-----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, RtdRXgwNQI3DWLdPvBj4XX9trLV+uTBoifdqOnHDLz6ZkYCDABad3J1YXYdzkoCD 9zPmDxJKvw0eIl8ocr/HDw== 0000950131-02-004191.txt : 20021106 0000950131-02-004191.hdr.sgml : 20021106 20021106172827 ACCESSION NUMBER: 0000950131-02-004191 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXTENDED STAY AMERICA INC CENTRAL INDEX KEY: 0001002579 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363996573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13125 FILM NUMBER: 02811650 BUSINESS ADDRESS: STREET 1: 450 E LAS OLAS BLVD STREET 2: STE 1100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33301 BUSINESS PHONE: 9547131600 MAIL ADDRESS: STREET 1: 450 E LAS OLAS BLVD STREET 2: STE 1100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33301 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File Number 001-13125 ------------- EXTENDED STAY AMERICA, INC. (Exact name of Registrant as specified in its charter) Delaware 36-3996573 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 North Pine Street, Spartanburg, SC 29302 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (864) 573-1600 ------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At October 31, 2002, the registrant had issued and outstanding an aggregate of 93,819,942 shares of Common Stock. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EXTENDED STAY AMERICA, INC. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share data)
ASSETS September 30, December 31, 2002 2001(1) ------------ ------------ Current assets: Cash and cash equivalents................. $ 32,455 $ 11,027 Accounts receivable....................... 5,899 6,385 Prepaid income taxes...................... 1,207 10,669 Prepaid expenses.......................... 4,188 3,628 Deferred income taxes..................... 34,624 37,589 ------------ ------------ Total current assets................. 78,373 69,298 Property and equipment, net.................. 2,343,002 2,277,414 Deferred loan costs, net..................... 22,525 24,371 Other assets................................. 795 788 ------------ ------------ $ 2,444,695 $ 2,371,871 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................... $ 20,429 $ 34,433 Accrued retainage......................... 7,353 13,879 Accrued property taxes.................... 17,840 12,174 Accrued salaries and related expenses..... 6,543 4,291 Accrued interest.......................... 9,477 7,011 Other accrued expenses.................... 21,628 20,798 Current portion of long-term debt......... 20,490 12,500 ------------ ------------ Total current liabilities............... 103,760 105,086 ------------ ------------ Deferred income taxes........................ 139,864 126,752 ------------ ------------ Long-term debt............................... 1,136,386 1,132,250 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and outstanding.................. Common stock, $.01 par value, 500,000,000 shares authorized, 93,816,942 and 93,228,443 shares issued and outstanding, respectively............... 938 932 Additional paid-in capital................ 800,626 793,484 Retained earnings......................... 263,121 213,367 ------------ ------------ Total stockholders' equity........... 1,064,685 1,007,783 ------------ ------------ $ 2,444,695 $ 2,371,871 ============ ============
- ------------------- (1) Derived from audited financial statements See notes to the unaudited condensed consolidated financial statements 1 EXTENDED STAY AMERICA, INC. Condensed Consolidated Statements of Income (Unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended ----------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------ ------------- ------------ ------------- Revenue .............................................. $153,463 $145,717 $421,058 $423,243 Property operating expenses ... ...................... 66,485 59,874 189,902 173,407 Corporate operating and property management expenses . 12,170 12,003 36,355 35,402 Headquarters relocation costs ........................ 4,593 9,019 Depreciation and amortization ........................ 19,858 18,243 58,781 53,530 -------- -------- -------- -------- Total costs and expenses ..................... 98,513 94,713 285,038 271,358 -------- -------- -------- -------- Income from operations before interest, income taxes, extraordinary item and cumulative effect of accounting change .............................. 54,950 51,004 136,020 151,885 Interest expense, net ................................ 20,245 19,524 59,413 57,616 -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change ............ 34,705 31,480 76,607 94,269 Provision for income taxes ........................... 13,535 12,592 26,853 37,707 -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change ....................... 21,170 18,888 49,754 56,562 Extraordinary write-off of unamortized debt issue costs, net of income tax benefit of $3,942 ........ (5,912) (5,912) Cumulative effect of change in accounting for derivatives, net of income tax benefit of $446 .... (669) -------- -------- -------- -------- Net income ........................................... $ 21,170 $ 12,976 $ 49,754 $ 49,981 ======== ======== ======== ======== Net income per common share - Basic: Income before extraordinary item and cumulative effect of accounting change ..................... $ 0.23 $ 0.20 $ 0.53 $ 0.60 Extraordinary item ................................ (0.06) (0.06) Cumulative effect of accounting change ............ (0.01) -------- -------- -------- -------- Net income ........................................... $ 0.23 $ 0.14 $ 0.53 $ 0.53 ======== ======== ======== ======== Net income per common share - Diluted: Income before extraordinary item and cumulative effect of accounting change ..................... $ 0.22 $ 0.20 $ 0.51 $ 0.58 Extraordinary item ................................ (0.06) (0.06) Cumulative effect of accounting change ............ (0.01) -------- -------- -------- -------- Net income ........................................... $ 0.22 $ 0.14 $ 0.51 $ 0.51 ======== ======== ======== ======== Weighted average shares: Basic ............................................. 93,784 93,094 93,631 94,527 Effect of dilutive options ........................ 2,354 2,580 3,077 2,951 -------- -------- -------- -------- Diluted ........................................... 96,138 95,674 96,708 97,478 ======== ======== ======== ========
See notes to the unaudited condensed consolidated financial statements 2 EXTENDED STAY AMERICA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended ---------------------------- September 30, September 30, 2002 2001 ------------- ------------- Cash flows from operating activities: Net income ........................................................... $ 49,754 $ 49,981 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................. 58,781 53,530 Amortization of deferred loan costs included in interest expense 3,128 3,552 Deferred income taxes .......................................... 16,077 17,762 Non-cash charges included in headquarters relocation costs ..... 2,106 Extraordinary item, net ........................................ 5,912 Cumulative effect of accounting change, net .................... 669 Changes in operating assets and liabilities .................... 23,064 26,683 --------- ---------- Net cash provided by operating activities .................. 150,804 160,195 --------- ---------- Cash flows from investing activities: Additions to property and equipment .................................. (145,860) (233,320) Other assets ......................................................... (7) (187) --------- ---------- Net cash used in investing activities ...................... (145,867) (233,507) --------- ---------- Cash flows from financing activities: Proceeds from long-term debt ......................................... 100,000 1,008,625 Repayments of credit facilities ...................................... (87,874) (882,000) Proceeds from issuance of common stock ............................... 5,646 17,548 Repurchases of Company common stock .................................. (58,362) Additions to deferred loan costs ..................................... (1,281) (21,468) --------- ---------- Net cash provided by financing activities .................. 16,491 64,343 --------- ---------- Increase (decrease) in cash and cash equivalents ....................... 21,428 (8,969) Cash and cash equivalents at beginning of period ....................... 11,027 13,386 --------- ---------- Cash and cash equivalents at end of period ............................. $ 32,455 $ 4,417 ========= ========== Noncash investing and financing transactions: Capitalized or deferred items included in accounts payable and accrued liabilities ............................................ $ 13,547 $ 34,448 ========= ========== Supplemental cash flow disclosures: Cash paid for: Income taxes, net of refunds ....................................... $ (158) $ 15,930 ========= ========== Interest expense, net of amounts capitalized ....................... $ 54,357 $ 52,115 ========= ==========
See notes to the unaudited condensed consolidated financial statements 3 EXTENDED STAY AMERICA, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited and include the accounts of Extended Stay America, Inc. and subsidiaries. In this Quarterly Report on Form 10-Q, the words "Extended Stay America", "Company", "we", "our", "ours", and "us" refer to Extended Stay America, Inc. and its subsidiaries unless the context suggests otherwise. All significant intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet data at December 31, 2001 was derived from our audited financial statements but does not include all disclosures required by generally accepted accounting principles. Operating results for the three-month and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001. The computation of diluted earnings per share for the three months ended September 30, 2002 and 2001 does not include approximately 2.8 million and 2.6 million weighted average shares, respectively, and for the nine months ended September 30, 2002 and 2001 does not include approximately 2.4 million weighted average shares of our common stock in both periods represented by outstanding options because the exercise price of the options for the periods was greater than the average market price of our common stock during the periods. Certain previously reported amounts have been reclassified to conform with the current period's presentation. Income Taxes We expect our estimated annual effective income tax rate for 2002 to decrease from 40% to 39%, reflecting a reduction in estimated state income taxes resulting from state tax planning and credits. Accordingly, the provision for income taxes in the nine-month period ended September 30, 2002 reflects a reduction in expense of approximately $3.0 million, which was recorded in the first quarter of 2002, associated with adjusting our deferred tax assets and liabilities to reflect the lower rate. Derivative Financial Instruments and Cumulative Effect of a Change in Accounting We do not enter into financial instruments for trading or speculative purposes. We have used interest rate cap contracts to hedge our exposure on variable rate debt in the past. Through December 31, 2000, the cost of the caps was included in prepaid expenses and amortized to interest expense over the life of the cap contract. Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended, requires all derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as amended, is effective for financial statements issued for periods beginning after December 15, 2000. At December 31, 2000, the carrying value of our interest rate cap contracts was $1,115,000 and their fair value was 4 zero. We adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as interpreted by the Derivatives Implementation Group, required the transition adjustment to be allocated between the cumulative-effect-type adjustment of earnings and the cumulative-effect-type adjustment of other comprehensive income based on our pre-SFAS No.133 accounting policy for the contracts. Because the fair value of the interest rate cap contracts at adoption was zero, the entire transition adjustment of $669,000, net of income tax benefit of $446,000, was recognized in earnings as a cumulative effect adjustment on January 1, 2001. New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which we are required to adopt on January 1, 2003. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate certain inconsistencies, and amends other existing authoritative pronouncements to make technical corrections and clarify meanings. The adoption of this statement is not expected to have a material effect on our financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The adoption of this statement is not expected to have a material effect on our financial statements. Related Party Transactions The Chairman of our Board of Directors serves as a director of a company to which we sublease office space. The sublease provides for monthly rent of $52,157 through December 2004. On December 17, 2001, the company to which we sublease office space filed a voluntary petition for reorganization under Chapter 11 of the U. S. Bankruptcy Code. We have continued to receive rent payments under the sublease, and the company has not repudiated the sublease. Commitments and Contingencies On August 5, 2002, one of our subsidiaries was served with a complaint against us and several of our subsidiaries in the Superior Court of California, County of Alameda. This action, filed on behalf of an alleged class of former and existing managers, assistant managers, and manager trainees for our properties in California, alleges violations of certain of California's wage and hour laws. In particular, the action alleges that we misclassified these property managers as exempt from California's laws regarding overtime pay. The plaintiffs are seeking to certify a class representing all such property managers in California, an injunction, and damages for back pay, penalties, interest, and attorneys' fees. The case is captioned Rachelle Reid, et al vs. Extended Stay America, Inc., etc., et al. We are in the beginning stages of this litigation, but we believe we have meritorious defenses against this claim and intend to defend this case vigorously. The financial impact, if any, of this case cannot yet be predicted. From time to time, we may incur expenses due to defects in materials, construction, or systems installed in our properties. Most significant products or systems include manufacturers' warranties. In addition, contractual agreements with our general contractors typically require general contractors and subcontractors to maintain insurance designed to cover the faulty installation of significant systems. Testing has revealed that certain of our properties have sustained damage arising from defective materials and/or faulty installation of the Exterior Insulation Finish System ("EIFS"). At this time, the full extent of damage cannot be reasonably estimated. We have filed suit against the EIFS manufacturers, certain applicators, certain general contractors, and others seeking necessary repairs and recovery rights against expected and incurred 5 expenses. The suits allege, among other things, negligence, breach of warranty, breach of contract, tort, fraud, and unfair and deceptive trade practices. At this time, the extent of recovery, if any, cannot be reasonably determined. NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
(000's Omitted) September 30, December 31, 2002 2001 ------------- ------------ Operating Facilities: Land and improvements ................................... $ 637,904 $ 593,428 Buildings and improvements .............................. 1,645,527 1,541,091 Furniture, fixtures, equipment and supplies ............. 299,334 284,005 ---------- ---------- Total Operating Facilities ............................ 2,582,765 2,418,524 Office furniture, fixtures and equipment .................... 7,313 6,852 Facilities under development, including land and improvements 80,231 120,626 ---------- ---------- 2,670,309 2,546,002 Less: Accumulated depreciation .............................. (327,307) (268,588) ---------- ---------- Total property and equipment ................................ $2,343,002 $2,277,414 ========== ==========
We utilize general contractors for the construction of our properties. Pursuant to the terms of our contractual agreements with the general contractors, amounts are retained from payments made to them until the terms of the agreement have been satisfactorily completed. Retained amounts are recorded as accrued retainage. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General We own and operate three brands in the extended stay lodging market--StudioPLUS Deluxe Studios(R) ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency Studios(R) ("EXTENDED STAY"), and Crossland Economy Studios(R) ("Crossland"). Each brand is designed to appeal to different price points that are generally below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those in our other brands, an exercise facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category. The table below provides a summary of our selected development and operational results for the three months and nine months ended September 30, 2002 and 2001.
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Total Facilities Open (at period end) ..................... 451 413 451 413 Total Facilities Opened ................................... 2 8 20 21 Average Occupancy Rate .................................... 74% 77% 71% 77% Average Weekly Room Rate .................................. $325 $323 $319 $322
Average occupancy rates are determined by dividing the number of rooms occupied on a daily basis by the total number of rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates generally will be greater than standard room rates because of (1) stays of less than one week, which are charged at a higher nightly rate, (2) higher weekly rates for rooms that are larger than the standard rooms, and (3) additional charges for more than one person per room. We expect that our future occupancy and room rates will be impacted by a number of factors, including the impact of the U.S. economy on demand for lodging products, the number and geographic location of our new facilities, and the season in which we open those facilities. We also cannot assure you that we can maintain our occupancy and room rates. At September 30, 2002, we had 451 operating facilities (39 Crossland, 317 EXTENDED STAY, and 95 StudioPLUS) and had 15 EXTENDED STAY facilities under construction. We expect to complete the construction of the facilities currently under construction generally within the next twelve months, however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors, including final permitting, obtaining certificates of occupancy, and weather related construction delays. 7 Results of Operations For the Three Months Ended September 30, 2002 and 2001 Property Operations The following is a summary of the number of properties in operation at the end of each period along with the related average occupancy rates and average weekly room rates during each period:
For the Three Months Ended ------------------------------------------------------------------ September 30, 2002 September 30, 2001 ------------------------------- -------------------------------- Average Average Average Average Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room Open Rate Rate Open Rate Rate ---------- --------- ----------- ---------- --------- ----------- Crossland 39 73% $ 222 39 80% $ 222 EXTENDED STAY 317 74 338 280 78 335 StudioPLUS 95 74 332 94 75 345 ---- -- ------ --- -- ----- Total 451 74% $ 325 413 77% $ 323 ==== == ====== === == =====
We realized an overall decrease of 4.0% in revenue per available room ("REVPAR") for the third quarter of 2002 as compared to the third quarter of 2001. The decrease in overall average occupancy rates for the third quarter of 2002 compared to the third quarter of 2001 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the weakened U.S. economy, the continued impact on travel resulting from the events of September 11, 2001 and subsequent terrorism alerts, and a decline in demand surrounding the anniversary of the events of September 11, 2001. The increase in overall average weekly room rates for the third quarter of 2002 compared to the third quarter of 2001 is due to the geographic dispersion of properties opened since September 30, 2001 and the higher standard weekly room rates in certain of those markets, which was partially offset by decreases in rates charged in previously opened properties. Comparable hotels, consisting of the 359 properties opened for at least one year at the beginning of the first quarter of 2001 (excluding three EXTENDED STAY properties located in Salt Lake City, Utah, which were impacted by one-time rental contracts during the 2002 Winter Olympics (the "Olympic Properties")), realized the following percentage changes in the components of REVPAR for the third quarter of 2002 as compared with the third quarter of 2001:
Crossland EXTENDED STAY StudioPLUS Total --------- ------------- ---------- ----- Number of Comparable Hotels ......... 39 230 90 359 Change in Occupancy Rate ............ (7.9)% (5.5)% (2.1)% (5.2)% Change in Average Weekly Rate ....... 0.0% (0.3)% (3.5)% (0.8)% Change in REVPAR .................... (7.9)% (5.8)% (5.5)% (5.9)%
We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels. While we believe that improvements in the U.S. economy will result in increased demand for our products, it is difficult to assess the timing and magnitude of these improvements. Based on trends experienced in the third quarter and in October of 2002, we currently anticipate that we will experience changes in REVPAR for our comparable hotels when compared to the prior year of zero to 2% for the fourth quarter of 2002. In this event, we would realize annual REVPAR declines for our comparable hotels of 8% to 9% for 2002. 8 We recognized total revenue of $153.5 million for the third quarter of 2002 and $145.7 million for the third quarter of 2001. This is an increase of approximately $7.7 million, or 5%. The 405 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $8.2 million, which was offset by approximately $15.9 million of incremental revenue attributable to properties opened after June 30, 2001. Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, and interest were $66.5 million (43% of total revenue) for the third quarter of 2002, compared to $59.9 million (41% of total revenue) for the third quarter of 2001. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to REVPAR increases or decreases because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 4.0% in REVPAR for the third quarter of 2002 as compared to the third quarter of 2001, and our property operating margins were 57% for the third quarter of 2002 and 59% for the third quarter of 2001. The provisions for depreciation and amortization for our lodging facilities were $19.7 million for the third quarter of 2002 and $18.0 million for the third quarter of 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for the third quarter of 2002 increased as compared to the third quarter of 2001 because we operated 38 additional facilities in 2002 and because we operated for a full quarter the 8 properties that were opened in the third quarter of 2001. Corporate Operations Corporate operating and property management expenses include all expenses not directly related to the development or operation of lodging facilities. These expenses consist primarily of personnel and certain marketing costs, as well as development costs that are not directly related to a site that we will develop. We incurred corporate operating and property management expenses of $12.2 million (8% of total revenue) in the third quarter of 2002 and $12.0 million (8% of total revenue) in the third quarter of 2001. The increase in the amount of these expenses for the third quarter of 2002 as compared to the same period in 2001 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase as we develop and operate additional facilities in the future. In May 2001, we announced that we would be relocating our corporate headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. We completed the relocation in the third quarter of 2001. As a result, we incurred non-recurring charges of approximately $9.0 million during 2001 in connection with the move, including approximately $2.1 million in non-cash charges related to the abandonment of unamortized leasehold improvements and charges associated with the valuation of stock options for terminated employees. Depreciation and amortization was $178,000 for the quarter ended September 30, 2002 and $238,000 for the comparable period in 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets for assets not directly related to the operation of our facilities. These assets were primarily office furniture and equipment. We realized $191,000 of interest income in the third quarter of 2002 and $105,000 in the third quarter of 2001. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $21.5 million during the third quarter of 2002 and $22.5 million in the third quarter of 2001. Of these amounts, $1.2 million in the third quarter of 2002 and $2.9 million in the third quarter of 2001 were capitalized and included in the cost of buildings and improvements. We recognized income tax expense of $13.5 million and $12.6 million (39% and 40%, respectively, of income before income taxes, extraordinary item, and cumulative effect of an accounting change) for the third quarter of 2002 and 2001, respectively. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes. 9 For the Nine Months Ended September 30, 2002 and 2001 Property Operations Operating results for the nine-month period ended September 30, 2002 include the impact of one-time rental contracts during the 2002 Winter Olympics at the Olympic Properties. We estimate that these contracts generated additional non-recurring net income of approximately $1.2 million, or $0.01 per diluted share, for the nine-month period. Including the Olympic Properties, we realized average occupancies of 71% and average weekly room rates of $319 for the nine-month period ended September 30, 2002, and we realized average occupancies of 77% and average weekly room rates of $322 for the nine-month period ended September 30, 2001, resulting in a decrease of 9.6% in overall REVPAR for the period when compared to the same period of last year. Excluding the Olympic Properties, the following is a summary of the number of properties in operation at the end of each period along with the related average occupancy rates and average weekly room rates during each period:
For the Nine Months Ended ------------------------------------------------------------------- September 30, 2002 September 30, 2001 -------------------------------- -------------------------------- Average Average Average Average Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room Open Rate Rate Open Rate Rate ---------- --------- ----------- ---------- --------- ----------- Crossland ................................ 39 71% $220 39 79% $222 EXTENDED STAY ............................ 314 71 330 277 78 334 StudioPLUS ............................... 95 70 329 94 76 345 --- -- ---- --- -- ---- Total ............................... 448 71% $318 410 78% $323 === == ==== === == ====
Excluding the Olympic Properties, we realized an overall decrease of 10.0% in REVPAR for the nine months ended September 30, 2002 as compared to the same period in 2001. The decrease in overall average occupancy rates for the nine month period ended September 30, 2002 compared to the same period in 2001 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the weakened U.S. economy and the continued impact on travel resulting from the events of September 11, 2001 and subsequent terrorism alerts. The decrease in overall average weekly room rates for the nine months ended September 30, 2002 compared to the same period in 2001 is due to decreases in rates charged in previously opened properties. Particularly for the EXTENDED STAY brand, this decrease in rates was partially offset by the geographic dispersion of properties opened since September 30, 2001 and the higher standard weekly room rates in certain of those markets. Comparable hotels, consisting of the 359 properties opened for at least one year at the beginning of the first quarter of 2001 (excluding the Olympic Properties), realized the following percentage changes in the components of REVPAR for the nine months ended September 30, 2002 as compared with the same period in 2001:
Crossland EXTENDED STAY StudioPLUS Total --------- ------------- ---------- ----- Number of Comparable Hotels 39 230 90 359 Change in Occupancy Rate (9.7)% (9.0)% (8.0)% (8.9)% Change in Average Weekly Rate (0.9)% (2.4)% (4.4)% (2.6)% Change in REVPAR (10.5)% (11.2)% (12.1)% (11.3)%
10 We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels. The percentage change in the components of REVPAR for comparable hotels experienced in the nine months ended September 30, 2002 reflects a decrease in REVPAR of 17.2% in the first quarter, a decrease in REVPAR of 11.0% in the second quarter, and a decrease in REVPAR of 5.9% in the third quarter. We recognized total revenue of $421.1 million for the nine months ended September 30, 2002 and $423.2 million for the nine months ended September 30, 2001. This is a decrease of $2.1 million or less than 1%. The 392 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $45.1 million, net of incremental revenue at the Olympic Properties of approximately $2.0 million, which was partially offset by approximately $43.0 million of incremental revenue attributed to properties opened after December 31, 2000. Property operating expenses for the nine months ended September 30, 2002 were $189.9 million (45% of total revenue), compared to $173.4 million (41% of total revenue) for the nine months ended September 30, 2001. We did not incur significant incremental property operating expenses at the Olympic Properties during the first quarter of 2002. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to REVPAR increases or decreases because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 9.6% in REVPAR for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. Our property operating margins were 55% for the nine months ended September 30, 2002 and 59% for the nine months ended September 30, 2001. The provisions for depreciation and amortization for our lodging facilities were $58.2 million for the nine months ended September 30, 2002 and $52.7 million for the nine months ended September 30, 2001. Depreciation and amortization for the nine months ended September 30, 2002 increased as compared to the same period in 2001 because we operated 20 additional facilities in 2002 and because we operated for a full nine months the 21 properties that were opened in the first nine months of 2001. Corporate Operations We incurred corporate operating and property management expenses of $36.4 million (9% of total revenue) in the nine months ended September 30, 2002 and $35.4 million (8% of total revenue) in the nine months ended September 30, 2001. The increase in the amount of these expenses for the nine-month period ended September 30, 2002 as compared to the same period in 2001 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. Depreciation and amortization for assets not directly related to operation of our facilities was $568,000 for the nine months ended September 30, 2002 and $794,000 for the nine months ended September 30, 2001. We realized $552,000 of interest income in the nine months ended September 30, 2002 and $437,000 in the nine months ended September 30, 2001. This interest income was attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $64.1 million in the nine months ended September 30, 2002 and $65.8 million in the nine months ended September 30, 2001. Of these amounts, $4.2 million in the nine months ended September 30, 2002 and $7.8 million in the nine months ended September 30, 2001 were capitalized and included in the cost of buildings and improvements. 11 We recognized income tax expense of $26.9 million for the nine-month period ended September 30, 2002 and $37.7 million for the nine-month period ended September 30, 2001 (35% and 40%, respectively, of income before income taxes, extraordinary item, and cumulative effect of an accounting change). We expect our annual effective income tax rate for 2002 to decrease from 40% to 39%, reflecting a reduction in estimated state income taxes resulting from state tax planning and credits. Accordingly, the provision for income taxes in the first quarter of 2002 reflected a reduction in expense of approximately $3.0 million associated with adjusting our deferred tax assets and liabilities to reflect the lower rate. Excluding the impact of our estimated annual effective income tax rate decrease, our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes. Cumulative Effect of a Change in Accounting Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended, requires all derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as amended, is effective for financial statements issued for periods beginning after December 15, 2000. At December 31, 2000, the carrying value of our interest rate cap contracts was $1,115,000 and their fair value was zero. We adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as interpreted by the Derivatives Implementation Group, required the transition adjustment to be allocated between the cumulative-effect-type adjustment of earnings and the cumulative-effect-type adjustment of other comprehensive income based on our pre-SFAS No. 133 accounting policy for the contracts. Because the fair value of the interest rate cap contracts at adoption was zero, the entire transition adjustment of $669,000, net of income tax benefit of $446,000, was recognized in earnings as a cumulative effect adjustment on January 1, 2001. Liquidity and Capital Resources We had net cash and cash equivalents of $32.5 million as of September 30, 2002 and $11.0 million as of December 31, 2001. At September 30, 2002 we had approximately $27.4 million invested in short-term money market depository accounts. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. At December 31, 2001 we had approximately $13.0 million invested in short-term demand notes of companies having credit ratings of A1/P1 or the equivalent using domestic commercial banks and other financial institutions. We also invested excess funds during these periods in an overnight sweep account with a commercial bank, which in turn invested these funds in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these investments, we did not take possession of the securities, which were instead held by the financial institutions. The market value of the securities held pursuant to these arrangements approximates the carrying amount. Our operating activities generated cash of $150.8 million during the nine months ended September 30, 2002 and $160.2 million during the nine months ended September 30, 2001. We used $145.9 million to acquire land, develop, or furnish a total of 35 sites opened or under construction in the nine months ended September 30, 2002 and $233.3 million for 59 sites in the nine months ended September 30, 2001. Our cost to develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the resulting cash flow from these properties will vary significantly but generally are expected to be in proportion to the development costs. For the 398 properties we opened from January 1, 1996 through December 31, 2001, the average development cost was approximately $5.6 million with an average of 107 rooms. In 2002, we expect to open a number of properties in the Northeast and West, where average development costs are higher. Accordingly, we expect our average development cost for 2002 to increase to approximately $8.5 million per property, with an average of 110 rooms per property. We made open market repurchases of 4,189,100 shares of common stock for approximately $58.4 million in the nine months ended September 30, 2001. We made no such repurchases in the nine months ended September 30, 2002. We received net proceeds from the exercise of options to purchase common stock totaling approximately $5.6 12 million in the nine months ended September 30, 2002 and $17.6 million in the nine months ended September 30, 2001. In addition to our $200 million 9.15% Senior Subordinated Notes due 2008 and our $300 million 9.875% Senior Subordinated Notes due 2011, we have a $900 million credit facility (the "Credit Facility") which provides for revolving loans and term loans on a senior collateralized basis. Loans under the Credit Facility bear interest, at our option, at either a variable prime-based rate or a variable LIBOR-based rate, plus an applicable margin. In January 2002, we borrowed $100 million pursuant to a delayed draw term loan under the Credit Facility. To minimize interest rates charged under the Credit Facility, we prepaid $25 million in March 2002. As of September 30, 2002, we did not have outstanding loans under the $200 million revolving facility and had $656.9 million, net of principal repayments, outstanding under the term loans. Availability of the revolving facility is dependent, however, upon us satisfying certain financial ratios of debt and interest compared to earnings before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility documents. As of September 30, 2002, we had $1.3 million in outstanding letters of credit. These letters of credit are being maintained as security for construction related performance and will expire between October 2002 and May 2003. If required, use of the letters of credit would draw against the revolving facility. Effective October 31, 2002, the Credit Facility was amended to provide additional flexibility in managing the development of new hotels. The amendment increased the total leverage covenant (defined as the ratio of our consolidated debt to our consolidated EBITDA, each as defined in the Credit Facility documents) from 4.50 to 5.00 for the period from April 1, 2003 to March 31, 2004 and from 4.50 to 4.75 for the period from April 1, 2004 to June 30, 2004. Beginning July 1, 2004, the leverage covenant will return to the previously scheduled level of 4.50. The amendment also modified the definition of EBITDA to exclude non-cash stock based compensation expenses. Our primary market risk exposures result from the variable nature of the interest rates on borrowings under the Credit Facility. We entered into the Credit Facility for purposes other than trading or speculation. Based on the levels of borrowings under the Credit Facility at September 30, 2002, if interest rates changed by 1.0%, our annual cash flow and net income would change by $4.0 million. We manage our market risk exposures by periodic evaluation of such exposures relative to the costs of reducing the exposures by entering into interest rate swaps or by refinancing the underlying obligations with longer term fixed rate debt obligations. We do not own derivative financial instruments or derivative commodity instruments. In connection with the Credit Facility, the 9.15% Senior Subordinated Notes, and the 9.875% Senior Subordinated Notes, we incurred additions to deferred loan costs of $1.3 million during the nine months ended September 30, 2002 and $21.5 million during the nine months ended September 30, 2001. We plan to open approximately 22 properties with total costs of approximately $186 million in 2002. We plan to commence construction on a total of 31 sites during 2002 with total development costs of approximately $250 million. We expect to open two of the 31 sites in 2002. We expect to open the remaining 29 sites, with total costs of approximately $235 million, in 2003. In addition, we plan to commence construction on 31 sites with total development costs of approximately $270 million in 2003 and have identified 10 additional sites with total development costs of approximately $86 million for which we could commence construction in 2003. We will continue to seek the necessary approvals and permits for additional sites and may seek to increase the number of construction starts in the future. Our current and future development plans will be affected by a number of factors, including the overall state of the U.S. economy, demand for lodging products in the overall lodging industry, demand for our extended stay lodging products, and availability of funds within the constraints of our financing agreements. 13 At September 30, 2002, we had commitments not reflected in our financial statements totaling approximately $84 million to complete construction of extended stay properties and $12 million to complete construction of our corporate headquarters. We believe that the remaining availability under the Credit Facility, together with our cash on hand and cash flows from operations, will provide sufficient funds to continue our expansion as presently planned and to fund our operating expenses, including our working capital deficit, for the next twelve months. We may increase our capital expenditures and property openings in future years, which would increase our capital needs. We may also need additional capital depending on a number of factors, including the number of properties we construct or acquire, the timing of that development, the cash flow generated by our properties and the amount of any open market repurchases of our common stock we make. Also, if capital markets provide favorable opportunities, our plans or assumptions change or prove to be inaccurate, our existing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions, we may seek additional capital sooner than currently anticipated. In the event we obtain additional capital, we may seek to increase property openings in future years. Sources of capital may include public or private debt or equity financing. We cannot assure you that we will be able to obtain additional financing on acceptable terms, if at all. Our failure to raise additional capital could result in the delay or abandonment of some or all of our development and expansion plans, and could have a material adverse effect on us. New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which we are required to adopt on January 1, 2003. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate certain inconsistencies, and amends other existing authoritative pronouncements to make technical corrections and clarify meanings. The adoption of this statement is not expected to have a material effect on our financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The adoption of this statement is not expected to have a material effect on our financial statements. Seasonality and Inflation Based upon the operating history of our facilities, we believe that extended stay lodging facilities are not as seasonal in nature as the overall lodging industry. We do expect, however, that our occupancy rates and revenues will be lower than average during the first and fourth quarters of each calendar year. Because many of our expenses do not fluctuate with changes in occupancy rates, declines in occupancy rates may cause fluctuations or decreases in our quarterly earnings. The rate of inflation as measured by changes in the average consumer price index has not had a material effect on our revenue or operating results during any of the periods presented. We cannot assure you, however, that inflation will not affect our future operating or construction costs. 14 Special Note on Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements. Words such as "expects", "intends", "plans", "projects", "believes", "estimates", and similar expressions are used to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors which may cause our actual results, performance, or achievements to be materially different. These factors include, among other things: . uncertainty as to changes in U.S. general economic activity and the impact of such changes on the consumer demand for lodging products in general and for extended stay lodging products in particular; . increasing competition in the extended stay lodging market; . our ability to increase or maintain revenue and profitability in our new and mature properties; . uncertainty as to the impact on the lodging industry of any additional terrorist attacks or responses to terrorist attacks; . uncertainty as to our future profitability; . our ability to operate within the limitations imposed by financing arrangements; . our ability to meet construction and development schedules and budgets; . our ability to obtain financing on acceptable terms to finance our growth; . the risk of significant one-time or continuing expenses due to defects in materials, construction, or systems installed throughout many of our properties; . our ability to integrate and successfully operate any properties acquired in the future and the risks associated with these properties; and . our ability to develop and implement the operational and financial systems needed to manage rapidly growing operations. Other matters set forth in this Quarterly Report may also cause our actual future results to differ materially from these forward-looking statements. We cannot assure you that our expectations will prove to be correct. In addition, all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-looking statements. All of these forward-looking statements are based on our expectations as of the date of this Quarterly Report. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 15 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In October 2002, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding us (including our consolidated subsidiaries) that is required to be included in our periodic reports to the SEC. In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our October 2002 evaluation. We cannot assure you, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote. 16 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit number and Description of Exhibit 10.1 Time Sharing Agreement, dated as of July 22, 2002, by and between ESA Services, Inc. and Advance America, Cash Advance Centers, Inc. for the Learjet 55 (serial No. 132) N242RB 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company filed a report on Form 8-K dated September 12, 2002, announcing that President and Chief Operating Officer Robert A. Brannon is taking a leave of absence while recovering from a stroke. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2002. EXTENDED STAY AMERICA, INC. /s/ GREGORY R. MOXLEY ------------------------------------- Gregory R. Moxley Chief Financial Officer (Principal Financial Officer) /s/ PATRICIA K. TATHAM ------------------------------------- Patricia K. Tatham Vice President - Corporate Controller (Principal Accounting Officer) 17 CERTIFICATIONS I, George D. Johnson, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Extended Stay America, Inc. (the "Company"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 6, 2002 /s/ GEORGE D. JOHNSON, JR. - --------------------------- George D. Johnson, Jr. Chief Executive Officer 18 CERTIFICATIONS I, Gregory R. Moxley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Extended Stay America, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 6, 2002 /s/ GREGORY R. MOXLEY - --------------------- Gregory R. Moxley Chief Financial Officer and Vice President - Finance 19 EX-10.1 3 dex101.txt TIME SHARING AGREEMENT Exhibit 10.1 TIME SHARING AGREEMENT This Agreement is made, effective as of July 24, 2002, by and between ESA Services, Inc., a corporation organized under the laws of the State of Delaware, with principal offices at 101 N. Pine Street, Spartanburg, SC 20303 (hereinafter referred to as "Lessor"), and Advance America Cash Advance Centers, Inc. with principal offices at 135 N. Church Street, Spartanburg, SC 20302 (hereinafter referred to as "Lessee"); RECITALS WHEREAS, Lessor is the owner of that certain civil Aircraft bearing the United States Registration Number N242RB ("the Aircraft" or "Aircraft"), a LearJet, Model 55B, Manufacturer's Serial Number 132; WHEREAS, Lessor employs a fully qualified flight crew to operate the Aircraft; and WHEREAS, Lessor and Lessee desire to lease said Aircraft with flight crew on a non-exclusive time sharing basis as defined in Section 91.501 (c) (1) of the Federal Aviation Regulations ("FAR"); The parties agree as follows: 1. Lessor agrees to lease the Aircraft to Lessee pursuant to the provisions of FAR 91.501 (c) (1) and to provide a fully qualified flight crew for all operations. This Agreement shall commence on the date that it is signed and continue for one year after said date. Thereafter, this Agreement shall be automatically renewed on a month to month basis, unless sooner terminated by either party as hereinafter provided. Either party may at any time terminate this Agreement upon thirty (30) days written notice to the other party, delivered personally or by certified mail, return receipt requested, at the address for said other party as set forth above. 2. Lessee shall pay Lessor for each flight conducted under this Agreement the actual expenses of each specific flight as authorized by FAR Part 91.501 (d). These expenses include: (a) Fuel, oil, lubricants, and other additives; (b) Travel expenses of the crew, including food, lodging and ground transportation; (c) Hangar and tie down costs away from the Aircraft's base of operation; (d) Insurance obtained for the specific flight; (e) Landing fees, airport taxes and similar assessments including, but not limited to IRC Section 4261 and related excise taxes; (f) Customs, foreign permit, and similar fees directly related to the flight; (g) In-flight food and beverages; (h) Passenger ground transportation; (i) Flight planning and weather contract services; and (j) An additional charge not to exceed 100% of the expenses listed in subparagraph (a) of this paragraph. 3. Lessor will pay all expenses related to the operation of the Aircraft when incurred, and will provide an invoice and bill Lessee for the expenses enumerated in paragraph 2 above on the last day of the month in which any flight or flights for the account of Lessee occur. Lessee shall pay Lessor for said expenses within fifteen (15) days of receipt of the invoice and bill therefor. 4. Lessee will provide Lessor with requests for flight time and proposed flight schedules as far in advance of any given flight as possible, and in any case, at least twenty-four (24) hours in advance of Lessee's planned departure. Requests for flight time shall be in a form whether written or oral, mutually convenient to, and agreed upon by the parties. In addition to the proposed schedules and flight times Lessee shall provide at least the following information for each proposed flight at some time prior to scheduled departure as required by the Lessor or Lessor's flight crew: (a) proposed departure point; (b) destination; (c) date and time of flight; (d) the number of anticipated passengers; (e) the nature and extent of luggage and/or cargo to be carried (f) the date and time of return flight, if any; and (g) any other information concerning the proposed flight that may be pertinent or required by Lessor or Lessor's flight crew. 5. Lessor shall have final authority over the scheduling of the Aircraft, provided, however, that Lessor will use its best efforts to accommodate Lessee's needs and to avoid conflicts in scheduling. 6. Lessor shall be solely responsible for securing maintenance, preventive maintenance and required or otherwise necessary inspections on the Aircraft,and shall take such requirements into account in scheduling the Aircraft. No period of maintenance, preventative maintenance or inspection shall be delayed or postponed for the purpose of scheduling the Aircraft, unless said maintenance or inspection can be safely conducted at a later time in compliance with all applicable laws and regulations, and within the sound discretion of the pilot in command. The pilot in command shall have final and complete authority to cancel any flight for any reason or condition which in his judgment would compromise the safety of the flight. 7. Lessor shall employ, pay for and provide to Lessee a qualified flight crew for each flight undertaken under this Agreement. 8. In accordance with applicable Federal Aviation Regulations, the qualified flight crew provided by Lessor will exercise all of its duties and responsibilities in regard to the safety of each flight conducted hereunder. Lessee specifically agrees that the flight crew, in its sole discretion, may terminate any flight, refuse to commence any flight, or take other action which in the considered judgment of the pilot in command is necessitated by considerations of safety. No such action of the pilot in command shall create or support any liability for loss, injury, damage or delay to Lessee or any other person. The parties further agree that Lessor shall not be liable for delay or failure to furnish the Aircraft and crew pursuant to this Agreement when such failure is caused by government regulation or authority, mechanical difficulty, war, civil commotion, strikes or labor disputes, weather conditions, or acts of God. 9. At all times during the term of this Lease, Lessor shall cause to be carried and maintained, at Lessor's cost and expense, physical damage insurance with respect to the Aircraft in the amount set forth below: Aircraft Physical Damage $5,650,000.00 (No Deductible While In Motion or Not in Motion) At all times during the term of this Lease, Lessor shall also cause to be carried and maintained, at lessor's cost and expense, third party aircraft liability insurance, passenger legal liability insurance, property damage liability insurance, and medical expense insurance in the amounts set forth below: Combined Liability Coverage for Bodily Injury and Property Damage Including Passengers - Each Occurrence $100,000,000.00 Medical Expense Coverage - Each Person $5,000.00 Lessor shall also bear the cost of paying any deductible amount on any policy of insurance in the event of a claim or loss. Any policies of insurance carried in accordance with this Lease: (i) shall name lessee as an additional insured; and (ii) shall contain a waiver by the underwriter thereof of any right of subrogation against Lessee. Each liability policy shall be primary without right of contribution from any other insurance which is carried by Lessee or Lessor and shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured. Lessor shall submit this Lease for approval to the insurance carrier for each policy of insurance on the aircraft. Lessor shall arrange for a Certificate of Insurance evidencing appropriate coverage as to the Aircraft and the satisfaction of the requirements set forth above to be given by its insurance carriers to Lessor. 10. Lessee warrants that: (a) It will use the Aircraft for and on account of its own business only, and will not use the Aircraft for the purpose of providing transportation of passengers or cargo in air commerce for compensation or hire; (b) It shall refrain from incurring any mechanics or other lien in connection with inspection, preventative maintenance, maintenance or storage of the Aircraft, whether permissible or impermissible under this Agreement, nor shall there by any attempt by any party hereto to convey, mortgage, assign, lease or any way alienate the Aircraft or create any kind of lien or security interest involving the Aircraft or do anything or take any action that might mature into such a lien; and (c) During the term of this Agreement, it will abide by and conform to all such laws, governmental and airport orders, rules and regulations, as shall from time to time be in effect relating in any way to the operation and use of the Aircraft by a timesharing Lessee. 11. For purposes of this Agreement, the permanent base of operation of the aircraft shall be Spartanburg, SC. 12. Neither this Agreement nor any party's interest herein shall be assignable to any other party whatsoever. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their heirs, representatives and successors. 13. TRUTH IN LEASING STATEMENT THE AIRCRAFT, A LEARJET 55B MODEL, MANUFACTURER'S SERIAL NO. 132, CURRENTLY REGISTERED WITH THE FEDERAL AVIATION ADMINISTRATION AS N242RB HAS BEEN MAINTAINED AND INSPECTED UNDER FAR PART 91 DURING THE 12 MONTH PERIOD PRECEDING THE DATE OF THIS LEASE. THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER FAR PART 91 FOR OPERATIONS TO BE CONDUCTED UNDER THIS LEASE. DURING THE DURATION OF THIS LEASE, ESA SERVICES, INC. 101 NORTH PINE STREET, SUITE 200, SPARTANBURG, SOUTH CAROLINA 29302, IS CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE. AN EXPLANATION OF FACTORS BEARING AN OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE. THE "INSTRUCTIONS FOR COMPLIANCE WITH TRUTH IN LEASING REQUIREMENTS" ATTACHED HERETO ARE INCORPORATED HEREIN BY REFERENCE. I, THE UNDERSIGNED, GREGORY R. MOXLEY, AS CHIEF FINANCIAL OFFICER OF ESA SERVICES, INC., 101 NORTH PINE STREET, SUITE 200, SPARTANBURG, SOUTH CAROLINA 29302, CERTIFY THAT IT IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT AND THAT I UNDERSTAND THE RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS. IN WITNESS WHEREOF, the parties have executed this Agreement. ESA Services, Inc. By: /s/ Gregory R. Moxley --------------------------------- ______________________________ Gregory R. Moxley Date and Time of Execution Chief Financial Officer By: /s/ William W. Webster, IV --------------------------------- ______________________________ William W. Webster, IV Date and Time of Execution INSTRUCTIONS FOR COMPLIANCE WITH "TRUTH IN LEASING" REQUIREMENTS 1. Mail a copy of the lease to the following address via certified mail, return receipt requested, immediately upon execution of the lease (14 C.F.R. 91.23 requires that the copy be sent within twenty-four hours after it is signed): Federal Aviation Administration Aircraft Registration Branch ATTN: Technical Section P.O. Box 25724 Oklahoma City, Oklahoma 73125 2. Telephone the nearest Flight Standards District Office at least forty-eight hours prior to the first flight under this lease. 3. Carry a copy of the lease in the aircraft at all times. EX-99.1 4 dex991.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Extended Stay America, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2002 /s/ GEORGE D. JOHNSON, JR. ------------------------------------ George D. Johnson, Jr. Chief Executive Officer EX-99.2 5 dex992.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Extended Stay America, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as Chief Financial Officer and Vice President - Finance of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2002 /s/ GREGORY R. MOXLEY ----------------------------------- Gregory R. Moxley Chief Financial Officer and Vice President- Finance -----END PRIVACY-ENHANCED MESSAGE-----