<PAGE>
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, 1997
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 5, 1997, the registrant had issued and outstanding an aggregate of
95,359,890 shares of Common Stock.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 (1)
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $174,998 $224,325
Accounts receivable...................................................................... 4,493 1,665
Prepaid expenses......................................................................... 1,766 796
Deferred income taxes.................................................................... 356 1,143
Other current assets..................................................................... 664 1,580
-------- --------
Total current assets................................................................. 182,277 229,509
Property and equipment, net................................................................. 686,393 428,749
Deferred loan costs......................................................................... 9,519
Other assets................................................................................ 902 658
-------- --------
$869,572 $668,435
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 16,387 $ 14,827
Accrued salaries and related expenses.................................................... 2,282 1,694
Due to related parties................................................................... 10 204
Other accrued expenses................................................................... 3,125 3,463
Accrued retainage........................................................................ 13,922 11,371
Deferred revenue........................................................................ 789 179
-------- --------
Total current liabilities............................................................ 36,515 31,738
-------- --------
Deferred income taxes....................................................................... 11,072 7,983
-------- --------
Commitments
Shareholders' 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, 95,321,398 and 83,666,383
shares issued and outstanding, respectively............................................ 953 837
Additional paid-in capital............................................................... 819,648 619,870
Retained earnings........................................................................ 1,384 8,007
-------- --------
Total shareholders' equity........................................................... 821,985 628,714
-------- --------
$869,572 $668,435
======== ========
</TABLE>
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
2
<PAGE>
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenue................................................. $ 29,028 $ 8,035 $ 48,791 $13,629
-------- ------- -------- -------
Property operating expenses............................. 12,307 3,350 22,487 5,724
Corporate operating and property
management expenses................................. 6,989 3,768 12,744 7,162
Merger, financing and other charges..................... 19,895 19,895
Depreciation and amortization........................... 4,358 1,105 8,070 1,982
-------- ------- -------- -------
Total costs and expenses.......................... 43,549 8,223 63,196 14,868
-------- ------- -------- -------
Loss from operations.................................... (14,521) (188) (14,405) (1,239)
Interest income......................................... 3,447 2,947 7,434 4,429
-------- ------- -------- -------
Income (loss) before income taxes....................... (11,074) 2,759 (6,971) 3,190
Provision (benefit) for income taxes.................... (1,981) 1,103 (348) 1,276
-------- ------- -------- -------
Net income (loss)....................................... $ (9,093) $ 1,656 $ (6,623) $ 1,914
======== ======= ======== =======
Net income (loss) per common share...................... $($0.10) $0.02 $(0.07) $0.03
======== ======= ======== =======
Weighted average common equivalent shares outstanding... 95,306 68,240 92,991 60,843
======== ======= ======== =======
</TABLE>
See notes to the unaudited condensed consolidated financial statements
3
<PAGE>
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ (6,623) $ 1,914
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 8,070 1,982
Bad debt expense..................................... 208 62
Merger costs......................................... 9,727
Deferred loan costs.................................. 9,667
Write off of site deposits and preacquisition costs.. 1,970 583
Deferred income taxes................................ 4,488 (51)
Changes in operating assets and liabilities.......... (4,687) 1,525
--------- ---------
Net cash provided by operating activities.......... 22,820 6,015
--------- ---------
Cash flows from investing activities:
Acquisitions of extended stay properties............... (3,746)
Additions to property and equipment.................... (262,248) (71,357)
Payments for merger costs.............................. (8,789)
Purchase of investments available for sale............. (38,829)
Payments for other assets.............................. (244) (749)
--------- ---------
Net cash used in investing activities.............. (271,281) (114,681)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt........................... 7,000
Payments of long-term debt and note payable............ (11,705)
Proceeds from issuance of common stock................. 199,282 365,807
Additions to deferred loan costs....................... (148) (3,672)
Payments for prepaid registration costs................ (52)
--------- ---------
Net cash provided by financing activities.......... 199,134 357,378
--------- ---------
Increase (decrease) in cash and cash equivalents......... (49,327) 248,712
Cash and cash equivalents at beginning of period......... 224,325 125,915
--------- ---------
Cash and cash equivalents at end of period............... $ 174,998 $ 374,627
========= =========
Noncash investing and financing transactions:
Issuance of common stock for acquisition of extended
stay properties....................................... $ $ 22,422
========= =========
Capitalized or deferred items included in accounts
payable and accrued liabilities....................... $ 25,410 $ 3,868
========= =========
Supplemental cash flow disclosures:
Cash paid for income taxes............................. $ 1,000 $
========= =========
</TABLE>
See notes to the unaudited condensed consolidated financial statements
4
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
NOTE 1 -- BASIS OF PRESENTATION
Extended Stay America, Inc. ("ESA") was organized on January 9, 1995 as a
Delaware corporation to develop, own and manage extended stay lodging
facilities.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), a wholly-owned
subsidiary of ESA, and Studio Plus Hotels, Inc. ("SPH") consummated a merger
(the "Merger") pursuant to which SPH was merged with and into Merger Sub and
each of the 12,557,786 shares of SPH common stock issued and outstanding on such
date were converted into the right to receive 15,410,915 shares of common stock,
par value $.01 per share, of ESA ("Common Stock") and options to purchase
1,072,565 shares of SPH common stock were converted into options to purchase
1,316,252 shares of Common Stock. The Merger was accounted for using the
pooling of interests method of accounting. The accompanying unaudited condensed
consolidated financial statements of ESA and SPH (together, the "Company") give
effect to the Merger as if it had been consummated as of the beginning of the
periods presented. 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.
The condensed consolidated balance sheet data at December 31, 1996 was
derived from the audited consolidated financial statements of ESA and SPH but
does not include all disclosures required by generally accepted accounting
principles.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and six-month periods ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in the Company's
supplemental financial statements included in Form S-3 filed July 29, 1997,
ESA's Annual Report on Form 10-K and SPH's Annual Report on Form 10-K for the
year ended December 31, 1996.
On May 9, 1996, the Board of Directors of the Company declared a 2-for-1
stock split effected in the form of a stock dividend payable on July 19, 1996 to
shareholders of record as of the close of business on July 5, 1996. Accordingly,
Common Stock outstanding or issued, the weighted average number of common and
common equivalent shares and per share amounts have been retroactively adjusted
to give effect to the stock split.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per share" ("SFAS
128") This statement establishes standards for computing and presenting earnings
per share ("EPS") and supersedes APB Opinion No. 15, "Earnings per share". SFAS
128 replaces the presentation of primary EPS with a presentation of basic EPS
which excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. This statement also requires dual presentation of basic EPS and
diluted EPS on the face of the income statement for all periods presented.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion
No. 15, with some modifications. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. Early adoption is not
permitted and requires restatement of all prior period EPS data presented after
the effective date.
Certain previously reported amounts have been reclassified to conform with
the current period's presentation.
5
<PAGE>
NOTE 2 -- ACQUISITION OF EXTENDED STAY PROPERTIES
During 1996, the Company acquired ten (10) extended stay facilities from a
number of unrelated sellers (the "Acquisitions") for approximately $59.5
million, which was paid for by the issuance of approximately 4.5 million shares
of Common Stock valued at approximately $55.2 million and approximately $4.3
million in cash. As a part of the Acquisitions, the Company assumed liabilities
aggregating approximately $470,000 under certain leases for personal property
which were subsequently paid.
The Acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of the properties are included in
the consolidated statements of operations from the dates of acquisition.
The following unaudited pro forma condensed consolidated statement of
operations for the six months ended June 30, 1996 is presented as if the
acquisition of all properties acquired during 1996 and the related issuances of
shares of Common Stock had occurred on January 1, 1996. The pro forma condensed
statement of operations is not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of January 1, 1996, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
Actual Pro forma
for the six for the six
months ended months ended
June 30, June 30,
1997 1996
--------------------- ----------------------
(Dollars and shares in thousands)
<S> <C> <C>
Total revenue.................................................. $ 48,791 $ 22,048
Total costs and expenses....................................... 63,196 24,425
--------------------- ----------------------
(Loss) from operations.................................... (14,405) (2,377)
Interest income................................................ 7,434 4,429
--------------------- ----------------------
Income (loss) before income taxes......................... (6,971) 2,052
Provision (benefit) for income taxes........................... (348) 821
--------------------- ----------------------
Net (loss) income......................................... $ (6,623) $ 1,231
===================== ======================
Net income (loss) per common share........................ $ $(0.07) $ 0.02
===================== ======================
Weighted average common shares outstanding................ 92,991 68,068
===================== ======================
</TABLE>
NOTE 3 -- INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income tax expense for the three months and six months ended June 30, 1996
differed from the amounts computed by applying the U.S. Federal income tax rate
of 35% primarily as a result of the impact of state and local income taxes. The
benefit from income taxes for the three months and six months ended June 30,
1997 differed from the amounts computed by applying the U.S Federal income tax
rate of 35% primarily as a result of the impact of nondeductible expenses
associated with the Merger and state and local taxes.
6
<PAGE>
NOTE 4 -- OTHER MATTERS
On April 11, 1997, the Company's shareholders approved an amendment of the
Restated Certificate of Incorporation increasing the number of authorized shares
of Common Stock from 200 million to 500 million shares.
In connection with the Merger, the Company recorded in the quarter ended
June 30, 1997 a one-time, pre-tax charge of $9.7 million representing merger
expenses and costs associated with the integration of SPH operations following
the Merger.
During the quarter ended June 30, 1997, the Company announced that its
Board of Directors had approved a plan to have the Common Stock listed on the
New York Stock Exchange, Inc. ("NYSE") and to move trading in the Common Stock
from the Nasdaq National Market to the NYSE. The Common Stock began trading on
the NYSE on June 30, 1997. The Company has recorded a one-time, pre-tax charge
of $500,000 in connection with listing of the Common Stock on the NYSE in the
quarter ended June 30, 1997.
The Company has accepted from Morgan Stanley Senior Funding, Inc. a
commitment to provide a $500 million senior secured revolving credit facility
(the "Revolving Facility") which is to be used for general corporate purposes,
including the construction and acquisition of extended stay lodging properties.
The Revolving Facility will be a five year senior secured facility structured as
a corporate bank loan and syndicated to relationship banks. Upon execution of
the Revolving Facility the Company will terminate its two existing mortgage loan
facilities, which provide for an aggregate of $400 million in available mortgage
loans. Accordingly, the Company has recorded a one-time, pre-tax charge of $9.7
million. The charge represents deferred costs associated with its previous
mortgage facilities and has been reflected in the Company's financial results
for the quarter ended June 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Extended Stay America, Inc. ("ESA"), was organized on January 9, 1995, as a
Delaware corporation to develop, own, and manage extended stay lodging
facilities.
Studio Plus Hotels, Inc. ("SPH") was formed on December 19, 1994, to
acquire, through merger and exchange of partnership interests all of the assets
of Studio Plus, Inc. and the corporations and partnerships (collectively, the
"SPH Predecessor Entities") which owned and operated StudioPLUS extended stay
hotels. On June 26, 1995, SPH completed an initial public offering (the "SPH
IPO"). Prior to completion of the SPH IPO, SPH acquired, through merger and
exchange of SPH common stock for partnership interests, the assets of the SPH
Predecessor Entities which owned and operated all of the StudioPLUS extended
stay hotel properties then in operation or under development (the "Corporate
Organization"). The acquisition of the interests of the controlling shareholder
or partner and affiliates of the SPH Predecessor Entities was accounted for as a
pooling of interests.
On April 11, 1997, ESA, ESA Merger Sub, Inc. ("Merger Sub"), a wholly-owned
subsidiary of ESA, and SPH consummated a merger (the "Merger") pursuant to which
SPH was merged with and into Merger Sub and each of the 12,557,786 shares of SPH
common stock that were outstanding on the closing date were converted into the
right to receive 15,410,915 shares of common stock, par value $.01 per share, of
ESA ("Common Stock") and options to purchase 1,072,565 shares of SPH common
stock were converted into options to purchase 1,316,252 shares of Common Stock.
As a result of the Merger, SPH is a wholly-owned subsidiary of ESA. The
accompanying unaudited condensed consolidated financial statements of ESA and
SPH (together the "Company") contained elsewhere in this Report on Form 10-Q
give effect to the Merger as if it had been consummated as of the beginning of
the periods presented.
The Company owns and operates three brands in the extended stay lodging
market--StudioPLUS\TM\ hotels ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland
7
<PAGE>
Economy Studios\SM\ ("Crossland"), each designed to appeal to different price
points below $500 per week. All three brands offer the same core components: a
living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom.
EXTENDED STAY rooms are designed to compete in the economy category. Crossland
guest rooms are typically smaller than EXTENDED STAY rooms and are targeted for
the budget category, while StudioPLUS facilities serve the mid-price category
and generally feature larger guest rooms and also generally offer an exercise
facility and a swimming pool.
The following is a summary of the Company's selected development and
operational results for the three-month and six-month periods ended June 30,
1997 and June 30, 1996.
<TABLE>
<CAPTION>
Total Total Total Average
Facilities Facilities Facilities Average Weekly
Open Developed Acquired Occupancy Rate
------------ --------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1997 116 23 - 78% $264
Three Months Ended June 30, 1996 35 3 2 83% $261
Six Months Ended June 30, 1997 116 41 - 72% $261
Six Months Ended June 30, 1996 35 6 5 83% $254
</TABLE>
Occupancy rates are determined by dividing the guest rooms occupied on a
daily basis by the total number of guest 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 vary from standard room rates due primarily to (i) stays of less than
one week, which are charged at a higher nightly rate, (ii) higher weekly rates
for rooms which are larger than the standard rooms, and (iii) additional charges
for more than one person per room. Future occupancy and room rates may be
impacted by a number of factors including the number and geographic location of
new facilities, as well as the season in which such facilities commence
operations. There can be no assurance that the foregoing occupancy and room
rates can be maintained.
In addition, as of June 30, 1997, the Company had 98 facilities under
construction and options to purchase 106 sites for development. The Company
expects to complete the construction of the facilities currently under
construction generally within the next twelve months and to commence
construction on the majority of the sites under option at various dates in the
future. There can be no assurance, however, that the Company will complete the
acquisition of the sites under option or, if acquired, commence construction
within similar time periods. The Company's ability to complete development of
sites under construction and under option may be materially impacted by various
factors including zoning, permitting, environmental, due diligence issues, and
weather-induced construction delays.
The following is a summary of the Company's development status as of June
30, 1997, by brand:
<TABLE>
<CAPTION>
Crossland EXTENDED STAY StudioPLUS Total
---------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Operating Facilities 1 74 41 116
Facilities Under Construction 6 62 30 98
Sites Under Option 37 51 18 106
</TABLE>
During the quarter ended June 30, 1997, the Company completed construction
of 23 properties, and commenced construction on 39 additional properties. For
the six months ended June 30, 1997, the Company completed construction of 41
properties, and commenced construction on 78 additional properties. During the
quarter ended June 30, 1996, the Company completed construction of 3 properties,
acquired 2 operating properties and commenced construction on 24 additional
properties. For the six months ended June 30, 1996, the Company completed
construction of 6 properties, acquired 5 operating properties and commenced
construction on 37
8
<PAGE>
properties. As of June 30, 1996, the Company had 35 operating facilities, 47
facilities under construction and options to purchase 102 sites for development
in 33 states.
Results of Operations
Property Operations. The following is a summary of the properties operated
during the specified periods and the related average occupancy and weekly rates:
<TABLE>
<CAPTION>
For the three months ended
---------------------------------------------------------------------------
June 30, 1997 June 30, 1996
------------------------------------ ------------------------------------
Average Average
Facilities Weekly Facilities Weekly
Open Occupancy Rate Open Occupancy Rate
---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Crossland 1 97% $180 N/A N/A N/A
EXTENDED STAY 74 76% $249 9 82% $219
StudioPLUS 41 84% $308 26 84% $283
---------- --------- ------- ---------- --------- -------
Total 116 78% $264 35 83% $261
========== ========= ======= ========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
---------------------------------------------------------------------------
June 30, 1997 June 30, 1996
------------------------------------ ------------------------------------
Average Average
Facilities Weekly Facilities Weekly
Open Occupancy Rate Open Occupancy Rate
---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Crossland 1 85% $176 N/A N/A N/A
EXTENDED STAY 74 69% $246 9 85% $211
StudioPLUS 41 80% $300 26 82% $273
---------- --------- ------- ---------- --------- -------
Total 116 72% $261 35 83% $254
========== ========= ======= ========== ========= =======
</TABLE>
The decline in average occupancy for the quarter and the six months ended
June 30, 1997 compared to the comparable periods in 1996 reflects the lower
occupancy typically experienced during the pre-stabilization periods for the 41
facilities (35% of all opened facilities) which commenced operations during the
first six months of 1997 and the 40 facilities (34% of all opened facilities)
which commenced operations during the last six months of 1996. The increase in
average weekly room rates for the quarter and the six months ended June 30, 1997
compared to the same periods in 1996 reflects the geographic dispersion of
facilities opened and the standard weekly rates in those markets, along with
increases in rates charged in previously opened properties. The average weekly
room rate for the 24 properties that were in operation throughout both periods
increased by 4.0% for the quarter and 4.6% for the six months.
The Company recognized total revenues for the quarter ended June 30, 1997
of $29.0 million, compared with $8.0 million during the same period in 1996, and
$48.8 million for the six months ended June 30, 1997, compared with $13.6
million during the same period in 1996. The $21.0 million increase in revenue
for the second quarter of 1997 as compared to the second quarter of 1996 was
attributable to approximately $20.7 million of revenue generated by new or
acquired properties in 1996 and 1997 and approximately $292,000 in increased
revenue from the 24 properties that were in operation throughout both periods.
Similarly, the $35.2 million increase in revenue for the six months ended June
30, 1997 as compared to the six months ended June 30, 1996, was attributable to
$34.8 million of revenue generated by new or acquired facilities in 1996 and
1997 and approximately $437,000 in incremental revenue from the 24 properties
that were in operation during both periods. Property operating expenses,
consisting of all expenses directly allocable to the operation of the facilities
but excluding any allocation of corporate operating expenses and depreciation,
were $12.3 million, or 42% of total revenue, for the quarter ended June 30,
1997, compared to $3.4 million, or 42%, for the quarter ended June 30, 1996.
Property operating expenses for the six months ended June 30, 1997 were $22.5
million, or 46%, of total revenue compared to $5.7 million, or
9
<PAGE>
42%, of total revenue for the six months ended June 30, 1996. The increase in
the property operating expenses in relation to total revenue in the first six
months of 1997 as compared to the same period in 1996 was primarily a result of
lower occupancies and revenue for the prestabilization period of the 41
facilities that commenced operations during the first six months of 1997.
The provision for depreciation and amortization of lodging facilities of
$4.1 million and $7.6 million for the quarter and the six months ended June
30, 1997, respectively, and $1.0 million and $ 1.8 million for the same periods
in 1996, was provided 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 period for which the
facilities were in operation. The increase in depreciation for the three months
and six months ended June 30, 1997 as compared to comparable periods in 1996 is
due to the operation of 63 and 81 additional facilities in the respective
periods.
Corporate Operations. Corporate operating and property management expenses
include all expenses not directly related to the development or operation of
lodging facilities. The Company incurred expenses of $7 million, or 24%, of
total revenue for the quarter ended June 30, 1997 and $3.8 million, or 47%, of
total revenue for the quarter ended June 30, 1996. Corporate operating and
property management expenses for the six months ended June 30, 1997 and 1996
were $12.7 million and $7.2 million, respectively, or 26% and 53% of total
revenue, respectively. The expenses consist primarily of personnel expenses,
professional and consulting fees, and related travel expenses including costs
that are not directly related to a site that will be developed by the Company.
The increases in the amount of these expenses for the periods ending in 1997 as
compared to comparable periods of the previous year reflect the impact of
additional personnel and related expenses in connection with the Company's
increased level of operating facilities and site development. The total amount
of these expenses are expected to increase in the future with the development of
additional facilities.
In connection with the Merger, the Company recorded in the second quarter
of 1997 a one-time, pre-tax charge of $9.7 million representing merger expenses
and costs associated with the integration of SPH operations following the
Merger. Management believes that these charges are not recurring in nature and
will not affect the future results of operations.
During the quarter ended June 30, 1997, the Company announced that its
Board of Directors had approved a plan to have the Common Stock listed on the
New York Stock Exchange, Inc. ("NYSE") and to move trading in the Common Stock
from the Nasdaq National Market to the NYSE. The Common Stock began trading on
the NYSE on June 30, 1997. The Company has recorded a one-time pre-tax charge of
$500,000 in connection with listing of the Common Stock on the NYSE.
The Company has accepted from Morgan Stanley Senior Funding, Inc. ("MSSF")
a commitment to provide a $500 million senior secured revolving credit facility
(the "Revolving Facility") which is to be used for general corporate purposes,
including the construction and acquisition of extended stay lodging properties.
The Revolving Facility will be a five year senior secured facility structured as
a corporate bank loan and syndicated to relationship banks. Upon execution of
the Revolving Facility, the Company will terminate its two existing mortgage
loan facilities, which provide for an aggregate of $400 million in available
mortgage loans. Accordingly, the Company has recorded a one-time, pre-tax charge
of $9.7 million. The charge represents deferred costs associated with its
mortgage facilities and has been reflected in the Company's financial results
for the three months and six months ended June 30, 1997. In addition to the
Revolving Facility, the Company expects to issue approximately $300 million of
unsecured subordinated debt as part of an overall financing plan that is
expected to increase the Company's credit availability to $800 million.
The Company realized interest income of $3.4 million and $7.4 million for
the quarter and six months, respectively, ended June 30,1997 and $2.9 million
and $4.4 million for the same periods in 1996. Interest income is primarily
attributable to the investment of funds received from offerings of the Company's
Common Stock.
The Company recognized income tax benefits of $2.0 million and $348,000 for
the quarter and the six months, respectively, ended June 30, 1997 and incurred
income tax expense of $1.1 million and $1.3 million for the respective
comparable periods in 1996. The income tax benefits for 1997 differ from the
expected tax rate of 40% primarily due to permanent tax differences relating to
non-deductible merger expenses. Management expects that the annualized effective
tax rate, not inclusive of the effect of the permanent differences associated
with the Merger, will be approximately 40%.
10
<PAGE>
Depreciation and amortization in the amount of $213,000 and $422,000 for
the quarter and six months ended June 30, 1997, respectively, and $80,000 and
$145,000 for the respective comparable periods in 1996, were provided using the
straight-line method over the estimated useful lives of the assets for assets
not directly related to the operation of the facilities, including primarily
organization costs and office furniture and equipment.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $175 million and $224 million
as of June 30, 1997 and December 31, 1996, respectively. Substantially all of
the cash balances were invested, utilizing domestic commercial banks and other
financial institutions, in short-term commercial paper and other securities
having credit ratings of A1/P1 or equivalent. The market value of the securities
held approximates the carrying amount. During 1996 SPH temporarily invested
proceeds from an offering of its common stock in investments with maturities
greater than 90 days. Accordingly, these investments in a mutual fund (primarily
in municipal bonds) and in United States Government obligations have been
classified as investments available-for-sale in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". During the six months ended June 30, 1996,
purchases of such investments available-for-sale aggregated $38.8 million.
During the six-month period ended June 30, 1996, the Company acquired five
extended stay facilities from a number of unrelated sellers for approximately
$26.4 million, which was paid for by the issuance of approximately 1.8 million
shares of Common Stock, valued at approximately $22.7 million, and approximately
$3.7 million in cash. In addition, approximately $71.4 million was used to
acquire land and develop and furnish the 37 sites under construction during the
six months ended June 30, 1996.
In February 1996, SPH increased its existing revolving line of credit (the
"Line of Credit") maturing in June 1998, from $30 million to $50 million. The
Line of Credit was terminated upon consummation of the Merger. For the six
months ended June 30, 1996, SPH received proceeds from borrowings under the Line
of Credit totaling $7.0 million and made payments on the Line of Credit totaling
$11.1 million. ESA made payments of $630,000 during the six months ended
June 30, 1996 on a note payable which was issued in 1995 for the purchase of a
property site. At December 31, 1996 there were no outstanding borrowings under
the Line of Credit. SPH incurred deferred loan costs associated with the Line of
Credit of $232,000 in the six-month period ended June 30, 1996.
In October 1995, ESA executed a credit facility agreement providing up to
$200 million in mortgage financing for completed facilities, subject to certain
conditions and limitations. ESA entered into an additional credit facility
agreement in May 1996 which provides up to $300 million in mortgage financing,
subject to certain conditions and limitations, for completed facilities. At that
time, ESA reduced the size of the original mortgage facility from $200 million
to $100 million. As a result of these transactions, the Company has two credit
facility agreements which provide for a total of $400 million in mortgage
financing. No advances have been made under either facility. The Company made
payments for deferred loan costs in connection with the mortgage facilities
totaling $148,000 and $3.7 million during the respective six-month periods ended
June 30, 1997 and 1996.
In April 1996, SPH closed a public offering of 4,855,347 shares of common
stock, and 319,653 shares sold by selling shareholders, at $16.83 per share
(number of shares and price per share have not been adjusted for the Merger).
Net cash proceeds to SPH were approximately $76.8 million, which excluded any
proceeds from the sales by selling shareholders.
On June 5, 1996, ESA closed a public offering of 19,550,000 shares of its
Common Stock at a public offering price of $15.50 per share. The proceeds to the
Company of such offering were approximately $289 million, net of offering
expenses.
During the six-month period ended June 30, 1997, additions to property and
equipment totaling $262.2 million were used to acquire, develop and furnish the
139 sites under construction during that period.
11
<PAGE>
During the quarter ended June 30, 1997, the Company made payments of $8.8
million for costs associated with the Merger. Management believes that these
costs are not recurring and that they will not have an impact on future
earnings.
On February 6, 1997, ESA issued 11,500,000 shares of its Common Stock to a
number of institutional investors in a private placement transaction (the
"Private Placement"). The purchase price in the Private Placement was $17.625
per share, for an aggregate amount of approximately $203 million. Net proceeds
received by ESA from the Private Placement were approximately $198 million. The
Company has registered under the Securities Act all of the shares of Common
Stock issued in the Private Placement so that the holders of such shares may
make resales in the public market of those shares. In addition, proceeds of
approximately $1.2 million were received as a result of the exercise of options
to purchase the Company's Common Stock during the six months ended June 30,
1997.
The Company has accepted from MSSF a commitment to provide the Revolving
Facility which is to be used for general corporate purposes, including the
construction and acquisition of extended stay lodging properties. Upon execution
of the Revolving Facility, the Company will terminate its two existing mortgage
loan facilities.
The Company had commitments to complete construction of additional extended
stay properties with a total cost of approximately $500 million at June 30,
1997. The Company expects to finance the construction and development of its
lodging facilities principally with its cash balances, issuances of equity or
debt securities, and loans under the Revolving Facility.
In the future, the Company may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue equity or corporate
debt instruments. Any debt incurred or issued by the Company may be
collateralized, with a fixed or variable interest rate, and may be subject to
such terms as the Board of Directors of the Company deems prudent. The Company
expects that it will need to procure additional financing over time, although
there can be no assurance that such financing will be available when needed.
Seasonality and Inflation
Based upon the operating history of the Company's facilities, management
believes that extended stay lodging facilities are not as seasonal in nature as
the overall lodging industry. Management does expect, however, that occupancy
and revenues may be lower than average during the first and fourth quarters of
each calendar year. Because many of the Company's expenses do not fluctuate with
occupancy, such declines in occupancy may cause fluctuations or decreases in the
Company's quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenue or operating results of the
Company during any of the periods presented. There can be no assurance, however,
that inflation will not effect future operating or construction costs.
Special Note on Forward-Looking Statements
The statements contained in this Report on Form 10-Q that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the Company's actual results for future periods to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. These factors include, among other things: the Company's limited
operating history and uncertainty as to the Company's future profitability; the
ability to meet construction and development schedules and budgets; the ability
to develop and implement operational and financial systems to manage rapidly
growing operations; the uncertainty as to the consumer demand for extended stay
lodging; increasing competition in the extended stay lodging market; the ability
to integrate and successfully operate acquired properties and the risks
associated with such properties; the ability to obtain financing on acceptable
terms to finance the Company's growth strategy; and general economic conditions
as they may impact the overall lodging industry.
12
<PAGE>
PART II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes the votes of the Special Meeting of the Company's
stockholders held on April 11, 1997:
<TABLE>
<CAPTION>
Matter For Against Abstain Non-Vote Shares Voted
- ------ --- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Approval and adoption of
the Merger Agreement
among ESA, Merger Sub,
and SPH 56,017,900 15,815 249,983 4,799,025 61,082,723
Matter
- ------
Approval of an amendment
to the ESA Certificate of
Incorporation increasing
the authorized shares of
Common Stock from 200
million to 500 million 56,957,515 4,103,055 17,253 4,900 61,082,723
Matter
- ------
Approval of the Extended
Stay America, Inc.
Amended 1997 Employee
Stock Option Plan 47,495,948 8,732,229 55,521 4,799,025 61,082,723
</TABLE>
The following summarizes the votes at the Annual Meeting of the Company's
stockholders held on May 12, 1997:
<TABLE>
<CAPTION>
Matter For Against Abstain Non-Vote Shares Voted
- ------ --- ------- ------- -------- ------------
Election of Directors -
<S> <C> <C> <C> <C> <C>
H. Wayne Huizenga 64,845,169 -- 14,561 -- 64,859,730
George D. Johnson, Jr. 64,845,155 -- 14,575 -- 64,859,730
Norwood Cowgill, Jr. 64,845,169 -- 14,561 -- 64,859,730
Donald F. Flynn 64,845,169 -- 14,561 -- 64,859,730
Stewart H. Johnson 64,845,169 -- 14,561 -- 64,859,730
John J. Melk 64,845,169 -- 14,561 -- 64,859,730
Peer Pederson 64,845,169 -- 14,561 -- 64,859,730
Matter
- ------
Ratification of the
appointment of
Coopers & Lybrand L.L.P.
as Independent Auditors
for the Company for 1997 64,835,108 4,650 19,972 -- 64,859,730
</TABLE>
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement and Plan of Merger dated as of January 16, 1997 by and among
the Company, Merger Sub, and Studio Plus (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated January
16, 1997)
10.1 Confidential Separation Agreement and General Release, dated as of
June 1, 1997, between the Company and Harold E. Wright
10.2 1997 Employee Stock Option Plan of the Company
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule (for EDGAR filings only)
99.1 Commitment letter for revolving credit facility dated as of July
21, 1997 between the Company and Morgan Stanley Senior Funding, Inc.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 11, 1997, announcing
the completion of the Merger.
14
<PAGE>
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, 1997.
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)
15
<PAGE>
EXHIBIT 10.1
Confidential Separation Agreement and General Release
This Confidential Separation Agreement and General Release ("Agreement") is
made between ESA Management, Inc. (the "Company") and Harold E. Wright
("Wright") as of June 1, 1997.
Recitals
A. Wright is currently employed as Senior Vice President of Real Estate of
the Company.
B. Wright and ESA Development, Inc. entered into a certain Employment
Agreement dated as of March 18, 1996 (the "Employment Agreement") attached
hereto as Exhibit A. Subsequent to March 18, 1996, ESA Development, Inc. merged
with and into the Company, and as such, the Company is the successor to ESA
Development, Inc.
C. The Company is a wholly owned subsidiary of Extended Stay America, Inc.
D. Wright holds certain options to purchase shares of stock in Extended
Stay America, Inc. which were granted to him under the terms of the Employment
Agreement and that certain Amended and Restated 1996 Employee Stock Option Plan
of Extended Stay America, Inc.
E. Wright and the Company have agreed that Wright shall no longer be an
employee and officer of the Company.
F. The parties intend this Agreement to resolve all actual or potential
disputes now or hereafter between them.
Agreement
1. Termination of Employment: Effective June 1, 1997, Wright shall have no
right, nor be expected, to perform any duties or responsibilities as an
employee, officer or director of the Company.
2. Options Held and Forfeiture, Cancellation and Exercise of Options: Wright
agrees that the only options (the "Options") to purchase common stock of
Extended Stay America, Inc. that Wright has as of the date hereof are as set
forth in the chart below. Wright and the Company hereby agree that upon
execution of this Agreement, the Options granted to Wright on March 18, 1996,
shall become vested pursuant to Item 4 of the Non-Qualified Stock Option
Certificate, and Wright hereby agrees to forfeit those options marked as
"forfeited" on the chart below. In addition, Wright agrees and acknowledges that
the Company, as of the date of this Agreement, shall cancel or cause to be
canceled, those options marked "canceled" on the chart below. The exercise
prices for the vested options and the dates by which Wright must exercise those
fully
<PAGE>
vested options is provided on the chart below. The terms and conditions
pertaining to the vested options that Wright shall hold hereafter, and the
exercise of such options shall otherwise remain governed by all other applicable
agreements and documents, including but not limited to the Extended Stay
America, Inc. Amended and Restated 1996 Employee Stock Option Plan, as may be
amended from time to time.
<TABLE>
<CAPTION>
Per Share Vesting and Exercise Date
Grant Date Shares Exercise Price
- ---------- ------ -------------- -------------------------
<S> <C> <C> <C>
3/18/96 300,000 $ 10.50 Fully vested upon 6/1/97; Must be exercised by 6/1/99
3/18/96 300,000 $ 10.50 Fully vested upon 6/1/97; Must be exercised by 6/1/99
3/18/96 200,000 $ 10.50 Fully vested upon 6/1/97; Must be exercised by 6/1/99
3/18/96 100,000 $ 10.50 Forfeited as of 6/1/97
3/18/96 300,000 $ 10.50 Forfeited as of 6/1/97
1/07/97 14,189 $ 18.50 Canceled as of 6/1/97
1/07/97 14,189 $ 18.50 Canceled as of 6/1/97
1/07/97 14,189 $ 18.50 Canceled as of 6/1/97
1/07/97 14,189 $ 18.50 Canceled as of 6/1/97
1/02/96 19,626 $13.375 Fully vested; Must be exercised by 6/1/98
1/02/96 19,126 $13.375 Canceled as of 6/1/97
1/02/96 19,126 $13.375 Canceled as of 6/1/97
1/02/96 19,126 $13.375 Canceled as of 6/1/97
</TABLE>
3. Consideration: As further consideration of Wright's execution of this
Agreement and the releases attached hereto and contained herein, and the
expiration of the revocation period set forth in Section 16 hereof, the Company
will pay Wright (a) accrued salary payments due to Wright, totaling $65,000, for
the period January 16, 1997, through May 31, 1997, (b) on a monthly basis,
beginning on June 30, 1997, and continuing through June 30, 1999, $43,800 (the
"Site Payment" and collectively the "Site Payments"), and (c) upon the closing
of the sale of Wright's Spartanburg, South Carolina home (the "SC Home"), any
realtor's commission charged to Wright, not to exceed six percent (6%) of the
sales price of the SC Home, provided that the sale of the SC Home is completed
prior to June 1, 1999.
The computation of the Site Payment was made as follows: 113 sites approved
by Wright x $15,000 = $1,695,000; $1,695,000 - $600,000 (represents amounts
already paid by the Company to Wright) = $1,095,000; $1,095,000 \ 25 months
(time period over which Site Payments are to be made) = $43,800.
Wright acknowledges that he is not entitled to a substantial portion of the
payments and benefits set forth under this Agreement except as consideration for
his release and non-compete post-termination obligations.
In addition, to continue to receive group health insurance coverage, Wright
must elect continuation coverage in accordance with federal COBRA law. If Wright
continues such coverage, Wright must pay all premiums associated with such
continued coverage.
2
<PAGE>
The payments and benefits set forth under this Agreement will not begin
before Wright signs and returns this Agreement and the Agreement is no longer
subject to revocation. The value of all consideration paid or provided for under
this Agreement will be disclosed in appropriate tax forms. Since the Company is
making no representations whatsoever regarding potential tax consequences of the
consideration Wright is receiving under this Agreement, Wright may wish to
consult a tax or financial advisor regarding them.
4. Compliance with Non-Compete and other Post-Termination Obligations under
Employment Agreement: Nothing in this Agreement shall terminate or otherwise
limit Wright's post-termination obligations and duties under the Employment
Agreement with the Company contained in Sections 5(a) - 5(d) of the Employment
Agreement. Notwithstanding the foregoing, the certain amendments to certain
provision of Sections 5 of the Employment Agreement, as agreed upon by the
parties hereto, are being made herein as follows:
. The phrase "after the termination of this Agreement" in Section 5(c)
of the Employment Agreement is hereby deleted and replaced with "after
the termination of payments to Wright under that certain Confidential
Separation Agreement and General Release by and between Wright and the
Company dated as of June 1, 1997".
. The first sentence of Section 5(d) shall be deleted in its entirety
and replaced with the following sentences: "Wright agrees that during
the Term of this Agreement, and for a period of two years after the
termination of payments to Wright under that certain Confidential
Separation Agreement and General Release by and between Wright and the
Company dated as of June 1, 1997 (the "Termination Agreement"),
neither Wright nor any person or enterprise controlled by Wright will
become a stockholder, director, officer, agent, consultant or employee
of a business, whether or not incorporated, or have any financial
stake of any nature in any of the foregoing or otherwise engage
directly or indirectly in any enterprise which is a Competing Business
(defined below) in the Prohibited Area (defined below). In addition,
while Wright is receiving payments under the Termination Agreement,
neither Wright nor any person or enterprise controlled by Wright will
become a stockholder, director, officer, agent, consultant or employee
of a business, whether or not incorporated, or have any financial
stake of any nature in any of the foregoing or otherwise engage
directly or indirectly in any enterprise which is a Competing
Business. Notwithstanding the foregoing, Wright shall not be
prohibited from owning less than 5% of the outstanding shares of stock
of any corporation engaged in any business, which shares are regularly
traded on a national securities exchange or in any over-the-counter
market.
. The phrase "on the date of termination of Wright's employment
hereunder" in the second to last sentence of Section 5(d) of the
Employment Agreement is hereby deleted and replaced with "as of
July 1, 1999".
3
<PAGE>
. The phrase "termination of this Agreement" in the last sentence of
Section 5(d) of the Employment Agreement is hereby deleted and
replaced with "after the termination of payments to Wright under the
Termination Agreement".
5. General Release: In exchange for the consideration described above, as well
as the other promises made in this Agreement, each of Wright, the Company, and
Extended Stay America, Inc. hereby release the other and all of the other's
affiliates, shareholders, predecessors, successors, assigns, representatives,
officers, directors, agents and employees (collectively referred to as "Released
Parties"), jointly and severally, from all legal, statutory, and equitable
claims that they may have based on any set of facts in existence on the date
that they sign this Agreement, including those relating in any way to either
Wright's employment or termination of employment with the Company or any
predecessor or successor or the Company. The release specifically includes
without limitation, any claim under the federal Age Discrimination in Employment
Act that arose or accrued at any time before Wright signed this Agreement.
Wright acknowledges that the foregoing release means that he is giving up
any and all claims or demands of any kind which he may have against the Released
Parties under federal, state or local law, including, but not limited to:
. any claim relating in any way to Wright's employment and separation
from employment from the Company, including, but not limited to,
wrongful termination or wrongful discharge;
. any claim for discrimination in employment related to race, age, sex,
national origin, disability, marital status, sexual orientation,
veteran's status or any other reason, whether such claim is based upon
or may be under federal or state law or municipal or local law or
ordinance;
. any claim for breach of contract relating to any oral or written
representation Wright believes to have been made by the Company or any
representative, including all those that are related to Wright's
separation from employment (except this Agreement);
. any claim, including for fraud, or breach of fiduciary duty, that
Wright was not fully advised about the contents, nature and
consequences of this Agreement;
. any claim for personal injuries, emotional duress, or intentional
infliction of mental distress, as well as any claim for compensation
or damages of any nature whatsoever, except as otherwise allowed by
this Agreement;
. any claim for attorneys' fees; and
. any claim for benefits other than as provided in this Agreement.
4
<PAGE>
Notwithstanding the above, neither party shall be deemed to have released
the other from any obligation set forth in this Agreement.
6. Compensation and Expenses Through Termination Date: Except for the payments
provided for herein, Wright acknowledges that the Company has paid him all of
his wages, bonuses and accrued vacation pay or other compensation payments of
any kind which may be due him through the date on which Wright signs this
Agreement. All reasonable expenses incurred by Wright through May 31, 1997 in
the performance of his duties as an employee of the Company and which are
eligible for reimbursement in accordance with the Company's policies, shall be
promptly reimbursed.
7. Confidentiality: Wright understands and agrees that the Company's
confidential information belongs solely and exclusively to the Company, and that
the confidential information of the Company, and related entities, and to
entities with which the Company did and does business, to which Wright may have
had access during his employment may not be used by him in any way. Section 5 of
the Employment Agreement discusses Wright's agreement to protect trade secrets
of the Company and its predecessor and successor entities, its parent company,
and its related or affiliated entities, which may not be fully known by
individuals who are not employed by or for the Company.
All terms and conditions of any confidentiality agreement signed by Wright
during his employment with the Company, including but not limited to the
provisions of Section 5 of the Employment Agreement, shall remain in full force
and effect beyond June 1, 1997, the separation date, and Wright agrees to remain
bound by the portions of the Employment Agreement which relate to and maintain
the confidentiality of such confidential information. If Wright is under a legal
obligation, or receives notice of legal or administrative process that may
compel him, to disclose such information, or if such disclosure is requested by
any regulatory, administrative, judicial or legislative body in the course of
any investigation, hearing or proceeding, Wright agrees to immediately notify
the Company and provide the Company time to object to or limit the disclosure.
Wright also agrees to keep confidential this Agreement, and its terms, and
will not contact any communication media concerning his employment and
separation from employment with the Company. This in no way affects Wright's
right to discuss this Agreement with counsel.
8. Non-Disparagement: Wright will make no comments or take any action that has
the result of damaging the reputation of the Company, or any related or
affiliated entity, or any of its or their employees, officers, directors or,
equity holders. This includes Wright's agreement to avoid voluntarily commencing
or participating in any proceeding, claim, or legal action brought by a third
party against the Company, or from making any statement, whether written or
oral, adverse to the Company, or any related or affiliated entity, or any of its
or their respective officers, directors, and employees or equity holders.
9. Company Property: Wright agrees to return to the Company by June 1, 1997
all property of the Company that is in his control or possession. This includes
all computer equipment,
5
<PAGE>
programs, access cards, office keys, manuals, records, documents, plans or
copies thereof, and other property relating to the business of the Company, or
any related or affiliated entity.
10. Agreement Not to Sue; Breach by Wright: If either party hereto raises a
claim that he or it has released as to one or more of the Released Parties, such
party agrees to pay all costs, fees and expenses that those Released Parties
incur in defending against the suit or claim, including reasonable attorneys'
fees. In addition, Wright acknowledges that any material breach of the covenants
contained in Section 5(a) - 5(d) of the Employment Agreement, as revised by the
provisions of Section 5 hereof, and as incorporated herein, will cause
irreparable harm to the Company, which will be difficult if not impossible to
ascertain, and the Company shall be entitled to equitable relief, including
injunctive relief, against any actual or threatened breach hereof, without bond
and without liability should such relief be denied, modified or vacated. Neither
the right to obtain such relief or the obtaining of such relief shall be
exclusive or preclude the Company from any other remedy. Additionally, if Wright
violates the terms of this Agreement, the Company shall have the right to
discontinue immediately and permanently all further payments owed to Wright
under this Agreement and anything else promised in this Agreement by the
Company. The Company may also seek repayment of any payments made to Wright
under this Agreement.
11. Review and Acceptance: The mutual promises contained herein affect
important rights and carry important obligations. Before Wright agrees to accept
the terms set forth in this Agreement, the releases that it contains, and the
exhibits attached to the Agreement, Wright should consult with an attorney of
his choice. If he decides to accept the terms offered in this Agreement, Wright
must timely sign and return it to: Extended Stay America, Inc., 450 East Las
Olas Boulevard, Suite 1100, Ft. Lauderdale, FL 33301 Attention: Marshall Dildy.
12. Interpretation: This Agreement shall be interpreted according to the laws
of theof Delaware, and under federal law as necessary. All terms shall be
interpreted in the broadest manner possible to provide the broadest application,
which is the express intent of the parties. The unenforceability of any clause
or provision of this Agreement shall not affect the remainder of the Agreement,
which shall be enforced to the full extent allowed by law. Any clause,
provision, or portion of this Agreement, except the general release that it
contains, found to be unenforceable shall be declared modified, amended or
limited to the maximum extent necessary to render it valid and enforceable. The
parties intend that this Agreement shall be interpreted to forever resolve all
disputes that may arise between Wright and the Company.
13. Signatures: By their signatures, the parties agree and acknowledge that the
Agreement has been read, is understood by them, and represents their entire and
complete agreement (specifically, that there are no verbal understandings
regarding this matter, and that all understandings have been reduced to writing
and are contained in this agreement). Each party further acknowledges that he or
it has had an opportunity to consult with an attorney before signing it and has
voluntarily entered into it. Wright also specifically states that he has not
received any promise or inducement to sign this Agreement that is not contained
in the Agreement itself.
6
<PAGE>
14. Counterpart Originals: This Agreement may be executed in counterparts, both
of which shall be construed as one document.
15. Response: Wright has 21 days from the date of his receipt of this Agreement
to decide whether he will accept this Agreement. Wright has seven days after he
signs the agreement to revoke it. To revoke the Agreement, Wright must provide
written notice of such revocation to: ESA Management, Inc., 450 East Las Olas
Boulevard, Suite 1100, Ft. Lauderdale, Florida 33301 Attention: Marshall Dildy
and such notice of revocation must be received by the Company within the seven
(7) day revocation period. If Employee revokes this Agreement, he will not be
entitled to any of the payments or the other promises set forth in this
Agreement.
ESA MANAGEMENT, INC.
/s/ Harold E. Wright By /s/ Robert A. Brannon
- ------------------------------------- -----------------------------
Harold E. Wright Its Vice President
--------------------------
Date Signed: June 5, 1997 Date Signed: June 5, 1997
------------------------- -------------------
For purposes of Section 5 only:
EXTENDED STAY AMERICA, INC.
By /s/ Robert A. Brannon
-----------------------------
Its Senior Vice President
--------------------------
Date Signed: June 5, 1997
-------------------
7
<PAGE>
EXHIBIT 10.2
EXTENDED STAY AMERICA, INC.
1997 EMPLOYEE STOCK OPTION PLAN
1. Statement of Purpose. The purpose of this Stock Option Plan (the
"Plan") is to benefit Extended Stay America, Inc. (the "Company") and its
subsidiaries by offering certain present and future key individuals a favorable
opportunity to become holders of stock in the Company over a period of years,
thereby giving them a stake in the growth and prosperity of the Company and
encouraging the continuance of their services with the Company or its
subsidiaries.
2. Administration. The Plan shall be administered by the Compensation
Committee (the "Committee") of the board of directors of the Company (the "Board
of Directors"), whose interpretation of the terms and provisions of the Plan and
whose determination of matters pertaining to options granted under the Plan
shall be final and conclusive. The Committee shall be composed of two or more
disinterested members of the Board of Directors of the Company.
3. Eligibility. Options shall be granted only to key employees and
consultants of the Company and its subsidiaries (including officers of the
Company and its subsidiaries but excluding members of the Committee) selected
initially and from time to time thereafter by the Committee on the basis of the
special importance of their services in the management, development and
operations of the Company or its subsidiaries (each such individual receiving
options granted under the Plan and each other person entitled to exercise an
option granted under the Plan is referred to herein as an "Optionee").
4. Granting of Options. (a) The Committee may grant options to employees,
directors and consultants of the Company and its subsidiaries; provided,
however, that members of the Committee shall not be eligible to receive grants
of options under the Plan. Pursuant to the Plan, a maximum of 6,000,000 shares
of the $.01 par value common stock of the Company (the "Common Stock") may be
purchased from the Company, subject to adjustment as provided in Paragraph 10
hereof; provided, however, that the maximum number of shares subject to all
options granted to an individual under the Plan shall in no event exceed 50% of
the shares of Common Stock authorized for issuance under the Plan. Options
granted under the Plan are intended not to be treated as incentive stock options
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
(b) No options shall be granted under the Plan subsequent to the tenth
anniversary of the adoption of the Plan. In the event that an option expires or
is terminated or canceled unexercised as to any shares, such released shares may
again be optioned (including a grant in substitution for a canceled option).
Shares subject to options may be made available from unissued or reacquired
shares of Common Stock.
(c) Nothing contained in the Plan or in any option granted pursuant
thereto shall confer upon any Optionee any right to be continued in the
employment of, or a consulting arrangement with, the Company or any subsidiary,
or interfere in any way with the right of the
<PAGE>
Company or its subsidiaries to terminate his or her employment or consulting
arrangement at any time.
5. Option Price. The option price of any option granted under the Plan
shall be determined by the Committee and shall not be less than the fair market
value of the shares of Common Stock subject to the option on the date of the
grant of such option. Unless the Committee otherwise determines, for purposes of
this Paragraph 5, "fair market value" shall be the average of the highest and
lowest sales prices of the Common Stock reported on the Nasdaq National Market
(or on the principal national stock exchange on which it is listed or quotation
service on which it is listed) (as reported in The Wall Street Journal) on the
date the option is granted (or, if the date of grant is not a trading date, on
the first trading date immediately preceding the date of grant). In the event
that the Common Stock is not listed or quoted on the Nasdaq National Market or
any other national stock exchange, the fair market value of the shares of Common
Stock for all purposes of this Plan shall be reasonably determined by the
Committee.
6. Duration of Options, Increments and Extensions. (a) Subject to the
provisions of Paragraph 8 hereof, each option shall be for such term of not more
than ten years as shall be determined by the Committee at the date of the grant.
Each option shall become exercisable with respect to one-fourth of the total
number of shares subject to the option 12 months after the date of its grant and
with respect to an additional one-fourth at the end of each 12-month period
thereafter during the succeeding three years.
(b) Notwithstanding any other provisions of the Plan to the contrary,
the Committee may in its discretion (i) specifically provide as of the date of
the grant for another time or times of exercise; (ii) accelerate the
exercisability of any option, subject to such terms and conditions as the
Committee deems necessary and appropriate to effectuate the purposes of the
Plan, which may include, without limitation, a requirement that the Optionee
grant to the Committee an option to repurchase all or a portion of the number of
shares acquired upon exercise of the accelerated option for their fair market
value, as determined by the Committee, as of the date of acceleration; (iii) at
any time prior to the expiration or termination of any options previously
granted, extend the term of any option (including such options held by officers)
for such additional period or periods as the Committee, in its discretion, may
determine. In no event, however, shall the aggregate option period with respect
to any option, including the original term of the option and any extensions
thereof, exceed ten years. Subject to the foregoing, all or any part of the
options as to which the right to exercise has accrued may be exercised at the
time of such accrual or at any time or times thereafter during the option term.
(c) In the event of a change in control of the Company, all
outstanding options shall become immediately exercisable. For the purposes of
the Plan, the term "change in control" shall mean (1) that any person is or
becomes the beneficial owner, directly or indirectly, of at least 50% of the
combined voting power of the Company's outstanding securities, except by reason
of a repurchase by the Company of its own securities, or (2) that a change in
the composition of the Board of Directors of the Company occurs as a result of
which fewer than one-half of the incumbent directors are directors who either
had been directors of the Company 24 months prior to such change or were elected
or nominated for election to the Board of
2
<PAGE>
Directors with the approval of at least a majority of the directors who had been
directors of the Company 24 months prior to such change and who were still in
office at the time of the election or nomination.
7. Exercise of Option. (a) An option may be exercised by giving written
notice to the Committee, specifying the number of shares to be purchased. The
option price for the number of shares of Common Stock for which the option is
exercised shall become immediately due and payable; provided, however, that in
lieu of cash an Optionee may, with the approval of the Committee, exercise his
or her option by (i) delivering a promissory note in accordance with the terms
of the Plan and in a form specified by the Company; (ii) tendering to the
Company shares of Common Stock owned by him or her and with the certificates
therefor registered in his or her name, having a fair market value equal to the
cash exercise price of the shares being purchased; or (iii) delivery of an
irrevocable written notice instructing the Company to deliver the shares of
Common Stock being purchased to a broker selected by the Company, subject to the
broker's written guarantee to deliver the cash to the Company, in each case
equal to the full consideration of the exercise price for the shares of Common
Stock being purchased. For this purpose, the per share value of Common Stock
shall be the fair market value on the date of exercise (or, if the date of
exercise is not a trading date, on the first trading date immediately preceding
the date of exercise), which shall, unless the Committee otherwise determines,
be the average of the highest and lowest sales prices of the Common Stock
reported on the Nasdaq National Market (or on the principal national stock
exchange on which it is listed or quotation service on which it is listed) (as
reported in The Wall Street Journal) on such date.
(b) In connection with the exercise of options granted under the Plan,
the Company may make loans to such Optionees as the Committee, in its
discretion, may determine. Such loans shall be subject to the following terms
and conditions and such other terms and conditions as the Committee shall
determine to be not inconsistent with the Plan. Such loans shall bear interest
at such rates as the Committee shall determine from time to time, which rates
may be below then current market rates or may be made without interest. In no
event may any such loan exceed the fair market value, at the date of exercise,
of the shares covered by the option, or portion thereof, exercised by the
Optionee. No loan shall have an initial term exceeding two years, but any such
loan may be renewable at the discretion of the Committee. When a loan shall have
been made, shares of Common Stock having a fair market value at least equal to
150 percent of the principal amount of the loan shall be pledged by the Optionee
to the Company as security for payment of the unpaid balance of the loan.
(c) At the time of the exercise of any option, the Company may
require, as a condition of the exercise of such option, the Optionee to pay the
Company an amount equal to the amount of the tax the Company may be required to
withhold to obtain a deduction for federal and state income tax purposes as a
result of the exercise of such option by the Optionee or to comply with
applicable law. An Optionee may, with the approval of the Committee, make an
election to satisfy the tax withholding obligation by either (1) tendering to
the Company shares of Common Stock owned by him or her and with the certificates
therefor registered in his or her name, having a fair market value equal to the
tax withholding obligation, (2) deduct from any cash payment pursuant to any
broker-assisted option exercise (net to Optionee in cash or shares)
3
<PAGE>
an amount sufficient to satisfy any withholding tax requirements, or (3)
instructing the Company to withhold from the shares of Common Stock otherwise
issuable upon the exercise of the option that number of shares having a fair
market value equal to the tax withholding obligation. The value of the shares to
be delivered or withheld shall be based on the fair market value of the shares
of Common Stock on the date of exercise, which shall, unless the Committee
otherwise determines, be the average of the highest and lowest sales prices of
the Common Stock reported on the Nasdaq National Market (or on the principal
national stock exchange on which it is listed or quotation service on which it
is listed) (as reported in The Wall Street Journal) on the date of exercise.
(d) At the time of any exercise of any option, the Company may, if the
Company shall determine it necessary or desirable for any reason, require the
Optionee (or his or her heirs, legatees, or legal representative, as the case
may be) as a condition upon the exercise thereof, to deliver to the Company a
written representation of present intention to purchase the shares for
investment and not for distribution. In the event such representation is
required to be delivered, an appropriate legend may be placed upon each
certificate delivered to the Optionee upon his or her exercise of part or all of
the option and a stop order may be placed with the transfer agent for the Common
Stock. Each option shall also be subject to the requirement that, if at any time
the Company determines, in its discretion, that the listing, registration or
qualification of the shares subject to the option upon any securities exchange
or under any state, federal or foreign law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the issue or purchase of shares thereunder, the option may not
be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Company.
8. Termination of Employment or Consulting Arrangement - Exercise
Thereafter. (a) In the event the employment or consulting arrangement of an
Optionee with the Company or any of its subsidiaries is terminated for any
reason other than the Optionee's death, permanent disability, retirement after
age 65 or following a change in control (as defined in Paragraph 6(c) hereof),
such Optionee's option shall expire and all rights to purchase shares pursuant
thereto shall terminate immediately. Temporary absence from employment because
of illness, vacation, approved leaves of absence, and transfers of employment
among the Company and its subsidiaries, shall not be considered to terminate
employment or to interrupt continuous employment. Temporary cessation of the
provision of consulting services because of illness, vacation or any other
reason approved in advance by the Company shall not be considered a termination
of the consulting arrangement or an interruption of the continuity thereof.
Conversion of an Optionee's employment relationship to a consulting arrangement
shall not result in termination of previously granted options.
(b) In the event of termination of employment or consulting
arrangement following a change in control (as defined in Paragraph 6(c) hereof),
the option may be exercised in full (without regard to any times of exercise
established under Paragraph 6 hereof; provided, however, that no options shall
be exercisable during the first six months after the date of grant) by the
Optionee or, if the Optionee is not living, by the Optionee's heirs, legatees,
or legal
4
<PAGE>
representatives, as the case may be, during its specified term. In the event of
termination of employment or consulting arrangement because of death, permanent
disability (as that term is defined in Section 22(e)(3) of the Code, as now in
effect or as shall be subsequently amended) or retirement after age 65, the
option may be exercised by the Optionee, or, if the Optionee dies after such
termination, by the Optionee's heirs, legatees, or legal representatives, as the
case may be, at any time during its specified term prior to three years after
the date of such termination, but only to the extent the option was exercisable
at the date of such termination.
(c) Notwithstanding any other provision of the Plan to the contrary,
the Committee may in its discretion provide for such other terms of expiration
and termination of an option in the event of termination of the employment or
consulting arrangement of the optionee as the Committee shall determine.
9. Non-Transferability of Options. No option shall be transferable by the
Optionee otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order and each option shall be
exercisable during an Optionee's lifetime only by the Optionee or by the
Optionee's legal representative. This restriction on transferability is
effective only so long as it is required pursuant to Section 16 under the
Securities Exchange Act of 1934, as amended. At the time such restriction on
transferability is no longer so required, the Committee, in its discretion, may
permit the transfer of an option on such terms and subject to such conditions as
the Committee may deem necessary or appropriate or as otherwise may be required
by applicable law or regulation.
10. Adjustment. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
number of outstanding shares of Common Stock is changed by any stock dividend,
stock split or combination of shares, the number of shares subject to the Plan
and to options granted thereunder shall be proportionately adjusted; (b) in the
event of any merger, consolidation or reorganization of the Company with any
other corporation or legal entity there shall be substituted, on an equitable
basis as determined by the Committee, for each share of Common Stock then
subject to the Plan and for each share of Common Stock then subject to an option
granted under the Plan, the number and kind of shares of stock or other
securities to which the holders of shares of Common Stock will be entitled
pursuant to the transaction; and (c) in the event of any other relevant change
in the capitalization of the Company, the Committee shall provide for an
equitable adjustment in the number of shares of Common Stock then subject to the
Plan and to each share of Common Stock then subject to an option granted under
the Plan. In the event of any such adjustment, the option price per share of
Common Stock shall be proportionately adjusted.
11. Amendment of the Plan. The Board of Directors of the Company or any
authorized committee thereof may amend or discontinue the Plan at any time.
However, no such amendment or discontinuance shall (a) without the consent of
the Optionee change or impair any option previously granted, or (b) without the
approval of the holders of a majority of the shares of the Common Stock which
vote in person or by proxy at a duly held stockholders' meeting, (i) increase
the maximum number of shares which may be purchased by all employees pursuant to
5
<PAGE>
this Plan, (ii) change the minimum purchase price of any option, or (iii) change
the limitations on the option period or increase the time limitations on the
grant of options.
12. Effective Date. The Plan is effective as of January 16, 1997.
6
<PAGE>
EXTENDED STAY AMERICA INC.
EXHIBIT 11.1 -- Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Month Period Six Month Period
------------------ ------------------
June 30, June 30, June 30, June 30,
1997 1996(1) 1997 1996(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding............ 95,306 66,561 92,991 60,456
Net effect of dilutive stock options -
based on the treasury stock method
using the average market price....... 1,679 387
------- ------- ------- -------
TOTAL............................. 95,306 68,240 92,991 60,843
======= ======= ======= =======
Net income (loss)..................... $(9,093) $ 1,656 $(6,623) $ 1,914
======= ======= ======= =======
Net income (loss) per share........... $ (0.10) $ 0.02 $ (0.07) $ 0.03
======= ======= ======= =======
FULLY DILUTED:
Average shares outstanding............ 95,306 66,561 92,991 60,456
Net effect of dilutive stock options -
based on the treasury stock method
using the greater of ending or
average market price................. 1,830 1,879
------- ------- ------- -------
TOTAL............................. 95,306 68,391 92,991 62,335
======= ======= ======= =======
Net income (loss)...................... $(9,093) $ 1,656 $(6,623) $ 1,914
======= ======= ======= =======
Net income (loss) per share............ $ (0.10) $ 0.02 $ (0.07) $ (0.03)
======= ======= ======= =======
</TABLE>
(1) Amounts are restated to reflect the 2-for-1 stock split effected in July
1996 and the effect of the Merger.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Condensed Consolidated Financial Statements of Extended Stay America, Inc. as of
June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 174,998
<SECURITIES> 0
<RECEIVABLES> 4,493
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 182,277
<PP&E> 686,393
<DEPRECIATION> 0
<TOTAL-ASSETS> 869,572
<CURRENT-LIABILITIES> 36,515
<BONDS> 0
0
0
<COMMON> 953
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 869,572
<SALES> 0
<TOTAL-REVENUES> 48,791
<CGS> 0
<TOTAL-COSTS> 63,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (14,405)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,971)
<INCOME-TAX> (348)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,623)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
MORGAN STANLEY SENIOR FUNDING, INC.
1585 BROADWAY
NEW YORK, NEW YORK 10036
July 21, 1997
Extended Stay America, Inc.
450 East Las Olas Boulevard
Suite 1100
Ft. Lauderdale, FL 33301
Attention: Mr. Robert A. Brannon
re Financing Letter
----------------
Ladies and Gentlemen:
You have advised Morgan Stanley Senior Funding, Inc. ("MSSF") that you
would like to enter into a $500 million senior secured revolving credit facility
(the "Revolving Credit Facility") for your general corporate purposes, including
the construction and acquisition of extended stay hotel properties. A
preliminary summary of the terms and conditions of the Revolving Credit Facility
is attached as Exhibit A to this letter (the "Summary of Terms"). In
conjunction with the establishment of the Revolving Credit Facility, and at your
option, you may elect to issue up to the Aggregate Permitted Amount (as defined
below) of unsecured senior subordinated notes (which may or may not be
convertible into equity), on terms reasonably satisfactory to you and MSSF (with
any notes so issued being herein called the "Senior Subordinated Notes") which,
in the case of non-convertible notes, are generally outlined in Exhibit B to
this letter (the "Senior Subordinated Notes Summary of Terms"). As used herein,
the terms (x) "Transaction" shall refer to the financing to be extended pursuant
to the Revolving Credit Facility and, if same are issued, the Senior
Subordinated Notes, (y) "Aggregate Permitted Amount" shall mean $300 million;
provided that such amount shall be increased by the sum of (i) the lesser of
$300 million or the aggregate principal amount of Senior Subordinated Notes
issued by the Borrower within six months after the Closing Date, (ii) 50% of the
net cash proceeds of common equity issued by the Borrower after the date of this
letter and (iii) 33% of the net cash proceeds received by the Borrower from any
issuance by it of Qualified Convertible Senior Subordinated Notes (excluding any
Qualified Convertible Senior Subordinated Notes already included as an
adjustment pursuant to preceding clause (i)), and (z) "Qualified Convertible
Senior Subordinated Notes" shall mean Senior Subordinated Notes issued by the
Borrower which (i) are convertible into common equity of the Borrower, (ii) bear
interest (after giving effect to any original issue discount) at a rate per
annum not to exceed 7 1/2% and (iii) mature at least one year after the final
maturity of the
<PAGE>
Revolving Credit Facility. It is our understanding that, after giving effect to
the Transaction, Extended Stay America, Inc. (the "Borrower") and its
subsidiaries will have no indebtedness or preferred stock outstanding other than
the indebtedness incurred pursuant to the Transaction and such other
indebtedness, if any, as is satisfactory to MSSF.
MSSF is pleased to confirm that it is willing to commit to provide, subject
to and upon the terms and conditions set forth herein and in the Summary of
Terms, 100% of the $500 million Revolving Credit Facility. As you are aware,
this letter does not constitute a commitment on the part of MSSF or any of its
affiliates with respect to the Senior Subordinated Notes. It is understood that
MSSF shall act as Syndication Agent and Arranger for the Revolving Credit
Facility. MSSF will identify a lender to act as Administrative Agent for the
Revolving Credit Facility, provided that if no such lender is identified, MSSF
will act as Administrative Agent. It is understood that the MSSF shall be
permitted to designate one or more lenders as agents or co-agents, as the case
may be, reasonably acceptable to the Borrower with respect to the Revolving
Credit Facility, which lenders shall have such titles as may be determined by
MSSF.
MSSF reserves the right, prior to or after execution of the definitive
credit documentation for the Revolving Credit Facility, to syndicate all or part
of its commitments for the Revolving Credit Facility to one or more lending
institutions (the "Lenders") that will become parties to such definitive credit
documentation pursuant to a syndication to be managed by MSSF. MSSF shall
commence syndication efforts promptly after the execution of this letter by you
and you agree actively to reasonably assist MSSF in achieving a successful
syndication. Such syndication will be accomplished by a variety of means,
including direct contact during the syndication between senior management and
advisors of the Borrower and the proposed syndicate members. To reasonably
assist MSSF in its syndication efforts, you hereby agree (a) to provide and
cause your advisors to provide MSSF and the other syndicate members upon request
with all information reasonably deemed necessary by MSSF to complete
syndication, including but not limited to information and evaluations prepared
by you and your advisors or on your behalf relating to the transactions
contemplated hereby and (b) to reasonably assist MSSF upon request in the
preparation of an Information Memorandum to be used in connection with the
syndication of the Revolving Credit Facility and (c) to make available your
senior officers and representatives from time to time and to attend and make
presentations regarding the business and prospects of the Borrower and its
subsidiaries at a meeting or meetings of lenders or prospective lenders.
As you are aware, MSSF has substantially completed its business due
diligence with respect to the Borrower and its subsidiaries, but has not yet had
the opportunity to conduct its legal and environmental due diligence analysis
and review with respect to the Borrower and its subsidiaries. You agree to
reasonably cooperate with MSSF to enable it to complete said legal and
environmental due diligence prior to the execution of the Revolving Credit
Facility. MSSF's commitment hereunder is subject to (a) there not occurring or
becoming known to us any material adverse condition or material adverse change
in or affecting the business, property, assets, nature of assets, liabilities,
condition (financial or otherwise) or prospects of the Borrower or the Borrower
and its subsidiaries taken as a whole, (b) our not becoming aware after the date
2
<PAGE>
hereof of any information or other matter affecting the Borrower and its
subsidiaries or the transactions contemplated hereby, which is inconsistent in a
material and adverse manner with any such information or other matter disclosed
to us by the Borrower prior to the date hereof, (c) there not having occurred a
material disruption of or material adverse change in financial, banking or
capital market conditions that, in our reasonable judgment, would materially
impair the syndication of the Revolving Credit Facility, (d) prior to and during
the syndication of the Revolving Credit Facility, there being no competing
offering, placement or arrangement of any debt securities (other than the Senior
Subordinated Notes) or bank financing by or on behalf of the Borrower or any of
its subsidiaries, and (e) the other conditions set forth or referred to in the
Summary of Terms. MSSF shall not be responsible or liable for any consequential
damages which may be alleged as a result of its failure to provide, or
participate in, the Revolving Credit Facility other than as a result of the
gross negligence or willful misconduct of MSSF.
To induce MSSF to issue this letter, you hereby agree that all reasonable
out-of-pocket fees and expenses (including the reasonable fees and expenses of
counsel and consultants) of MSSF and its affiliates arising in connection with
this letter (and its due diligence and syndication efforts in connection
herewith) and in connection with the transactions described herein shall be for
your account, whether or not the Revolving Credit Facility is made available or
definitive credit documents are executed. In addition, you hereby agree to pay
when and as due the fees described in the enclosed "Fee Letter". You further
agree to indemnify and hold harmless each Lender (including without limitation
MSSF as a party to this letter and the Fee Letter, and in its capacity as an
agent and as a Lender) and each director, officer, employee and affiliate
thereof (each an "indemnified person") from and against any and all actions,
suits, proceedings (including any investigations or inquiries), claims, losses,
damages, liabilities or expenses of any kind or nature whatsoever which may be
incurred by or asserted against or involve such Lender or any such other
indemnified person as a result of or arising out of or in any way related to or
resulting from this letter and, upon demand, to pay and reimburse each Lender
and each other indemnified person for any legal or other out-of-pocket expenses
incurred in connection with investigating, defending or preparing to defend any
such action, suit, proceeding (including any inquiry or investigation) or claim
(whether or not any Lender or any such other indemnified person is a party to
any action or proceeding out of which any such expenses arise, and whether any
such action, suit or proceeding is between you and a Lender or any other
indemnified person or between any indemnified person and a third party or
otherwise); provided, however, that you shall not have to indemnify any
indemnified person against any loss, claim, damage, expense or liability which
resulted primarily from the gross negligence or willful misconduct of such
indemnified person. This letter is issued for your benefit only and no other
person or entity may rely hereon.
MSSF reserves the right to employ the services of its affiliates in
providing services contemplated by this letter and to allocate, in whole or in
part, to such affiliates certain fees payable to MSSF in such manner as MSSF and
such affiliates may agree in their sole discretion. You acknowledge that MSSF
may share with any of its affiliates, and such affiliates may share with MSSF,
any information related to the Transaction, the Borrower and its subsidiaries
and affiliates, or any of the matters contemplated hereby.
3
<PAGE>
MSSF agrees that it will use its reasonable best efforts not to disclose
without your prior consent (other than to its directors, employees, auditors,
advisors or counsel, provided such persons shall be subject to the provisions of
this paragraph to the same extent as MSSF) any confidential information with
respect to the Borrower or any of its subsidiaries obtained from you by virtue
of the transactions contemplated by this letter, provided that MSSF may disclose
any such information (a) as has become generally available to the public other
than by virtue of a breach of this paragraph by MSSF, (b) to the extent such
information was legally in the possession of MSSF prior to its receipt from or
on behalf of the Borrower or any of its subsidiaries and was from a source not
known to MSSF to be (x) bound by a confidentiality agreement with the Borrower
or (y) otherwise prohibited from transmitting the information to MSSF by a
contractual, legal or fiduciary obligation, (c) such information becomes
available to MSSF from a source other than the Borrower or any of its
subsidiaries and such source is not known to MSSF to be (x) bound by a
confidentiality agreement with the Borrower or (y) otherwise prohibited from
transmitting the information to MSSF by a contractual, legal or fiduciary
obligation, (d) as may be required or reasonably appropriate in any report,
statement or testimony submitted to any municipal, state or Federal regulatory
body having or claiming to have jurisdiction over MSSF or to the Federal Reserve
Board, the Federal Deposit Insurance Corporation, the NAIC or similar
organizations (whether in the United States or elsewhere) or their successors,
(e) as may be required or reasonably appropriate in respect to any summons or
subpoena or in connection with any litigation, (f) in order to comply with any
law, order, regulation or ruling applicable to MSSF, and (g) to Lenders or
prospective Lenders in connection with the syndication of the Revolving Credit
Facility, provided that such Lenders or prospective Lenders shall have agreed to
be subject to the provisions of this paragraph.
The provisions of the immediately preceding three paragraphs shall survive
any termination of this letter.
MSSF's willingness to provide the Revolving Credit Facility as set forth
above will terminate on October 15, 1997, if a definitive credit agreement
evidencing the Revolving Credit Facility, reasonably satisfactory in form and
substance to MSSF and drafted by its counsel (the "Credit Agreement"), shall not
have been entered into prior to such date (with the date of the entering into of
the Credit Agreement being herein called the "Closing Date"). MSSF will use its
reasonable good faith efforts to cause the Closing Date of the Revolving Credit
Facility to occur on or prior to the date referenced above, assuming your
cooperation.
Except as otherwise required by law or unless MSSF has otherwise consented,
you are not authorized to show or circulate this letter to any other person or
entity (other than your legal or financial advisors in connection with your
evaluation hereof). If this letter is not accepted by you as provided in the
immediately succeeding paragraph, you are to immediately return this letter (and
any copies hereof) to MSSF.
If you are in agreement with the foregoing, please sign and return to MSSF
(including by way of facsimile transmission), the enclosed copy of this letter,
together with the related fee letter, no later than 6:00 p.m., New York time, on
July 23, 1997. This letter may be executed in any number of counterparts, and
by the different parties hereto on separate counterparts, each of
4
<PAGE>
which when executed and delivered, shall be an original, but all of which shall
together constitute one and the same instrument.
THIS LETTER AND THE RELATED FEE LETTER SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, AND ANY RIGHT TO TRIAL BY
JURY WITH RESPECT TO ANY CLAIM, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR
CONTEMPLATED BY THIS LETTER AND/OR THE RELATED FEE LETTER IS HEREBY WAIVED. YOU
HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK
STATE COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE
RELATED TO THIS LETTER AND/OR THE RELATED FEE LETTER OR ANY MATTERS CONTEMPLATED
HEREBY OR THEREBY.
Very truly yours,
MORGAN STANLEY SENIOR FUNDING, INC.
By
-----------------------------------
Title:
Agreed to and Accepted as of
this 21st day of July, 1997:
EXTENDED STAY AMERICA, INC.
By
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Title:
5
