-----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, MJdd76Penwuu3Z9s65dGUselKMc3vUDAE/NfZZsV1L1k0ahCiqGTUnfvcgdBrkCW NoeKvsYRVZCEuGefBbtnhg== 0000950131-99-004935.txt : 19990817 0000950131-99-004935.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950131-99-004935 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: SEC FILE NUMBER: 001-13125 FILM NUMBER: 99689965 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 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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File Number 0-27360 _____________ EXTENDED STAY AMERICA, INC. (Exact name of Registrant as specified in its charter) Delaware 36-3996573 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 450 EAST LAS OLAS BOULEVARD, FORT LAUDERDALE, FL 33301 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (954) 713-1600 _____________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At August 4, 1999, the registrant had issued and outstanding an aggregate of 96,506,704 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 ------ June 30, December 31 1999 1998(1) ---------- ----------- Current assets: Cash and cash equivalents....................... $ 7,793 $ 623 Accounts receivable............................. 7,571 5,946 Prepaid expenses................................ 2,208 1,743 Deferred income taxes........................... 32,444 27,735 Other current assets............................ 27 781 ---------- ---------- Total current assets......................... 50,043 36,828 Property and equipment, net....................... 1,755,055 1,637,334 Deferred loan costs, net.......................... 17,352 19,260 Other assets...................................... 554 1,160 ---------- ---------- $1,823,003 $1,694,582 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
Current liabilities: Accounts payable................................ $ 27,224 $ 62,834 Income taxes payable............................ 7,079 Accrued retainage............................... 13,719 25,442 Accrued property taxes.......................... 11,595 6,856 Accrued salaries and related expenses........... 2,803 1,816 Accrued interest................................ 7,152 7,010 Other accrued expenses.......................... 16,495 15,304 Current portion of long-term debt............... 2,000 2,000 ---------- ---------- Total current liabilities.................... 80,988 128,341 ---------- ---------- Deferred income taxes............................. 60,076 46,490 ---------- ---------- Long-term debt.................................... 788,000 653,000 ---------- ---------- Commitments Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares issued and outstanding................................... Common stock, $.01 par value 500,000,000 shares authorized; 96,506,704 and 95,968,379 shares issued and outstanding, respect............... 965 960 Additional paid-in capital...................... 832,814 827,110 Retained earnings............................... 60,160 38,681 ---------- ---------- Total stockholders' equity................... 893,939 866,751 ---------- ---------- $1,823,003 $1,694,582 ========== ==========
_____________________ (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 Six Months Ended ------------------- ------------------- June 30, June 30, June 30, June 30, 1999 1998 1999 1998 --------- -------- --------- -------- Revenue.................................................... $106,487 $70,044 $195,906 $124,274 Property operating expenses................................ 44,053 28,893 85,046 55,175 Corporate operating and property management expenses...................................... 10,448 9,715 20,746 19,108 Reduction in valuation allowance........................... (1,079) (1,079) Depreciation and amortization.............................. 14,903 10,015 28,827 19,445 -------- ------- -------- -------- Total costs and expenses................................ 68,325 48,623 133,540 93,728 -------- ------- -------- -------- Income from operations before interest, income taxes and cumulative effect of accounting change................... 38,162 21,421 62,366 30,546 Interest expense, net...................................... 13,817 4,561 25,268 5,682 -------- ------- -------- -------- Income before income taxes and cumulative effect of accounting change......................................... 24,345 16,860 37,098 24,864 Provision for income taxes................................. 9,739 6,744 14,840 9,946 -------- ------- -------- -------- Net income before cumulative effect of accounting change... 14,606 10,116 22,258 14,918 Cumulative effect of change in accounting for start-up activities, net of income tax benefit of $520............. 779 -------- ------- -------- -------- Net income................................................. $ 14,606 $10,116 $ 21,479 $ 14,918 ======== ======= ======== ======== Net income per common share - Basic: Net income before cumulative effect of accounting change.. $ 0.15 $ 0.11 $ 0.23 $ 0.16 Cumulative effect of accounting change.................... (0.01) -------- ------- -------- -------- Net income................................................ $ 0.15 $ 0.11 $ 0.22 $ 0.16 ======== ======= ======== ======== Net income per common share - Diluted: Net income before cumulative effect of accounting change.. $ 0.15 $ 0.10 $ 0.23 $ 0.15 Cumulative effect of accounting change.................... (0.01) -------- ------- -------- -------- Net income................................................. $ 0.15 $ 0.10 $ 0.22 $ 0.15 ======== ======= ======== ======== Weighted average shares: Basic..................................................... 96,278 95,897 96,127 95,798 Effect of dilutive options................................ 1,005 1,221 811 1,303 -------- ------- -------- -------- Diluted................................................... 97,283 97,118 96,938 97,101 ======== ======= ======== ========
See notes to the unaudited condensed consolidated financial statements 2 EXTENDED STAY AMERICA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Ended --------------------------- June 30, June 30, 1999 1998 --------- ---------- Cash flows from operating activities: Net income.......................................................... $ 21,479 $ 14,918 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................... 28,827 19,445 Amortization of deferred loan costs included in interest expense.. 1,930 837 Deferred income taxes............................................. 8,877 3,791 Cumulative effect of accounting change, net....................... 779 Changes in operating assets and liabilities....................... (14,105) (1,997) --------- --------- Net cash provided by operating activities............................ 47,787 36,994 --------- --------- Cash flows from investing activities: Additions to property and equipment................................. (181,091) (284,200) Other assets........................................................ 85 (55) --------- --------- Net cash used in investing activities................................ (181,006) (284,255) --------- --------- Cash flows from financing activities: Proceeds from long-term debt........................................ 285,000 343,500 Repayments of revolving credit facility............................. (150,000) (28,500) Proceeds from issuance of common stock.............................. 5,410 4,185 Additions to deferred loan costs.................................... (21) (10,486) --------- --------- Net cash provided by financing activities............................ 140,389 308,699 --------- --------- Increase in cash and cash equivalents................................ 7,170 61,438 Cash and cash equivalents at beginning of period..................... 623 3,213 --------- --------- Cash and cash equivalents at end of period........................... $ 7,793 $ 64,651 ========= ========= Noncash investing and financing transactions: Capitalized or deferred items included in accounts payable and accrued liabilities............................................ $ 29,491 $ 67,358 ========= ========= Conversion of amounts due under revolving credit facility to term loan....................................................... $ $ 100,000 ========= ========= Capitalization of amortized deferred loan costs..................... $ $ 511 ========= ========= Supplemental cash flow disclosures: Cash paid for: Income taxes, net of refunds of $411 in 1998....................... $ 12,414 $ 2,663 ========= ========= Interest expense, net of amounts capitalized....................... $ 23,598 $ 7,056 ========= =========
See notes to the unaudited condensed consolidated financial statements 3 EXTENDED STAY AMERICA, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited and include the accounts of Extended Stay America, Inc. and subsidiaries (the "Company"). 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, 1998 was derived from audited financial statements of the Company but does not include all disclosures required by generally accepted accounting principles. Operating results for the three-month and six-month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Pursuant to the Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" issued by the Accounting Standards Executive Committee, effective January 1, 1999, the Company changed its method of accounting for start-up activities, including pre-opening and organizational costs, to expense them as they are incurred. Accordingly, the Company recorded an expense of $779,000, net of income tax benefit of $520,000, as the cumulative effect of this change in accounting. In the quarter ended September 30, 1998, unfavorable capital market conditions resulted in a reduction in the Company's development plans for 1999 and 2000. As a result, a valuation allowance of $12.0 million was established for the write-off of costs related to sites that would not be developed. The operating results for the quarter ended June 30, 1999 reflect the reversal of $1.1 million of this valuation allowance resulting from the renegotiation of the terms of a number of the optioned sites. For the six months ended June 30, 1999 and 1998, the computation of diluted earnings per share does not include approximately 8,098,000 and 6,187,000 weighted average shares, 4 respectively, of common stock represented by outstanding options because the exercise price of the options was greater than the average market price of common stock during the period. Certain previously reported amounts have been reclassified to conform with the current period's presentation. 5 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/TM/ Deluxe Studios ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency Studios ("EXTENDED STAY"), and Crossland Economy Studios/SM/ ("Crossland"). Each brand is designed to appeal to different price points below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully- equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those in our other brands, an exercise room, 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. 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. During the quarter ended June 30, 1999, 14 StudioPLUS properties were repositioned as EXTENDED STAY properties. All operating statistics reflect the repositioning of these properties as EXTENDED STAY properties for the entire periods presented. The table below provides a summary of our selected development and operational results for the three months and six months ended June 30, 1999 and 1998.
Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- Total Facilities Open (at Period End)........ 347 239 347 239 Total Facilities Developed................... 14 21 42 54 Average Occupancy Rate....................... 76% 76% 73% 72% Average Weekly Room Rate..................... $ 294 $ 288 $ 289 $ 284
Average occupancy rates are determined by dividing the rooms occupied on a daily basis by the total number of rooms. Due to our rapid expansion, our overall average occupancy rate has been negatively impacted by the lower occupancy typically experienced during the pre-stabilization period for newly- opened facilities. We expect the negative impact on overall average occupancy to decline as the ratio of newly-opened properties to total properties in operation declines. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates 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 number and geographic location of our new facilities as well as the season in which we open those facilities. We also cannot assure you that we can maintain our occupancy and room rates. 6 The following is a summary of our development status as of June 30, 1999 by brand. We expect to complete the construction of the facilities currently under construction generally within the next twelve months, however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors including final permitting, inspections and obtaining certificates of occupancy, as well as weather-induced construction delays.
EXTENDED Crossland STAY StudioPLUS Total --------- -------- ---------- ----- Operating Facilities................... 39 222 86 347 Facilities Under Construction.......... 0 18 5 23
Results of Operations For the Three Months Ended June 30, 1999 and 1998 Property Operations The following is a summary of the 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 ----------------------------------------------------------------------------------- June 30, 1999 June 30, 1998 --------------------------------------- --------------------------------------- Average Average Average Average Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room Open Rate Rate Open Rate Rate ---------- --------- ----------- ---------- --------- ----------- Crossland.............................. 39 68% $213 14 61% $194 EXTENDED STAY.......................... 222 78 297 162 78 282 StudioPLUS............................. 86 74 339 63 75 332 --- -- ---- --- -- ---- Total............................... 347 76% $294 239 76% $288 === == ==== === == ====
Because newly opened properties typically experience lower occupancies during their pre-stabilization period, average occupancy rates are impacted by the ratio of newly opened properties to total properties. The average occupancy rate in the second quarter of 1999 for the 218 properties we owned and operated as of March 31, 1998 was 80%. Similarly, the average occupancy rate in the second quarter of 1998 for the 93 properties we owned and operated as of March 31, 1997 was 84%. The decline in the average occupancy rate for properties open for at least one year at the beginning of the quarter of each year is primarily attributable to an increase during the last twelve months in the supply of available rooms in the lodging industry generally and specifically in certain of the markets in which we operate. We expect that this increase in supply, particularly in certain markets in Texas and North Carolina, will continue to impact our occupancies until incremental demand is sufficient to compensate for the additional supply of available rooms. The impact of the additional supply of available rooms was offset by the impact of a decline in the ratio of newly opened properties to total properties, particularly for the Crossland brand, resulting in overall average occupancy rates of 76% for the second quarter of each year. 7 The increase in overall average weekly room rates for the second quarter of 1999 as compared to the second quarter of 1998 reflects the geographic dispersion of properties opened since June 30, 1998 and the higher standard weekly room rates in certain of those markets. The increase also is due in part to increases in rates charged at previously opened properties. The average weekly room rate for the 218 properties that we owned and operated throughout both periods increased by 3% in the second quarter of 1999. The increase in our overall average weekly room rates for the second quarter of 1999 as compared to the same period of 1998 are diluted by an increase in the percentage of total occupied rooms attributable to the lower priced Crossland brand. Occupied rooms attributable to the Crossland brand were 13% of total occupied room nights for the second quarter of 1999 compared to 4% for the second quarter of 1998. We recognized total revenue of $106.5 million for the second quarter of 1999 and $70.0 million for the second quarter of 1998. This is an increase of $36.5 million, or 52%. Approximately $33.4 million of the increased revenue was attributable to properties opened subsequent to March 31, 1998 and approximately $3.1 million was attributable to an increase in revenue for the 218 properties that were owned and operated throughout both periods. Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation or interest, were $44.1 million (41% of total revenue) for the second quarter of 1999, compared to $28.9 million (41% of total revenue) for the second quarter of 1998. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to occupancy rate increases or decreases because the majority of these expenses do not vary based on occupancy. Our overall occupancy rates were 76% for the second quarter of both 1999 and 1998 and our property operating margins were 59% for both periods. The provisions for depreciation and amortization for the lodging facilities were $14.6 million for the second quarter of 1999 and $9.7 million for the second quarter of 1998. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for the second quarter of 1999 increased as compared to the second quarter of 1998 because we operated 108 additional facilities in 1999 and we operated for a full quarter the 21 properties that were opened in the second quarter of 1998. Corporate Operations Corporate operating and property management expenses include all expenses not directly related to the development or operation of lodging facilities. These expenses consist primarily of personnel and certain marketing costs, as well as development costs that are not directly related to a site that we will develop. We incurred corporate operating and property management expenses of $10.4 million (10% of total revenue) in the second quarter of 1999 and $9.7 million (14% of total revenue) in the second quarter of 1998. The increase in the amount of these expenses for the second quarter of 1999 as compared to the same period in 1998 reflects the 8 impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase in total amount but decline as a percentage of revenue as we develop and operate additional facilities in the future. Depreciation and amortization was $337,000 for the quarter ended June 30, 1999 and $324,000 for the comparable period in 1998. These provisions were computed using the straight-line method over the estimated useful lives of the assets for assets not directly related to the operation of our facilities. These assets were primarily office furniture and equipment. We realized $222,000 of interest income in the second quarter of 1999 and $1.0 million in the second quarter of 1998. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $16.4 million during the second quarter of 1999 and $9.7 million in the second quarter of 1998. Of these amounts, $2.4 million in the second quarter of 1999 and $4.1 million in the second quarter of 1998 were capitalized and included in the cost of buildings and improvements. We recognized income tax expense of $9.7 million for the second quarter of 1999 and $6.7 million for the second quarter of 1998 (40% of income before income taxes and the cumulative effect of an accounting change, in both periods). Income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes. We expect the annualized effective income tax rate for 1999 will be approximately 40%. Reduction in Valuation Allowance In the quarter ended September 30, 1998, unfavorable capital market conditions resulted in a reduction in our development plans for 1999 and 2000. As a result, a valuation allowance of $12.0 million was established for the write-off of costs related to sites that would not be developed. The operating results for the quarter ended June 30, 1999 reflect the reversal of $1.1 million of this valuation allowance resulting from the renegotiation of the terms of a number of the optioned sites. 9 For the Six Months Ended June 30, 1999 and 1998 Property Operations The following is a summary of the 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 Six Months Ended ----------------------------------------------------------------------------------- June 30, 1999 June 30, 1998 --------------------------------------- --------------------------------------- Average Average Average Average Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room Open Rate Rate Open Rate Rate ---------- --------- ----------- ---------- --------- ----------- Crossland.......... 39 65% $209 14 60% $193 EXTENDED STAY...... 222 75 293 162 74 277 StudioPLUS......... 86 72 332 63 68 332 --- -- ---- --- -- ---- Total............ 347 73% $289 239 72% $284 === == ==== === == ====
For each of the brands, occupancy rates increased for the six-month period ended June 30, 1999 as compared to the same period in 1998 primarily due to a decrease in the ratio of newly opened properties to total properties for those brands. The average occupancy rate in the six months ended June 30, 1999 for the 185 properties that we owned and operated as of December 31, 1997 was 77%. The increase in average weekly room rates for the six months ended June 30, 1999 as compared to the same period of 1998 reflects the geographic dispersion of properties opened since June 30, 1998 and the higher standard weekly room rates in certain of those markets. The increase also is due in part to increases in rates charged at previously opened properties. The average weekly room rate for the 185 properties that were owned and operated throughout both periods increased 2% in the first six months of 1999. For the StudioPLUS brand, the average weekly rate also reflects a change in pricing policies instituted in 1998. The new policies established a standard rate structure based on competitive rates in the markets served by the properties instead of variable rates based on actual and anticipated short-term demand factors. We believe that the current pricing strategy creates greater value for more customers and that, as a result, the properties will enjoy long-term benefits of increased customer retention and loyalty. This change in pricing strategy resulted in a decline in average weekly rates for the StudioPLUS brand of approximately 2% for the six months ended June 30, 1999, which was partially offset by the higher weekly rates charged in certain markets in which properties have been opened since June 30, 1998. We recognized total revenue of $195.9 million for the six months ended June 30, 1999 and $124.3 million for the six months ended June 30, 1998. This is an increase of $71.6 million, or 58%. Approximately $67.3 million of the increased revenue was attributable to properties opened subsequent to December 31, 1997 and approximately $4.3 million was attributable to an increase in revenue for the 185 properties that we owned and operated throughout both periods. Property operating expenses for the six months ended June 30, 1999 were $85.0 million (43% of total revenue) compared to $55.2 million (44% of total revenue) for the six months ended June 30, 1998. The decrease in property operating expenses as a percentage of total revenue for the six months ended June 30, 1999 as compared to the same period of 1998 was 10 primarily a result of improved occupancies and revenues for the facilities that were in their pre-stabilization periods during the first six months of 1998. Operating expenses as a percentage of revenue generally decline as a newly- opened property increases its occupancy and revenue because the majority of these expenses do not vary based on occupancy. As a result of the foregoing, we realized property operating margins of 57% for the six months ended June 30, 1999 and 56% for the six months ended June 30, 1998. The provisions for depreciation and amortization for the lodging facilities was $28.2 million for the six months ended June 30, 1999 and $18.7 million for the six months ended June 30, 1998. The increase in depreciation and amortization for the six months ended June 30, 1999 as compared to the same period in 1998 is due to the operation of 108 additional facilities in 1999 and we operated for a full six months the 54 properties that were opened in the first six months of 1998. Corporate Operations We incurred corporate operating and property management expenses of $20.7 million (11% of total revenue) in the six months ended June 30, 1999 and $19.1 million (15% of total revenue) in the six months ended June 30, 1998. The increase in the amount of these expenses for the six-month period ended June 30, 1999 as compared to the same period in 1998 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase in total amount but decline as a percentage of revenue as we develop and operate additional facilities in the future. Depreciation and amortization for assets not directly related to operation of our facilities was $642,000 for the six months ended June 30, 1999 and $727,000 for the six months ended June 30, 1998. We realized $400,000 of interest income in the six months ended June 30, 1999 and $1.4 million in the six months ended June 30, 1998. This interest income was attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $31.5 million in the six months ended June 30, 1999 and $15.0 million in the six months ended June 30 , 1998. Of these amounts, $5.9 million in the six months ended June 30, 1999 and $7.9 million in the six months ended June 30, 1998 were capitalized and included in the cost of buildings and improvements. We recognized income tax expense of $14.8 million for the six-month period ended June 30, 1999 and $9.9 million for the six-month period ended June 30, 1998 (40% of income before income taxes and the cumulative effect of an accounting change, in both periods). 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 Pursuant to the Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" issued by the Accounting Standards Executive Committee, effective January 1, 1999, we 11 changed our method of accounting for compensation and other training related costs incurred prior to the opening of a property to expense them as they are incurred. Accordingly, we recorded an expense of $779,000, net of income tax benefit of $520,000, as the cumulative effect of this change in accounting. Liquidity and Capital Resources We had net cash and cash equivalents of $7.8 million as of June 30, 1999 and $0.6 million as of December 31, 1998. At June 30, 1999 and December 31, 1998, we had invested substantially all of the cash balances in short-term demand notes having credit ratings of A1/P1 or the equivalent utilizing domestic commercial banks and other financial institutions. We also deposited excess funds during these periods in an overnight sweep account with a commercial bank which in turn invested 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 institution. The market value of the securities held pursuant to these arrangements approximates the carrying amount. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Our operating activities generated cash of $47.8 million during the six months ended June 30, 1999 and $37.0 million during the six months ended June 30, 1998. We used $181.1 million to acquire land, develop, or furnish a total of 65 sites opened or under construction in the six months ended June 30, 1999 and $284.2 million for 150 sites in the six months ended June 30, 1998. Our cost to develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the resultant cash flow from these properties will vary significantly but generally are expected to be in proportion to the development costs. For the 272 properties we opened from January 1, 1996 through December 31, 1998, the average development cost was approximately $5.0 million with an average of 107 rooms. In 1999, 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 1999 to increase to approximately $6.3 million per property. We received net proceeds from the exercise of options to purchase common stock totaling $5.4 million in the six months ended June 30, 1999 and $4.2 million in the six months ended June 30, 1998. In addition to our $200 million 9.15% Senior Subordinated Notes due 2008 (the "Notes"), we have an $800 million credit facility (the "Credit Facility") which provides for a $350 million revolving loan facility (the "Revolving Facility"), a $150 million term loan facility (the "Tranche A Facility"), a $200 million term loan facility (the "Tranche B Facility"), and a $100 million term loan facility (the "Tranche C Facility"). As of June 30, 1999, we had outstanding loans of $140 million under the Revolving Facility, $150 million under the Tranche A Facility, $200 million under the Tranche B Facility and $100 million under the Tranche C Facility, leaving $210 million available and committed under the Credit Facility. Availability of the Revolving Facility is dependent, however, upon us satisfying certain financial ratios of debt 12 and interest compared to earnings before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility. In April 1999, $100 million in term loans under the Tranche C Facility were funded and were applied to reduce outstanding loans under the Revolving Facility. Our primary market risk exposures result from the variable nature of the interest rates on borrowings under the Credit Facility. The Credit Facility was entered into for purposes other than trading. We do not own derivative financial instruments or derivative commodity instruments. Based on the levels of borrowings under the Credit Facility at June 30, 1999, if interest rates changed by 1.0%, our annual cash flow and net income would change by $3.5 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. In connection with the Credit Facility and the Notes, we incurred additions to deferred loan costs of $21,000 during the six months ended June 30, 1999 and $10.5 million during the six months ended June 30, 1998. We had commitments not reflected in our financial statements at June 30, 1999 totaling approximately $75 million to complete construction of extended stay properties. We expect we will continue to rapidly expand our operations. In 1999 and 2000, we plan to open new properties with total costs of approximately $350 million per year. We expect to continue an active development program thereafter. We believe that the remaining availability under the Credit Facility, together with cash on hand and cash flows from operations, will provide sufficient funds to continue our expansion as presently planned and to fund our operating expenses through 2000. We may need additional capital depending on a number of factors, including the number of properties we construct or acquire, the timing of that development, and the cash flow generated by our properties. Also, if capital markets provide favorable opportunities, our plans or assumptions change or prove to be inaccurate, our existing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions, we may seek additional capital sooner than we currently anticipate. Sources of capital may include public or private debt or equity financing. We cannot assure you that we will be able to obtain additional capital 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. 13 Impact of the Year 2000 Issue and Accounting Releases The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Based on our assessment, we do not anticipate that any significant modification or replacement of our hardware or software will be necessary for our computer systems to properly use dates beyond December 31, 1999 or that we will incur significant operating expenses to make any such computer system improvements. We are undertaking an assessment as to whether any of our significant suppliers, lenders, or service providers will need to make any such software modifications or replacements. While we do not expect the failure of any third parties to address the Year 2000 Issue to uniquely impact our business, we could be adversely affected should the availability of electricity, gas, water, telephone, or banking services be interrupted. In addition, we could be adversely affected if other businesses are impacted by the Year 2000 Issue to the extent that business related travel is reduced significantly or in the event that our employees are unable to fulfill their responsibilities. While we do not expect these pervasive failures to result from the Year 2000 Issue, we cannot assure you that these problems will not arise. 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: . our limited operating history and uncertainty as to our future profitability; . our ability to meet construction and development schedules and budgets; . our ability to develop and implement the operational and financial systems needed to manage rapidly growing operations; . uncertainty as to the consumer demand for extended stay lodging; . increasing competition in the extended stay lodging market; . our ability to integrate and successfully operate acquired properties and the risks associated with such properties; . our ability to obtain financing on acceptable terms to finance our growth; and . our ability to operate within the limitations imposed by financing arrangements. Other matters set forth in this Quarterly Report may also cause our actual future results to differ materially from these forward-looking statements. We can not 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 these cautionary statements mentioned above. You are cautioned not to 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 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The following summarizes the votes of the Annual Meeting of the Company's stockholders held on May 19, 1999:
Matter For Against Abstain Non-Vote Shares Voted - ------------------------------------ ---------- ------- ------- -------- ------------ Election of Directors: H. Wayne Huizenga................... 89,298,134 -- 111,132 -- 89,409,266 George D. Johnson, Jr............... 89,298,134 -- 111,132 -- 89,409,266 Donald F. Flynn..................... 89,298,134 -- 111,132 -- 89,409,266 Stewart H. Johnson.................. 89,298,134 -- 111,132 -- 89,409,266 John J. Melk........................ 89,298,134 -- 111,132 -- 89,409,266 Peer Pedersen....................... 89,347,134 -- 62,132 -- 89,409,266 Ratification of the appointment of PricewaterhouseCoopers LLP as Independent Auditors for the Company for 1999.................... 89,380,684 20,856 7,726 89,409,266
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- 27.1 Financial Data Schedule (for EDGAR filings only) (b) Reports on Form 8-K None 16 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 August 13, 1999. EXTENDED STAY AMERICA, INC. /s/ Robert A. Brannon -------------------------------------------------- Robert A. Brannon Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial Officer) /s/ Gregory R. Moxley -------------------------------------------------- Gregory R. Moxley Vice President Finance (Principal Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-01-1999 7,793 0 0 0 7,571 0 0 0 0 0 50,043 0 1,855,511 0 100,456 0 1,823,003 0 80,988 0 788,000 0 0 0 0 0 965 0 892,974 0 1,823,003 0 0 0 106,487 195,906 0 0 44,053 85,046 24,272 48,494 0 0 13,817 25,268 24,345 37,098 9,739 14,840 14,606 22,258 0 0 0 0 0 779 14,606 21,479 0.15 0.22 0.15 0.22
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