 1987, and which expanded into 10 Midwest cities in six states. Mr. Di Lillo was named 1997 Ohio Entrepreneur of the Year for service companies by Ernst & Young LLP. Mr. Di Lillo is a charter member of NIHN, the flexible accommodation services industry's leading trade association. Mark D. Gagne, CPA, has been Chief Financial Officer and Treasurer of the Company since January 1997. From January 1996 until January 1997, Mr. Gagne was a consultant to ABP. Previously, from February 1992 to December 1995, Mr. Gagne was Chief Financial Officer and Treasurer of CMG Information Services Inc. and subsidiaries, a publicly-traded information technology company. From April 1988 to January 1992, 37 39 Mr. Gagne was Vice President and Chief Financial Officer of the Trodella Companies, three privately-held construction services companies. From 1982 to 1988, Mr. Gagne served in a number of positions as a Certified Public Accountant for Kennedy & Lehan, P.C. and Arthur Andersen LLP. Paul M. Verrochi has been Chairman of the Board of Directors of the Company since August 1996. In 1992, Mr. Verrochi co-founded American Medical Response, Inc. ("AMR"), which prior to its acquisition was a publicly-held company and the largest national provider of ambulance services. From August 1992 to January 1996, Mr. Verrochi served as AMR's President and Chief Executive Officer, and until January 1997 he also served as the Chairman of the Board of Directors. Mr. Verrochi was selected as the 1995 National Entrepreneur of the Year for Emerging Growth Companies by Inc. Magazine. Mr. Verrochi serves as an advisory board member to numerous charitable foundations, including the New England Aquarium and the Boston Symphony Orchestra. Mr. Verrochi also is Chairman of ABP and a director of Coach USA, Inc., a publicly-held company. James M. Biggar will become a director of the Company upon consummation of this offering. Mr. Biggar has been Chairman and Chief Executive Officer of Glencairn Corporation, a real estate development company, since July 1991. From 1960 to July 1991, Mr. Biggar served in various positions with subsidiaries of Nestle SA and the Stouffer Corporation (which was acquired by Nestle SA in 1973), including Director of Marketing, Vice President and ultimately Chief Executive Officer of the Stouffer Corporation, President, Chief Executive Officer and Chairman of Nestle Enterprises, Inc. and Chairman of Nestle USA, Inc. Mr. Biggar is a director of The Sherwin-Williams Company and ESSEF Corporation. Lynda D. Clutchey has been a director of the Company, and President and Chief Operating Officer of one of the Company's five operating subsidiaries, since January 1997. Until January 1997, Ms. Clutchey was President and a director of TCH, which she co-founded in August 1983. Prior to co-founding TCH, Ms. Clutchey served in the United States Peace Corps. Ms. Clutchey is a charter member of NIHN and served on its Board of Directors from its inception in 1990 through 1994. Robert R. Mesel will become a director of the Company upon consummation of this offering. Mr. Mesel recently retired from BP Chemicals, Inc., where from January 1991 he had served as President and Chief Executive. From June 1994, he also had served as Chief Executive, Bulk Chemicals Division (London). Prior to joining BP Chemicals, Inc., Mr. Mesel had been Vice President, Administration of BP America, Inc. from October 1989 until January 1991, and Vice President, Corporate Control of Standard Oil from July 1985 until October 1989. Previously, from May 1980 to July 1985, Mr. Mesel was President of Chase Brass, a manufacturing company. Mr. Mesel has served on many local community and charitable boards, as well as the Board of Regents and the Board of Trustees for Canisius College. Connie F. O'Briant has been a director of the Company, and President and Chief Operating Officer of one of the Company's five operating subsidiaries, since January 1997. Until January 1997, Ms. O'Briant was President and a director of THEI, which she co-founded in May 1991. THEI received the Memphis Business Journal's "Memphis Business of the Year" Small Business Award in 1994. Ms. O'Briant is a member of the President's Council of United American Bank and an investment partner of Junior Achievement. Ms. O'Briant also is a member of NIHN and served on its Board of Directors from 1995 to 1996. Melanie R. Sabelhaus has been a director of the Company, and President and Chief Operating Officer of one of the Company's five operating subsidiaries, since January 1997. Until January 1997, Ms. Sabelhaus was President and a director of EIP, which she founded in June 1987. Prior to founding EIP, Ms. Sabelhaus spent 17 years in various sales and management positions at IBM. Ms. Sabelhaus was listed in the Women's Top 100 of Maryland 1996, and also was honored by the Baltimore Business Journal in 1995 for operating one of the top 25 women-owned businesses in that city. Ms. Sabelhaus is a charter member of NIHN. Jerry Sue Thornton, Ph.D. will become a director of the Company upon consummation of this offering. Dr. Thornton has been President of Cuyahoga Community College, the largest community college in Ohio, since 1992. Previously, from 1985 to 1992, Dr. Thornton had been President of Lakewood Community College in White Bear Lake, Minnesota. Dr. Thornton is a director of Applied Industrial Technologies, Inc. and 38 40 National City Bank (Cleveland), and of several non-profit organizations, including the Greater Cleveland Growth Association, the Urban League of Greater Cleveland and United Way Services. Officers of the Company serve at the pleasure of the Board of Directors, subject to the terms of any employment agreements with the Company. The term of office of each director of the Company ends at the next annual meeting of the Company's stockholders or when his successor is elected and qualified. COMMITTEES OF THE BOARD OF DIRECTORS Upon or prior to the closing of this offering, the Company will establish an Audit Committee and Compensation Committee. The Audit Committee, a majority of which will be independent directors, will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans for and results of the Company's annual audit, approve professional services provided by and the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. The Compensation Committee, a majority of which will be independent directors, will establish a general compensation policy for the Company, approve increases in directors' fees and salaries paid to officers and senior employees of the Company, administer the Company's 1997 Equity Incentive Plan and Stock Plan for Non-Employee Directors, and determine, subject to the provisions of the Company's employee benefit plans, the directors, officers and employees of the Company eligible to participate in any of the plans, the extent of such participation and terms and conditions under which benefits may be vested, received or exercised. DIRECTOR COMPENSATION Members of the Board of Directors who also serve as officers of the Company or its subsidiaries do not receive compensation for serving on the Board. Each other member of the Board will receive a fee of $2,000 for each Board of Directors meeting attended and an additional fee of $1,000 for each committee meeting attended, except that $500 will be paid for each committee meeting attended on the same date as a Board meeting. All directors will receive reimbursement of reasonable expenses incurred in attending Board and committee meetings and otherwise carrying out their duties. The Company's Board of Directors has adopted the Stock Plan for Non-Employee Directors (the "Directors' Plan"). Subject to adjustment for stock splits and similar events, a total of 100,000 shares of Common Stock are reserved for issuance under the Directors' Plan. Pursuant to the Directors' Plan, on the date of this Prospectus, each director who is neither an employee of the Company or one of its subsidiaries nor a holder of five percent or more of the Company's Common Stock (a "non-employee director") will receive an option to purchase 12,500 shares of Common Stock with a per-share exercise price equal to the initial public offering price. Thereafter, each such non-employee director will be granted, on every third anniversary of this Prospectus (provided he or she still is a non-employee director at such time), an option to acquire an additional 7,500 shares of Common Stock. Each non-employee director initially elected following this offering will be granted upon such election an option to purchase 7,500 shares of Common Stock, and thereafter will be granted, immediately following every third anniversary of such election provided he or she still is a non-employee director at such time (or third annual meeting at which such non-employee director is reelected, if the director initially was elected at an annual meeting) an option to acquire an additional 7,500 shares of Common Stock. The exercise price of options granted following this offering will be the fair market value of the Common Stock on the date of grant. Each option will be non-transferable except upon death (unless otherwise approved by the Board), will expire 10 years after the date of grant and will become exercisable with respect to one-third of the shares of Common Stock issuable thereunder on each of the first three anniversaries of the date of grant if the individual is a director at such time. If the director dies or otherwise ceases to be a director prior to the expiration of an option, the option (if exercisable) will remain exercisable for a period of one year (following death) or three months (following other termination of the individual's status as a director), but in no event beyond the tenth anniversary of the date of grant. The Board of Directors may at any time or times amend the Directors' Plan for any purpose that at the time may be permitted by law. 39 41 As of the date of this Prospectus, options to purchase 37,500 shares of Common Stock have been granted under the Directors' Plan. EXECUTIVE COMPENSATION The Company did not pay any compensation to its executive officers in 1996. Equity Incentive Plan The Company has adopted the 1997 Equity Incentive Plan (the "Equity Incentive Plan"), which provides for the award ("Award") of up to 1,000,000 shares of Common Stock in the form of incentive stock options ("ISOs"), non-qualified stock options, stock appreciation rights, performance shares, restricted stock or stock units. All directors and employees of, and all consultants and advisors to, the Company (including its subsidiaries) are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan will be administered by the Compensation Committee (the "Committee"), which determines who shall receive Awards from those individuals eligible to participate in the Equity Incentive Plan, the type of Award to be made, the number of shares of Common Stock that may be acquired pursuant to the Award and the specific terms and conditions of each Award, including the purchase price, term, vesting schedule, restrictions on transfer and any other conditions and limitations applicable to the Awards or their exercise. Options that are ISOs may be exercisable for not more than 10 years after the date the option is awarded. The Committee may at any time accelerate the exercisability of all or any portion of an option. In the event of a merger or consolidation in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding shares of capital stock, or in the event of the sale or transfer of substantially all of the Company's assets, if the Committee so determines, all outstanding Awards will terminate, provided that on or before 20 days prior to the proposed effective date of any such transaction, the Committee either (i) makes all outstanding Awards exercisable prior to the consummation of the transaction or (ii) arranges for the surviving or acquiring corporation, if any, to grant to participants replacement Awards. The Equity Incentive Plan may be amended from time to time by the Board of Directors or terminated in its entirety; however, no amendment may be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement. Options to Purchase Shares of Common Stock Messrs. Hulett, Di Lillo and Gagne have been awarded options under the Equity Incentive Plan, effective as of the date of this Prospectus, to purchase 150,000, 75,000 and 75,000 shares of Common Stock, respectively. Each option (i) has a per share exercise price equal to the initial public offering price, (ii) becomes exercisable with respect to one-third of the shares issuable thereunder on each of the first three anniversaries of the closing of this offering and (iii) expires 10 years from the date of grant. With respect to Messrs. Hulett and Gagne, upon the effectiveness of a change in control (as defined in their employment contracts), the stock option granted to each of them will become exercisable in full. In addition, if the Company fails to continue Mr. Hulett's employment following the term of his employment contract for a reason other than for cause (as defined) or disability, then all options held by Mr. Hulett at such time will become exercisable in full. See "--Employment Contracts." In addition to the options granted to Messrs. Hulett, Di Lillo and Gagne, the Company has awarded options under the Equity Incentive Plan, effective as of the date of this Prospectus, to purchase an aggregate of 182,667 shares of Common Stock, with each such option having a per share exercise price equal to the initial public offering price. 40 42 Employment Contracts The Company has entered into employment agreements with its executive officers, the material terms of which are summarized below. Mr. Hulett has an employment contract ending May 31, 2000 to serve as the Company's Chief Executive Officer and President. Under this contract, Mr. Hulett will receive a base salary of $200,000, subject to discretionary increases and also subject to specified increases if the Company achieves budgeted net earnings per share. Mr. Hulett also may receive a bonus of up to 50% of his base salary based on performance goals and other criteria. Mr. Hulett has agreed not to compete with the Company for a period of two years following termination of his employment. From January through May 1997, Mr. Hulett served as a consultant to the Company pursuant to a consulting agreement. Mr. Gagne has an employment contract ending May 31, 2000 to serve as the Company's Chief Financial Officer. Under this contract, Mr. Gagne will receive a base salary of $125,000, subject to discretionary increases, and a bonus of up to 40% of his base salary based on performance goals and other criteria. Under certain circumstances, Mr. Gagne will receive as severance three months' salary, six months' benefits and a pro rata portion of his bonus payment, if payable. In the event of a change in control (as defined), Mr. Gagne may terminate the contract and receive one year's salary and a pro rata portion of his bonus, if payable. Mr. Gagne has agreed not to compete with the Company for a period of two years following termination of his employment. Mr. Di Lillo has an employment contract ending January 2, 2000. Under this contract, Mr. Di Lillo will receive a base salary of $125,000, subject to discretionary increases, and a bonus of up to 40% of his base salary based on performance goals and other criteria. The contract may be terminated by the Company without cause upon the approval of two-thirds of the Company's Board of Directors. Mr. Di Lillo is subject to the non-competition provisions described in "Certain Transactions--Organization of the Company; The Combination." LIMITATION OF CERTAIN LIABILITY OF OFFICERS AND DIRECTORS As permitted by the DGCL, the Company's Certificate of Incorporation provides for the elimination, subject to certain conditions, of the personal liability of directors of the Company for monetary damages for breach of their fiduciary duties. The directors, however, remain subject to equitable remedies. The Company's Certificate of Incorporation also provides that the Company will indemnify its directors and officers. In addition, the Company maintains an indemnification insurance policy covering all directors and officers of the Company. In general, the Company's Certification of Incorporation and the indemnification insurance policy attempt to provide the maximum protection permitted by Delaware law with respect to indemnification of directors and officers. Under the indemnification provisions of the Company's Certificate of Incorporation and the indemnification insurance policy, the Company will repay certain expenses incurred by a director or officer in connection with any civil or criminal action or proceeding, and specifically including actions by or in the name of the Company (derivative suits), where the individual's involvement is by reason of the fact that he or she is or was a director or officer of the Company. Such indemnifiable expenses include, to the maximum extent permitted by law, attorney's fees, judgments, civil or criminal fines, settlement amounts, and other expenses customarily incurred in connection with legal proceedings. A director or officer will not receive indemnification if he or she is found not to have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. 41 43 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, as of July 31, 1997 and as adjusted to reflect the sale of shares of Common Stock by the Selling Stockholders, of (i) each director and director nominee of the Company, (ii) certain executive officers of the Company, (iii) all directors and executive officers as a group, (iv) each person or entity known to the Company to beneficially own more than 5% of the outstanding Common Stock and (v) the Selling Stockholders. Except as indicated in the footnotes below, the persons named in this table have sole investment and voting power with respect to the shares beneficially owned by them.
SHARES BENEFICIALLY SHARES TO BE OWNED PRIOR SHARES TO BENEFICIALLY OWNED TO OFFERING(1) BE SOLD AFTER OFFERING(1) ----------------------- IN --------------------- NUMBER PERCENT OFFERING NUMBER PERCENT --------- ------- --------- --------- ------- William N. Hulett, III............... 175,000 3.2% -- 175,000 2.4% Rocco A. Di Lillo(2)................. 810,851 14.8 200,000 610,851 8.5 Mark D. Gagne........................ 81,400 1.5 -- 81,400 1.1 Paul M. Verrochi(2).................. 300,500(3) 5.5 -- 300,500 4.2 James M. Biggar...................... -- -- -- -- -- Sandra A. Brown(2)(4)................ 475,000 8.7 95,000 380,000 5.3 Lynda D. Clutchey(2)................. 694,413(5) 12.7 139,200(6) 555,213 7.7 Robert R. Mesel...................... -- -- -- -- -- Connie F. O'Briant(2)................ 391,408(7) 7.1 50,000 291,408 4.1 Thomas W. O'Briant(2)................ 391,408(8) 7.1 50,000 291,408 4.1 Melanie R. Sabelhaus(2).............. 1,001,805(9) 18.3 200,000 801,805 11.2 Jerry Sue Thornton, Ph.D............. -- -- -- -- -- SLD Partnership(10).................. 1,489,395 27.2 320,000 1,169,395 16.3 All directors, director nominees and executive officers as a group (10 persons)........................... 3,455,377(11) 63.1 639,200 2,816,177 39.2
- --------------- (1) Percentages are based upon 5,475,000 shares of Common Stock outstanding on July 31, 1997 and 7,175,000 shares of Common Stock outstanding as of the closing of this offering, respectively. (2) The stockholder's address is c/o BridgeStreet Accommodations, Inc., 30670 Bainbridge Road, Solon, Ohio 44139. (3) Includes 150,250 shares of Common Stock held in a trust for the benefit of Mr. Verrochi's children, with respect to which Mr. Verrochi disclaims beneficial ownership. (4) Ms. Brown is President and Chief Operating Officer of one of the Company's operating subsidiaries. Prior to the Combination, she was a senior executive officer of Home Again. (5) Consists of (i) 47,890 shares of Common Stock held jointly with Ms. Clutchey's spouse and (ii) 646,523 shares of Common Stock held of record by SLD Partnership, an Ohio general partnership, with respect to which Ms. Clutchey has voting and investment power. (6) Represents shares of Common Stock being offered by SLD Partnership in this offering. (7) Includes 191,790 shares of Common Stock held by Ms. O'Briant's spouse, as to which shares Ms. O'Briant disclaims beneficial ownership. (8) Includes 199,618 shares held by Mr. O'Briant's spouse, as to which shares Mr. O'Briant disclaims beneficial ownership. See Note 7 above. (9) Includes 18,250 shares of Common Stock held by Ms. Sabelhaus' spouse and 100,000 shares of Common Stock held by trusts for the benefit of Ms. Sabelhaus' children, all as to which Ms. Sabelhaus disclaims beneficial ownership. (10) The address of SLD Partnership is 1515 Bethel Road, Columbus, Ohio 43220. Ms. Clutchey and two of her siblings are general partners of SLD Partnership. (11) See Notes 3, 5, 7 and 9 above. 42 44 CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY Start-Up Funding The Company was initially capitalized in August 1996 with an aggregate of $2,000 provided by Messrs. Verrochi, Donald W. Glazer, Joseph E. Palmer, Dominic J. Puopolo and Michael L. Stark. As a result of a 499-for-1 stock split in November 1996 (and following certain subsequent transfers), these individuals currently beneficially own 818,140 shares of Common Stock in the aggregate. ABP Mr. Verrochi, Chairman of the Company, is a principal and Chairman of ABP, and Mr. Glazer, Secretary of the Company, is a principal of ABP. The expenses incurred by the Company in connection with the Combination and this offering (estimated at approximately $2.2 million) will be paid by ABP, and the Company will reimburse ABP out of the proceeds of this offering. See "Use of Proceeds." As of July 31, 1997, ABP had advanced approximately $500,000 on an interest-free basis on behalf of the Company for such expenses. ABP has also agreed to assist the Company to complete future acquisitions if the Company so requests. Under the agreement between the parties, which is terminable at will by either party, ABP will receive from the Company in cash 1% of the transaction value of acquisitions for which ABP at the Company's request provides assistance. ABP also will be reimbursed for all direct expenses incurred by ABP in connection with such acquisitions. The Combination In connection with the Combination, the Company acquired all of the issued and outstanding capital stock of the Founding Companies. See "Combination." The aggregate consideration paid by the Company in the Combination was 4,301,000 shares of Common Stock. Of this amount, individuals who are executive officers and/or directors of the Company received the following: Mr. Di Lillo, 835,901 shares; Ms. Sabelhaus, 1,001,805 shares (including shares issued to her spouse); Ms. O'Briant, 391,408 shares (including shares issued to her spouse); and Ms. Clutchey, 1,537,285 shares (including shares issued to a general partnership in which each of Ms. Clutchey and two of her siblings are general partners). See "Principal and Selling Stockholders." Pursuant to the terms of the agreements by which their Founding Companies were merged into the Company, each of Mr. Di Lillo, Ms. Sabelhaus, Ms. O'Briant and Ms. Clutchey were designated directors of the Company. Each of Ms. Sabelhaus, Ms. O'Briant and Ms. Clutchey has entered into an employment agreement with the Company, the material terms of which are summarized as follows. Each employment agreement provides for an initial base salary of $100,000, subject to upward adjustment in the sole discretion of the Company's Board of Directors, and participation in the Company's bonus and benefit plans. The employment agreements expire on January 2, 2000 but may be terminated earlier in the event of disability, for cause (as defined) or without cause by the approval of two-thirds of the Company's Board of Directors. Mr. Di Lillo also entered into an employment agreement in connection with the Combination. See "Management -- Executive Compensation; Employment Contracts." Each of Mr. Di Lillo, Ms. Sabelhaus, Ms. O'Briant and Ms. Clutchey has agreed not to compete with the Company until January 2, 2002 or, if later, three years from the date of termination of employment by the Company (regardless of the reason therefor). TRANSACTIONS INVOLVING OFFICERS AND DIRECTORS As a result of the Combination, the Company assumed the obligations of TCH under a three-year contract, effective January 1, 1996, with Saturn Enterprises, Inc. ("Saturn"), a corporation of which David Clutchey III is the sole stockholder. Mr. Clutchey is the husband of Lynda D. Clutchey, a director of 43 45 BridgeStreet. Pursuant to the contract, TCH leased from Saturn on a non-exclusive basis televisions, VCRs, and microwave ovens. In 1994, 1995 and 1996, TCH paid or accrued expenses under this contract of approximately $11,200, $47,400 and $107,300, respectively. The Company has no obligation to lease equipment under the contract, but may continue to do so. BridgeStreet believes that the terms of this contract are no less favorable than could be obtained from non-affiliated parties. The Company also assumed TCH's obligations under an exclusive lease agreement with Integrity Furniture, Inc., a company which is 49% owned by SLD Partnership ("SLD"), an Ohio general partnership in which Ms. Clutchey and two of her siblings each are general partners. The agreement was entered into on September 12, 1995, has a five-year term and provides that the lessor has the exclusive right to furnish all of the Company's leased accommodations in Pittsburgh, Pennsylvania at agreed-upon prices. The initial unit lease terms are for minimum three-month periods that then are renewable monthly. The Company believes that the lease terms are no less favorable than could be obtained from non-affiliated parties. The rental amounts under this contract totalled approximately $213,000 during 1996. On October 15, 1995, TCH loaned to SLD $45,000, at an annual interest rate of 7% beginning November 1995. Also in 1995 SLD borrowed $109,602 from TCH. Both of these notes were repaid in full during 1996. Stephen and David Holzer performed consulting services for TCH from June 1992 until November 1996. For such services, each earned $48,000 per year during 1994, 1995 and 1996. The Holzers are brothers of Ms. Clutchey and general partners of SLD Partnership. The consulting agreements were terminated in November 1996. As a result of the Combination, the Company assumed the obligation of EIP to repay the outstanding balance borrowed to finance certain working capital requirements under a personal line of credit maintained by Melanie R. Sabelhaus. The outstanding balance bears interest at a rate of 8.25%. The Company will repay the outstanding balance from the net proceeds of this offering, together with accrued interest at a rate equal to the rate under the line of credit. See "Use of Proceeds." As of July 31, 1997, the outstanding balance was approximately $11,000. In February 1997, Thomas W. O'Briant loaned one of the Company's operating subsidiaries $50,000 to satisfy working capital requirements. The loan bears interest at a rate of 8.0%, and all outstanding principal and interest under such loan will be repaid by the Company from the net proceeds of this offering. See "Use of Proceeds." As of July 31, 1997, this loan had an outstanding principal balance of approximately $37,000. Mr. O'Briant is the husband of Connie F. O'Briant, a director of the Company. CLI performed certain general and administrative services (e.g., accounting services) for City Visitor, an entity which publishes a travel magazine and is 100% owned by Mr. Di Lillo. For services during 1994, 1995 and 1996, City Visitor paid CLI approximately $42,000, $51,000 and $15,000, respectively. City Visitor sold advertising space in its magazine to CLI during these years, and was paid, respectively, approximately $34,000, $22,000 and $31,000. Following this offering, the Company intends to continue purchasing advertising space from City Visitor from time to time. However, the Company has neither entered into a contract with, nor made any commitment with respect to the amounts of advertising purchases from, City Visitor. The Company believes that the prices currently paid to City Visitor for advertising are no less favorable than could be obtained from non-affiliated third parties. COMPANY POLICY The Company's policy is that any future transactions with directors, officers, employees or affiliates of the Company be approved in advance by a majority of the Company's Board of Directors, including a majority of disinterested directors, and be on terms no less favorable to the Company than the Company could obtain from non-affiliated parties. 44 46 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 35,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share. The following summary of the Common Stock and the Preferred Stock is qualified by reference to the Company's Amended and Restated Certificate of Incorporation and By-laws included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company had outstanding immediately prior to this offering 5,475,000 shares of Common Stock and options to purchase an aggregate of 520,167 shares of Common Stock. A total of 1,000,000 shares of Common Stock are reserved for issuance under the Equity Incentive Plan and a total of 100,000 shares of Common Stock are reserved for issuance under the Directors' Plan. Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors of the Company out of funds legally available therefor. See "Dividend Policy." All outstanding shares of Common Stock are, and the shares to be sold in this offering when issued and paid for will be, fully paid and nonassessable, and the holders thereof will have no preferences or conversion, exchange or pre-emptive rights. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and after liquidation payments to holders of outstanding shares of Preferred Stock, if any. PREFERRED STOCK The Preferred Stock, if issued, would have priority over the Common Stock with respect to dividends and other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without further stockholder authorization, to issue from time to time shares of Preferred Stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations of each series. In addition to having a preference with respect to dividends or liquidation proceeds, the Preferred Stock, if issued, may be entitled to the allocation of capital gains from the sale of the Company's assets. Although the Company has no present plans to issue any shares of Preferred Stock following the closing of this offering, the issuance of shares of Preferred Stock, or the issuance of rights to purchase such shares, could decrease the amount of earnings and assets available for distribution to the holders of Common Stock, could adversely affect the rights and powers, including voting rights, of the Common Stock, and could have the effect of delaying, deterring or preventing a change in control of the Company or an unsolicited acquisition proposal. ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS OF DIRECTORS The By-laws establish an advance notice procedure with regard to the nomination by the stockholders of the Company of candidates for election as directors and with regard to other matters to be brought by stockholders before a meeting of stockholders of the Company. These procedures require that a stockholder seeking to nominate a director or propose business at an annual meeting give written notice of such nomination or proposal, delivered to or mailed and received by the Secretary of the Company at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting. Detailed requirements as to the form, timing and substance of that notice are specified in the By-laws. No persons shall be eligible for election as a director of the Company nor shall any business matter be conducted unless nominated or proposed, as the case may be, in strict accordance with the procedures set forth in the Company's By-laws, as determined by the President of the Company. Although the By-laws do not give the Board of Directors any power to approve or disapprove stockholder nominations for the election of directors or of any other business desired by stockholders to be conducted at an annual or any other meeting, the By-laws (i) may have the effect of precluding nominations for the election of 45 47 directors or precluding the conduct of business at a particular annual meeting if the proper procedures are not followed or (ii) may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company, even if the conduct of such solicitation or such attempt might be beneficial to the Company and its stockholders. OTHER PROVISIONS Special Meetings of the Stockholders of the Company. The Company's By-laws provide that a special meeting of the stockholders of the Company only may be called by the President, the Chairman of the Board or by order of the Board of Directors. The By-laws do not authorize the stockholders to call a special meeting of stockholders, potentially limiting the stockholders' ability to offer proposals between annual meetings if no special meetings are otherwise called by the President, Chairman or the Board. Amendment of the By-laws. The Company's Certificate of Incorporation provides that the By-laws may be amended only by a majority vote of the Board of Directors or by a vote of at least 75% of the outstanding shares of the Company's stock entitled to vote in the election of directors. No Action by Written Consent. The Company's Certificate of Incorporation does not permit the Company's stockholders to act by written consent. As a result, any action to be taken by the Company's stockholders must be taken at a duly called meeting of the stockholders. DELAWARE ANTI-TAKEOVER STATUTE The Company is subject to Section 203 of the DGCL which, with certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer or (iii) on or after such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. An "interested stockholder" is defined as any person that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. TRANSFER AGENT The transfer agent and registrar for the Company is American Securities Transfer & Trust, Inc. 46 48 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 7,175,000 shares of Common Stock issued and outstanding, and 520,167 shares of Common Stock issuable upon the exercise of outstanding options. Of these shares, 2,615,000 shares sold pursuant to this offering (or 3,007,250 shares, if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction under the Securities Act, except any shares purchased by an "affiliate" (as that term is defined under the rules and regulations of the Securities Act) of the Company, which shares will be subject to the resale limitations of Rule 144 of the Securities Act. The remaining shares outstanding upon completion of this offering will be subject to the resale limitations of Rule 144. In general, under Rule 144, if a period of at least one year has elapsed between the later of the date on which restricted securities were acquired from the Company and the date on which they were acquired from an affiliate, then the holder of such restricted securities (including an affiliate) is entitled to sell that number of shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock or (ii) the average weekly reported volume of trading of Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain requirements pertaining to the manner of sales, notices of sales and the availability of current public information concerning the Company. Any shares not constituting restricted securities sold by affiliates must be sold in accordance with the foregoing volume limitations and other requirements but without regard to the one year holding period. Under Rule 144(k), if a period of at least two years has elapsed from the later of the date on which restricted securities were acquired from the Company and the date on which they were acquired from the affiliate, a holder of such restricted securities who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. The Company and each of its directors, director nominees, executive officers and existing stockholders have agreed with the Representatives of the Underwriters not to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock (subject, in the case of the Company, to an exception for the grant of options under the Company's Equity Incentive Plan and Directors' Plan or in connection with acquisitions), for a period of 180 days after the date of this Prospectus without the written consent of the Representatives. See "Underwriting." An additional 100,000 shares of Common Stock are reserved for issuance under the Directors' Plan and 1,000,000 shares are reserved for issuance under the Equity Incentive Plan. The Company presently intends to file a registration statement under the Securities Act to register Common Stock to be issued pursuant to exercise of options granted or to be granted under the Directors' Plan and Equity Incentive Plan. Common Stock issued after the effective date of such registration statement upon exercise of such options would be available for immediate resale in the open market, subject to compliance with Rule 144 in the case of affiliates. Prior to this offering, there has been no public market for the Common Stock of the Company, and no predictions can be made of the effect, if any, that the availability of shares for sale or the actual sale of shares will have on market prices prevailing from time to time. 47 49 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, the Underwriters named below have agreed, severally and not jointly, through Legg Mason Wood Walker, Incorporated and McDonald & Company Securities, Inc., the Representatives of the Underwriters, to purchase from the Company and the Selling Stockholders, and the Company and the Selling Stockholders have agreed to sell to the Underwriters, the number of shares of Common Stock set forth opposite the name of the respective Underwriter at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus.
UNDERWRITER NUMBER OF SHARES ------------------------------------------------------------- ---------------- Legg Mason Wood Walker, Incorporated......................... McDonald & Company Securities, Inc........................... --------- Total.............................................. 2,615,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the shares offered hereby if any of the shares are purchased. The Underwriters have advised the Company that they propose to offer all or a part of the shares offered hereby directly to the public at the Price to Public set forth on the cover page of this Prospectus, that they may offer shares to certain dealers at a price which represents a concession of $ per share and they may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the commencement of this offering, the Price to Public and the concessions may be changed. The Company has granted the Underwriters a 30-day option to purchase up to 392,250 additional shares of Common Stock at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus. The Underwriters may exercise the option only to cover over-allotments, if any, in connection with the offering of the shares made hereby. To the extent the Underwriters exercise the option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of additional shares of Common Stock as the number of shares set forth opposite that Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriter may be required to make in respect thereof. The Company and each of its directors, director nominees, executive officers and existing stockholders have agreed with the Representatives of the Underwriters not to sell or otherwise dispose of any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for shares of Common Stock (subject, in the case of the Company, to an exception for the grant of options under the Company's Equity Incentive Plan and Directors' Plan or in connection with acquisitions), for a period of 180 days after the date of this Prospectus without the written consent of the Representatives. See "Shares Eligible for Future Sale." The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiations between the Company and the Representatives of the Underwriters. Among the factors to be considered in such negotiations are prevailing market 48 50 conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company and the Representatives of the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The anticipated initial public offering price set forth on the cover of this Prospectus is subject to change as a result of market conditions and other factors. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Representatives to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Representatives create a short position in the Common Stock in connection with the offering, i.e., if it sells more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing shares of Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. Neither the Company nor the Representatives make any representation or prediction as to the direction or magnitude of any effect that the transaction described above might have on the price of the Common Stock. In addition, neither the Company nor the Representatives makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Under the rules of the National Association of Securities Dealers, Inc. (the "NASD"), when a NASD member participates in the distribution of equity securities of a company with which an affiliate of such member has a conflict of interest, the public offering price can be no higher than the price recommended by a "qualified independent underwriter" (as defined in NASD Rule 2720) (a "QIU"). The NASD requires that a QIU (i) be a NASD member experienced in the securities or investment banking business, (ii) not be an affiliate of the issuer of the securities, and (iii) agree to undertake the responsibilities and liabilities of an underwriter under the Securities Act. Mr. Robert G. Sabelhaus, an Executive Vice President and Director of Sales of Legg Mason Wood Walker, Incorporated, is the husband of Melanie R. Sabelhaus, a director of the Company. Together, the Sabelhauses currently own, and following completion of the offering will continue to own, 10% or more of the Common Stock of the Company. See "Principal and Selling Stockholders." In accordance with the Rules of the NASD, McDonald & Company Securities, Inc. ("McDonald"), has agreed to serve as QIU in this offering and to recommend an initial public offering price for the Common Stock in compliance with Rule 2720 of the NASD. McDonald, in its role as QIU, has performed due diligence investigations and reviewed and participated in the preparation of the Prospectus and the Registration Statement of which the Prospectus forms a part, although, in such capacity, it will receive no additional compensation in connection with this offering. LEGAL MATTERS The validity of the shares offered will be passed upon for the Company by Nutter, McClennen & Fish, LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. 49 51 EXPERTS The financial statements and schedule included in this Prospectus and elsewhere in the Registration Statement, to the extent of and for the periods indicated in the reports, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained in this Prospectus concerning the provisions or contents of any contract, agreement or any other document referred to herein are not necessarily complete with respect to each such contract, agreement or document filed as an exhibit to the Registration Statement, and reference is made to such exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement or any part thereof may be obtained from such office, upon payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that submit electronic filings to the Commission. 50 52 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS Basis of Presentation............................................................... F-3 Pro Forma Combined Balance Sheet as of December 31, 1996 (unaudited)................ F-4 Pro Forma Combined Statement of Operations for the Year Ended December 31, 1996 (unaudited)...................................................................... F-5 Pro Forma Combined Statement of Operations for the Six Months Ended June 30, 1997 (unaudited)...................................................................... F-6 Notes to Unaudited Pro Forma Combined Financial Statements.......................... F-7 HISTORICAL FINANCIAL STATEMENTS BRIDGESTREET ACCOMMODATIONS, INC. Consolidated Balance Sheets (unaudited).......................................... F-9 Consolidated Statements of Operations (unaudited)................................ F-10 Consolidated Statements of Stockholders' Equity (unaudited)...................... F-11 Consolidated Statements of Cash Flows (unaudited)................................ F-12 Notes to Consolidated Financial Statements (unaudited)........................... F-13 BRIDGESTREET ACCOMMODATIONS, INC. Report of Independent Public Accountants......................................... F-18 Balance Sheet.................................................................... F-19 Statement of Operations.......................................................... F-20 Statement of Stockholders' Equity................................................ F-21 Statement of Cash Flows.......................................................... F-22 Notes to Financial Statements.................................................... F-23 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. Report of Independent Public Accountants......................................... F-26 Combined Balance Sheets.......................................................... F-27 Combined Statements of Operations................................................ F-28 Combined Statements of Stockholders' Equity...................................... F-29 Combined Statements of Cash Flows................................................ F-30 Notes to Combined Financial Statements........................................... F-31 CORPORATE LODGINGS, INC. Report of Independent Public Accountants......................................... F-37 Combined Balance Sheets.......................................................... F-38 Combined Statements of Operations................................................ F-39 Combined Statements of Stockholders' Equity (Deficit)............................ F-40 Combined Statements of Cash Flows................................................ F-41 Notes to Combined Financial Statements........................................... F-42
F-1 53
PAGE ---- EXCLUSIVE INTERIM PROPERTIES, LTD. Report of Independent Public Accountants......................................... F-47 Combined Balance Sheets.......................................................... F-48 Combined Statements of Operations................................................ F-49 Combined Statements of Stockholders' Equity...................................... F-50 Combined Statements of Cash Flows................................................ F-51 Notes to Combined Financial Statements........................................... F-52 HOME AGAIN, INC. Report of Independent Public Accountants......................................... F-57 Combined Balance Sheets.......................................................... F-58 Combined Statements of Operations................................................ F-59 Combined Statements of Stockholder's Equity...................................... F-60 Combined Statements of Cash Flows................................................ F-61 Notes to Combined Financial Statements........................................... F-62 TEMPORARY HOUSING EXPERTS, INC. Report of Independent Public Accountants......................................... F-65 Balance Sheets................................................................... F-66 Statements of Operations......................................................... F-67 Statements of Stockholders' Equity............................................... F-68 Statements of Cash Flows......................................................... F-69 Notes to Financial Statements.................................................... F-70
F-2 54 BRIDGESTREET ACCOMMODATIONS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma combined financial statements give effect to the acquisitions by BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company"), through stock-for-stock mergers (the "Combination"), of the following providers of flexible accommodation services: (i) Temporary Corporate Housing Columbus, Inc. and three affiliates ("TCH"), (ii) Exclusive Interim Properties, Ltd. and an affiliate ("EIP"), (iii) Corporate Lodgings, Inc. and four affiliates ("CLI"), (iv) Home Again, Inc. and two affiliates ("Home Again") and (v) Temporary Housing Experts, Inc. ("THEI") (collectively, the "Founding Companies"). The acquisitions have been accounted for using the purchase method of accounting, and TCH has been identified as the acquiror for financial presentation purposes. The unaudited pro forma combined financial statements also give effect to this offering and the use of proceeds from this offering as described under "Use of Proceeds." These financial statements are based on the historical financial statements of the Founding Companies included elsewhere in this Prospectus and the estimates and assumptions set forth herein. The unaudited pro forma combined balance sheet gives effect to the Combination, and the payment of the related purchase prices for the Founding Companies, as if the Combination had occurred on December 31, 1996. The allocation of the purchase price to the assets acquired and the liabilities assumed initially has been assigned and recorded based on estimates of their fair value, and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. It is management's opinion, however, that the final allocation of the purchase price will not differ materially from the preliminary estimated amounts. The purchase price represents a fair market valuation of the acquired entities as determined by an independent investment banking firm based on specific information regarding TCH and each of the Founding Companies, which included historical financial statements, tax returns and detailed discussions with each company's management as to operations, financial condition and future prospects. Other valuation factors included published industry information and certain financial analyses. The unaudited pro forma combined statement of operations for the year ended December 31, 1996 gives effect to the Combination as if it had occurred on January 1, 1996. The historical results of operations for EIP represents 12 months derived from the unaudited three months ended March 31, 1996 and the audited nine months ended December 31, 1996. The unaudited pro forma combined statement of operations for the six months ended June 30, 1997 gives effect to the acquisition of Home Again as if it occurred on January 1, 1997; the acquisition of TCH, EIP, CLI and THEI all occurred on January 2, 1997. In the opinion of management, all adjustments necessary to present fairly the pro forma financial statements have been made. The unaudited pro forma combined financial information presented herein does not purport to represent what the Company's financial position and results of operations actually would have been had such events occurred on the dates noted above, or to project the Company's financial position or results of operations for any future period or the future results of the Founding Companies. The unaudited pro forma combined financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. F-3 55 BRIDGESTREET ACCOMMODATIONS, INC. AND FOUNDING COMPANIES PRO FORMA COMBINED BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS)
HOME PRO FORMA TCH CLI THEI EIP AGAIN BRIDGESTREET ADJUSTMENTS ------ ------ ---- ------ ---- ------------ ----------- ASSETS Current Assets: Cash and cash equivalents............................ $ 598 $ 180 $ 52 $ -- $146 $ 6 $ -- Investments in short-term marketable securities...... 152 -- -- -- -- -- -- Accounts receivable, net............................. 795 604 99 418 108 -- -- Security deposits held by landlords.................. -- -- 24 151 8 -- -- Deferred tax asset................................... 129 28 71 166 -- 1 -- Prepaid expense & other.............................. 34 126 26 -- 218 -- -- ------ ------ ---- ------ ---- ---- ------- Total current assets............................... 1,708 938 272 735 480 7 -- Operating stock........................................ 268 -- 146 580 196 -- -- Property and equipment................................. 27 118 57 1,392 143 -- -- Other assets........................................... -- 1 -- 8 -- 412 (176)(d) Notes receivable-stockholders related party............ 10 -- -- -- -- -- -- Goodwill............................................... -- -- -- -- -- -- 17,099(c) ------ ------ ----- ------ ---- ---- ------- Total assets................................... $2,013 $1,057 $475 $2,715 $819 $419 $16,923 ====== ====== ==== ====== ==== ==== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt................. $ -- $ 10 $ 19 $ 137 $ 9 $ -- $ -- Due to stockholders and affiliates................... -- 28 -- 95 191 417 -- Accounts payable and accrued expenses................ 622 440 58 584 366 -- -- Accrued income taxes................................. 100 76 16 -- -- -- -- Deferred revenue..................................... -- 428 34 155 31 -- -- Security deposits due to customers................... -- -- 50 260 60 -- -- ------ ------ ---- ------ ---- ---- ------- Total current liabilities.......................... 722 982 177 1,231 657 417 -- Long-term debt, net of current maturities.............. -- -- 12 1,049 26 -- -- Deferred income taxes.................................. 107 -- 58 233 -- -- -- Stockholders' Equity (Deficit): Common stock......................................... 31 5 1 -- 3 12 3(d) Additional paid in capital........................... -- 180 -- 75 -- (9) 17,292(d) Treasury stock....................................... (4) -- -- -- -- -- 4(d) Retained earnings (deficit).......................... 1,157 (110) 227 127 133 (1) (376)(d) ------ ------ ---- ------ ---- ---- ------- Total stockholders' equity......................... 1,184 75 228 202 136 2 16,923 ------ ------ ---- ------ ---- ---- ------- Total liabilities and stockholders' equity..... $2,013 $1,057 $475 $2,715 $819 $419 $16,923 ====== ====== ==== ====== ==== ==== ======= PRO FORMA PRO FORMA ADJUSTMENTS AS ADJUSTED --------- ----------- ----------- < ASSETS Current Assets: Cash and cash equivalents............................ $ 982 $ 8,655(a) $ 9,637 Investments in short-term marketable securities...... 152 -- 152 Accounts receivable, net............................. 2,024 -- 2,024 Security deposits held by landlords.................. 183 -- 183 Deferred tax asset................................... 395 -- 395 Prepaid expense & other.............................. 404 -- 404 ------- ------- ------- Total current assets............................... 4,140 8,655 12,795 Operating stock........................................ 1,190 -- 1,190 Property and equipment................................. 1,737 -- 1,737 Other assets........................................... 245 (235)(e) 10 Notes receivable-stockholders related party............ 10 -- 10 Goodwill............................................... 17,099 -- 17,099 ------- ------- ------- Total assets................................... $24,421 $ 8,420 $32,841 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt................. $ 175 $ (175)(b) $ -- Due to stockholders and affiliates................... 731 (731)(b) -- Accounts payable and accrued expenses................ 2,070 -- 2,070 Accrued income taxes................................. 192 -- 192 Deferred revenue..................................... 648 -- 648 Security deposits due to customers................... 370 -- 370 ------- ------- ------- Total current liabilities.......................... 4,186 (906) 3,280 Long-term debt, net of current maturities.............. 1,087 (1,087)(b) -- Deferred income taxes.................................. 398 -- 398 Stockholders' Equity (Deficit): Common stock......................................... 55 17(e) 72 Additional paid in capital........................... 17,538 10,396(e) 27,934 Treasury stock....................................... -- -- -- Retained earnings (deficit).......................... 1,157 -- 1,157 ------- ------- ------- Total stockholders' equity......................... 18,750 10,413 29,163 ------- ------- ------- Total liabilities and stockholders' equity..... $24,421 $ 8,420 $32,841 ======= ======= =======
See accompanying notes to pro forma financial statements. F-4 56 BRIDGESTREET ACCOMMODATIONS, INC. AND FOUNDING COMPANIES PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
HOME TCH CLI THEI EIP AGAIN BRIDGESTREET ADJUSTMENTS(J) PRO FORMA ----------- ---------- ---------- ---------- ---------- ------------ -------------- ---------- Revenues......... $ 12,502 $ 8,820 $ 3,583 $ 8,626 $ 4,035 $ -- $ -- $ 37,566 Cost of services........ 9,088 6,106 2,578 7,039 3,134 -- $ -- 27,945 Selling, general and administrative expense......... 2,327 2,519 1,078 1,374 586 2 (552)(f) 7,334 Goodwill amortization.... -- -- -- -- -- -- 490(g) 490 -------- ------- ------- ------- ------- ---- ------ ----------- Operating income (loss).......... 1,087 195 (73) 213 315 (2) 62 1,797 Other income (expenses)...... 89 (206) 5 (130) 77 -- 158(h) (7) -------- ------- ------- ------- ------- ---- ------ ---------- Income (loss) before provision for income taxes........... 1,176 (11) (68) 83 392 (2) 220 1,790 Provision (benefit) for income taxes.... 513 9 (23) 41 -- (1) 373(i) 912 --------- ------- ------- ------- ------- ---- ------ ---------- Net income (loss).......... $ 663 $ (20) $ (45) $ 42 $ 392 $ (1) $ (153) $ 878 ========= ========== ========== ======= ========== ==== ====== ========== Pro forma net income per share........... $ 0.12 Shares used in ========== computing pro forma net income per share....... 7,175,000
See accompanying notes to pro forma financial statements. F-5 57 BRIDGESTREET ACCOMMODATIONS, INC. AND FOUNDING COMPANIES PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
HOME BRIDGE STREET AGAIN ADJUSTMENTS PRO FORMA ------------- ------ ----------- ---------- Revenues...................................................... $21,757 $1,167 $ -- $ 22,924 Cost of services.............................................. 15,974 823 -- 16,797 Selling, general and administrative expense................... 4,397 230 30(k) 4,657 Officers' stock compensation.................................. 1,210 -- -- 1,210 Goodwill amortization......................................... 229 -- 16(l) 245 ------- ------ ----- ---------- Operating income (loss)....................................... (53) 114 (46) 15 Other income (expenses)....................................... (6) 1 97(m) 92 ------- ------ ----- ---------- Income (loss) before provision for income taxes............... (59) 115 51 107 Provision for income taxes.................................... 518 -- 75(n) 593 ------- ------ ----- ---------- Net income (loss)............................................. $ (577) $ 115 $ (24) $ (486) ======= ====== ===== ========== Pro forma net loss per share.................................. $ (0.07) ========== Shares used in computing pro forma net loss per share......... 7,175,000
F-6 58 BRIDGESTREET ACCOMMODATIONS, INC. AND FOUNDING COMPANIES NOTES TO PRO FORMA FINANCIAL STATEMENTS 1. BACKGROUND BridgeStreet was incorporated in August 1996 with the objective of becoming a leading national provider of flexible accommodation services. The Company acquired all of the outstanding stock of TCH, EIP, CLI and THEI on January 2, 1997 and Home Again on March 31, 1997 in exchange for 4,301,000 shares of Common Stock of the Company. The Company conducted no operations prior to January 2, 1997 except in connection with this offering and the Combination. For financial reporting purposes, TCH has been designated as the accounting acquiror, and its acquisition of the remaining four Founding Companies has been accounted for using the purchase method of accounting. 2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (a) Records the net increase to cash from the net proceeds of this offering of 1,700,000 shares of Common Stock at an assumed offering price of $8.00 per share, less underwriters' discounts and other offering costs, and less the use of proceeds to pay down approximately $1,262 of bank debt and $731 payable to stockholders and affiliates. (b) Records the assumed repayment of bank debt and amounts payable to stockholders and affiliates. (c) Records the goodwill resulting from the acquisition of four of the Founding Companies by TCH. The goodwill is calculated as follows: Appraised value of the four Founding Companies................... $ 13,093 Transaction costs................................................ 4,648 ---------- Total purchase price............................................. 17,741 Less: fair market value of net assets acquired................... 642 ---------- Goodwill......................................................... $ 17,099 ==========
The appraised value and the transaction costs in the table above are based on the estimated fair market value of the Common Stock as of the date of the Combination. The Company valued the Common Stock issued in the Combination and to certain executives based on an independent appraisal of TCH, the accounting acquirer. The appraisal was based on several estimates and assumptions about the future. Actual results could differ and the differences could be material. Below is a brief description of the appraisal methodology and the more important assumptions made. TCH was valued using a discounted cash flow approach which included an estimate of future TCH cash flows for five years plus a terminal value. This methodology was considered the most appropriate, and is commonly used for private companies similar to TCH for which market comparables are not readily available. The most important estimates and assumptions made for TCH only were (a) sales growth ranging from 15% to 18%, (b) earnings before interest expense and taxes (EBIT) margins ranging from 12.2% to 13.4%, and (c) a discount rate of 19.74%. These estimates were made after considering, among other things, historical operating results, the 1997 budget and TCH's actual results through June 1997, various risk factors, the relative size of TCH, management depth, markets served and market position and an evaluation of sales training programs. A company's client base cannot be separated from the general goodwill of an ongoing business, and industry practice is not to assign separate value to client base. The Company has not allocated purchase price to its non-compete agreements with its executives who were former owners of the Founding Companies because the Company believes that the value of these agreements is immaterial to the consolidated financial statements. Although the agreements are legally enforceable, the Company expects that the executives will continue in the employ of the Company and will have no reason to compete with it. The executives all are significant shareholders of the Company's Common Stock (either alone or with their affiliates) and, as a result, have significant incentives to use their best efforts to maximize the value of such Common Stock. F-7 59 BRIDGESTREET ACCOMMODATIONS, INC. AND FOUNDING COMPANIES NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) (d) Increase in stockholders' equity to record fair market value of shares issued to acquire Founding Companies other than TCH, record transaction fees paid in Company stock and eliminate in consolidation the acquired companies' equity sections. Also allocates to paid-in capital $176 of deferred merger costs. (e) Records net proceeds of this offering assuming an offering price of $8.00 per share less underwriters' commissions and other offering costs of approximately $3,000. Also allocates to paid-in capital $235 of deferred offering costs. 3. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (f) Compensation to certain executives of the Founding Companies has been adjusted to reflect the compensation to be paid pursuant to employment agreements signed in connection with the Combination. (g) Amortization of goodwill over 35 years. (h) Interest expense related to the bank debt and notes payable to stockholders has been eliminated because it is assumed to have been repaid at the beginning of the period. (i) Pro forma provision for income taxes has been adjusted to reflect the Company's estimated consolidated effective tax rate subsequent to the Combination, after considering nondeductible goodwill amortization. (j) The pro forma combined statement of operations excludes any adjustments for the compensation to be paid in 1997 for services to be rendered in 1997 by the Company's Chief Executive Officer and Chief Financial Officer pursuant to their employment agreements. The statement also excludes approximately $1,210 of non-recurring non-cash compensation expense recorded in the first quarter of 1997 in connection with the vesting of restricted stock. 4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS ) (k) Compensation to an executive of Home Again has been adjusted to reflect the compensation to be paid pursuant to an employment agreement signed in connection with the acquisition of Home Again. (l) Amortization of goodwill over 35 years associated with the acquisition of Home Again. (m) Interest expense related to the bank debt and notes payable to stockholders has been eliminated because it is assumed to have been repaid at the beginning of the period. (n) Tax provision of 40% of adjustments (k) and (m) above plus a 40% tax provision on Home Again's historical pretax income; Home Again historically was an S Corporation that did not pay corporate income taxes, but has become subject to income taxes subsequent to the Combination. F-8 60 BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED BALANCE SHEETS
TCH BRIDGESTREET DECEMBER 31, JUNE 30, 1996 1997 ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................................... $ 597,939 $ 1,709,701 Investments in short-term marketable securities................ 152,253 277,250 Accounts receivables- Trade, less allowance for doubtful accounts of $45,000 in 1996 and $296,515 in 1997................................... 794,445 3,415,595 Security deposits held by landlords............................ -- 218,218 Deferred income taxes.......................................... 129,200 677,861 Other current assets........................................... 33,927 592,401 ----------- ------------ Total current assets...................................... 1,707,764 6,891,026 Operating stock, net of accumulated amortization.................... 268,086 1,592,889 Property and equipment, net of accumulated depreciation............. 26,961 2,100,104 Other assets........................................................ -- 460,580 Notes receivable - stockholders/affiliates.......................... 10,568 106 Goodwill, net of amortization....................................... -- 17,884,985 ----------- ------------ Total assets.............................................. $ 2,013,379 $ 28,929,690 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt........................... $ -- $ 49,192 Due to stockholders and affiliates............................. -- 520,701 Accounts payable and accrued expenses.......................... 622,021 3,207,426 Accrued income taxes........................................... 100,000 287,827 Deferred revenue............................................... -- 1,047,437 Security deposits due to customers............................. -- 507,001 ----------- ------------ Total current liabilities................................. 722,021 5,619,584 Long-term debt, net of current maturities........................... -- 3,343,679 Deferred income taxes............................................... 107,744 581,783 Commitments and contingencies Stockholders' Equity: Preferred stock................................................ -- -- Common stock................................................... 31,000 54,750 Additional paid in capital..................................... -- 18,750,159 Treasury stock................................................. (4,185) -- Retained earnings.............................................. 1,156,799 579,735 ----------- ------------ Total stockholders' equity................................ 1,183,614 19,384,644 ----------- ------------ Total liabilities and stockholders' equity........... $ 2,013,379 $ 28,929,690 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-9 61 BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- TCH BRIDGESTREET TCH BRIDGESTREET 1996 1997 1996 1997 ---------- ------------- ---------- ------------- Revenues...................................... $3,003,283 $ 12,654,696 $5,641,484 $ 21,757,098 Operating Expenses: Cost of services......................... 2,197,640 8,961,314 4,186,365 15,973,576 Selling, general and administrative expense................................ 543,206 2,447,008 1,026,283 4,397,370 Officers' stock compensation............. -- -- -- 1,210,261 Goodwill amortization.................... -- 122,405 -- 229,090 ---------- ------------ ---------- ------------ Total operating expenses............ 2,740,846 11,530,727 5,212,648 21,810,297 ---------- ------------ ---------- ------------ Operating income (loss)............. 262,437 1,123,969 428,836 (53,199) Other Income (Expense): Interest income.......................... 7,203 7,932 4,545 17,288 Interest expense......................... -- (63,869) (107) (97,473) Other income, net........................ 4,069 44,474 33,863 74,340 ---------- ------------ ---------- ------------ Other income, net................... 11,272 (11,463) 38,301 (5,845) ---------- ------------ ---------- ------------ Income (loss) before provision for income taxes.................................. 273,709 1,112,506 467,137 (59,044) Provision for income taxes............... 119,276 500,000 203,567 518,020 ---------- ------------ ---------- ------------ Net income (loss)........................ $ 154,433 $ 612,506 $ 263,570 $ (577,064) ========== ============ ========== ============ Net income (loss) per share.............. $ 0.11 $ (0.11) ============ ============ Weighted average shares outstanding...... 5,475,000 5,238,812
The accompanying notes are an integral part of these consolidated financial statements. F-10 62 BRIDGESTREET ACCOMMODATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL -------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- ------- ----------- ----------- ------------- Balance, December 31, 1996....... 1,174,000 $11,740 $ (9,024) $ (1,336) $ 1,380 Issuance of stock to founders.................. 4,301,000 43,010 17,548,922 1,158,135 18,750,067 Officers' stock compensation.............. -- -- 1,210,261 -- 1,210,261 Net loss.................... -- -- -- (577,064) (577,064) --------- ------ --------- -------- --------- Balance, June 30, 1997........... 5,475,000 $54,750 $18,750,159 $ 579,735 $ 19,384,644 ========= ====== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-11 63 BRIDGESTREET ACCOMMODATIONS, INC CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- TCH BRIDGESTREET 1996 1997 --------- ------------ Cash Flows From Operating Activities: Net income (loss)................................................ $ 263,569 $ (577,064) Adjustments to reconcile net income (loss) to net cash provided by operating activities-- Officers' stock compensation.................................. -- 1,210,261 Depreciation and amortization................................. 35,470 481,854 Change in operating assets and liabilities excluding the effect of acquisitions-- Accounts receivable......................................... (260,494) (1,378,688) Security deposits held by landlords......................... -- (37,237) Prepaid expenses............................................ -- (376,884) Other assets................................................ 26,212 -- Accounts payable and accrued expenses....................... 67,981 1,329,546 Accrued taxes............................................... 114,626 95,839 Deferred income taxes....................................... (190,952) (176,274) Security deposits due to customers.......................... -- 130,749 Deferred revenue............................................ -- 387,677 --------- --------- Net cash provided by operating activities................ 56,412 1,089,779 Cash Flows From Investing Activities: Purchases of investments in short term marketable securities..... (112,616) (124,997) Sales of investments in short term marketable securities......... 29,980 -- Acquisitions, net of cash acquired............................... -- (655,581) Purchases of operating stock..................................... (44,759) (448,343) Purchases of property and equipment.............................. (14,862) (378,726) --------- --------- Net cash (used in) provided by investing activities...... (142,257) (1,607,647) --------- --------- Cash Flows From Financing Activities: Borrowings from stockholders..................................... -- (296,724) Repayment of long term debt...................................... -- (186,972) Borrowings under line of credit.................................. -- 2,110,000 Borrowings under promissory note................................. -- 211,112 Capitalization of offering costs................................. -- (218,248) Collections of notes receivable.................................. -- 10,462 --------- --------- Net cash provided by financing activities................ -- 1,629,630 --------- --------- Net (decrease) increase in cash and cash equivalents..... (85,845) 1,111,762 Cash and cash equivalents, beginning of period..................... 834,615 597,939 --------- --------- Cash and cash equivalents, end of period........................... $ 748,770 $ 1,709,701 ========= ========= Supplemental Cash Flow Information: Cash paid for interest................................... $ 107 $ 60,805 ========= ========= Cash paid for income taxes............................... $ 155,378 $ 214,054 ========= ========= Non-Cash Transaction: During the first quarter of 1997, the Company exchanged 4,301,000 shares of Common Stock in the Company for all of the outstanding stock of the five Founding Companies.
The accompanying notes are an integral part of these consolidated financial statements. F-12 64 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION BridgeStreet Accommodations, Inc. ("BridgeStreet" or the "Company") was incorporated on August 19, 1996, to create a leading national provider of flexible accommodation services through the acquisition and consolidation of the operations of flexible accommodation service companies. During the first quarter of 1997, the Company became the holder of all the outstanding stock of the Founding Companies, five flexible accommodation service providers (the "Combination"), in exchange for 4,301,000 shares of Common Stock of the Company (see note 4). The Company conducted no operations prior to January 2, 1997, except in connection with the offering and the Combination. For financial reporting purposes, the largest founding company, Temporary Corporate Housing Columbus, Inc. (together with its three affiliates, "TCH") has been designated as the accounting acquiror, and its acquisition of the remaining four Founding Companies has been accounted for using the purchase method of accounting. The interim consolidated financial statements presented herein have been prepared by the Company and include the unaudited accounts (on a combined basis where applicable) of TCH, Corporate Lodgings, Inc., Exclusive Interim Properties, Ltd. and Temporary Housing Experts, Inc. all of which were merged on January 2, 1997, as well as the accounts of Home Again, Inc. which was acquired on March 31, 1997. In the opinion of management, the financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of BridgeStreet's financial position at June 30, 1997, the results of operations for the three- and six-month periods ended June 30, 1997, and cash flows for the six-month period ended June 30, 1997. The financial position at June 30, 1996, the results of operations for the three- and six-month periods ended June 30, 1996, and cash flows for the six-month period ended June 30, 1996 presented herein are of TCH, the designated accounting acquiror. In the opinion of management these financial statements reflect all normal and recurring adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the period presented. Interim results are not necessarily indicative of results for a full year. The balance sheet presented as of December 31, 1996, has been derived from the financial statements of TCH that have been audited by the Company's independent public accountants. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes of TCH and the acquired companies included elsewhere in this prospectus. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Refer to the combined financial statement footnotes of TCH and the Company included in this registration statement. The Company follows these policies and the policies described in the next two paragraphs. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company assesses the future useful life of the assets whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considered the future undiscounted cash flows of the acquired companies in assessing the recoverability of the asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. The Company intends to account for its stock-based compensation plans under Statement of Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation, and to elect the disclosure only provisions for stock options as permitted by SFAS No. 123. F-13 65 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INCOME TAXES The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. Income taxes for the first quarter of 1997 have been provided based on the Company's estimated full year 1997 effective tax rate of approximately 45%, after excluding the nonrecurring $1,210,000 officers' restricted stock compensation charge. The 45% effective rate is higher than the Federal statutory rate of 34% because of state taxes and because goodwill amortization is not tax deductible. Deferred tax assets and liabilities resulting in temporary differences between tax and book reporting relate primarily to operating stock, accounts receivable and other accruals. Certain of the Founding Companies elected to be recognized as S corporations under the appropriate federal and state tax codes when formed. Upon their acquisition by the Company, these entities were converted to C Corporation tax filing status. The impact of the change in tax reporting was recorded in purchase accounting and was not material to the financial statements. 4. DEFERRED OFFERING AND MERGER COSTS Deferred offering costs consist primarily of legal, accounting and other professional fees incurred in connection with the offering. All of the costs associated with the Combination will be included as a component of the purchase price pursuant to the purchase method of accounting. All the costs associated with the offering will be charged to stockholders' equity as a reduction to the proceeds of the offering when the offering closes. 5. ACQUISITIONS As discussed in Note 1, in the first quarter of 1997, the Company merged with five flexible accommodation operating companies in stock for stock tax-free mergers. The mergers have been accounted for using the purchase method of accounting with TCH designated as the accounting acquiror and the other operating companies designated as "acquired companies." The results of operations of the "acquired companies" have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The purchase price of the four "acquired companies," including the value of stock issued to the founders of BridgeStreet as a transaction fee, was approximately $17.7 million based on an independent appraisal of TCH and the companies acquired. The aggregate cost of the acquisitions exceeded the estimated fair value of assets and liabilities of the acquired companies by $17,214,000. Goodwill is being amortized over 35 years. Allocation of the purchase price for these acquisitions was based on an independent appraisal of the fair value of the net assets acquired. Amortization expense was approximately $122,000 for the three months ended June 30, 1997 and accumulated goodwill amortization was approximately $229,000 as of and for the six months ended June 30, 1997. Based on the unaudited data, the following table presents selected financial information for the Company, TCH and the four acquired companies on a pro forma basis, assuming the companies had been combined since the beginning of 1996.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ------------------ ---------------- Revenues................................................... $ 37,566,000 $ 22,924,000 Net income (loss).......................................... $ 452,000 $ (523,000) Net income (loss) per share................................ $ 0.08 $ (0.10)
The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made at the beginning of 1996. F-14 66 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 30, 1997, the Company acquired the assets of a flexible accommodation services provider in Memphis for $1.0 million in cash. The acquisition has been accounted for using the purchase method of accounting and the results of operations of this company have been included in the accompanying financial statements from the date of acquisition. The cost of the acquisition exceeded the estimated fair value of the acquired net assets by $900,000, which has been accounted for as goodwill and will be amortized over 35 years. Allocation of purchase price was based on estimates of the fair value of the net assets acquired. Pro forma data is not presented since the acquisition was not material to the Company's results of operations. 6. PROPERTY AND EQUIPMENT; OPERATING STOCK Property and equipment, and operating stock consist of the following:
JUNE 30, 1997 USEFUL LIVES ------------- ------------ Land............................................................. $ 266,235 Condominiums..................................................... 1,069,265 27.5 years Computer equipment............................................... 353,295 1-5 years Furniture, office equipment and leasehold improvements........... 435,160 5-7 years Automobiles...................................................... 109,454 5 years ---------- Total property and equipment................................ 2,233,409 Less-accumulated depreciation.................................... 133,305 ---------- Property and equipment, net................................. $2,100,104 ========== Operating stock.................................................. $1,711,790 Less-accumulated amortization.................................... 118,901 ---------- Operating stock, net............................................. $1,592,889 ==========
7. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT During the first quarter of 1997 the Company entered into a credit agreement with a bank to provide up to $10 million of revolving credit. The revolving credit agreement, secured by the capital stock of the Company's operating subsidiaries, extends to March 31, 2002. Interest is payable at the prime rate, 1.25% above the Eurodollar rate or a 30-day LIBOR rate. A commitment fee is payable on the average unused credit at a rate of 0.375%. The revolving credit agreement contains certain restrictive covenants with which the Company must comply. As of June 30, 1997, the Company had outstanding $2,110,000 under this agreement. As of August 15, 1997, the weighted average interest rate was 7.02%. Also during the first quarter, the Company borrowed under a promissory note $211,112. The funds were used to repay a portion of the indebtedness of one of the acquired companies. The note bears interest at 7.625% and matures on August 31, 1997 unless extended. See Note 5 of the Exclusive Interim Properties, Ltd. financial statements included elsewhere in this prospectus for a summary of long-term debt at December 31, 1996 assumed by the Company on January 2, 1997. 8. RELATED PARTY TRANSACTIONS Refer to the combined financial statements of the five founding companies and BridgeStreet Accommodations, Inc. included elsewhere in this registration statement. 9. CAPITAL STOCK The Company's authorized capital stock consists of 35,000,000 (increased on April 10, 1997, from 10,000,000 at December 31, 1996) shares of Common Stock, $.01 par value per share. On April 10, 1997, the F-15 67 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's Certificate of Incorporation authorized 5,000,000 shares of Preferred Stock, $0.01 par value per share. Common Stock. BridgeStreet effected a 499-for-one stock split in November 1996 of its Common Stock for each share of Common Stock then outstanding. The effects of the stock split have been retroactively reflected on the balance sheet and in the accompanying notes. At June 30, 1997, there were 5,475,000 shares of Common Stock outstanding. Holders of Common Stock are entitled to one vote for each share held of record on all matters to be submitted to a vote of the stockholders, and do not have cumulative voting rights. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and after liquidation payments to holders of outstanding shares of Preferred Stock, if any. Preferred Stock. At June 30, 1997, there were no shares of Preferred Stock outstanding. Holders of Preferred Stock would have priority over the holders of Common Stock with respect to the dividends, and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of Preferred Stock in one or more series and to fix terms, limitations, relative rights and preferences and variations as among series. 10. STOCK OPTION PLANS The Company adopted the 1997 Equity Incentive Plan (the "Equity Incentive Plan") which provides for the award of incentive stock options ("ISOs"), non-qualified stock options, stock appreciation rights, performance shares, restricted stock and stock units to all directors and employees of (including directors and employees of the founding companies) and consultants and advisors to the Company. The number of shares authorized and reserved for issuance under the Equity Incentive Plan is 1,000,000. In general, the terms of awards granted under the Equity Incentive Plan (including vesting shares) will be established by the Compensation Committee of the Company's Board of Directors. As of August 1, 1997, the Company had awarded options to purchase 482,667 shares of Common Stock under the Equity Incentive Plan effective as of the date of the final Prospectus used in connection with the offering. Of this amount, options to purchase 300,000 shares were granted pursuant to employment agreements. Each option will have a per-share exercise price equal to the offering price. The Company has adopted the Stock Plan for Non-Employee Directors (the "Directors' Plan"). Pursuant to the Directors' Plan, on the date of the final Prospectus used in connection with the offering, each director who is not an employee of the Company or one of its subsidiaries ( a "non-employee director") and neither is a holder of five percent or more of the Company's Common Stock nor was a stockholder of the Company prior to the offering will receive options to purchase 12,500 shares of Common Stock with a per-share exercise price equal to the offering price. Thereafter, each such non-employee director will be granted, on every third anniversary of the final Prospectus (provided he or she still is a non-employee director at such time), an option to acquire an additional 7,500 shares of Common Stock, and each non-employee director initially elected following the offering also will be granted an options to purchase 7,500 shares of Common Stock having a per-share exercise price equal to the fair marker value of the Common Stock on the date of such grant. The number of shares authorized and reserved for issuance under the Directors' Plan is 100,000. No options have been granted under the Directors' Plan as of August 1, 1997. 11. RESTRICTED STOCK COMPENSATION In 1996, the CEO and CFO purchased 250,000 shares of restricted Common Stock for nominal value. The restrictions were originally scheduled to lapse upon the earlier to occur of five years from the date of purchase or upon the successful completion of an initial public offering of the Company's common stock or a change in control of the Company, as long as the individuals holding the stock were the CEO and CFO on the F-16 68 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) date the restrictions lapsed. As part of the negotiations involving these officers' employment agreements during the first quarter of 1997, the Company's Board of Directors removed all restrictions on the stock as of March 31, 1997, and all of the restricted shares became fully vested. In connection with this vesting, the Company recognized non-recurring, non-cash compensation expense of approximately $1,210,000, which was charged to operations with an offsetting credit to additional paid-in capital in the first quarter of 1997. The compensation charge of approximately $1,210,000 represented the difference between the value of the stock issued and the amount paid by the officers, measured by an independent appraisal as of the date the individuals were appointed to be the CEO and CFO. 12. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" which is effective for periods ending after December 15, 1997. The standard requires the presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS replaces the primary EPS calculation required under APB Opinion No. 15. Basic EPS excludes dilution and is calculated using the weighted average of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The pro forma effect of this accounting change on the June 30, 1997 EPS data is immaterial. 13. COMMITMENTS AND CONTINGENCIES Employment Contracts. During the first quarter of 1997, the Company entered into three-year employment contracts with three officers requiring minimum base salaries aggregating $450,000 per year. The contracts also provide severance benefits of up to the longer of 12 months' pay or the remaining contract term for two of the officers. Lease Commitments. The Company leases administrative offices, accommodations and furniture at several locations through August 31, 2003. Rent expense for the three- and six-month periods ended June 30, 1997, was $7,243,000 and $12,598,000, respectively. Minimum future rental payments on non-cancelable leases at June 30, 1997, are as follows:
OPERATING LEASES ----------------- 1997...................................................... $ 690,034 1998...................................................... 1,364,514 1999...................................................... 1,233,379 2000...................................................... 601,422 2001...................................................... 281,433 Thereafter................................................ 111,168 ---------- Total........................................... $4,281,950 ==========
The Company is party to litigation in the ordinary course of business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition or results of operations. F-17 69 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of BridgeStreet Accommodations, Inc.: We have audited the accompanying balance sheet of BridgeStreet Accommodations, Inc. as of December 31, 1996, and the related statement of operations, stockholders' equity and cash flows from Inception (August 19, 1996) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements arc free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BridgeStreet Accommodations, Inc. as of December 31, 1996, and the results of its operations and its cash flows from inception through December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts April 10, 1997 F-18 70 BRIDGESTREET ACCOMMODATIONS, INC. BALANCE SHEET
DECEMBER 31, 1996 ------------ ASSETS Current Assets: Cash and cash equivalents..................................................... $ 5,804 Deferred income taxes......................................................... 890 -------- Total current assets....................................................... 6,694 Deferred offering and merger costs.............................................. 411,783 Organization costs.............................................................. 449 -------- Total assets.......................................................... $418,926 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Due to affiliate.............................................................. $417,546 Stockholders' Equity: Capital stock................................................................. 11,740 Additional paid-in capital.................................................... (9,024) Accumulated deficit........................................................... (1,336) -------- Total stockholders' equity................................................. 1,380 -------- Total liabilities and stockholders' equity............................ $418,926 ========
The accompanying notes are an integral part of these financial statements. F-19 71 BRIDGESTREET ACCOMMODATIONS, INC. STATEMENT OF OPERATIONS
INCEPTION (AUGUST 19, 1996) THROUGH DECEMBER 31, 1996 ----------------- Revenues..................................................................... $ -- Selling, general and administrative expense.................................. 2,226 ------- Loss before benefit for income taxes......................................... (2,226) Benefit for income taxes..................................................... (890) ------- Net loss..................................................................... $(1,336) =======
The accompanying notes are an integral part of these financial statements. F-20 72 BRIDGESTREET ACCOMMODATIONS, INC. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY --------- ------- ---------- ----------- ------------- Balance, inception, August 19, 1996............................ -- $ -- $ -- $ -- $ -- Shares issued................... 1,174,000 11,740 (9,024) -- 2,716 Net loss........................ -- -- -- (1,336) (1,336) --------- ------- -------- ------- ------- Balance, December 31, 1996........ 1,174,000 $11,740 $ (9,024) $(1,336) $ 1,380 ========= ======= ======== ======= =======
The accompanying notes are an integral part of these financial statements. F-21 73 BRIDGESTREET ACCOMMODATIONS, INC. STATEMENT OF CASH FLOWS
INCEPTION (AUGUST 19, 1996) THROUGH DECEMBER 31, 1996 ----------------- Cash Flows From Operating Activities: Net loss................................................................... $(1,336) Adjustments to reconcile net loss to net cash used in operating activities -- Change in assets and liabilities -- Deferred income taxes................................................. (890) ------- Net cash used in operating activities.............................. (2,226) Cash Flows Used in Investing Activities: Organization costs......................................................... (449) Cash Flows From Financing Activities: Advances from affiliate.................................................... 5,763 Issuance of common stock................................................... 2,716 ------- Net cash provided by financing activities.......................... 8,479 ------- Net increase in cash and cash equivalents.................................... 5,804 Cash and cash equivalents, beginning of period..................... -- ------- Cash and cash equivalents, end of period........................... $ 5,804 =======
The accompanying notes are an integral part of these financial statements. F-22 74 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION BridgeStreet Accommodations, Inc. ("BridgeStreet" or "the Company") was incorporated on August 19, 1996 to create a leading national provider of flexible accommodation services through the acquisition and consolidation of the operations of flexible accommodation service companies. During the first quarter of 1997 the Company acquired, through stock-for-stock transactions, five flexible accommodation service providers (the "Combination"). BridgeStreet intends to complete an initial public offering (the "Offering") of its common stock and subsequent to the Offering continue to acquire, through merger or purchase, similar companies to expand its national and regional operations. BridgeStreet's primary assets at December 31, 1996 are cash and deferred offering and merger costs. BridgeStreet's only operations to date have related to the Combination and the Offering. Funding for the deferred offering and merger costs has been provided by American Business Partners, LLC ("ABP"). See Note 4. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Stock Based Compensation Plans The Company intends to account for its stock-based compensation plans under Statement of Financial Accounting Standards ("SFAS") No. 123, and to elect the disclosure only provisions for stock options as permitted by SFAS No. 123. Deferred offering and merger costs Deferred offering and merger costs consist primarily of legal, accounting and other professional fees incurred in connection with the Combination and the Offering. All of the costs associated with the Combination will be included as a component of the purchase price pursuant to the purchase method of accounting. All of the costs associated with the Offering will be charged to Stockholders' Equity as a reduction to the proceeds of the Offering when the Offering closes. 3. INCOME TAXES The Company records income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized as income in the period that includes the enactment. At December 31, 1996 the Company has recorded as an asset deferred income taxes of $890. F-23 75 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. RELATED PARTY TRANSACTIONS Funding for the deferred Offering and merger costs has been provided by ABP. Certain shareholders of BridgeStreet are principals of ABP including the Company's Chairman. In addition, the Chief Financial Officer of the Company was a consultant to ABP from January 1996 through December 1996, and the Chief Executive Officer of the Company was a consultant to ABP from October 31, 1996 through December 31, 1996. At December 31, 1996 ABP has provided aggregate funding of $417,546. Upon completion of the Offering the Company will pay ABP for the funding it provided. The Company also has a consulting agreement with ABP in which ABP will perform services for the Company in connection with its acquisition program. In exchange for such services, ABP will be paid a fee of 1% of the transaction value for each acquisition by the Company after the closing of the Offering for which ABP provides assistance. ABP also will be reimbursed for all direct expenses incurred by ABP in connection with such acquisitions. The Company is not obligated to utilize ABP's services in connection with its acquisition program. 5. CAPITAL STOCK The Company's authorized capital stock consists of 35,000,000 (increased on April 10, 1997, from 10,000,000 at December 31, 1996) shares of Common Stock, $0.01 par value per share, and 5,000,000 shares of Preferred Stock, $0.01 par value per share. Common Stock. BridgeStreet effected a 499-for-one stock split in November 1996 of its Common Stock for each share of Common Stock then outstanding. The effects of the stock split have been retroactively reflected on the balance sheet and in the accompanying notes. At December 31, 1996 there were 1,174,000 shares of Common Stock outstanding. Holders of Common Stock are entitled to one vote for each share held of record on all matters to be submitted to a vote of the stockholders, and do not have cumulative voting rights. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and after liquidation payments to holders of outstanding shares of Preferred Stock, if any. Preferred Stock. At December 31, 1996 there were no shares of Preferred Stock outstanding. Holders of Preferred Stock would have priority over the holders of Common Stock with respect to dividends, and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of Preferred Stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations as among series. 6. STOCK OPTION PLANS The Company has adopted the 1997 Equity Incentive Plan (the "Equity Incentive Plan") which provides for the award of incentive stock options ("ISOs"), non-qualified stock options, stock appreciation rights, performance shares, restricted stock or stock units to all directors and employees of (including directors and employees of the Founding Companies) and consultants and advisors to the Company. The number of shares authorized and reserved for issuance under the Equity Incentive Plan is 1,000,000. In general, the terms of awards granted under the Equity Incentive Plan (including vesting schedules) will be established by the Compensation Committee of the Company's Board of Directors. As of April 10, 1997 the Company had awarded options to purchase 334,000 shares of Common Stock under the Equity Incentive Plan effective as of the date of the final Prospectus used in connection with the Offering. Of this amount, options to purchase 300,000 shares were granted pursuant to employment agreements. Each option will have a per-share exercise price equal to the Offering price. F-24 76 BRIDGESTREET ACCOMMODATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company has adopted the Stock Plan for Non-Employee Directors (the "Directors' Plan"). Pursuant to the Directors' Plan, on the date of the final Prospectus used in connection with the Offering, each director who is not an employee of the Company or one of its subsidiaries (a "non-employee director") and neither is a holder of five percent or more of the Company's Common Stock nor was a stockholder of the Company prior to the Offering will receive options to purchase 12,500 shares of Common Stock with a per-share exercise price equal to the Offering price. Thereafter, each such non-employee director will be granted, on every third anniversary of the final Prospectus (provided he or she still is a non-employee director at such time), an option to acquire an additional 7,500 shares of Common Stock, and each non-employee director initially elected following the Offering also will be granted an option to purchase 7,500 shares of Common Stock having a per-share exercise price equal to the fair market value of the Common Stock on the date of such grant. The number of shares authorized and reserved for issuance under the Directors Plan is 100,000. No options have been granted under the plan as of April 10, 1997. 7. COMMITMENTS Subsequent to December 31, 1996 the Company entered into three year employment contracts with three officers requiring minimum base salaries aggregating $450,000 per year. The contracts also provide severance benefits of up to 12 months' pay for two of the officers. 8. RESTRICTED STOCK COMPENSATION In 1996, the CEO and CFO purchased an aggregate of 250,000 shares of restricted Common Stock for nominal value. The restrictions were originally scheduled to lapse upon the earlier to occur of five years from the date of purchase or the successful completion of an initial public offering of the Company's common stock or a change in control of the Company, as long as the individuals holding the stock were the CEO and CFO on the date the restrictions lapsed. As part of the negotiations involving these officers' employment agreements during the first quarter of 1997, the Company's Board of Directors removed all of the restrictions as of March 31, 1997, and all of the restricted shares became fully vested on that date. In connection with this vesting, the Company recognized non-recurring, non-cash compensation expense of approximately $1,210,000, which will be charged to operations with an offsetting credit to Additional paid-in capital in the first quarter of 1997. The compensation charge of approximately $1,210,000 represented the difference between the value of the stock issued and the amount paid by the officers, measured by an independent appraisal as of the date the individuals were appointed to be the CEO and CFO. 9. SUBSEQUENT EVENTS During the first quarter of 1997, the Company acquired through stock-for-stock mergers five flexible accommodation service providers. The aggregate consideration paid by the Company was 4,301,000 shares of Common Stock. The companies acquired were Temporary Corporate Housing Columbus, Inc. (together with its three affiliates), Corporate Lodgings, Inc. (together with its four affiliates), Exclusive Interim Properties, Ltd. (together with its affiliate), Home Again, Inc. (together with its two affiliates) and Temporary Housing Experts, Inc. During the first quarter of 1997 the Company entered into a credit agreement with a bank to provide up to $10 million of revolving credit. The revolving credit, secured by the capital stock of the Company's operating subsidiaries, extends to March 31, 2002. Interest is payable at the prime rate, 1.25% above the Eurodollar rate or a 30-day LIBOR rate. A commitment fee is payable on the average unused credit at a rate of 0.375%. The revolving credit agreement contains certain restrictive covenants with which the Company must comply. F-25 77 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Temporary Corporate Housing Columbus, Inc.: We have audited the accompanying combined balance sheets of Temporary Corporate Housing Columbus, Inc. as of December 31, 1995 and 1996, and the related combined statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Temporary Corporate Housing Columbus, Inc. as of December 31, 1995 and 1996, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts February 28, 1997 F-26 78 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------- 1995 1996 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents......................................... $ 834,615 $ 597,939 Investment in short-term marketable securities.................... 219,300 152,253 Accounts receivable, less allowance for doubtful accounts of $45,000 in 1996............................................. 755,649 794,445 Deferred income taxes............................................. 255,217 129,200 Refundable taxes.................................................. -- 33,927 Other current assets.............................................. 36,883 -- ---------- ---------- Total current assets........................................... 2,101,664 1,707,764 Operating stock, net of accumulated amortization.................... 220,251 268,086 Property and equipment, net of accumulated depreciation............. 33,482 26,961 Notes receivable -- stockholder/related party....................... 154,602 10,568 ---------- ---------- Total assets.............................................. $2,509,999 $2,013,379 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................. $ 208,712 $ 218,407 Accrued expenses -- Payroll and employee benefits.................................. 391,420 61,201 Other.......................................................... 371,880 342,413 Accrued income taxes.............................................. 501,520 100,000 Due to stockholder................................................ 64,844 -- ---------- ---------- Total current liabilities...................................... 1,538,376 722,021 Deferred income taxes............................................... 102,500 107,744 Commitments and contingencies Stockholders' Equity: Common stock...................................................... 31,000 31,000 Treasury stock.................................................... (4,185) (4,185) Retained earnings................................................. 842,308 1,156,799 ---------- ---------- Total stockholders' equity..................................... 869,123 1,183,614 ---------- ---------- Total liabilities and stockholders' equity................ $2,509,999 $2,013,379 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-27 79 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1994 1995 1996 ---------- ---------- ----------- Revenues.............................................. $8,308,840 $9,754,222 $12,501,885 Operating Expenses: Cost of services.................................... 6,474,548 7,353,552 9,087,689 Selling, general and administrative expense......... 1,628,406 2,064,463 2,326,772 ---------- ---------- ----------- Total operating expenses......................... 8,102,954 9,418,015 11,414,461 ---------- ---------- ----------- Operating income................................. 205,886 336,207 1,087,424 Other Income (Expense): Interest income..................................... 9,586 25,592 47,093 Interest expense.................................... (2,957) (6,914) (107) Other income........................................ 14,024 34,537 41,941 ---------- ---------- ----------- Other income, net................................ 20,653 53,215 88,927 ---------- ---------- ----------- Income before provision for income taxes.............. 226,539 389,422 1,176,351 Provision for income taxes............................ 113,116 178,269 512,627 ---------- ---------- ----------- Net income............................................ $ 113,423 $ 211,153 $ 663,724 ========== ========== ===========
The accompanying notes are an integral part of these combined financial statements. F-28 80 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ------------------ TREASURY RETAINED STOCKHOLDERS' SHARES AMOUNT STOCK EARNINGS EQUITY ------ ------- -------- ---------- ------------- Balance, December 31, 1993............ 2,056 $31,000 $(4,185) $ 517,732 $ 544,547 Net income.......................... -- -- -- 113,423 113,423 ----- ------- ------- ---------- ---------- Balance, December 31, 1994............ 2,056 31,000 (4,185) 631,155 657,970 Net income.......................... -- -- -- 211,153 211,153 ----- ------- ------- ---------- ---------- Balance, December 31, 1995............ 2,056 31,000 (4,185) 842,308 869,123 Net income.......................... -- -- -- 663,724 663,724 Cash dividend....................... -- -- -- (349,233) (349,233) ----- ------- ------- ---------- ---------- Balance, December 31, 1996............ 2,056 $31,000 $(4,185) $1,156,799 $1,183,614 ===== ======= ======= ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-29 81 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 --------- --------- --------- Cash Flows From Operating Activities: Net income............................................ $ 113,423 $ 211,153 $ 663,724 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization...................... 66,652 78,684 60,333 Gain on sale of assets............................. -- -- (500) Change in operating assets and liabilities -- Accounts receivable.............................. (207,780) (154,680) (38,796) Other assets..................................... 572 (30,978) 36,883 Accounts payable................................. (25,488) 53,404 9,695 Accrued expenses................................. 280,353 560,967 (761,206) Deferred income taxes............................ (42,338) (98,307) 97,334 --------- --------- --------- Net cash provided by operating activities..... 185,394 620,243 67,467 --------- --------- --------- Cash Flows From Investing Activities: Purchases of investments in short-term marketable securities......................................... (134,501) (194,925) (330,887) Sales of investments in short-term marketable securities......................................... 27,888 151,076 397,934 Proceeds from sale of assets.......................... -- -- 4,507 Purchases of operating stock.......................... (76,610) (24,591) (77,642) Purchases of property and equipment................... (30,341) (57,798) (28,012) --------- --------- --------- Net cash used in investing activities......... (213,564) (126,238) (34,100) --------- --------- --------- Cash Flows From Financing Activities: Due to stockholders................................... 5,154 (1,920) (64,844) Cash dividend......................................... -- -- (349,233) Payments of notes payable............................. (10,318) -- -- Collections on notes receivable....................... -- -- 144,034 Additions to notes receivable......................... -- (154,602) -- --------- --------- --------- Net cash used in financing activities......... (5,164) (156,522) (270,043) --------- --------- --------- Net (decrease) increase in cash and cash equivalents................................. (33,334) 337,483 (236,676) Cash and cash equivalents, beginning of year............ 530,466 497,132 834,615 --------- --------- --------- Cash and cash equivalents, end of year.................. $ 497,132 $ 834,615 $ 597,939 ========= ========= ========= Supplemental cash flow information: Cash paid for interest........................ $ 2,957 $ 6,914 $ 107 ========= ========= ========= Cash paid for income taxes.................... $ 25,264 $ 33,348 $ 828,618 ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. F-30 82 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION The accompanying combined financial statements include the accounts of Temporary Corporate Housing Columbus, Inc. and three affiliated entities in the same business (collectively, "TCH" or the "Company"), substantially all of which are commonly owned through a general partnership, the general partners of which are all family members. The affiliated entities are Temporary Corporate Housing Cincinnati, Inc., Temporary Corporate Housing Cleveland, Inc. and Temporary Corporate Housing Pittsburgh, Inc. The Company was founded in 1983, and provides fully-furnished apartments, townhouses, condominiums and, to a lesser extent, homes (collectively, "accommodations") to individuals in need of flexible accommodations. The Company has offices in four cities: Columbus, Cleveland and Cincinnati, Ohio; and Pittsburgh, Pennsylvania. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these combined financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Combination The accompanying combined financial statements include the accounts of Temporary Corporate Housing Columbus, Inc. and three affiliated entities. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The fair market value of the Company's financial instruments approximates their financial statement carrying value. Investments in Available-for-Sale Marketable Securities Investments in available-for-sale short-term marketable securities are stated at cost, which approximates market value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the combined statement of operations. Depreciation is determined using the straight-line method for financial F-31 83 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) reporting and income tax reporting purposes over the estimated useful lives of the respective assets. Estimated useful lives are as follows:
ESTIMATED USEFUL ASSET CLASSIFICATION LIFE -------------------- ---------- Computer equipment..................................... 1-5 Years Office furniture and equipment......................... 5 Years Automobiles............................................ 5 Years
Repairs and maintenance are charged to expense as incurred. General and administrative costs associated with the opening of new Company offices are expenses as incurred. Revenue Recognition The Company recognizes revenues on the rentals of accommodations to its clients on a pro rata basis over the length of the client's stay. Concentration of Credit Risk Concentration of credit risk is limited to accounts receivable. The Company does not require collateral or other security to support their receivables. The Company conducts periodic reviews of its clients' financial condition and payment practices to minimize collection risks on accounts receivable. Operating Stock Operating stock to furnish new units, including linen, glassware, silverware, utensils and minor appliances, is capitalized as it is purchased and amortized over a three year period to a residual value of 50% of the original cost. Additional purchases of operating stock for units already established is expensed as incurred. Accommodation and Furniture Leases The Company leases substantially all of its accommodations on a short-term basis with lease terms ranging from three months to one year. Furniture for the accommodations is leased on a monthly basis from various furniture rental companies, including a related party. (See Note 6) 3. INCOME TAXES The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. F-32 84 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 -------- -------- --------- Current -- City and state.......................... $ 12,360 $ 13,964 $ 112,447 Federal................................. 58,418 65,998 531,441 -------- -------- --------- 70,778 79,962 643,888 -------- -------- --------- Deferred -- City and state.......................... 7,394 17,168 (22,923) Federal................................. 34,944 81,139 (108,338) -------- -------- --------- 42,338 98,307 (131,261) -------- -------- --------- Total provision for income taxes......................... $113,116 $178,269 $ 512,627 ======== ======== =========
A reconciliation between the provision for income taxes computed at the statutory rates and the amount reflected in the accompanying combined statements of operations is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Computed expected federal tax provision for the three years ended December 31, 1994, 1995 and 1996............................ $ 77,023 $132,403 $399,959 Increase in taxes resulting from -- City and state income taxes.............. 16,297 28,015 84,627 Other.................................... 19,796 17,851 28,041 -------- -------- -------- Provision for income taxes....... $113,116 $178,269 $512,627 ======== ======== ========
Deferred tax assets (liabilities) consist of the following:
DECEMBER 31, --------------------- 1995 1996 -------- -------- Tax assets -- Accruals not yet deductible for tax purposes...... $255,217 $129,200 Net operating loss carryforward................... 17,391 -- Less -- valuation allowance............................ (17,391) -- -------- -------- 255,217 129,200 -------- -------- Tax liabilities Operating stock and prepaid supplies expensed for tax purposes.................................... 102,500 107,744 -------- -------- Net deferred tax assets...................... $152,717 $ 21,456 ======== ========
The Company had no net operating loss ("NOL") carryforwards as of December 31, 1996. At December 31, 1995, the valuation allowance related to uncertainty concerning the Company's ability to realize the NOL. F-33 85 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT; OPERATING STOCK Property and equipment, and operating stock, consist of the following:
DECEMBER 31, ---------------------- 1995 1996 -------- --------- Computer equipment............................................. $183,201 $169,577 Furniture and office equipment................................. 89,252 80,738 Automobiles.................................................... 62,084 57,584 -------- -------- Total property and equipment......................... 334,537 307,899 Less -- accumulated depreciation............................... 301,055 280,938 -------- -------- Property and equipment, net.......................... $ 33,482 $ 26,961 ======== ======== Operating stock................................................ $398,570 $476,212 Less -- accumulated amortization............................... 178,319 208,126 -------- -------- Operating stock, net................................. $220,251 $268,086 ======== ========
5. LEASE COMMITMENTS The Company leases administrative offices, accommodations and furniture at several locations through August 31, 1999. Rent expense for the fiscal years ended December 31, 1994, 1995 and 1996 was $4,965,215, $5,642,868 and $6,998,444, respectively. Minimum future rental payments on noncancelable leases at December 31, 1996 are as follows:
OPERATING LEASES ---------- 1997..................................................................... $ 969,826 1998..................................................................... 796,825 1999..................................................................... 806,518 2000..................................................................... 301,523 ---------- Total.......................................................... $2,874,692 ==========
6. RELATED PARTY TRANSACTIONS For the period from November 1, 1992 until October 31, 1995, the Company leased office space for its corporate headquarters located in Columbus, Ohio, from a former owner of the Company and spouse of one the general partners of SLD Partnership ("SLD"), an Ohio general partnership that owns substantially all of the outstanding capital stock of the Company. The lease term and annual rental amounts were comparable to the current lease agreement for the same premises that the Company entered into, effective November 1, 1995, with an unaffiliated entity. Rent expense related to this office space for the years ended December 31, 1994, 1995 and 1996 was $9,720, $10,200 and $11,378, respectively. The Company has entered into an exclusive furniture lease agreement with Integrity Furniture, Inc., which is 49% owned by SLD. The agreement was entered into on September 12, 1995, has a five year period and provides that the lessor will have the exclusive right to furnish all of the Company's leased accommodations in Pittsburgh, Pennsylvania at agreed-upon prices. The initial unit lease terms are for minimum three-month periods that then are renewable monthly. In management's opinion, the lease terms and rental amounts are comparable to other agreements that the Company has entered into with unaffiliated entities. F-34 86 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On October 15, 1995, the Company loaned to SLD $45,000 (included in related party notes receivable as of December 31, 1995), at an annual interest rate of 7% beginning November 1995. Also in 1995 SLD borrowed $109,602 from the Company. Both of these notes were repaid in full during 1996. The Company leases televisions, VCRs and microwave ovens from Saturn Enterprises, Inc. ("Saturn"), which is owned by the spouse of one of the general partners of SLD. The original agreement commenced on January 1, 1989, and was renewed on December 28, 1995 for a three-year period beginning on January 1, 1996. These items are rented at rates that are comparable to those charged by unaffiliated companies. Included in accounts payable at December 31, 1995 and 1996 are amounts owed to Saturn of approximately $47,000 and $17,500, respectively. For the period from June 1992 until November 1996, the Company received consulting services from two of the general partners of SLD. The cost incurred for these services was $96,000 in each of 1994, 1995 and 1996. The consulting contracts with the two general partners of SLD were terminated in November 1996. 7. PROFIT SHARING PLAN Eligible employees of the Company participated in a profit sharing plan (the "Plan") sponsored by the Company. This defined contribution plan provides that the Company will make contributions to the Plan in its sole discretion. The Company's contributions to the Plan amounted to approximately $43,523 in 1995. The Plan was terminated by the Company on December 31, 1995. In accordance with the provisions of the Plan agreement, all plan assets were distributed to the participants during 1996. 8. CONTINGENCIES The Company is a party to litigation in the ordinary course of business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition and results of operations. 9. STOCKHOLDERS' EQUITY Combined stockholders' equity includes the following common stock accounts as of December 31, 1995 and 1996 (no par value for all classes of stock):
OUTSTANDING SHARES AMOUNT ----------- ------- Temporary Corporate Housing Columbus, Inc. -- Class A common stock -- Voting common stock authorized -- 500 shares.............. 500 $25,000 Class B common stock -- Nonvoting common stock authorized -- 500 shares........... 56 -- Temporary Corporate Housing Cleveland, Inc. -- Voting common stock authorized -- 500 shares.............. 500 500 Temporary Corporate Housing Cincinnati, Inc. -- Voting common stock authorized -- 500 shares.............. 500 5,000 Temporary Corporate Housing Pittsburgh, Inc. -- Voting common stock authorized -- 500 shares.............. 500 500 ----- ------- 2,056 $31,000 ===== =======
The treasury stock in the combined financial statements represents 40 shares of TCH Class B common stock purchased for $4,185. F-35 87 TEMPORARY CORPORATE HOUSING COLUMBUS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. ACCRUED EXPENSES -- OTHER Accrued expenses -- other includes an accrual for sales and use taxes of $125,000 and $200,000 as of December 31, 1995 and 1996, respectively. 11. SALE OF COMPANY Effective on January 2, 1997, the Company was acquired, through a stock for stock merger, by Bridgestreet Accommodations, Inc. The stockholders of the Company received 1,596,350 shares of Bridgestreet Accommodations, Inc.'s common stock in exchange for all of the outstanding common stock of the Company. F-36 88 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Corporate Lodgings, Inc.: We have audited the accompanying combined balance sheets of Corporate Lodgings, Inc., as of December 31, 1995 and 1996, and the related combined statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Corporate Lodgings, Inc. as of December 31, 1995 and 1996, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts February 28, 1997 F-37 89 CORPORATE LODGINGS, INC. COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------- 1995 1996 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents......................................... $ 343,231 $ 179,795 Accounts receivable -- trade, less allowance for doubtful accounts of $29,689 and $43,172 in 1995, and 1996, respectively......... 376,317 604,098 Deferred income taxes............................................. 78,734 28,215 Prepaid expenses and other current assets......................... 217,793 126,116 ---------- ---------- Total current assets...................................... 1,016,075 938,224 Property and equipment, net of accumulated depreciation........... 117,777 117,906 Notes receivable -- stockholder................................... 30,034 -- Other assets...................................................... 1,752 1,249 ---------- ---------- Total assets.............................................. $1,165,638 $1,057,379 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable.................................................. $ 186,859 $ 282,436 Accrued expenses -- Payroll, bonuses and related items............................. 275,007 65,238 Other.......................................................... 59,566 92,631 Accrued income taxes.............................................. 125,104 76,093 Current portion of notes payable.................................. 28,893 9,720 Notes payable -- stockholder...................................... 194,015 28,493 Deferred revenue.................................................. 371,283 427,987 ---------- ---------- Total current liabilities................................. 1,240,727 982,598 Notes payable....................................................... 9,720 -- Commitments and contingencies Stockholders' Equity (Deficit): Common stock...................................................... 5,000 5,000 Additional paid-in capital........................................ 800 179,797 Accumulated deficit............................................... (90,609) (110,016) ---------- ---------- Total stockholders' equity (deficit)........................... (84,809) 74,781 ---------- ---------- Total liabilities and stockholders' equity (deficit)...... $1,165,638 $1,057,379 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-38 90 CORPORATE LODGINGS, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Revenues............................................... $4,069,094 $6,067,389 $8,820,039 ---------- ---------- ---------- Operating Expenses: Cost of services..................................... 2,744,916 4,046,624 6,105,473 Selling, general and administrative expense.......... 1,237,403 1,981,852 2,519,435 ---------- ---------- ---------- Total operating expenses.......................... 3,982,319 6,028,476 8,624,908 ---------- ---------- ---------- Operating income.................................. 86,775 38,913 195,131 Other Income (Expense): Interest income...................................... 1,992 1,646 1,284 Interest expense..................................... (6,851) (14,615) (26,625) Other income (expense), net.......................... (2,491) 504 (180,449) ---------- ---------- ---------- Other expense, net................................ (7,350) (12,465) (205,790) ---------- ---------- ---------- Income (loss) before provision for income taxes... 79,425 26,448 (10,659) Provision for income taxes............................. 50,454 47,463 8,748 ---------- ---------- ---------- Net income (loss)...................................... $ 28,971 $ (21,015) $ (19,407) ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-39 91 CORPORATE LODGINGS, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' --------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIT) --------- --------- ---------- ----------- ------------- Balance, December 31, 1993............ 1,450 $3,000 $ 800 $ (98,565) $(94,765) Net income.......................... -- -- -- 28,971 28,971 Issuance of stock................... 100 1,000 -- -- 1,000 ----- ------ -------- --------- -------- Balance, December 31, 1994............ 1,550 4,000 800 (69,594) (64,794) Net loss............................ -- -- -- (21,015) (21,015) Issuance of stock................... 100 1,000 -- -- 1,000 ----- ------ -------- --------- -------- Balance, December 31, 1995............ 1,650 5,000 800 (90,609) (84,809) Net loss............................ -- -- -- (19,407) (19,407) Capital contribution................ -- -- 178,997 -- 178,997 ----- ------ -------- --------- -------- Balance, December 31, 1996............ 1,650 $5,000 $179,797 $(110,016) $ 74,781 ===== ====== ======== ========= ========
The accompanying notes are an integral part of these combined financial statements. F-40 92 CORPORATE LODGINGS, INC. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------ 1994 1995 1996 -------- --------- --------- Cash Flows From Operating Activities: Net (loss) income...................................... $ 28,971 $ (21,015) $ (19,407) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities -- Depreciation and amortization....................... 16,376 36,496 52,970 Change in operating assets and liabilities -- Accounts receivable............................... (43,184) (145,204) (227,781) Deferred income taxes............................. (1,346) (36,580) 50,519 Prepaid expenses and other current assets......... (10,206) (141,831) 91,677 Accounts payable.................................. (67,939) 98,767 95,577 Accounts payable -- stockholder................... 72,468 (11,544) -- Accrued expenses.................................. 47,090 209,822 (176,704) Accrued income taxes.............................. 20,217 76,525 (49,011) Deferred income................................... 16,665 151,041 56,704 Other............................................. (379) (434) -- -------- --------- --------- Net cash provided by (used in) operating activities................................... 78,733 216,043 (125,456) -------- --------- --------- Cash Flows From Investing Activities: Purchases of property and equipment.................... (26,159) (94,032) (53,953) Other.................................................. -- -- 1,357 -------- --------- --------- Net cash used in investing activities.......... (26,159) (94,032) (52,596) -------- --------- --------- Cash Flows From Financing Activities: Cash received from notes receivable -- stockholder..... 1,648 5,576 30,034 Issuance (payments) of notes payable, net.............. 13,642 11,303 (15,418) Issuance (payments) of notes payable -- stockholder.... -- 112,000 -- Issuance of common stock............................... 1,000 1,000 -- -------- --------- --------- Net cash provided by financing activities...... 16,290 129,879 14,616 -------- --------- --------- Net (decrease) increase in cash and cash equivalents..... 68,864 251,890 (163,436) Cash and cash equivalents, beginning of year............. 22,477 91,341 343,231 -------- --------- --------- Cash and cash equivalents, end of year................... $ 91,341 $ 343,231 $ 179,795 ======== ========= ========= Supplemental Cash Flow Information: Cash paid for interest......................... $ 6,851 $ 14,615 $ 25,675 ======== ========= ========= Cash paid for income taxes..................... $ 31,583 $ 7,518 $ 14,726 ======== ========= =========
Non-Cash Transaction: In 1996 the stockholder contributed to capital a note payable to the stockholder for $178,977. The accompanying notes are an integral part of these combined financial statements. F-41 93 CORPORATE LODGINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION The accompanying combined financial statements include the accounts of Corporate Lodgings, Inc., a C corporation, and four S corporations which all are owned substantially by the same individual and operate similar businesses (collectively, the "Company"). The four S corporations are Corporate Lodgings, Pennsylvania Inc.; Corporate Lodgings, Minnesota Inc.; Corporate Lodgings, Kentucky Inc.; and Corporate Lodgings, Wisconsin Inc. The Company was founded in 1987 and provides fully-furnished apartments, townhouses, condominiums and, to a lesser extent, homes (collectively, "accommodations") to individuals in need of flexible accommodations. The Company has offices in: Ohio, Pennsylvania, Minnesota, Kentucky and Wisconsin. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these combined financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Combination The accompanying combined financial statements include the accounts of Corporate Lodgings, Inc. and four affiliated entities which are under common control of and management by a single shareholder. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The fair market value of the Company's financial instruments approximates their financial statement carrying value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the combined statements of operations. Depreciation is determined using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the respective assets. Estimated useful lives are as follows:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE -------------------- ----------- Computer equipment................................................ 3 Years Office furniture and equipment.................................... 5 Years
Repairs and maintenance are charged to expense as incurred. General and administrative costs associated with the opening of new company offices are expensed as incurred. F-42 94 CORPORATE LODGINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition The Company records cash payments from clients in advance of their stays as deferred revenue and recognizes these amounts as revenue on a pro rata basis over the length of the guests' stays. Concentration of Credit Risk Concentration of credit risk is limited to accounts receivable. The Company does not require collateral or other security to support their receivables. The Company conducts periodic reviews of its clients' financial condition and payment practices to minimize collection risk on accounts receivable. Operating Stock The Company leases operating stock such as linens, small appliances, glassware, silverware, dishes, etc. Accommodation and Furniture Leases The Company leases substantially all of its accommodations on a short-term basis with lease terms that range from three months to one year. Furniture for the accommodations is leased on a monthly basis from various furniture rental companies. 3. INCOME TAXES The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 ------- -------- -------- Current provision (benefit) -- State............................................. $10,403 $ 16,142 $ (3,189) Federal........................................... 38,897 61,501 (12,311) ------- -------- -------- 49,300 77,643 (15,500) ------- -------- -------- Deferred provision (benefit) -- State............................................. 171 (4,463) 3,586 Federal........................................... 983 (25,717) 20,662 ------- -------- -------- 1,154 (30,180) 24,248 ------- -------- -------- Total provision for income taxes.......... $50,454 $ 47,463 $ 8,748 ======= ======== ========
F-43 95 CORPORATE LODGINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation between the provision for income taxes computed at the statutory rates and the amount reflected in the accompanying combined statements of operations is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Computed expected federal tax provision (benefit)..... $27,005 $ 8,992 $(3,624) Increase (decrease) in taxes resulting from -- Impact of S corporation not taxable................. 13,908 29,699 4,470 State income taxes, net of federal benefit.......... 5,141 2,547 (4,355) Other............................................... 4,400 6,225 12,257 ------- ------- ------- Provision for income taxes.................. $50,454 $47,463 $ 8,748 ======= ======= =======
Deferred tax assets (liabilities) consist of the following:
DECEMBER 31, ----------------------- 1995 1996 --------- --------- Tax Assets: Accruals................................................... $ 117,550 $ 152,152 Other...................................................... 63,750 178,641 --------- --------- 181,300 330,793 --------- --------- Tax Liabilities: Receivables................................................ (73,016) (251,205) Other...................................................... (29,550) (51,373) --------- --------- (102,566) (302,578) --------- --------- Net deferred tax asset............................. $ 78,734 $ 28,215 ========= =========
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, --------------------- 1995 1996 -------- -------- Computer equipment............................................. $127,281 $159,835 Furniture and office equipment................................. 48,734 65,555 -------- -------- Total property and equipment......................... 176,015 225,390 Less -- accumulated depreciation............................... 58,238 107,484 -------- -------- Property and equipment, net.......................... $117,777 $117,906 ======== ========
5. NOTES PAYABLE As of December 31, 1995 and 1996, the Company had $38,613 and $9,720, respectively, of notes payable outstanding, related in part to the purchase of computer equipment. The notes bear interest at rates ranging from 6.75% to 9.75% and are secured by all business assets. All such outstanding notes mature in 1997. F-44 96 CORPORATE LODGINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. RELATED PARTY TRANSACTIONS Notes Receivable -- Stockholder As of December 31, 1995, the Company held notes receivable from the majority stockholder of $30,034. All of such notes are non-interest-bearing with the exception of one, which bears interest at 5.69%. Included in the accompanying statements of operations is $1,114, $1,023 and $854 of interest income related to these notes for the years ended December 31, 1994, 1995 and 1996, respectively. These notes were repaid in 1996. Notes Payable -- Stockholder As of December 31, 1995 and 1996, the Company had $194,015 and $28,493 respectively, of notes payable due to the majority stockholder. The notes bear interest at rates ranging from 6.75% and 9.75% and are payable on demand. Interest expense for the fiscal years ended December 31, 1994, 1995 and 1996 of $3,873, $10,943 and $24,168, respectively, related to these notes is included in the accompanying statements of operations. Contingent Liabilities During 1995, the Company entered into an agreement to guarantee a promissory note of the majority stockholder. As of December 31, 1995 and 1996, there was $25,000 outstanding on the note. In addition, during December 1995, the Company pledged the inventory, accounts receivable, contract rights, equipment and general intangibles of one of the affiliated companies to secure a $200,000 promissory note between the majority stockholder and a bank. As of December 31, 1995 and 1996, there was $137,000 and $109,000, respectively, outstanding on the promissory note. City Visitor The Company purchases advertising space from City Visitor Publications, Inc. ("City Visitor"), an entity which publishes a travel magazine and is 100% owned by the majority stockholder of the Company. Included in the accompanying statements of operations is $34,048, $21,780 and $31,356 of advertising expense paid to City Visitor in 1994, 1995, and 1996, respectively. In addition, the Company will from time to time pay expenses on behalf of City Visitor which are subsequently repaid to the Company by City Visitor. Included in accounts payable in the accompanying balance sheet is approximately $866 and $1,790 as of December 31, 1995 and 1996, respectively. In addition, the Company performed certain general and administrative functions, such as accounting and finance, on behalf of City Visitor. In connection with these services, the Company billed City Visitor approximately $42,200, $51,000 and $14,500 for the years ended December 31, 1994, 1995 and 1996, respectively. 7. LEASE COMMITMENTS The Company leases administrative offices, accommodations and furniture at several locations through January 1998. The terms of the leases of accommodations are typically less than one year. Rent expense for the fiscal years ended December 31, 1994, 1995 and 1996 was $1,575,031, $2,317,274 and $3,518,705, respectively. Minimum future rental payments at December 31, 1996 are as follows:
OPERATING LEASES --------- 1997...................................................... $ 78,583 1998...................................................... 61,558 1999...................................................... 3,834 ------- Total..................................................... $ 143,975 =======
F-45 97 CORPORATE LODGINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 8. PENSION PLAN Eligible employees of the Company participate in a defined contribution profit sharing plan sponsored by the Company. The plan provides that the Company may make discretionary contributions to the plan. For the years ended December 31, 1994, 1995 and 1996, the Company did not make any discretionary contributions to the plan. 9. STOCKHOLDERS' EQUITY Combined stockholders' equity includes the following common stock accounts as of December 31, 1995 and 1996.
OUTSTANDING SHARES AMOUNT ----------- ------ Corporate Lodgings, Inc.: No par value, voting common stock, 1,750 shares authorized.... 1,250 $1,000 Corporate Lodgings, Pennsylvania: No par value, voting common stock, 750 shares authorized... 100 1,000 Corporate Lodgings, Minnesota: No par value, voting common stock, 750 shares authorized... 100 1,000 Corporate Lodgings, Kentucky: No par value, voting common stock, 750 shares authorized... 100 1,000 Corporate Lodgings, Wisconsin: No par value, voting common stock, 750 shares authorized... 100 1,000 ----- ------ 1,650 $5,000 ===== ======
10. CONTINGENCIES Various lawsuits have arisen in the ordinary course of the Company's business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition and results of operations. 11. OTHER INCOME (EXPENSE), NET Included in other income (expense) for the year ended December 31, 1996 is approximately $160,000 for services rendered by an outside consultant related to the sale of the Company. 12. SALE OF COMPANY Effective on January 2, 1997, the Company was acquired, through a stock for stock merger, by BridgeStreet Accommodations, Inc. The stockholders of the Company received 836,437 shares of BridgeStreet Accommodations, Inc.'s common stock in exchange for all of the outstanding common stock of the Company. F-46 98 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Exclusive Interim Properties, Ltd.: We have audited the accompanying combined balance sheets of Exclusive Interim Properties, Ltd. as of March 31, 1996 and as of December 31, 1996, and the related combined statements of operations, stockholders' equity and cash flows for each of the two years in the period ended March 31, 1996 and for the nine month period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Exclusive Interim Properties, Ltd. as of March 31, 1996 and December 31, 1996, and the combined results of their operations and their cash flows for each of the two years in the period ended March 31, 1996 and for the nine month period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts March 11, 1997 F-47 99 EXCLUSIVE INTERIM PROPERTIES, LTD. COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1996 1996 ---------- ------------ ASSETS Current Assets: Cash and cash equivalents......................................... $ 32,284 $ -- Accounts receivable -- trade less allowance for doubtful accounts of $25,191 and $107,191 at March 31, 1996 and December 31, 1996, 158,664 405,244 respectively................................................... Other receivables................................................. 23,913 12,384 Security deposits held by landlord................................ 85,473 150,614 Deferred income taxes............................................. 143,058 166,650 ---------- ---------- Total current assets........................................... 443,392 734,892 Operating stock, net of accumulated amortization.................... 381,852 580,394 Land, property and equipment, net of accumulated depreciation....... 1,367,371 1,391,834 Other assets........................................................ 10,504 7,950 ---------- ---------- Total assets................................................... $2,203,119 $2,715,070 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................. $ 296,444 $ 366,004 Accrued expenses Payroll, bonuses and related items............................. 18,852 15,308 Other.......................................................... 98,750 202,575 Deferred revenue.................................................. 123,138 155,313 Security deposits due to customers................................ 117,475 260,443 Current portion of long-term debt................................. 70,080 136,579 Notes payable-stockholder......................................... 110,549 94,655 ---------- ---------- Total current liabilities...................................... 835,288 1,230,877 Deferred income taxes............................................... 152,741 232,168 Long-term debt, net of current maturities........................... 1,113,921 1,049,038 Commitments and contingencies Stockholders' Equity: Common stock...................................................... 20 20 Additional paid in capital........................................ 50,200 75,801 Retained earnings................................................. 50,949 127,166 ---------- ---------- Total stockholders' equity..................................... 101,169 202,987 ---------- ---------- Total liabilities and stockholders' equity................ $2,203,119 $2,715,070 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-48 100 EXCLUSIVE INTERIM PROPERTIES, LTD. COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS YEAR ENDED MARCH 31, ENDED ------------------------- DECEMBER 31, 1995 1996 1996 ---------- ---------- ------------ Revenues.............................................. $4,014,541 $5,521,373 $7,136,843 Operating Expenses: Cost of services.................................... 3,015,261 4,246,342 5,789,975 Selling, general and administrative expense......... 895,109 975,186 1,110,249 ---------- ---------- ---------- Total operating expenses......................... 3,910,370 5,221,528 6,900,224 ---------- ---------- ---------- Operating income................................. 104,171 299,845 236,619 Other Income (Expense): Interest income..................................... 3,195 -- 29 Interest expense.................................... (110,726) (133,025) (95,974) ---------- ---------- ---------- Other expense, net............................... (107,531) (133,025) (95,945) ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes............................................... (3,360) 166,820 140,674 Provision (benefit) for income taxes.................. (18,466) 57,723 64,457 ---------- ---------- ---------- Net income............................................ $ 15,106 $ 109,097 $ 76,217 ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-49 101 EXCLUSIVE INTERIM PROPERTIES, LTD. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS' ----------------- PAID-IN EARNINGS EQUITY SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) ------ ------ ---------- -------- ------------- Balance, March 31, 1994................ 2,000 $ 20 $ 40,500 $(73,254) $(32,734) Contributions........................ -- -- 2,600 -- 2,600 Net income........................... -- -- -- 15,106 15,106 ----- --- -------- -------- -------- Balance, March 31, 1995................ 2,000 20 43,100 (58,148) (15,028) Contributions........................ -- -- 50,000 -- 50,000 Withdrawals.......................... -- -- (42,900) -- (42,900) Net income........................... -- -- -- 109,097 109,097 ----- --- -------- -------- -------- Balance, March 31, 1996................ 2,000 20 50,200 50,949 101,169 Contributions........................ -- -- 56,100 -- 56,100 Withdrawals.......................... -- -- (30,499) -- (30,499) Net income........................... -- -- -- 76,217 76,217 ----- --- -------- -------- -------- Balance, December 31, 1996............. 2,000 $ 20 $ 75,801 $127,166 $202,987 ===== === ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-50 102 EXCLUSIVE INTERIM PROPERTIES, LTD. COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS YEAR ENDED MARCH 31, ENDED ------------------------- DECEMBER 31, 1995 1996 1996 ----------- --------- ------------ Cash Flows From Operating Activities: Net income.......................................... $ 15,106 $ 109,097 $ 76,217 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.................... 70,149 118,131 116,218 Provision for bad debts.......................... -- 25,191 82,000 Change in operating assets and liabilities Accounts receivable............................ (19,981) (145,513) (317,051) Security deposits held by landlord............. (32,230) (32,753) (65,141) Accounts payable............................... (22,061) 196,063 69,560 Deferred revenue............................... 71,172 23,988 32,175 Security deposits due to customers............. 10,100 29,150 142,968 Accrued expenses............................... 59,803 21,194 100,281 Other.......................................... 20,769 58,306 55,836 ----------- --------- --------- Net cash provided by operating activities... 172,827 402,854 293,063 ----------- --------- --------- Cash Flows From Investing Activities: Purchases of operating stock........................ (37,782) (323,287) (278,487) Purchases of property and equipment................. (1,377,093) (10,164) (58,183) ----------- --------- --------- Net cash used in investing activities....... (1,414,875) (333,451) (336,670) ----------- --------- --------- Cash Flows From Financing Activities: Due to stockholder.................................. 82,265 (11,716) (15,894) Proceeds from long-term debt........................ 1,191,600 -- 71,266 Principal payments of long-term debt................ -- (69,266) (69,650) Capital contributions............................... 2,600 50,000 56,100 Distributions to stockholder........................ -- (42,900) (30,499) ----------- --------- --------- Net cash provided by (used in) financing activities................................ 1,276,465 (73,882) 11,323 ----------- --------- --------- Net (decrease) increase in cash and cash equivalents......................................... 34,417 (4,479) (32,284) Cash and cash equivalents, beginning of period........ 2,346 36,763 32,284 ----------- --------- --------- Cash and cash equivalents, end of period.............. $ 36,763 $ 32,284 $ -- =========== ========= ========= Supplemental Cash Flow Information: Cash paid for interest...................... $ 99,726 $ 133,025 $ 92,391 =========== ========= ========= Cash paid for income taxes.................. $ -- $ 1,273 $ -- =========== ========= =========
The accompanying notes are an integral part of these combined financial statements. F-51 103 EXCLUSIVE INTERIM PROPERTIES, LTD. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION The accompanying combined financial statements include the accounts of Exclusive Interim Properties, Ltd., which is owned by a sole stockholder, and Haus Account, LLC (the "LLC") and an individual condominium unit, each of which are owned by the sole stockholder of EIP and her spouse (collectively, the "Company"). These entities and the condominium unit are involved in the same business. The Company was founded in 1987 and provides fully-furnished apartments, townhouses, condominiums and, to a lesser extent, homes (collectively, "accommodations") to individuals in need of flexible accommodations. The Company has offices in Baltimore, Maryland; and Washington, D.C. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these combined financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Combination The accompanying combined financial statements include the accounts of Exclusive Interim Properties, Ltd. and one affiliated entity. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The fair market value of the Company's financial instruments approximates their financial statement carrying value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the combined statements of operations. Depreciation is computed on the straight-line method over estimated useful lives for financial reporting purposes. For income tax reporting purposes, depreciation on equipment is determined using the double-declining balance method. Condominiums are depreciated using the straight-line method for financial reporting and income tax reporting purposes over the estimated useful life of the units. Estimated useful lives are as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE -------------------- --------------------- Computer equipment........................................ 3 years Office furniture and equipment............................ 7 years Condominiums.............................................. 39 years Vehicles.................................................. 5 years Leasehold improvements.................................... Lease life
Repairs and maintenance are charged to expense as incurred. General and administrative costs associated with the opening of new company offices are expensed as incurred. F-52 104 EXCLUSIVE INTERIM PROPERTIES, LTD. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition The Company records cash payments from clients in advance of their stay as Deferred Revenue and recognizes these amounts as revenue on a pro rata basis over the length of the guests' stays. Concentration of Credit Risk Concentration of credit risk is limited to accounts receivable. The Company does not require collateral or security to support their receivables. The Company conducts periodic reviews of its clients' financial condition and payment practices to minimize collection risk on accounts receivable. Operating Stock Operating stock to furnish new apartment units, including linens, glassware, silverware, utensils, and small appliances, is capitalized as it is purchased and amortized over a three-year period to a residual value of 50% of its original cost. Additional purchases of operating stock for apartment units already established is expensed as incurred. Accommodation and Furniture Leases The Company leases substantially all of its accommodations on a short-term basis with lease terms ranging from three months to one year. Furniture for the accommodations is leased on a monthly basis from various furniture rental companies. 3. INCOME TAXES The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The provision (benefit) for income taxes consists of the following:
YEAR ENDED MARCH 31, -------------------- DECEMBER 31, 1995 1996 1996 -------- -------- ------------ Total provision (benefit) for income taxes: State............................................ $ (7,673) $ 13,294 $ 14,390 Federal.......................................... (56,467) 97,833 105,902 -------- -------- -------- (64,140) 111,127 120,292 -------- -------- -------- Deferred State............................................ 5,464 (6,389) (6,679) Federal.......................................... 40,210 (47,015) (49,156) -------- -------- -------- 45,674 (53,404) (55,835) -------- -------- -------- Total provision (benefit) for income taxes.................................. $(18,446) $ 57,723 $ 64,457 ======== ======== ========
Income taxes are not provided on the portion of income related to the LLC because those taxes are paid by the partners. F-53 105 EXCLUSIVE INTERIM PROPERTIES, LTD. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation between the provision for income taxes computed at the statutory rates and the amount reflected in the accompanying combined statements of operations for the two years ended March 31, 1996 and the nine months ended December 31, 1996 is as follows:
NINE MONTHS YEAR ENDED MARCH 31, ENDED -------------------- DECEMBER 31, 1995 1996 1996 -------- -------- ------------ Computed expected federal tax provision............ $ (1,142) $ 56,719 $ 47,829 Increase (decrease) in taxes resulting from: State income taxes............................... (222) 11,010 9,284 Deductions taken for books not allowed for tax purposes...................................... 3,941 4,053 3,400 LLC income not taxable........................... (14,996) (11,531) (4,373) Other............................................ (6,047) (2,528) 8,317 -------- -------- -------- Provision (benefit) for income taxes..... $(18,466) $ 57,723 $ 64,457 ======== ======== ========
The Company uses the cash basis method for its tax returns. Deferred tax (assets) liabilities consist of the following:
MARCH 31, 1996 DECEMBER 31, 1996 -------------- ----------------- Tax assets: Payables and accruals not yet deducted for tax purposes......................................... 214,874 295,680 Net operating loss carry forwards................... -- 39,638 -------- -------- 214,874 335,318 -------- -------- Tax liabilities: Accounts receivable not yet reported for tax purposes......................................... (63,466) (162,098) Operating stock expensed for tax purposes........... (152,741) (232,158) Other............................................... (8,350) (6,580) -------- -------- (224,557) (400,836) -------- -------- Net deferred tax liabilities................ (9,683) (65,518) ======== ========
The Company has net operating loss carryforwards of $99,000 as of December 31, 1996. 4. LAND, PROPERTY AND EQUIPMENT; OPERATING STOCK Land, property and equipment, and operating stock consist of the following:
MARCH 31, 1996 DECEMBER 31, 1996 -------------- ----------------- Land.................................................. $ 266,235 $ 266,235 Condominiums.......................................... 1,166,700 1,166,700 Leasehold improvements & vehicles..................... -- 30,992 Computer equipment.................................... 37,392 64,582 Furniture and office equipment........................ 66,266 66,266 ---------- ---------- Total land, property and equipment.......... 1,536,593 1,594,775 Less -- accumulated depreciation...................... 169,222 202,941 ---------- ---------- Land, property and equipment, net........... $1,367,371 $1,391,834 ========== ========== Operating stock....................................... $ 535,583 $ 814,070 Less -- accumulated amortization...................... 153,731 233,676 ---------- ---------- Operating stock, net........................ $ 381,852 $ 580,394 ========== ==========
F-54 106 EXCLUSIVE INTERIM PROPERTIES, LTD. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT A summary of long-term debt is as follows:
MARCH 31, 1996 DECEMBER 31, 1996 -------------- ----------------- Mortgage note -- LLC.................................. $ 975,520 $ 962,935 Installment note -- LLC............................... 150,000 100,000 Mortgage notes -- stockholder......................... 58,481 56,182 Revolving lines of credit............................. -- 49,817 Automobile loan....................................... -- 16,683 ---------- ---------- Total....................................... 1,184,001 1,185,617 Less-current maturities............................... 70,080 136,579 ---------- ---------- Total long-term debt........................ $1,113,921 $1,049,038 ========== ==========
Mortgage Note -- LLC On May 12, 1994, the LLC entered into a Mortgage note agreement with a bank, under which the bank provided cash of $1,005,000 in exchange for a $1,005,000 Mortgage note (the "Mortgage"). The Mortgage is secured by substantially all assets of the LLC, including 18 condominiums owned by the LLC. The Mortgage calls for monthly principal payments of $1,340 through June 1, 1999 at which time all outstanding borrowings are due. The Mortgage bears interest at bank's prime rate plus 1.5%. The interest rates at both March 31, 1996 and December 31, 1996 were 9.75%. Interest is payable monthly, in arrears. Installment Note -- LLC On May 12, 1994, the LLC entered into an agreement with a bank, pursuant to which the bank provided the LLC with cash of $200,000 in exchange for a $200,000 installment note (the "Installment Note"). The Installment Note calls for annual principal payments of $50,000, from May 1, 1995 through May 1, 1998. The Installment Note bears interest at the highest prime rate published in the Wall Street Journal on the last day of the immediately prior calendar month plus 1.5%. The interest rate at both March 31, 1996 and December 31, 1996 was 9.75%. Interest is payable monthly, in arrears. Mortgage -- Stockholder On October 22, 1993, the principal stockholder of the Company entered into a mortgage note agreement for $65,000. The mortgage is secured by a condominium owned by the stockholder located in Baltimore, Maryland. The mortgage calls for monthly payments of principal and interest in the amount of $590. The mortgage bears interest at a fixed rate of 7.0%. The mortgage and the condominium were contributed by the stockholder to the Company. Revolving Lines of Credit At December 31, 1996, the Company had a line of credit agreement expiring February 15, 1997 which provided for borrowings of up to $50,000 and bore interest at 8.25% on such date. At December 31, 1996, the Company's advances on this line of credit were $49,817. Automobile Loan In April 1996, the Company entered into a note payable agreement for $21,000 with Chrysler Financial Group. The note calls for monthly payments of principal and interest of $570 through April 1999. The note bears interest at a fixed rate of 8.55%. F-55 107 EXCLUSIVE INTERIM PROPERTIES, LTD. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule of required debt payments as of December 31, 1996:
YEAR AMOUNT ---- ---------- 1997..................................................... $ 136,579 1998..................................................... 70,080 1999..................................................... 935,300 2000..................................................... 4,000 2001..................................................... 4,000 Thereafter............................................... 35,658 ---------- Total.......................................... $1,185,617 ==========
6. LEASE COMMITMENTS The Company leases administrative offices, accommodations and furniture at several locations through August 31, 1999. Rent expense for the fiscal years ended March 31, 1995 and 1996 and for the nine months ended December 31, 1996 was $2,183,491, $3,240,935 and $4,102,087, respectively. Minimum future rental payments at December 31, 1996 are as follows:
OPERATING LEASES --------- 1997...................................................... $ 57,212 1998...................................................... 56,522 1999...................................................... 48,526 2000...................................................... 50,088 2001...................................................... 41,741 -------- Total........................................... $254,089 ========
7. CONTINGENCIES Various lawsuits have arisen in the ordinary course of the Company's business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition and results of operations. 8. SALE OF COMPANY Effective on January 2, 1997, the Company was acquired, through a stock for stock merger, by BridgeStreet Accommodations, Inc. The stockholders of the Company received 1,001,805 shares of BridgeStreet Accommodations, Inc.'s common stock in exchange for all of the outstanding common stock of and equity interests in the Company. F-56 108 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder of Home Again, Inc.: We have audited the accompanying combined balance sheets of Home Again, Inc. as of December 31, 1995 and 1996, and the related combined statements of operations, stockholder's equity and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Home Again, Inc. as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts March 21, 1997 F-57 109 HOME AGAIN, INC. COMBINED BALANCE SHEETS
DECEMBER 31, --------------------- 1995 1996 -------- -------- ASSETS Current Assets: Cash and cash equivalents............................................ $ 14,210 $145,140 Accounts receivable.................................................. 68,905 109,167 Security deposits held by landlords.................................. 6,801 7,553 Prepaid expenses..................................................... 131,325 217,172 Other current assets................................................. 1,774 1,293 -------- -------- Total current assets.............................................. 223,015 480,325 Operating stock, net of accumulated amortization....................... 35,966 196,015 Property and equipment, net of accumulated depreciation................ 68,759 142,508 -------- -------- Total assets................................................. $327,740 $818,848 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable..................................................... $191,119 $300,755 Accrued expenses -- Payroll and employee benefits..................................... 6,977 290 Other............................................................. 42,500 64,750 Deferred revenue..................................................... 20,850 30,880 Security deposits due to customers................................... -- 60,460 Due to stockholder................................................... 2,812 191,404 Current portion of long-term debt.................................... -- 8,595 -------- -------- Total current liabilities......................................... 264,258 657,134 Long-term debt, net of current maturities.............................. -- 25,608 Commitments and Contingencies Stockholder's Equity: Common stock......................................................... 30 30 Additional paid-in capital........................................... 2,970 2,970 Retained earnings.................................................... 60,482 133,106 -------- -------- Total stockholder's equity........................................ 63,482 136,106 -------- -------- Total liabilities and stockholder's equity................... $327,740 $818,848 ======== ========
The accompanying notes are an integral part of these combined financial statements. F-58 110 HOME AGAIN, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 ---------- ---------- Revenues............................................................ $1,569,502 $4,034,905 Operating Expenses: Cost of services.................................................. 1,283,752 3,133,900 Selling, general and administrative expense....................... 212,242 586,339 ---------- ---------- Total operating expenses....................................... 1,495,994 3,720,239 ---------- ---------- Operating income............................................... 73,508 314,666 Other Income: Interest income................................................... 362 1,202 Other income...................................................... 33,042 75,702 ---------- ---------- Other income, net.............................................. 33,404 76,904 ---------- ---------- Net income.......................................................... $ 106,912 $ 391,570 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-59 111 HOME AGAIN, INC. COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
TOTAL COMMON STOCK ADDITIONAL RETAINED STOCKHOLDER'S --------------- PAID-IN EARNINGS EQUITY SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) ------ ------ ---------- --------- ------------ Balance, December 31, 1994..................... 1,000 $10 $ 990 $ (46,430) $ (45,430) Issuance of stock............................ 2,000 20 1,980 -- 2,000 Net income................................... -- -- -- 106,912 106,912 ----- --- ------ --------- --------- Balance, December 31, 1995..................... 3,000 30 2,970 60,482 63,482 Distributions to stockholder................. -- -- -- (318,946) (318,946) Net income................................... -- -- -- 391,570 391,570 ----- --- ------ --------- --------- Balance, December 31, 1996..................... 3,000 $30 $2,970 $ 133,106 $ 136,106 ===== === ====== ========= =========
The accompanying notes are an integral part of these combined financial statements. F-60 112 HOME AGAIN, INC. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 -------- --------- Cash Flows From Operating Activities: Net income.......................................................... $106,912 $ 391,570 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.................................... 23,518 101,045 Change in operating assets and liabilities -- Accounts receivable............................................ (54,407) (40,262) Security deposits held by landlords............................ (783) (752) Prepaid expenses............................................... (96,119) (85,847) Other current assets........................................... (999) 481 Accounts payable............................................... 171,759 109,636 Advanced rent.................................................. 5,132 10,030 Security deposits due customers................................ -- 60,460 Accrued expenses............................................... 19,789 15,563 -------- --------- Net cash provided by operating activities................... 174,802 561,924 -------- --------- Cash Flows From Investing Activities: Purchases of operating stock........................................ (43,159) (200,689) Purchases of property and equipment................................. (55,918) (134,154) -------- --------- Net cash used in investing activities....................... (99,077) (334,843) -------- --------- Cash Flows From Financing Activities: Due to stockholder.................................................. (64,179) 188,592 Proceeds from issuance of stock..................................... 2,000 -- Payments of long-term debt.......................................... -- (4,411) Proceeds from long-term debt........................................ -- 38,614 Distribution to stockholder......................................... -- (318,946) -------- --------- Net cash used in financing activities....................... (62,179) (96,151) -------- --------- Net increase in cash and cash equivalents............................. 13,546 130,930 Cash and cash equivalents, beginning of year.......................... 664 14,210 -------- --------- Cash and cash equivalents, end of year................................ $ 14,210 $ 145,140 ======== ========= Supplemental Cash Flow Information: Cash paid for interest...................................... $ 362 $ 1,202 ======== =========
The accompanying notes are an integral part of these combined financial statements. F-61 113 HOME AGAIN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION The accompanying combined financial statements include the accounts of Home Again, Inc. and two affiliated entities in the same business (collectively, "Home Again" or the "Company"), all of which are S corporations owned by the same stockholder. The Company was founded in 1994 and provides fully-furnished apartments, townhouses, condominiums and, to a lesser extent, homes (collectively, "accommodations") to individuals in need of flexible accommodations. The Company has offices in Minneapolis, Minnesota; and Oklahoma City, Oklahoma. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The fair market value of the Company's financial instruments approximates their financial statement carrying value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Leasehold improvements are capitalized and charged to expense through depreciation. Upon sale or retirements, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the statement of operations. Depreciation is determined using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the respective assets. Estimated useful lives are as follows:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE -------------------- ----------- Computer equipment............................................... 3-5 years Office furniture and equipment................................... 5 years Leasehold improvements........................................... 7 years Vehicles......................................................... 5 years
Repairs and maintenance are charged to expense as incurred. General and administrative costs associated with the opening of new company offices are expenses as incurred. Revenue Recognition The Company recognizes revenues on the sublease of accommodations for its clients as services are provided. F-62 114 HOME AGAIN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk Concentration of credit risk is limited to accounts receivable. The Company does not require collateral or other security to support their receivables. The Company conducts periodic reviews of its clients' financial conditions and payment practices to minimize collection risks on accounts receivable. Operating Stock Operating stock to furnish new apartment units, including linen, glass and silver, and minor appliances is capitalized as it is purchased and amortized over a three-year period to a residual value of 50% of the original cost. Additional purchases of operating stock for apartment units established is expensed as incurred. Apartment and Furniture Leases The Company leases substantially all of its accommodations under lease terms ranging from one to two years. Furniture for the accommodations is leased on a monthly basis from various furniture rental companies. 3. INCOME TAXES The Company, with the consent of its stockholder, elected to be recognized as an S corporation under the appropriate federal and state tax codes beginning June 8, 1993. In lieu of corporate income taxes, the stockholders of an S corporation are taxed on their proportionate shares of the Company's taxable income. As a result, the recognition of current and deferred income taxes is not needed in the accompanying combined financial statements. 4. PROPERTY AND EQUIPMENT; OPERATING STOCK Property and equipment and operating stock consist of the following:
DECEMBER 31, -------------------- 1995 1996 ------- -------- Computer equipment.............................................. $18,542 $ 35,171 Furniture and office equipment.................................. 71,405 146,787 Vehicles........................................................ -- 42,143 ------- -------- Total property and equipment............................... 89,947 224,101 Less -- accumulated depreciation................................ 21,188 81,593 ------- -------- Property and equipment, net........................... $68,759 $142,508 ======= ======== Operating stock................................................. $43,159 $243,848 Less -- accumulated amortization................................ 7,193 47,833 ------- -------- Operating stock, net.................................. $35,966 $196,015 ======= ========
5. DEBT Long-term debt consist of the following:
DECEMBER 31, 1996 ------------ Note payable to a bank, interest rate of 8.75%, due in 48 equal installments through October 2000, secured by an automobile purchased with the proceeds from the note........................... $ 18,031 Note payable to a bank, interest rate of 9.5%, due in 48 equal installments through March 2000; secured by an automobile purchased with the proceeds from the note..................................... 16,172 -------- 34,203 Less -- current maturities............................................ 8,595 -------- Total long-term debt.................................................. $ 25,608 ========
F-63 115 HOME AGAIN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule of required debt payments as of December 31, 1996: 1997....................................................................... $ 8,595 1998....................................................................... 9,641 1999....................................................................... 10,561 2000....................................................................... 5,406 ------- Total............................................................ $34,203 =======
6. LEASE COMMITMENTS The Company leases administrative offices, apartment units and furniture at several locations through 1998. Rent expense for the fiscal years ended December 31, 1995 and 1996 was $989,203 and $2,592,965 respectively. Minimum future rental payments on long-term leases at December 31, 1996 are as follows:
OPERATING LEASES ---------------- 1997.......................................... $ 59,793 1998.......................................... 57,078 1999.......................................... 53,340 2000.......................................... 51,070 2001.......................................... 50,247 Thereafter.................................... 111,168 -------- Total............................... $382,696 ========
7. DISTRIBUTION TO STOCKHOLDER The Company declared a distribution to the stockholder during December 1996 in the amount of $191,404, related to 1996 earnings, to be paid in 1997. 8. CONTINGENCIES Various lawsuits have arisen in the ordinary course of the Company's business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition and results of operations. 9. STOCKHOLDERS' EQUITY Combined stockholder's equity includes the following common stock accounts as of December 31, 1995 and 1996 (.01 par value and voting for all classes of common stock).
OUTSTANDING SHARES AMOUNT ----------- ------ Home Again, Inc. Authorized--1,000,000................................................ 1,000 $ 10 Home Again, Corporate Housing, Inc. Authorized--100,000.................................................. 1,000 $ 10 Home Again, Amenities, Inc. Authorized--100,000.................................................. 1,000 $ 10
10. SALE OF COMPANY Effective on March 31, 1997, the Company was acquired, through a stock for stock merger, by Bridgestreet Accomodations, Inc. The stockholder of the Company received 475,000 shares of Bridgestreet Accomodations, Inc.'s common stock in exchange for all of the outstanding common stock of the Company. F-64 116 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Temporary Housing Experts, Inc.: We have audited the accompanying balance sheets of Temporary Housing Experts, Inc. as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Temporary Housing Experts, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee March 21, 1997 (except for Note 10, for which the date is June 30, 1997) F-65 117 TEMPORARY HOUSING EXPERTS, INC. BALANCE SHEETS
DECEMBER 31, --------------------- 1995 1996 -------- -------- ASSETS Current Assets: Cash and cash equivalents............................................ $213,845 $ 51,536 Accounts receivable, less allowance for doubtful accounts of $1,311 in 1995 and 1996.................................................. 77,481 99,487 Deferred income taxes................................................ 46,300 70,794 Prepaid expenses..................................................... -- 25,504 Security deposits held by landlord complexes......................... 18,566 24,244 -------- -------- Total current assets.............................................. 356,192 271,565 Operating stock, net of accumulated amortization....................... 141,680 145,086 Property and equipment, net of accumulated depreciation................ 82,265 58,450 -------- -------- Total assets................................................. $580,137 $475,101 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt................................. $ 15,669 $ 18,745 Accounts payable..................................................... 1,257 6,046 Security deposits due to customers................................... 51,087 50,548 Deferred revenue..................................................... 3,363 34,347 Accrued expenses..................................................... 115,750 51,875 Accrued income taxes................................................. 48,287 15,895 -------- -------- Total current liabilities......................................... 235,413 177,456 Long-term debt, net of current maturities.............................. 15,669 11,873 Deferred income taxes.................................................. 56,671 58,033 Stockholders' Equity: Common stock......................................................... 1,000 1,000 Retained earnings.................................................... 271,384 226,739 -------- -------- Total stockholders' equity........................................ 272,384 227,739 -------- -------- Total liabilities and stockholders' equity................... $580,137 $475,101 ======== ========
The accompanying notes are an integral part of these financial statements. F-66 118 TEMPORARY HOUSING EXPERTS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 ---------- ---------- Revenues............................................................ $3,085,736 $3,582,924 Operating Expenses: Cost of services.................................................. 2,190,252 2,578,247 Selling, general and administrative expense....................... 865,689 1,077,568 ---------- ---------- Total operating expenses....................................... 3,055,941 3,655,815 ---------- ---------- Operating income (loss)........................................ 29,795 (72,891) Other Income (Expense): Interest expense.................................................. (1,018) (977) Other income (expense)............................................ (3,649) 6,197 ---------- ---------- Other income (expense), net.................................... (4,667) 5,220 ---------- ---------- Income (loss) before provision for income taxes..................... 25,128 (67,671) Benefit for income taxes............................................ (1,923) (23,026) ---------- ---------- Net income (loss)................................................... $ 27,051 $ (44,645) ========== ==========
The accompanying notes are an integral part of these financial statements. F-67 119 TEMPORARY HOUSING EXPERTS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ----------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------------- Balance, December 31, 1994......................... 1,000 $1,000 $244,333 $ 245,333 Net income....................................... -- -- 27,051 27,051 ----- ------ -------- -------- Balance, December 31, 1995......................... 1,000 1,000 271,384 272,384 Net loss......................................... -- -- (44,645) (44,645) ----- ------ -------- -------- Balance, December 31, 1996......................... 1,000 $1,000 $226,739 $ 227,739 ===== ====== ======== ========
The accompanying notes are an integral part of these financial statements. F-68 120 TEMPORARY HOUSING EXPERTS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 --------- --------- Cash Flows From Operating Activities: Net (loss) income................................................ $ 27,051 $ (44,645) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation and amortization................................. 41,044 59,507 Provision for bad debts....................................... (1,359) -- Gain on sale of property and equipment........................ -- (6,197) Change in operating assets and liabilities -- Accounts receivable......................................... 740 (26,547) Prepaid expenses and deposits............................... 1,247 (31,182) Accounts payable............................................ (12,131) 4,789 Accrued expenses............................................ 102,745 (96,267) Deferred revenue............................................ (4,615) 30,984 Refundable customer deposits................................ 17,584 (539) Loans made to employees..................................... (1,676) -- Loan payments from employees................................ -- 4,541 Deferred income taxes....................................... (23,512) (23,132) --------- --------- Net cash provided by (used in) operating activities...... 147,118 (128,688) --------- --------- Cash Flows from Investing Activities: Purchases of operating stock..................................... (54,534) (23,250) Purchases of property and equipment.............................. (83,521) (33,553) Proceeds from sale of property and equipment..................... -- 23,901 --------- --------- Net cash used in investing activities.................... (138,055) (32,902) --------- --------- Cash Flows from Financing Activities: Proceeds from notes payable...................................... 31,338 17,100 Payments of notes payable........................................ (14,251) (17,819) Advances from stockholder........................................ -- 50,000 Repayments to stockholder........................................ -- (50,000) --------- --------- Net cash provided by (used in) financing activities...... 17,087 (719) --------- --------- Net (decrease) increase in cash and cash equivalents............... 26,150 (162,309) Cash and cash equivalents, beginning of year....................... 187,695 213,845 --------- --------- Cash and cash equivalents, end of year............................. $ 213,845 $ 51,536 ========= ========= Supplemental Cash Flow Information: Cash paid for interest................................... $ 979 $ 969 ========= ========= Cash paid for income taxes............................... $ 17,800 $ 27,564 ========= =========
The accompanying notes are an integral part of these financial statements. F-69 121 TEMPORARY HOUSING EXPERTS, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION Temporary Housing Experts, Inc. (the "Company") was founded in 1991, and provides fully-furnished apartments, townhouses, condominiums and, to a lesser extent, homes (collectively "accommodations") to individuals in need of flexible accommodations. The Company has offices in: Memphis, Tennessee; and Jackson, Mississippi. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The fair market value of the Company's financial instruments approximates their financial statement carrying value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Leasehold improvements are capitalized and charged to expense through depreciation. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in the statement of operations. Depreciation is determined using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the respective assets. Estimated useful lives are as follows:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE ---------------------------------------------------------------- ----------- Computer equipment.............................................. 3 Years Office furniture and equipment.................................. 5 Years Leasehold improvements.......................................... 7 Years Vehicles........................................................ 5 Years
Revenue Recognition The Company recognizes revenues on the rentals of accommodations to its clients on a pro rata basis over the length of the client's stay. Concentration of Credit Risk Concentration of credit risk is limited to accounts receivable. The Company does not require collateral or other security to support their receivables. The Company conducts periodic reviews of its clients' financial condition and payment practices to minimize collection risks on accounts receivable. F-70 122 TEMPORARY HOUSING EXPERTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Operating Stock Operating stock to furnish new units, including linen, glassware, silverware and minor appliances is capitalized as it is purchased and amortized over a three-year period to a residual value of 50% of the original cost. Additional purchases of operating stock for apartment units already established is expensed as incurred. Accommodation and Furniture Leases The Company leases substantially all of its accommodations under lease terms ranging from one to two years. Furniture for the accommodations is leased on a monthly basis from various furniture rental companies. 3. INCOME TAXES The Company records income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 -------- -------- Current -- State........................................................ $ 5,009 $ 106 Federal...................................................... 16,580 -- --------- --------- 21,589 106 --------- --------- Deferred -- State........................................................ $ (1,881) $ (2,891) Federal...................................................... (21,631) (20,241) --------- --------- (23,512) (23,132) --------- --------- Total benefit for income taxes....................... $ (1,923) $(23,026) ========= =========
A reconciliation between the benefit for income taxes computed at the statutory rates and the amount reflected in the accompanying statements of operations for the two years ended is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 -------- -------- Computed expected federal tax provision (benefit).............. $ 3,769 $(23,008) Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit................... 829 (4,060) Other........................................................ (6,521) 4,042 --------- --------- Benefit for income taxes............................. $ (1,923) $(23,026) ========= =========
F-71 123 TEMPORARY HOUSING EXPERTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 -------- -------- Deferred tax assets (liabilities) consist of the following: Tax assets -- Accruals not yet deductible for tax purposes................. $ 46,300 $ 20,750 Net operating loss carryforward.............................. -- 50,044 -------- -------- 46,300 70,794 Tax liabilities -- Operating stock expensed for tax purposes.................... (56,671) (58,033) -------- -------- Net deferred tax asset (liability)................... $(10,371) $ 12,761 -------- --------
4. PROPERTY AND EQUIPMENT; OPERATING STOCK Property and equipment and operating stock consist of the following:
DECEMBER 31, -------------------- 1995 1996 --------- -------- Leasehold improvements.......................................... $ 1,987 $ 1,987 Computer equipment.............................................. 26,298 42,602 Furniture and office equipment.................................. 28,429 23,204 Vehicles........................................................ 80,258 65,296 --------- -------- Total property and equipment.......................... 136,972 133,089 Less -- accumulated depreciation................................ 54,707 74,639 --------- -------- Property and equipment, net........................... $ 82,265 $ 58,450 ========= ======== Operating stock................................................. $ 203,244 $226,494 Less -- accumulated amortization................................ 61,564 81,408 --------- -------- Operating stock, net.................................. $ 141,680 $145,086 ========= ========
5. DEBT Long-term obligations consist of the following:
DECEMBER 31, ------------------- 1995 1996 -------- -------- Notes payable to financial institutions, interest ranging from 0% to 7.99% maturing at various dates through March 2001: secured by certain automobiles purchased with the proceeds from the notes.......................................................... $ 31,338 $ 30,618 Less -- current maturities....................................... (15,669) (18,745) -------- -------- $ 15,669 $ 11,873 ======== ========
6. LEASE COMMITMENTS The Company leases administrative offices, accommodations and furniture at several locations through 1998. Rent expense for the fiscal years ended December 31, 1995 and 1996 was $1,890,967 and $2,164,855, respectively. Minimum future rental payments on long-term leases at December 31, 1996 are as follows:
OPERATING LEASES ---------------- 1997................................................ $709,278 1998................................................ 65,825 -------- Total..................................... $775,103 ========
F-72 124 TEMPORARY HOUSING EXPERTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. PENSION PLAN Eligible employees of the Company participate in a profit sharing plan sponsored by the Company. This defined contribution plan was effective on January 1, 1995 and provides that the Company will match participant contributions within specific limitations. The Company's contributions to the plan amounted to approximately $28,000 in 1995. There was no contribution to the plan in 1996. 8. CONTINGENCIES Various lawsuits have arisen in the ordinary course of the Company's business. The Company does not anticipate an unfavorable result in any such litigation or believe that an unfavorable result, if it occurred, would have a material adverse effect on its business, financial condition and results of operations. 9. SALE OF COMPANY Effective on January 2, 1997, the Company was acquired, through a stock for stock merger, by BridgeStreet Accommodations, Inc. The stockholders of the Company received 391,408 shares of BridgeStreet Accommodations, Inc.'s common stock in exchange for all of the outstanding common stock of the Company. 10. SUBSEQUENT EVENTS On June 30, 1997, the Company acquired all the assets of a flexible accommodation services provider in Memphis for $1 million, which was financed with intercompany debt from BridgeStreet. The cost of the acquisition exceeded the estimated fair value of the acquired net assets by $900,000, which will be accounted for as goodwill and will be amortized over 35 years. Allocation of purchase price was based on estimates of the fair value of the net assets acquired. F-73 125 ============================================================ NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
Prospectus Summary......................... 3 Risk Factors............................... 8 Combination................................ 13 Use of Proceeds............................ 14 Dividend Policy............................ 14 Capitalization............................. 15 Dilution................................... 16 Selected Financial Data.................... 17 Selected Individual Founding Company Financial and Other Data................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 20 Business................................... 28 Management................................. 37 Principal and Selling Stockholders......... 42 Certain Transactions....................... 43 Description of Capital Stock............... 45 Shares Eligible for Future Sale............ 47 Underwriting............................... 48 Legal Matters.............................. 49 Experts.................................... 50 Additional Information..................... 50 Index to Financial Statements.............. F-1
============================================================ 2,615,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ LEGG MASON WOOD WALKER INCORPORATED MCDONALD & COMPANY SECURITIES, INC. , 1997 ============================================================ 126 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq listing fee. SEC registration fee..................................................... $ 9,113 NASD filing fee.......................................................... 3,536 Blue Sky fees and expenses............................................... 5,000 Nasdaq listing fee....................................................... 39,168 Printing and engraving expenses.......................................... 150,000 Legal fees and expenses.................................................. 750,000 Accounting fees and expenses............................................. 750,000 Transfer agent and registrar fees........................................ 4,000 Premium for directors' and officers' insurance........................... 80,000 Miscellaneous............................................................ 209,183 ---------- Total.......................................................... $2,000,000 ==========
ABP will bear all of the foregoing fees and expenses, and the Company will reimburse ABP for such fees and expenses out of the proceeds of this offering. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a Delaware corporation. Reference is made to Section 145 of the DGCL, as amended, which provides that a corporation may indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceedings, had no reasonable cause to believe his or her conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite an adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Company's Certificate of Incorporation further provides that the Company shall indemnify its directors and officers to the full extent permitted by the law of the State of Delaware. The Company's Certificate of Incorporation provides that the Company's directors shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the II-1 127 extent that exculpation from liability is not permitted under the DGCL as in effect at the time such liability is determined. The Certificate of Incorporation also provides that each person who was or is made a party to, or is involved in, any action, suit, proceeding or claim by reason of the fact that he or she is or was a director, officer or employee of the Registrant (or is or was serving at the request of the Registrant as a director, officer, trustee employee or agent of any other enterprise including service with respect to employee benefit plans) shall be indemnified and held harmless by the Registrant, to the full extent permitted by Delaware law, as in effect from time to time, against all expenses (including attorneys' fees and expenses), judgments, fines, penalties and amounts to be paid in settlement incurred by such person in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim. The rights to indemnification and the payment of expenses provided by the Certificate of Incorporation do not apply to any action, suit, proceeding or claim initiated by or on behalf of a person otherwise entitled to the benefit of such provisions. Any person seeking indemnification under the Certificate of Incorporation shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established. Any repeal or modification of such indemnification provisions shall not adversely affect any right or protection of a director or officer with respect to any conduct of such director or officer occurring prior to such repeal or modification. The Company maintains an indemnification insurance policy covering all directors and officers of the Company and its subsidiaries. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with the Combination, in January and March 1997, the Company issued to the stockholders of the Founding Companies an aggregate of 4,301,000 shares of Common Stock in exchange for all of the issued and outstanding stock of such companies. Prior to the Combination, in August 1996, the Company issued to the promoters of the Company an aggregate of 2,000 shares of Common Stock at a purchase price of $1.00 per share. In August and November 1996, the Company issued 150 and 350 shares of restricted Common Stock, respectively, at a purchase price of $1.00 per share, to two individuals upon their agreement to become executive officers of the Company in January 1997. The restrictions since have lapsed. In November 1996, the Company issued 66 shares of Common Stock to a consultant at a purchase price of $1.00 per share. A 499-for-1 stock dividend (the "Stock Dividend") was declared by the Company with respect to all shares of Common Stock that were outstanding as of November 28, 1996. All such issuances of Common Stock (other than the Stock Dividend) have been made in reliance upon the exemption from registration afforded by Section 4(2) under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS (a) EXHIBITS.
SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------- ---------- +1 Form of Underwriting Agreement........................................... *3.1 Certificate of Incorporation of the Company.............................. *3.2 By-laws of the Company................................................... *4.1 Form of Specimen Stock Certificate....................................... *5 Opinion of Nutter, McClennen & Fish, LLP................................. *10.1 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., EIP Acquisition Corp., Exclusive Interim Properties, Ltd. and Melanie R. Sabelhaus................................
II-2 128
SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------- ---------- *10.2 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., THEI Acquisition Corp., Temporary Housing Experts, Inc., Connie F. O'Briant and Thomas W. O'Briant......... *10.3 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., TCHI Acquisition Corp., Temporary Corporate Housing Columbus, Inc., Temporary Corporate Housing Cleveland, Inc., Temporary Corporate Housing Cincinnati, Inc., Temporary Corporate Housing Pittsburgh, Inc., SLD Partnership, Lynda Clutchey, David Clutchey III, Beth Holzer and David Holzer........................................ *10.4 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., CL Acquisition Corp., Corporate Lodgings, Inc., Corporate Lodgings of Kentucky, Inc., Corporate Lodgings of Minnesota, Inc., Corporate Lodgings of Pennsylvania, Inc., Corporate Lodgings of Wisconsin, Inc. and Rocco A. Di Lillo........................ *10.5 Agreement and Plan of Merger dated as of March 31, 1997 by and among BridgeStreet International Inc., HAI Acquisition Corp., Home Again, Inc., Home Again Amenities, Inc., Home Again Corporate Housing, Inc. and Sandra A. Brown................................................................. *10.6 1997 Equity Incentive Plan............................................... *10.7 Stock Plan for Non-Employee Directors.................................... *10.8 Employment Agreement dated December 30, 1996, between CL Acquisition Corp. and Rocco A. Di Lillo.............................................. *10.9 Employment Agreement dated December 30, 1996, between EIP Acquisition Corp. and Melanie R. Sabelhaus........................................... *10.10 Employment Agreement dated December 30, 1996 between THEI Acquisition Corp. and Connie F. O'Briant............................................. *10.11 Employment Agreement dated December 30, 1996, between TCHI Acquisition Corp. and Lynda Clutchey................................................. *10.12 Employment Agreement dated as of January 2, 1997, between BridgeStreet International Inc. and Mark D. Gagne..................................... *10.13 Employment Agreement dated as of March 31, 1997, between BridgeStreet International Inc. and William N. Hulett, III............................ *10.14 Revolving Credit Agreement. Dated as of March 31, 1997 between BridgeStreet International Inc., as Borrower, and Fleet National Bank and the Other Lending Institutions listed on Schedule 1 thereto and Fleet National Bank as Agent................................................... *10.15 Revolving Credit Note for the principal balance of $10,000,000, dated March 31, 1997........................................................... *10.16 Rental Agreement between Saturn Enterprises Inc. and Temporary Corporate Housing Inc. dated December 28, 1995..................................... *10.17 Exclusive Lease Agreement between Integrity Furniture, Inc. and Temporary Corporate Housing Pittsburgh, Inc. dated September 12, 1995.............. *21 Subsidiaries of the Registrant........................................... +23.1 Consent of Arthur Andersen, LLP.......................................... +23.2 Consent of Arthur Andersen, LLP.......................................... *23.3 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)........ *24 Power of Attorney (contained in the signature page to this Registration Statement)............................................................... *27 Financial Data Schedule.................................................. *99.1 Consent of James M. Biggar............................................... *99.2 Consent of Robert R. Mesel...............................................
II-3 129
SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------- ---------- *99.3 Consent of Jerry Sue Thornton............................................
- --------------- * Previously filed. + Filed herewith. (b) FINANCIAL STATEMENT SCHEDULES The following Financial Statement Schedule is filed herewith as part of this Registration Statement: Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A under the Securities Act and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide in its annual reports on Form 10-K filed under the Securities Exchange Act of 1934, as amended, commencing with its annual report on Form 10-K for its fiscal year ending December 31, 1997, consolidated historical information (and, commencing with its annual report on Form 10-K for its fiscal year ending December 31, 1998, comparative data for prior periods during the two previous years, to the extent such data is available) regarding: (i) the number of accommodation units owned and leased; (ii) the percentage of its leases of one year or less in duration; (iii) its average occupancy rates; and (iv) its average daily lease and rental rates. II-4 130 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, the Commonwealth of Massachusetts, on the 28th day of August 1997. BRIDGESTREET ACCOMMODATIONS, INC. By: /s/ MARK D. GAGNE ------------------------------------ Mark D. Gagne Chief Financial Officer and Principal Accounting Officer POWER OF ATTORNEY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- ---------------- /s/ WILLIAM N. HULETT, III* President, Chief Executive August 28, 1997 - --------------------------------------------- Officer and Director William N. Hulett, III /s/ MARK D. GAGNE Chief Financial Officer and August 28, 1997 - --------------------------------------------- Principal Accounting Officer Mark D. Gagne /s/ PAUL M. VERROCHI* Chairman of the Board August 28, 1997 - --------------------------------------------- Paul M. Verrochi /s/ ROCCO A. DI LILLO* Vice President, Chief Operating August 28, 1997 - --------------------------------------------- Officer and Director Rocco A. Di Lillo /s/ LYNDA D. CLUTCHEY* Director August 28, 1997 - --------------------------------------------- Lynda D. Clutchey /s/ CONNIE F. O'BRIANT* Director August 28, 1997 - --------------------------------------------- Connie F. O'Briant /s/ MELANIE R. SABELHAUS* Director August 28, 1997 - --------------------------------------------- Melanie R. Sabelhaus
*By: /s/ MARK D. GAGNE ------------------------------- Mark D. Gagne Attorney-in-Fact Powers of Attorney have been filed with this Registration Statement II-5 131 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of BridgeStreet Accommodations, Inc. We have audited, in accordance with generally accepted auditing standards, the combined financial statements of Temporary Corporate Housing Columbus, Inc. included in BridgeStreet Accommodations, Inc.'s Form S-1 and have issued our report thereon dated February 28, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Temporary Corporate Housing Columbus, Inc.'s Schedule of Valuation and Qualifying Accounts, included in Schedule II on page S-2, is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic combined financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic combined financial statements and, in our opinion, fairly states in all material respects the combined financial data required to be set forth therein in relation to the basic combined financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts February 28, 1997 S-1 132 SCHEDULE II TEMPORARY CORPORATE HOUSING COLUMBUS, INC. VALUATION AND QUALIFYING ACCOUNTS
PROVISION BALANCE AT CHARGED ACCOUNTS BALANCE BEGINNING TO ACCOUNTS WRITTEN AT END OF YEAR EXPENSE RECOVERED OFF OF YEAR ---------- --------- --------- -------- ------- Year Ended December 31, 1996 Allowance for Doubtful Accounts....... $ -- $ 45,000 $ -- $ -- $45,000 Year Ended December 31, 1995 Allowance for Doubtful Accounts....... $ -- $ -- $ -- $ -- $ -- Year Ended December 31, 1994 Allowance for Doubtful Accounts....... $ -- $ -- $ -- $ -- $ --
S-2 133 EXHIBIT INDEX
SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------- ---------- +1 Form of Underwriting Agreement........................................... *3.1 Certificate of Incorporation of the Company.............................. *3.2 By-laws of the Company................................................... *4.1 Form of Specimen Stock Certificate....................................... *5 Opinion of Nutter, McClennen & Fish, LLP................................. *10.1 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., EIP Acquisition Corp., Exclusive Interim Properties, Ltd. and Melanie R. Sabelhaus................................ *10.2 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., THEI Acquisition Corp., Temporary Housing Experts, Inc., Connie F. O'Briant and Thomas W. O'Briant......... *10.3 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., TCHI Acquisition Corp., Temporary Corporate Housing Columbus, Inc., Temporary Corporate Housing Cleveland, Inc., Temporary Corporate Housing Cincinnati, Inc., Temporary Corporate Housing Pittsburgh, Inc., SLD Partnership, Lynda Clutchey, David Clutchey III, Beth Holzer and David Holzer........................................ *10.4 Agreement and Plan of Merger dated as of December 30, 1996 by and among BridgeStreet International Inc., CL Acquisition Corp., Corporate Lodgings, Inc., Corporate Lodgings of Kentucky, Inc., Corporate Lodgings of Minnesota, Inc., Corporate Lodgings of Pennsylvania, Inc., Corporate Lodgings of Wisconsin, Inc. and Rocco A. Di Lillo........................ *10.5 Agreement and Plan of Merger dated as of March 31, 1997 by and among BridgeStreet International Inc., HAI Acquisition Corp., Home Again, Inc., Home Again Amenities, Inc., Home Again Corporate Housing, Inc. and Sandra A. Brown................................................................. *10.6 1997 Equity Incentive Plan............................................... *10.7 Stock Plan for Non-Employee Directors.................................... *10.8 Employment Agreement dated December 30, 1996, between CL Acquisition Corp. and Rocco A. Di Lillo.............................................. *10.9 Employment Agreement dated December 30, 1996, between EIP Acquisition Corp. and Melanie R. Sabelhaus........................................... *10.10 Employment Agreement dated December 30, 1996 between THEI Acquisition Corp. and Connie F. O'Briant............................................. *10.11 Employment Agreement dated December 30, 1996, between TCHI Acquisition Corp. and Lynda Clutchey *10.12 Employment Agreement dated as of January 2, 1997, between BridgeStreet International Inc. and Mark D. Gagne..................................... *10.13 Employment Agreement dated as of March 31, 1997, between BridgeStreet International Inc. and William N. Hulett, III............................ *10.14 Revolving Credit Agreement. Dated as of March 31, 1997 between BridgeStreet International Inc., as Borrower, and Fleet National Bank and the Other Lending Institutions listed on Schedule 1 thereto and Fleet National Bank as Agent................................................... *10.15 Revolving Credit Note for the principal balance of $10,000,000, dated March 31, 1997........................................................... *10.16 Rental Agreement between Saturn Enterprises Inc. and Temporary Corporate Housing Inc. dated December 28, 1995..................................... *10.17 Exclusive Lease Agreement between Integrity Furniture, Inc. and Temporary Corporate Housing Pittsburgh, Inc. dated September 12, 1995..............
134
SEQUENTIAL EXHIBIT DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------- ---------- *21 Subsidiaries of the Registrant........................................... +23.1 Consent of Arthur Andersen, LLP.......................................... +23.2 Consent of Arthur Andersen, LLP.......................................... *23.3 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)........ *24 Power of Attorney (contained in the signature page to this Registration Statement)............................................................... *27 Financial Data Schedule.................................................. *99.1 Consent of James M. Biggar............................................... *99.2 Consent of Robert R. Mesel............................................... *99.3 Consent of Jerry Sue Thornton............................................
- --------------- * Previously filed. + Filed herewith. EX-1 2 FORM OF UNDERWRITING AGREEMENT 1 2,615,000 Shares BRIDGESTREET ACCOMMODATIONS, INC. Common Stock UNDERWRITING AGREEMENT September __, 1997 LEGG MASON WOOD WALKER, INCORPORATED MCDONALD & COMPANY SECURITIES, INC. As Representatives of the several Underwriters c/o Legg Mason Wood Walker, Incorporated 111 South Calvert Street, 20th Floor Baltimore, MD 21202 Ladies and Gentlemen: BridgeStreet Accommodations, Inc. a Delaware corporation (the "Company"), and the persons named in Schedule I (the "Selling Shareholders") propose to sell an aggregate of 2,615,000 shares (the "Firm Shares") of the Company's Common Stock, $.01 par value per share (the "Common Stock"), of which 1,700,000 shares are to be issued and sold by the Company and an aggregate of 915,000 shares are to be sold by the Selling Shareholders in the respective amounts set forth opposite their respective names in Schedule I, in each case to you and to the other underwriters named in Schedule II, acting severally and not jointly (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company and the Selling Shareholders have also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 392,250 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b). The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The initial public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the several Underwriters shall be agreed upon by the Company, the Selling Shareholders and the Representatives, acting on behalf of the several Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication among the Company, the Selling Shareholders and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by 2 this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and, unless the context otherwise indicates, all references contained herein to "this Agreement" and to the phrase "herein" shall be deemed to include the Price Determination Agreement. Each Selling Shareholder has executed and delivered a Custody Agreement and a Power of Attorney in the form attached hereto as Exhibit B (collectively, the "Agreement and Power of Attorney") pursuant to which each Selling Shareholder has placed his or her Firm Shares in custody and appointed the persons designated therein as a committee (the "Committee") with authority to execute and deliver this Agreement on behalf of such Selling Shareholder and to take certain other actions with respect thereto and hereto. The Company and the Selling Shareholders severally confirm as follows their respective agreements with the Representatives and the several other Underwriters. 1. Agreement to Sell and Purchase. (a) On the basis of the respective representations, warranties and agreements of the Company and the Selling Shareholders herein contained and subject to all the terms and conditions of this Agreement, (i) the Company and each of the Selling Shareholders, severally and not jointly, agree to sell to the several Underwriters and (ii) each of the Underwriters, severally and not jointly, agrees to purchase from the Company and the Selling Shareholders, at the purchase price per share for the Firm Shares to be agreed upon by the Representatives, the Company and the Selling Shareholders in accordance with Section 1(c) hereof, which purchase price shall not be higher than the maximum price recommended by McDonald & Company Securities, Inc., who the Company has engaged to act as "qualified independent underwriter" within the meaning of Rule 2720 (formerly Schedule E) to the By-Laws of the National Association of Securities Dealers, Inc., and set forth in the Price Determination Agreement, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 9 hereof. Schedule II may be attached to the Price Determination Agreement. The Company and the Underwriters agree that McDonald & Company Securities, Inc. will not receive any additional benefits hereunder for serving as the QIU in connection with the offering. (b) Subject to all the terms and conditions of this Agreement, the Company and the Selling Shareholders grant the Option to the several Underwriters to purchase, severally and not jointly, up to 255,000 Option Shares from the Company and an aggregate of 137,250 Option Shares (determined on a pro rata basis) unless the Company and the Selling Shareholders otherwise agree from the Selling Shareholders at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the Price Determination Agreement, 2 3 upon written or telegraphic notice (the "Option Shares Notice") by the Representatives to the Company and the Committee no later than 12:00 noon, New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company and the Selling Shareholders will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. (c) The initial public offering price per share for the Firm Shares and the purchase price per share for the Firm Shares to be paid by the several Underwriters shall be agreed upon and set forth in the Price Determination Agreement. The Company has elected to rely on Rule 430A. In the event such price has not been agreed upon and the Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the date on which the Registration Statement (as hereinafter defined) becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Section 7 shall remain in effect. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representatives for the accounts of the Underwriters at the office of Legg Mason Wood Walker, Incorporated, 111 South Calvert Street, 20th Floor, Baltimore, Maryland 21202, against payment of the purchase price therefor by wire transfer of Federal Funds or similar same day funds to an account designated in writing by the Company and an account designated in writing by the Selling Shareholders as a group to Legg Mason Wood Walker, Incorporated at least one business day prior to the Closing Date (as hereinafter defined). Such payment shall be made at 10:00 a.m., New York City time, on the third business day (or fourth business day, if the Price Determination Agreement is executed after 4:30 p.m. New York City time) after the date on which the first bona fide offering of the Shares to the public is made by the Underwriters or at such time on such other date, not later than ten business days after such date, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Representatives shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be. 3 4 The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The cost of tax stamps, if any, in connection with the sale of the Firm Shares by the Selling Shareholders shall be borne by the Selling Shareholders. The Company and the Selling Shareholders will, severally and not jointly, pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying Federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Firm Shares and Option Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: (a) A registration statement (Registration No. 333-26647) on Form S-1 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the published rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The term "preliminary prospectus" as used herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to the Representatives. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits and any information deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. If the Company files a registration statement to register a portion of the Shares and relies on Rule 462(b) of the Rules and Regulations for such registration statement to become effective upon filing with the Commission (the "Rule 462 Registration Statement"), then any reference to the "Registration Statement" shall be deemed to include the Rule 462 Registration Statement, as amended from time to time. The term "Prospectus" means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. (b) On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all 4 5 applicable provisions of the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto or relating to any Selling Shareholder forwarded in writing to the Company by or on behalf of such Selling Shareholder. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the preliminary prospectus, the Registration Statement or the Prospectus. The Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the preliminary prospectus, the Prospectus or any other materials, if any, permitted by the Act. (c) The only subsidiaries (as defined in the Rules and Regulations) of the Company are the subsidiaries listed on Exhibit 21 to the Registration Statement (the "Subsidiaries"). The Company and each of its Subsidiaries is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company and each of its Subsidiaries has, and at the Closing Date will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. Each of the Company and its Subsidiaries is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation (i) in the jurisdiction in which it has its principal place of business and (ii) in all other jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary except where the failure to so license or qualify in any such other jurisdiction will not have a material adverse effect on the business, properties, condition (financial or otherwise), or results of operations of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). All of the outstanding shares of capital stock of the Subsidiaries have been duly authorized and validly issued, and are fully paid and non-assessable and are owned by the Company free and clear of all liens, encumbrances and claims whatsoever, except as disclosed in the Prospectus. Except for the stock of the Subsidiaries and as disclosed in the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, 5 6 partnership, joint venture, limited liability company, association or other entity. Complete and correct copies of the certificate of incorporation and of the by-laws of the Company and each of its Subsidiaries and all amendments thereto have been delivered to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. (d) The outstanding shares of Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Registration Statement and the Prospectus is, and at the Closing Date will be, complete and accurate in all respects. Except as set forth in the Prospectus, the Company does not have outstanding, and at the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of Common Stock, any shares of capital stock of any Subsidiary or any such warrants, convertible securities or obligations. (e) The financial statements and schedules included in the Registration Statement or the Prospectus present fairly the consolidated financial condition of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. The pro forma financial statements and other pro forma financial information included in the Registration Statement or the Prospectus (i) present fairly in all material respects the information shown therein, (ii) have been prepared in accordance with the Commission's published rules and guidelines with respect to pro forma financial statements and (iii) have been properly computed on the bases described therein. The assumptions used in the preparation of the pro forma financial statements and other pro forma financial information included in the Registration Statement or the Prospectus are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. No other financial statements or schedules of the Company are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. Arthur Andersen LLP (the "Accountants") who have reported on such financial statements and schedules, are independent accountants with respect to the Company as required by the Act and the Rules and Regulations. The statements included in the Registration Statement with respect to the Accountants pursuant to Rule 509 of Regulation S-K of the Rules and Regulations are true and correct in all material respects. (f) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with 6 7 existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) there has not been and will not have been any change in the capitalization of the Company or any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, arising for any reason whatsoever, (ii) neither the Company nor any of its Subsidiaries has incurred nor will it incur any liabilities or obligations, direct or contingent, other than in the ordinary course of business and as will not have a Material Adverse Effect nor has it entered into nor will it enter into any transactions other than in the ordinary course of business and as will not have a Material Adverse Effect and other than pursuant to this Agreement and the transactions referred to herein and (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. (h) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (i) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or threatened against or affecting the Company or any of its Subsidiaries or any of their respective officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding could have a Material Adverse Effect. (j) Except to the extent that breach of any of the following will not, individually or in the aggregate, have a Material Adverse Effect, the Company and each of its Subsidiaries has, and at the Closing Date will have, (i) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (ii) complied in all respects with all laws, regulations and orders applicable to it or its business, including without limitation all zoning and licensing requirements and (iii) performed all its obligations required to be performed by it, and is not, and at the Closing Date will not be, in default under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected. To the best knowledge of the Company and each of its Subsidiaries, no other party under any contract or other agreement to which it is a party is in default in any respect thereunder, which default could have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is, nor at the Closing Date will any of them be, in violation of any provision of its certificate of incorporation or by-laws. 7 8 (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of this Agreement by the Company or in connection with the taking by the Company of any action contemplated hereby, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state or other securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof. The performance of this Agreement and the consummation of the transactions contemplated hereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company or any of its Subsidiaries pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the certificate of incorporation or by-laws of the Company or any of its Subsidiaries, any contract or other agreement to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any of its Subsidiaries. (m) The Company and each of its Subsidiaries has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except for liens for taxes not yet due and payable for which adequate reserves have been made, and except such as are described in the Prospectus or are not material to the business of the Company and its Subsidiaries taken as a whole. The Company and each of its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not, individually or in the aggregate, material to the Company and its Subsidiaries taken as a whole and do not materially interfere with the use made and proposed to be made of such properties by the Company and such Subsidiaries, and no other parties to such leases have asserted any violations thereunder which, individually or in the aggregate, could result in a Material Adverse Effect on the condition (financial or otherwise) or on the earnings, business, properties, business prospects or operations of the Company and its Subsidiaries, taken as a whole. (n) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration 8 9 Statement which is not described or filed as required. All such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against the Company or such Subsidiary in accordance with the terms thereof. (o) Neither the Company nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (p) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (q) Prior to the Closing Date, the Shares will be duly authorized for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market"). (r) The Company and its Subsidiaries are in compliance with all material federal, state and local employment and labor laws, including, but not limited to, laws relating to non-discrimination in hiring, promotion and pay of employees; no labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent or threatened; and the Company is not aware of any existing, imminent or threatened labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could result in a Material Adverse Effect. (s) The Company and its Subsidiaries own, or are licensed or otherwise have the full exclusive right to use the material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "patent and proprietary rights") presently employed by them or which are necessary in connection with the conduct of the business now operated by them, and neither the Company nor any of its Subsidiaries has received any written notice or otherwise has actual knowledge of any infringement of or conflict with asserted rights of others or any other claims with respect to any patent or proprietary rights, or of any basis for rendering any patent and proprietary rights invalid or inadequate to protect the interest of the Company or any of its Subsidiaries. (t) Neither the Company nor any of its Subsidiaries nor, to the Company's knowledge, any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation or in a transaction of a character required to be disclosed in the Prospectus. 9 10 (u) The Company has complied, and until the completion of the distribution of the Shares, will comply with all of the provisions of (including, without limitation, filing all forms required by) Section 517.075 of the Florida Securities and Investor Protection Act and Regulation 3E-900.001 issued thereunder with respect to the offering and sale of the Shares. (v) The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or imposing liability or standards of conduct concerning any Hazardous Material (as hereinafter defined) ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, result in a Material Adverse Effect. The term "Hazardous Material" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (B) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (C) any petroleum or petroleum product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant or hazardous, dangerous, or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. (w) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its Subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). Except as set forth in the Registration Statement and the Prospectus there are no costs and liabilities associated with or arising in connection with Environmental Laws as currently in effect (including, without limitation, costs of compliance herewith) which could, singly or in the aggregate, have a Material Adverse Effect. (x) The Company maintains insurance with respect to its properties and business of the types and in amounts believed by the Company to be generally adequate for its business and consistent with insurance coverage maintained in similar companies and businesses, all of which insurance is in full force and effect. (y) The Company has filed all material federal, state and foreign income and franchise tax returns and has paid all taxes shown as due thereon, other than taxes which are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles ("GAAP"); and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company. There are 10 11 no tax returns of the Company or any of its Subsidiaries that are currently being audited by state, local or federal taxing authorities or agencies (and with respect to which the Company or any Subsidiary has received notice), where the findings of such audit, if adversely determined, could result in a Material Adverse Effect. (z) With respect to each employee benefit plan, program and arrangement (including, without limitation, any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or contributed to by the Company, or with respect to which the Company could incur any liability under ERISA (collectively, the "Benefit Plans"), no event has occurred and, to the best knowledge of the Company, there exists no condition or set of circumstances, in connection with which the Company could be subject to any liability under the terms of such Benefit Plan, applicable law (including, without limitation, ERISA and the Internal Revenue Code of 1986, as amended) or any applicable agreement that could have a Material Adverse Effect. 4. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder, severally and not jointly, represents, warrants and covenants to each Underwriter that: (a) Such Selling Shareholder has full power and authority to enter into this Agreement and the Agreement and Power of Attorney. All authorizations and consents necessary for the execution and delivery by such Selling Shareholder of the Agreement and Power of Attorney, and for the execution of this Agreement on behalf of such Selling Shareholder, have been given. Each of the Agreement and Power of Attorney and this Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and constitutes a valid and binding agreement of such Selling Shareholder and is enforceable against such Selling Shareholder in accordance with the terms thereof and hereof. (b) Such Selling Shareholder now has, and at the time of delivery thereof hereunder will have, (i) good and marketable title to the Shares to be sold by such Selling Shareholder hereunder, free and clear of all liens, encumbrances and claims whatsoever (other than pursuant to the Agreement and Power of Attorney), and (ii) full legal right and power, and all authorizations and approvals required by law, to sell, transfer and deliver such Shares to the Underwriters hereunder and to make the representations, warranties and agreements made by such Selling Shareholder herein. Upon the delivery of and payment for such Shares hereunder, such Selling Shareholder will deliver good and marketable title thereto, free and clear of all liens, encumbrances and claims whatsoever. (c) On the Closing Date or the Option Closing Date, as the case may be, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares to be sold by such Selling Shareholder to the several Underwriters hereunder will have been fully paid or provided for by such Selling Shareholder and all laws imposing such taxes will have been fully complied with. 11 12 (d) The performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of such Selling Shareholder pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the acceleration of any obligation under, any contract or other agreement to which such Selling Shareholder is a party or by which such Selling Shareholder or any of its property is bound or affected, or under any ruling, decree, judgment, order, statute, rule or regulation of any court or other governmental agency or body having jurisdiction over such Selling Shareholder or the property of such Selling Shareholder. (e) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by such Selling Shareholder of the transactions on its part contemplated herein and in the Agreement and Power of Attorney, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by such Selling Shareholder. (f) Such Selling Shareholder has examined the Registration Statement and Prospectus and has no knowledge of any material fact or condition not set forth in the Registration Statement or the Prospectus which has adversely affected, or may adversely affect, the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and, to the best of such Selling Shareholder's knowledge and belief, neither the Registration Statement nor the Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein in order to make the statements therein not misleading, and the sale of the Shares proposed to be sold by such Selling Shareholder is not prompted by any such knowledge. (g) All information with respect to such Selling Shareholder contained in the Registration Statement and the Prospectus (as amended or supplemented, if the Company shall have filed with the Commission any amendment or supplement thereto) complied and will comply with all applicable provisions of the Act and the Rules and Regulations, contains and will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations, and does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (h) To the best knowledge of such Selling Shareholder, the representations and warranties of the Company contained in Section 3 hereof are true and correct. (i) Other than as permitted by the Act and the Rules and Regulations, such Selling Shareholder has not distributed and will not distribute any preliminary prospectus, the Prospectus or any other offering material in connection with the offering and sale of the Shares. 12 13 Such Selling Shareholder has not taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result in, under the Act or otherwise, or which has caused or resulted in, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (j) Certificates in negotiable form for the Firm Shares to be sold hereunder by such Selling Shareholder have been placed in custody, for the purpose of making delivery of such Firm Shares under this Agreement, under the Agreement and Power of Attorney which appoints ______________ as custodian (the "Custodian") for each Selling Shareholder. Such Selling Shareholder agrees that the Shares represented by the certificates held in custody for him or her under the Agreement and Power of Attorney are for the benefit of and coupled with and subject to the interest hereunder of the Custodian, the Committee, the Underwriters, each other Selling Shareholder and the Company, that the arrangements made by such Selling Shareholder for such custody and the appointment of the Custodian and the Committee by such Selling Shareholder are irrevocable, and that the obligations of such Selling Shareholder hereunder shall not be terminated by operation of law, whether by the death, disability, incapacity or liquidation of any Selling Shareholder or the occurrence of any other event. If any Selling Shareholder should die, become disabled or incapacitated or be liquidated or if any other such event should occur before the delivery of the Shares hereunder, certificates for the Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement and actions taken by the Committee and the Custodian pursuant to the Agreement and Power of Attorney shall be as valid as if such death, liquidation, incapacity or other event had not occurred, regardless of whether or not the Custodian or the Committee, or either of them, shall have received notice thereof. (k) Such Selling Shareholder has not taken any action which would cause the Company to incur or become liable for any broker's commission or finder's fee in connection with any transaction contemplated by this Agreement. 5. Agreements of the Company and the Selling Shareholders. The Company and the Selling Shareholders (as to Sections 5(i), (j), (o), (p), (q), (r) and (s)) agree, severally and not jointly, with the several Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify the Representatives promptly, and will confirm such advice in writing, (1) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (2) of any request by the Commission for amendments or 13 14 supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (4) of the happening of any event during the period mentioned in the second sentence of Section 5(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (5) of receipt by the Company or any representative of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. The Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and to notify the Representatives promptly of all such filings. (c) The Company will furnish to the Representatives, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, a copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. (e) On the Effective Date, and thereafter from time to time, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representatives may reasonably request. (f) Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the 14 15 registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject or subject itself to taxation in any jurisdiction where it is not now so subject. (g) During the period of five years commencing on the Effective Date, the Company will furnish to the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. (h) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representatives, all costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders under this Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the Registration Statement and exhibits to it, each preliminary prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (2) the preparation and delivery of certificates representing the Shares, (3) the word processing, printing and reproduction of this Agreement, the Agreement Among Underwriters, any Dealer Agreements, any Underwriters' Questionnaire and the Agreement and Power of Attorney, (4) furnishing (including costs of shipping, mailing and courier) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (5) the listing of the Shares on the Nasdaq National Market, (6) any filings required to be made by the Underwriters with the NASD, and the fees, disbursements and other charges of counsel for the Underwriters in connection therewith, (7) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(f), including the fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (8) counsel to the Company and counsel to the Selling Shareholders, (9) the transfer agent for the Shares and (10) the Accountants. 15 16 (j) If this Agreement shall be terminated by the Company or the Selling Shareholders pursuant to any of the provisions hereof (otherwise than pursuant to Section 9) or if for any reason the Company or any Selling Shareholder shall be unable to perform its obligations hereunder, the Company and the Selling Shareholders, jointly and severally, will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) reasonably incurred by them in connection herewith. (k) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (l) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (m) During the period of 180 days commencing at the Closing Date, the Company will not, without the prior written consent of Legg Mason Wood Walker, Incorporated, directly or indirectly, sell, offer to sell, contract to sell, grant any option for the purchase of, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to acquire shares of Common Stock, other than to the Underwriters pursuant to this Agreement and other than pursuant to employee benefit plans or in connection with the acquisition of the business, stock or assets of third parties provided that the shares issued in any such acquisition may not be resold or otherwise disposed of during the period of 180 days commencing at the Closing Date. (n) The Company will cause each of its executive officers, directors and each beneficial owner of more than 5% of the outstanding shares of Common Stock to enter into agreements with the Representatives in the form set forth in Exhibit C to the effect that they will not, for a period of 180 days after the commencement of the public offering of the Shares, without the prior written consent of Legg Mason Wood Walker, Incorporated, directly or indirectly, sell, offer to sell, contract to sell, grant any option for the purchase of, or otherwise dispose of (except bona fide gifts to donees who agree to comply with the restrictions imposed upon the donors), or require the Company to file with the Commission a registration statement under the Securities Act to register any shares of, Common Stock or securities convertible into or exchangeable for Common Stock, or warrants or other rights to acquire shares of Common Stock of which any of such executive officers, directors, and more than 5% beneficial owners is now, or in the future may become, the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than to the Underwriters pursuant to this Agreement and other than pursuant to employee benefit plans. 16 17 (o) The Selling Shareholders will not, for a period of 180 days after the commencement of the public offering of the Shares, without the prior written consent of Legg Mason Wood Walker, Incorporated, directly or indirectly, offer to sell, sell, contract to sell, grant any option to sell, or otherwise dispose of or require the Company to file with the Commission on a registration statement under the Securities Act to register, any shares of Common Stock or securities convertible into or exchangeable for Common Stock, or warrants or other rights to acquire shares of Common Stock of which such Selling Shareholders are now or may in the future become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act). (p) The Selling Shareholders will not, without the prior written consent of Legg Mason Wood Walker, Incorporated, make any bid for or purchase any shares of Common Stock during the 120-day period following the date hereof. (q) As soon as any Selling Shareholder is advised thereof, such Selling Shareholder will advise Legg Mason Wood Walker, Incorporated and confirm such advice in writing, (1) of receipt by such Selling Shareholder, or by any representative of such Selling Shareholder, of any communication from the Commission relating to the Registration Statement, the Prospectus or any preliminary prospectus, or any notice or order of the Commission relating to the Company or any of the Selling Shareholders in connection with the transactions contemplated by this Agreement and (2) of the happening of any event during the period from and after the Effective Date that in the judgment of such Selling Shareholder makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they were made, not misleading. (r) The Selling Shareholders will deliver to Legg Mason Wood Walker, Incorporated prior to or on the Effective Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 6. Conditions of the Obligations of the Underwriters. In addition to the execution and delivery of the Price Determination Agreement, the obligations of each Underwriter hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by Legg Mason Wood Walker, Incorporated not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by Legg Mason Wood Walker, Incorporated and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the 17 18 qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to Legg Mason Wood Walker, Incorporated and Legg Mason Wood Walker, Incorporated did not object thereto in good faith, and Legg Mason Wood Walker, Incorporated shall have received certificates, dated the Closing Date and the Option Closing Date and signed on behalf of the Company by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been, and no development shall have occurred which could reasonably be expected to have a Material Adverse Effect whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (ii) neither the Company nor any of its Subsidiaries shall have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of Legg Mason Wood Walker, Incorporated any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or any of its Subsidiaries or any of their respective officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding could have a Material Adverse Effect. (e) Each of the representations and warranties of the Company and the Selling Shareholders contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and the Selling Shareholders and all conditions herein contained to be fulfilled or complied with by the Company and the Selling Shareholders at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. 18 19 (f) The Representatives shall have received opinions, each dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, and satisfactory in form and substance to counsel for the Underwriters, from Nutter, McClennen & Fish LLP, counsel to the Company, and from _______________________, counsel to the Selling Shareholders, to the effect set forth in Exhibit D. (g) The Representatives shall have received opinions, each dated the Closing Date and with respect to the Option Shares, the Option Closing Date, from Goodwin, Procter & Hoar LLP, counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to Legg Mason Wood Walker, Incorporated. (h) On the date of the Prospectus, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, addressed to the Representatives and in form and substance satisfactory to Legg Mason Wood Walker, Incorporated, confirming that they are independent accountants with respect to the Company as required by the Act and the Rules and Regulations and with respect to the financial and other statistical and numerical information contained in the Registration Statement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter from the Accountants, that nothing has come to their attention during the period from the date of the letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date and the Option Closing Date which would require any change in their letter dated the date of the Prospectus, if it were required to be dated and delivered at the Closing Date and the Option Closing Date. (i) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company on behalf of the Company, in form and substance satisfactory to Legg Mason Wood Walker, Incorporated, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not untrue or misleading and (B) since the Effective Date, no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Company contained in this Agreement was, when originally made, and is, at the time such certificate is delivered, true and correct in all material respects; 19 20 (iii) Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with; and (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) there has not been, and no development has occurred which could reasonably be expected to result in, a material adverse change in the general affairs, business, properties, management, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (B) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus. (v) There are no actions, suits, proceedings or investigations pending or threatened in writing against the Company or any of its Subsidiaries or any of their respective officers or directors in their capacities as such, before any court, governmental agency or arbitrator which seek to challenge the legality or enforceability of any of the documents filed, or required to be filed, as exhibits to the Registration Statement, seek damages or other remedies with respect to any of the documents filed, or required to be filed, as exhibits to the Registration Statement, except as set forth in or contemplated by the Registration Statement and the Prospectus, seek money damages in excess of $100,000 or seek to impose criminal penalties upon the Company, any of its Subsidiaries or any of their respective officers or directors in their capacities as such or seek to enjoin any of the business activities of the Company or any of its Subsidiaries or the transactions described in the Prospectus. (vi) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall have been furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by the Committee on behalf of each of the Selling Shareholders, in form and substance satisfactory to Legg Mason Wood Walker, Incorporated, to the effect that the representations and warranties of each of the Selling Shareholders contained herein are true and correct in all material respects on and as of the date of such certificate as if made on and as of the date of such certificate, and each of the covenants and conditions required herein to be performed or complied with by the Selling Shareholders on or prior to the date of such certificate has been duly, timely and fully performed or complied with. 20 21 (j) On or prior to the Closing Date, Legg Mason Wood Walker, Incorporated shall have received the executed agreements referred to in Section 5(n). (k) The Shares shall be qualified for sale in such states as Legg Mason Wood Walker, Incorporated may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date. (l) Prior to the Closing Date, the Shares shall have been duly authorized for quotation on the Nasdaq National Market. (m) The NASD shall have approved the underwriting terms and arrangements and such approval shall not have been withdrawn or limited. 7. Indemnification. (a) Each of the Company and the Selling Shareholders, severally and not jointly, will indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, liabilities, expenses and damages (including, without limitation, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted, which settlement has been approved by the indemnifying party), as and when incurred, to which any Underwriter, or any such person, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or in any application or other document executed by or on behalf of the Company or based on written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the shares under the securities laws thereof or filed with the Commission, (ii) the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, liability, expense or damage arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent it is finally judicially determined by a court of competent jurisdiction that such loss, claim, liability, expense or damage resulted directly from any such acts or failures to act undertaken or omitted to be taken by such underwriter through its negligence or willful misconduct), provided that the Company and the Selling Shareholders will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the 21 22 public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of any Underwriter expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus; and provided further that the Company shall not be liable to any Underwriter and each person, if any, who controls any Underwriter as aforesaid with respect to the preliminary Prospectus to the extent such loss, claim, damage or liability results from the fact that such Underwriter sold Shares to a person who was not sent or given, prior to or concurrently with written confirmation of such sale, a copy of the Prospectus in each case where such delivery is required by the Securities Act, if the Company has previously furnished copies thereof to such Underwriter and the loss, claim, damage or liability of such Underwriter is caused by such untrue statement or omission that was corrected in such Prospectus. This indemnity agreement will be in addition to any liability that the Company or any Selling Shareholder might otherwise have to any person who is an indemnified party hereunder. The Company will also indemnify and hold harmless McDonald & Company Securities, Inc. acting as "qualified independent underwriter" within the meaning of Rules 2720(b)(15)(A) through (b)(15)(G) of the Conduct Rules of the NASD (the "QIU"), the directors, officers, employees, and agents and each person, if any, who controls the QIU within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, liabilities, expenses and damages (including, without limitation, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties, or between any indemnified parties and any third party, or otherwise, or any claim asserted, which settlement has been approved by the indemnifying party), as and when incurred, as a result of the QIU's participation as a "qualified independent underwriter" in connection with the offering of the Common Stock, except for any losses, claims, liabilities, expenses, damages and judgments resulting from the QIU's or such controlling person's willful misconduct or gross negligence. (b) Each Underwriter will indemnify and hold harmless the Company, the Selling Shareholders, each person, if any, who controls the Company or the Selling Shareholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company and the Selling Shareholders to each Underwriter, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of such Underwriter expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that each Underwriter might otherwise have; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discounts and commissions received by such Underwriter. 22 23 (c) Any party that proposes to assert the right to be indemnified under this Section 7 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 7, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 7 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 7 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. Notwithstanding any other provision of this Section 7(c), if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such 23 24 indemnifying party agrees that it shall be liable for any settlement effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 7 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company, the Selling Shareholders or the Underwriters, the Company, the Selling Shareholders and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid consistent with the Agreement in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company or the Selling Shareholders from persons other than the Underwriters, such as persons who control the Company or the Selling Shareholders within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company or the Selling Shareholders and any one or more of the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company and Selling Shareholders on the one hand and the Underwriters on the other. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Representatives on behalf of the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 7(d) shall be deemed to include, for purpose of 24 25 this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions received by it, and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 7(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 7(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 7(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 7(d). Except for a settlement entered into pursuant to the last sentence of Section 7(c) hereof, no party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (e) The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company and the Selling Shareholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. 8. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from Legg Mason Wood Walker, Incorporated, without liability on the part of any Underwriter to the Company or any Selling Shareholder, if, prior to delivery and payment for the Shares (or the Option Shares, as the case may be), in the sole judgment of the Representatives, (i) there has been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the Company's business, properties, condition (financial or otherwise) or results of operations, (ii) trading in any of the equity securities of the Company shall have been suspended by the Commission, the NASD or by the Nasdaq Stock Market, (iii) trading in securities generally on the Nasdaq National Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange or on the Nasdaq National Market, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or the NASD or any court or other governmental authority, (iv) a general banking moratorium shall have been declared by either Federal or New York State authorities or (v) any material adverse change in the financial or securities markets in the United States or in political, 25 26 financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 9. Substitution of Underwriters. If any one or more of the Underwriters shall fail or refuse to purchase any of the Firm Shares which it or they have agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as the Representatives may specify; provided that in no event shall the maximum number of Firm Shares which any Underwriter has become obligated to purchase pursuant to Section 1 be increased pursuant to this Section 9 by more than one-ninth of the number of Firm Shares agreed to be purchased by such Underwriter without the prior written consent of such Underwriter. If any Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the Representatives, the Company and the Committee for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, or the Company or any Selling Shareholder for the purchase or sale of any Shares under this Agreement. In any such case either the Representatives or the Company and the Committee shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Miscellaneous. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 1896 Georgetown Road, Hudson, Ohio 44236, Attention: William N. Hulett, III, with a copy to Constantine Alexander, Esq., Nutter, McClennen & Fish, LLP, One International Place, Boston, Massachusetts 02110-2699, (b) if to any Selling Shareholder, _______________________, or (c) if to the Underwriters, to Legg Mason Wood Walker, Incorporated at the offices of Legg Mason Wood Walker, Incorporated, 111 South Calvert Street, 20th Floor, Baltimore, MD 21202, Attention: Corporate Finance Department. Any such notice shall be effective only upon receipt. Any notice under Section 8 or 9 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. 26 27 This Agreement has been and is made solely for the benefit of the several Underwriters, the Company and the Selling Shareholders and of the controlling persons, directors and officers referred to in Section 7, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from any of the several Underwriters. With respect to any obligation of the Company and the Selling Shareholders hereunder to make any payment, to indemnify for any liability or to reimburse for any expense, the Underwriters (or any other person to whom such payment, indemnification or reimbursement is owed) may pursue the Company with respect thereto prior to pursuing any Selling Shareholder. All representations, warranties and agreements of the Company and the Selling Shareholders contained herein or in certificates or other instruments delivered pursuant hereto, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any of their controlling persons and shall survive delivery of and payment for the Shares hereunder. Any action required or permitted to be taken by the Representatives under this Agreement may be taken by them jointly or by Legg Mason Wood Walker, Incorporated. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Company, the Selling Shareholders and the Underwriters each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. This Agreement may not be amended or otherwise modified or any provision hereof waived except by an instrument in writing signed by (i) Legg Mason Wood Walker, Incorporated and the Company and, (ii) with respect to any amendment, modification or waiver which would materially and adversely affect the rights or materially increase the obligation of the Selling Shareholders, by the holders of at least two-thirds of the Firm Shares held by the Selling Shareholders. 27 28 UNDERWRITING AGREEMENT SIGNATURE PAGE Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, BRIDGESTREET ACCOMMODATIONS, INC. By:_______________________________ Title: THE SELLING SHAREHOLDERS NAMED IN SCHEDULE I ATTACHED HERETO By: The Committee By:_______________________________ Confirmed as of the date first above mentioned: LEGG MASON WOOD WALKER, INCORPORATED MCDONALD & COMPANY SECURITIES, INC. Acting on behalf of themselves and as the Representatives of the several Underwriters named in Schedule II hereof. By: LEGG MASON WOOD WALKER, INCORPORATED By:_______________________________ Title: By: MCDONALD & COMPANY SECURITIES, INC. By:_______________________________ Title: 28 29 SCHEDULE I 29 30 SCHEDULE II UNDERWRITERS
Name of Number of Underwriters Firm Shares ------------ to be Purchased --------------- Legg Mason Wood Walker, Incorporated McDonald & Company Securities, Inc. Total......................................... --------------- ---------------
31 EXHIBIT A BRIDGESTREET ACCOMMODATIONS, INC. --------------------- PRICE DETERMINATION AGREEMENT September __, 1997 LEGG MASON WOOD WALKER, INCORPORATED MCDONALD & COMPANY SECURITIES, INC. As Representatives of the several Underwriters c/o Legg Mason Wood Walker, Incorporated 111 South Calvert Street, 20th Floor Baltimore, MD 21202 Dear Sirs: Reference is made to the Underwriting Agreement, dated September __, 1997 (the "Underwriting Agreement"), among BridgeStreet Accommodations, Inc., a Delaware corporation (the "Company"), the Selling Shareholders named in Schedule I thereto or hereto (the "Selling Shareholders"), and the several Underwriters named in Schedule II thereto or hereto (the "Underwriters"), for whom Legg Mason Wood Walker, Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "Representatives"). The Underwriting Agreement provides for the purchase by the Underwriters from the Company and the Selling Shareholders, subject to the terms and conditions set forth therein, of an aggregate of 2,615,000 shares (the "Firm Shares") of the Company's common stock, par value $.01 per share. This Agreement is the Price Determination Agreement referred to in the Underwriting Agreement. Pursuant to Section 1 of the Underwriting Agreement, the undersigned agree with the Representatives as follows: The initial public offering price per share for the 2,615,000 Shares shall be $_______. 32 The purchase price per share for the Firm Shares to be paid by the several Underwriters shall be $_______ representing an amount equal to the initial public offering price set forth above, less $______ per share. The Company represents and warrants to each of the Underwriters that the representations and warranties of the Company set forth in Section 3 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. The Selling Shareholders, severally and not jointly, represent and warrant to each of the Underwriters that the representations and warranties of the Selling Shareholders set forth in Section 4 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by the Underwriting Agreement, attached as Schedule II is a completed list of the several Underwriters, which shall be a part of this Agreement and the Underwriting Agreement. THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. If the foregoing is in accordance with your understanding of the agreement among the Underwriters, the Company and the Selling Shareholders, please sign and return to the Company a counterpart hereof, whereupon this instrument along with all counterparts and together with the Underwriting Agreement shall be a binding agreement among the Underwriters, the Company and the Selling Shareholders in accordance with its terms and the terms of the Underwriting Agreement. 2 33 PRICE DETERMINATION AGREEMENT SIGNATURE PAGE Very truly yours, BRIDGESTREET ACCOMMODATIONS, INC. By:_______________________________ Title: THE SELLING SHAREHOLDERS NAMED IN SCHEDULE I TO THE UNDERWRITING AGREEMENT By: The Committee By:_______________________________ Confirmed as of the date first above mentioned: LEGG MASON WOOD WALKER, INCORPORATED MCDONALD & COMPANY SECURITIES, INC. Acting on behalf of themselves and as the Representatives of the several Underwriters named in Schedule II hereof. By: LEGG MASON WOOD WALKER, INCORPORATED By:_______________________________ Title: By: MCDONALD & COMPANY SECURITIES, INC. By:_______________________________ Title: 3 34 EXHIBIT B POWER OF ATTORNEY BRIDGESTREET ACCOMMODATIONS, INC. Common Stock [Names and Addresses of Committee] Dear Sirs: The undersigned understands that BridgeStreet Accommodations, Inc., a Delaware corporation (the "Company"), intends to file a registration statement (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), in connection with the proposed public offering and sale by the Company, the undersigned (the "Selling Shareholder") and certain other Selling Shareholders of the Company's Common Stock, par value $.01 per share (the "Common Stock"). The Selling Shareholder desires to sell certain shares of Common Stock and to include such shares among the shares covered by the Registration Statement. The number of shares of Common Stock which the undersigned desires to sell (the "Shares") are set forth beneath the signature of the Selling Shareholder below. Concurrently with the execution and delivery of this Power of Attorney, the undersigned is delivering to you, or requesting the Company to deliver to you, certificates for the Shares, which you are authorized to deposit with ____________, as custodian (the "Custodian"), pursuant to a custody agreement in the form attached as Attachment A hereto (the "Custody Agreement"). 1. In connection with the foregoing, the Selling Shareholder hereby makes, constitutes and appoints you collectively, and each of you individually (a "Member") and each of your respective substitutes under Section 3, the true and lawful attorneys-in-fact of the undersigned (the Members or any of them or their respective substitutes, being herein referred to collectively as the "Committee"), with full power and authority, in the name and on behalf of the Selling Shareholder: 35 (a) To enter into the Custody Agreement and deposit with the Custodian pursuant thereto the certificates for the Shares delivered to the Committee concurrently herewith; (b) For the purpose of effecting the sale of the Shares, to execute and deliver (i) an Underwriting Agreement (the "Underwriting Agreement"), by and among the Company, the other Selling Shareholders and the representatives (the "Representatives"), selected by the Company, of the several Underwriters (the "Underwriters") and (ii) a Price Determination Agreement (as defined in the Underwriting Agreement), by and among the Company, the other Selling Shareholders and the Representatives; (c) To endorse, transfer and deliver certificates for the Shares to or on the order of the Representatives or to their nominee or nominees, and to give such orders and instructions to the Custodian as the Committee may in its sole discretion determine with respect to (i) the transfer on the books of the Company of the Shares in order to effect such sale (including the names in which new certificates for such Shares are to be issued and the denominations thereof); (ii) the delivery to or for the account of the Representatives of the certificates for the Shares against receipt by the Custodian of the full purchase price to be paid therefor; (iii) the remittance to the Selling Shareholder of the Selling Shareholder's share of the proceeds, after payment of expenses described in the Underwriting Agreement, from any sale of Shares; and (iv) the return to the Selling Shareholder of certificates representing the number of Shares (if any) deposited with the Custodian but not sold by the Selling Shareholder under the Registration Statement for any reason; (d) To retain ________________________ (who are also counsel to the Company) as legal counsel for the Selling Shareholders in connection with any and all matters referred to herein; (e) To take for the Selling Shareholder all steps deemed necessary or advisable by the Committee in connection with the registration of the Shares under the Act, including, without limitation, filing amendments to the Registration Statement, requesting acceleration of effectiveness of the Registration Statement, advising the Securities and Exchange Commission that the reason the Selling Shareholder is offering the Shares for sale is to diversify the Selling Shareholder's investments and to assist the Company in creating the public market for the Common Stock, informing said Commission that the Selling Shareholder has no knowledge of any material adverse information with regard to the current and prospective operations of the Company which is not stated in the Registration Statement, and such other steps as the Committee may in its absolute discretion deem necessary or advisable; 2 36 (f) To make, acknowledge, verify and file on behalf of the Selling Shareholder applications, consents to service of process and such other undertakings or reports as may be required by law with state commissioners or officers administering state securities or Blue Sky laws and to take any other action required to facilitate the qualification of the Shares under the securities or Blue Sky laws of the jurisdictions in which the Shares are to be offered; (g) If necessary, to endorse (in blank or otherwise) on behalf of the Selling Shareholder the certificate or certificates representing the Shares, or a stock power or powers attached to such certificate or certificates; and (h) To make, execute, acknowledge and deliver all such other contracts, orders, receipts, notices, requests, instructions, certificates, letters and other writings and, in general, to do all things and to take all action which the Committee in its sole discretion may consider necessary or proper in connection with or to carry out the aforesaid sale of Shares, as fully as could the Selling Shareholder if personally present and acting. 2. This Power of Attorney and all authority conferred hereby is granted and conferred subject to and in consideration of the interests of the Company, the Representatives, the Underwriters and the other Selling Shareholders and, for the purpose of completing the transactions contemplated by this Power of Attorney, this Power of Attorney and all authority conferred hereby shall be irrevocable and shall not be terminated by any act of the Selling Shareholder or by operation of law, whether by the death, disability, incapacity or liquidation of the Selling Shareholder or by the occurrence of any other event or events (including without limitation the termination of any trust or estate for which the Selling Shareholder is acting as a fiduciary or fiduciaries), and if, after the execution hereof, the Selling Shareholder shall die or become disabled or incapacitated or is liquidated, or if any other such event or events shall occur before the completion of the transactions contemplated by this Power of Attorney, the Committee shall nevertheless be authorized and directed to complete all such transactions as if such death, disability, incapacity, liquidation or other event or events had not occurred and regardless of notice thereof. 3. Each Member shall have full power to make and substitute any person in the place and stead of such Member, and the Selling Shareholder hereby ratifies and confirms all that each Member or substitute or substitutes shall do by virtue of these presents. All actions hereunder may be taken by any one Member or his substitute. In the event of the death, disability or incapacity of any Member, the remaining Member or Members shall appoint a substitute therefor. 4. The Selling Shareholder hereby represents, warrants and covenants that: 3 37 (a) All information furnished to the Company by or on behalf of the Selling Shareholder for use in connection with the preparation of the Registration Statement is and will be true and correct in all material respects and does not and will not omit any material fact necessary to make such information not misleading; (b) The Selling Shareholder, having full right, power and authority to do so, has duly executed and delivered this Power of Attorney; (c) The Selling Shareholder has carefully reviewed the Registration Statement and will carefully review each amendment thereto immediately upon receipt thereof from the Company and will promptly advise the Company in writing if: (i) The name and address of the Selling Shareholder is not properly set forth in each preliminary prospectus (collectively, the "Preliminary Prospectus") contained in the Registration Statement and the prospectuses (collectively, the "Prospectus") contained in the Registration Statement at the time it becomes effective; (ii) The Selling Shareholder has reason to believe that (A) any information furnished to the Company by or on behalf of the Selling Shareholder for use in connection with the Registration Statement or the Prospectus or any Preliminary Prospectus is not true and complete; and (B) any Preliminary Prospectus, the Prospectus and any supplements thereto contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iii) The Selling Shareholder knows of any material adverse information with regard to the current or prospective operations of the Company or any of its subsidiaries which is not disclosed in any Preliminary Prospectus, the Prospectus or the Registration Statement; or (iv) Except as indicated in the Prospectus, the Selling Shareholder knows of any arrangements made or to be made by any person, or of any transaction already effected, (A) to limit or restrict the sale of shares of the Common Stock during the period of the public distribution, (B) to stabilize the market for the Common Stock or (C) for withholding commissions, or otherwise to hold any other person responsible for the distribution of the Selling Shareholder's participation; (d) In connection with the offering of the Shares, the Selling Shareholder has not taken and will not take, directly or indirectly, any action intended to, or which 4 38 might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Shares to facilitate the sale or resale of the Shares; (e) The Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than a Preliminary Prospectus, a Prospectus or other material permitted by the Act; (f) The Selling Shareholder will notify the Company in writing immediately of any changes in the foregoing information which should be made as a result of developments occurring after the date hereof and prior to the Closing Date under the Underwriting Agreement, and the Committee may consider that there has not been any such development unless advised to the contrary; (g) The Selling Shareholder has, and at the time of delivery of the Shares to the Representatives, will have, full power and authority to enter into this Power of Attorney, to carry out the terms and provisions hereof and to make all the representations, warranties and covenants contained herein; and (h) This Power of Attorney is the valid and binding agreement of the Selling Shareholder and is enforceable against the Selling Shareholder in accordance with its terms. 5. The representations, warranties and covenants of the Selling Shareholder in this Power of Attorney are made for the benefit of, and may be relied upon by, the other Selling Shareholders, the Committee, the Company and its counsel, and their representatives, agents and counsel, the Custodian, the Underwriters and the Representatives and their counsel. 6. The Committee shall be entitled to act and rely upon any statement, request, notice or instructions respecting this Power of Attorney given to it by the Selling Shareholder, not only as to the authorization, validity and effectiveness thereof, but also as to the truth and acceptability of any information therein contained. 7. It is understood that the Committee assumes no responsibility or liability to any person other than to deal with the Shares deposited with it and the proceeds from the sale of the Shares in accordance with the provisions hereof. The Committee makes no representations with respect to and shall have no responsibility for the Registration Statement, the Prospectus or any Preliminary Prospectus nor, except as herein expressly provided, for any aspect of the offering of Common Stock, and it shall not be liable for any error of judgment or for any act done or omitted or for any mistake of fact or law except for its own negligence or bad faith. The Selling Shareholder agrees to indemnify the Committee for and to hold the Committee harmless against any loss, claim, damage or liability incurred on its part arising out of or in connection with it acting as the Committee under this Power of Attorney, as well as the cost 5 39 and expense of investigating and defending against any such loss, claim, damage or liability, except to the extent such loss, claim, damage or liability is due to the negligence or bad faith of the Member seeking indemnification. The Selling Shareholder agrees that the Committee may consult with counsel of its own choice (who may be counsel for the Company) and it shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. 8. It is understood that the Committee may, without breaching any express or implied obligation to the Selling Shareholder hereunder, release, amend or modify any other Power of Attorney granted by any other Selling Shareholder. 9. It is understood that the Committee shall serve entirely without compensation. 10. This Power of Attorney shall be governed by the laws of the State of New York without regard to the conflict of laws principles of such State. 11. This Power of Attorney may be signed in two or more counterparts with the same effect as if the signature thereto and hereto were upon the same instrument. 12. In case any provision in this Power of Attorney shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Power of Attorney shall be binding upon the Committee and the Selling Shareholder and the heirs, legal representatives, distributees, successors and assigns of the Selling Shareholder. Dated: __________, 1997 Very truly yours, _____________________________ 6 40 Signature(s) of Selling Shareholder(s) _____________________________ (Address) SHARES TO BE SOLD: _____ shares of Common Stock ACKNOWLEDGED AND ACCEPTED: THE COMMITTEE: _____________________________ _____________________________ _____________________________ _____________________________ 7 41 ATTACHMENT A CUSTODY AGREEMENT CUSTODY AGREEMENT, dated September ___, 1997, among _________________, as Custodian (the "Custodian"), and the persons listed on Annex I hereto (each a "Selling Shareholder" and collectively the "Selling Shareholders"). BridgeStreet Accommodations, Inc., a Delaware corporation (the "Company"), intends to file a Registration Statement (the "Registration Statement") with the Securities and Exchange Commission to register for sale to the public under the Securities Act of 1933, as amended (the "Act"), shares of the Company's common stock, $.01 par value per share (the "Common Stock"). Each of the Selling Shareholders has executed and delivered a Power of Attorney (the "Power of Attorney") naming _____________, ____________ and _______________, and each of them, as his or her attorney-in-fact (the "Committee"), for certain purposes, including the execution, delivery and performance of this Agreement in his or her name, place and stead, in connection with the proposed sale by each Selling Shareholder of the number of Shares set forth opposite such Selling Shareholder's name in Annex I. 1. A custody arrangement is hereby established by the Selling Shareholders with the Custodian with respect to the Shares, and the Custodian is hereby instructed to act in accordance with this Agreement and any amendments or supplements hereto authorized by the Committee. 2. There are herewith delivered to the Custodian, and the Custodian hereby acknowledges receipt of, certificates representing the Shares, which certificates have been endorsed in blank or are accompanied by duly executed stock powers, in each case with all signatures guaranteed by a commercial bank or trust company or by a member firm of the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or a member of the National Association of Securities Dealers, Inc. Such certificates are to be held by the Custodian for the account of the Selling Shareholders and are to be disposed of by the Custodian in accordance with this Agreement. 42 3. The Custodian is authorized and directed by the Selling Shareholders: (a) To hold the certificates representing the Shares delivered by the Selling Shareholders in its custody; (b) On or immediately prior to the settlement date for any Shares sold pursuant to the Registration Statement (the "Closing Date"), to cause such Shares to be transferred on the books of the Company into such names as the Custodian shall have been instructed by the representatives (the "Representatives") of the several Underwriters (the "Underwriters"); to cause to be issued, against surrender of the certificates for the Shares, a new certificate or certificates for such Shares, free of any restrictive legend, registered in such name or names; to deliver such new certificates representing such Shares to the Representatives, as instructed by the Representatives on the Closing Date for their account or accounts against full payment therefor; and to give receipt for such payment; (c) To disburse such payments in the following manner: (i) to itself, as agent for the Selling Shareholders, a reserve amount to be designated in writing by the Committee from which amount the Custodian shall pay, as soon as reasonably practicable, (A) the Selling Shareholders' proportionate share of all expenses of the offering and sale of the Shares as provided in the Underwriting Agreement by and among the Company, the Selling Shareholders and the Representatives, (B) its reasonable disbursements for acting hereunder with respect to the sale of the Shares and (C) any applicable stock transfer taxes; and (ii) to each Selling Shareholder, pursuant to the written instructions of the Committee, (A) on the Closing Date, a sum equal to the share of the proceeds to which such Selling Shareholder is entitled, as determined by the Committee, less the reserve amount designated by any Committee, and (B) promptly after all proper charges, disbursements, costs and expenses shall have been paid, any remaining balance of the amount reserved under clause (i) above. Before making any payment from the amount reserved under clause (i) above, except payments made pursuant to subclause (B) of clause (ii) above, the Custodian shall request and receive the written approval of the Committee. To the extent the expenses referred to in subclause (A) of clause (i) above exceed the amount reserved, the Selling Shareholders shall remain liable for their proportionate share of such expenses. 4. Subject in each case to the indemnification obligations set forth in Section 7, in the event Shares of any Selling Shareholder are not sold, the Custodian shall deliver to such Selling Shareholder as soon as practicable after termination of the offering of the Shares, certificates representing such Shares deposited by such Selling Shareholder. Certificates returned to any Selling Shareholder shall be returned with any related stock powers, and any new certificates issued to the Selling Shareholders with respect to such Shares shall bear any appropriate legend reflecting the unregistered status thereof under the Act. 2 43 5. This Agreement is for the express benefit of the Company and the Selling Shareholders, the Underwriters and the Representatives. The obligations and authorizations of the Selling Shareholders hereunder are irrevocable and shall not be terminated by any act of any Selling Shareholder or by operation of law, whether by the death, disability, incapacity or liquidation of any Selling Shareholder or by the occurrence of any other event or events (including without limitation the termination of any trust or estate for which any Selling Shareholder is acting as a fiduciary or fiduciaries), and if after the execution hereof any Selling Shareholder shall die or become disabled or incapacitated or is liquidated, or if any other event or events shall occur before the delivery of such Selling Shareholder's Shares hereunder to the Representatives, such Shares shall be delivered to the Representatives in accordance with the terms and conditions of this Agreement, as if such event had not occurred, regardless of whether or not the Custodian shall have received notice of such event. 6. Until payment of the purchase price for the Shares has been made to the Selling Shareholders or to the Custodian, the Selling Shareholders shall remain the owner of (and shall retain the right to receive dividends and distributions on, and to vote) the number of Shares delivered by each of them to the Custodian hereunder. Until such payment in full has been made or until the offering of Shares has been terminated, each Selling Shareholder agrees that it will not give, sell, pledge, hypothecate, grant any lien on, transfer, deal with or contract with respect to the Shares and any interests therein. 7. The Custodian shall assume no responsibility to any person other than to deal with the certificates for the Shares and the proceeds from the sale of the Shares represented thereby in accordance with the provisions hereof, and the Selling Shareholders, severally and not jointly, hereby agree to indemnify the Custodian for and to hold the Custodian harmless against any and all losses, claims, damages or liabilities incurred on its part arising out of or in connection with it acting as the Custodian pursuant hereto, as well as the cost and expenses of investigating and defending any such losses, claims, damages or liabilities, except to the extent such losses, claims, damages or liabilities are due to the negligence or bad faith of the Custodian. The Selling Shareholders agree that the Custodian may consult with counsel of its own choice (who may be counsel for the Company), and the Custodian shall have full and complete authorization and protection for any action taken or suffered by the Custodian hereunder in good faith and in accordance with the opinion of such counsel. 8. Each of the Selling Shareholders, jointly and not severally, hereby represents and warrants that: (a) it has, and at the time of delivery of its Shares to the Representatives it will have, full power and authority to enter into this Agreement and the Power of Attorney, to carry out the terms and provisions hereof and thereof and to make all of the representations, warranties and agreements contained herein and therein; and (b) this Agreement and the Power of Attorney are the valid and binding agreements of such Selling Shareholder and are enforceable against such Selling Shareholder in accordance with their respective terms. 3 44 9. The Custodian's acceptance of this Agreement by the execution hereof shall constitute an acknowledgment by the Custodian of the authorization herein conferred and shall evidence the Custodian's agreement to carry out and perform this Agreement in accordance with its terms. 10. The Custodian shall be entitled to act and rely upon any statement, request, notice or instruction with respect to this Agreement given to it on behalf of each of the Selling Shareholders if the same shall be made or given to the Custodian by the Committee, not only as to the authorization, validity and effectiveness thereof, but also as to the truth and acceptability of any information therein contained. 11. This Agreement may be executed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. Execution by the Custodian of one counterpart hereof and its delivery thereof to the Committee shall constitute the valid execution of this Agreement by the Custodian. 12. This Agreement shall be binding upon the Custodian, each of the Selling Shareholders and the respective heirs, legal representatives, distributees, successors and assigns of the Selling Shareholders. 13. This Agreement shall be governed by the laws of the State of New York without regard to the conflict of laws principles of such State. 14. Any notice given pursuant to this Agreement shall be deemed given if in writing and delivered in person, or if given by telephone or telegraph if subsequently confirmed by letter: (i) if to a Selling Shareholder, to his address set forth in Annex I; and (ii) if to the Custodian, to it at ___________________. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. _________________________________ _________________________________, as Custodian THE SELLING SHAREHOLDERS LISTED IN ANNEX I HERETO: By: The Committee By:_______________________________ 4 45 Annex I
Names and Addresses of Selling Shareholders Share to be Sold Total...................................................... ---------------- ----------------
46 EXHIBIT C September __, 1997 LEGG MASON WOOD WALKER, INCORPORATED MCDONALD & COMPANY SECURITIES, INC. As Representatives of the several Underwriters c/o Legg Mason Wood Walker, Incorporated 111 South Calvert Street, 20th Floor Baltimore, MD 21202 Dear Sirs: In consideration of the agreement of the several Underwriters, for which Legg Mason Wood Walker, Incorporated and McDonald & Company Securities, Inc. (the "Representatives") intend to act as Representatives, to underwrite a proposed public offering (the "Offering") of 3,007,250 shares of Common Stock, par value $.01 per share (the "Common Stock") of BridgeStreet Accommodations, Inc., a Delaware corporation, as contemplated by a registration statement with respect to such shares filed with the Securities and Exchange Commission on Form S-1 (Registration No. 333-26647), the undersigned hereby agrees that the undersigned will not, for a period of 180 days after the date of the Prospectus (as defined in the Underwriting Agreement between the Company and the Underwriters), without the prior written consent of the Representatives, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, or otherwise dispose (or announce the offer, sale, contract of sale, grant of any option to purchase or other disposition) of any shares of Common Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock of the Company (such securities being referred to herein as "Rights"), other than pursuant to bona fide gifts to persons who agree in writing with the Representative to be bound by the balance of such 180-day restriction. The foregoing restriction is expressly agreed to preclude the holder of any such shares of Common Stock or Rights from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in such disposition during such 180-day period, even if such shares of Common Stock or Rights would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any such shares of Common Stock or Rights or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from such shares of Common Stock or Rights. The 47 undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Common Stock or Rights held by such person except in compliance with this restriction. Notwithstanding the foregoing, the undersigned may purchase Common Stock pursuant to the Company's 1997 Equity Incentive Plan and may exercise stock options granted pursuant to the Company's 1997 Equity Incentive Plan without complying with the restrictions described in the preceding paragraph provided that any shares of Common Stock purchased pursuant to such plans during the 180-day period described in the preceding paragraph shall be subject to the balance of such 180-day restriction. Very truly yours, By:____________________________________ Print Name:_____________________________ 2 48 EXHIBIT D Form of Opinion of Counsel to the Company The Company and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business, all as described in the Registration Statement and the Prospectus. The Company is the sole record owner and, to our knowledge, the sole beneficial owner of all of the capital stock of each of its Subsidiaries. All of the outstanding shares of Common Stock have been, and the Shares, when paid for by the Underwriters in accordance with the terms of the Agreement, will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right under (i) the statutes, judicial and administrative decisions and the rules and regulations of the governmental agencies of the State of Delaware, (ii) the Company's certificate of incorporation or by-laws or (iii) any instrument, document, contract or other agreement referred to in the Registration Statement or any instrument, document, contract or agreement filed as an exhibit to the Registration Statement. Except as described in the Registration Statement or the Prospectus, to our knowledge, there is no commitment or arrangement to issue, and there are no outstanding options, warrants or other rights calling for the issuance of, any share of capital stock of the Company or any Subsidiary to any person or any security or other instrument that by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of the Agreement by the Company or in connection with the taking by the Company of any action contemplated thereby, except such as have been obtained under the Act and the Rules and Regulations and such as may be required under state or other securities or "Blue Sky" laws or by the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. All references in this opinion to the Agreement shall include the Price Determination Agreement. 49 The authorized, issued and outstanding capital stock of the Company is as set forth in the Registration Statement and the Prospectus under the caption "Capitalization." The description of the Common Stock contained in the Prospectus is complete and accurate in all material respects. The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable statutory requirements. The Registration Statement and the Prospectus comply in all material respects as to form with the requirements of the Act (except that we express no opinion as to financial statements, schedules and other financial data contained in the Registration Statement or the Prospectus). To our knowledge, any instrument, document, lease, license, contract or other agreement (collectively, "Documents") required to be described or referred to in the Registration Statement or the Prospectus has been properly described or referred to therein and any Document required to be filed as an exhibit to the Registration Statement has been filed as an exhibit thereto. To our knowledge, except as disclosed in the Registration Statement or the Prospectus, no person or entity has the right to require the registration under the Act of shares of Common Stock or other securities of the Company by reason of the filing or effectiveness of the Registration Statement. To our knowledge, neither the Company nor any of the Subsidiaries is in violation of, or in default with respect to, any law, rule, regulation, order, judgment or decree, except as may be described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business or assets of the Company and the Subsidiaries, taken as a whole. All descriptions in the Prospectus of statutes, regulations or legal or governmental proceedings are accurate and fairly present the information required to be shown. The Company has full corporate power and authority to enter into the Agreement, and the Agreement has been duly authorized, executed and delivered by the Company. The execution and delivery by the Company of, and the performance by the Company of its agreements in, the Agreement do not and will not (i) violate the certificate of incorporation or by-laws of the Company, (ii) breach or result in a default under, cause the 2 50 time for performance of any obligation to be accelerated under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company or any of its Subsidiaries pursuant to the terms of, (A) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement, capital lease or other evidence of indebtedness of which we have knowledge, (B) any voting trust arrangement or any contract or other agreement to which the Company is a party that restricts the ability of the Company to issue securities and of which we have knowledge or (C) any Document filed as an exhibit to the Registration Statement, (iii) breach or otherwise violate any existing obligation of the Company under any court or administrative order, judgment or decree of which we have knowledge, or (iv) to our knowledge, violate applicable provisions of any statute or regulation. Delivery of certificates for the Shares will transfer valid and marketable title thereto to each Underwriter that has purchased such Shares in good faith and without any notice of any adverse claim with respect thereto. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. The Shares have been authorized for quotation on The Nasdaq Stock Market's National Market. We hereby confirm to you that we have been advised by the Commission that the Registration Statement has become effective under the Act and that no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is threatened, pending or contemplated. We hereby further confirm to you that, to our knowledge, there are no actions, suits, proceedings or investigations pending or overtly threatened in writing against the Company, any of the Subsidiaries or any of their respective officers or directors in their capacities as such, before or by any court, governmental agency or arbitrator which (i) seek to challenge the legality or enforceability of the Agreement or (ii) are of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectus. In addition to the opinion set forth above, we also confirm that we have participated in the preparation of the Registration Statement and the Prospectus and, without assuming any responsibility for the accuracy, completeness or fairness of the statements contained in the 3 51 Registration Statement or the Prospectus or in any amendment or supplement thereto nothing has come to our attention that causes us to believe that, both as of the Effective Date and as of the Closing Date and the Option Closing Date, the Registration Statement, or any amendment thereto, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any Prospectus or any amendment or supplement thereto at the time such Prospectus was issued, at the time any such amended or supplemented Prospectus was issued, at the Closing Date and the Option Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading (except that we express no opinion as to financial statements, schedules and other financial data contained in the Registration Statement or the Prospectus). The foregoing opinion is subject to the qualification that the enforceability of the Agreement may be: (i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity), including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. In rendering such opinion, we may rely (A) as to matters involving the application of laws of any jurisdiction other than the Commonwealth of Massachusetts, the United States or the Delaware General Corporation Law, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and of public officials. This letter is furnished by us solely for your benefit in connection with the transactions referred to in the Agreement and may not be circulated to, or relied upon by, any other person, except that this letter may be relied upon by your counsel in connection with the opinion letter to be delivered to you pursuant to Section 6(g) of the Agreement. 4 52 EXHIBIT E Form of Opinion of Counsel to the Selling Shareholders Each of the Selling Shareholders has full power and authority to enter into the Agreement and the Agreement and Power of Attorney and to sell, transfer and deliver such Shares pursuant to the Agreement and the Agreement and Power of Attorney. All authorizations and consents necessary for the execution and delivery of the Agreement and the Agreement and Power of Attorney on behalf of each of the Selling Shareholders has been given. The delivery of the Shares on behalf of the Selling Shareholders pursuant to the terms of the Agreement and payment therefor by the Underwriters will transfer good and marketable title to the Shares to the several Underwriters purchasing the Shares, free and clear of all liens, encumbrance and claims whatsoever. Each of the Agreement and the Agreement and Power of Attorney has been duly authorized, executed and delivered by or on behalf of each of the Selling Shareholders, is a valid and binding agreement of each Selling Shareholder and, except for the indemnification and contribution provisions of the Agreement, the Agreement and the Agreement and Power of Attorney are enforceable against the Selling Shareholders in accordance with the terms thereof. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by or on behalf of the Selling Shareholders, in connection with the execution, delivery and performance of the Agreement and the Agreement and Power of Attorney by or on behalf of the Selling Shareholders or in connection with the taking by or on behalf of the Selling Shareholders of any action contemplated thereby, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or "Blue Sky" laws or by the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Selling Shareholders. 53 The execution and delivery by the Selling Shareholders of, and the performance by the Selling Shareholders of their agreements in, the Agreement and the Agreement and Power of Attorney, do not and will not (i) breach or result in a default under, cause the time for performance of any obligation to be accelerated under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of any Selling Shareholder pursuant to the terms of, (A) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement, capital lease or other evidence of indebtedness of which we have knowledge, (B) any voting trust arrangement or any contract or other agreement to which any Selling Shareholder is a party that restricts the ability of any such Selling Shareholder to issue securities and of which we have knowledge or (C) any other contract or other agreement of which we have knowledge, (ii) breach or otherwise violate any existing obligation of any Selling Shareholder under any court or administrative order, judgment or decree of which we have knowledge or (iii) violate applicable provisions of any statute or regulation in the States of Delaware, Maryland, Virginia, Tennessee, Mississippi, Ohio, Minnesota, Michigan, Oklahoma, or Illinois, the District of Columbia or of the United States. There are no transfer or similar taxes payable in connection with the sale and delivery of the Shares by the Selling Shareholders to the several Underwriters, except as specified in such opinion. The foregoing opinion is subject to the qualification that the enforceability of the Agreement and the Agreement and Power of Attorney may be: (i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity), including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. This letter is furnished by us solely for your benefit in connection with the transactions referred to in the Agreement and may not be circulated to, or relied upon by, any other person, except that this letter may be relied upon by your counsel in connection with the opinion letter to be delivered to you pursuant to Section 6(g) of the Agreement. 2 EX-23.1 3 CONSENT OF ARTHUR ANDERSEN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS To BridgeStreet Accommodations, Inc. As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) for BridgeStreet Accommodations, Inc. dated April 10, 1997, for Temporary Corporate Housing Columbus, Inc. dated February 28, 1997, for Corporate Lodgings, Inc. dated February 28, 1997, for Exclusive Interim Properties, Ltd. dated March 11, 1997, and for Home Again, Inc. dated March 21, 1997, included in or made part of this registration statement. /S/ ARTHUR ANDERSEN LLP Boston, Massachusetts August 27, 1997 EX-23.2 4 CONSENT OF ARTHUR ANDERSEN, LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To BridgeStreet Accommodations, Inc. As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) for Temporary Housing Experts, Inc., dated March 21, 1997, included in or made part of this registration statement. /S/ ARTHUR ANDERSEN LLP Memphis, Tennessee August 27, 1997 -----END PRIVACY-ENHANCED MESSAGE-----