<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 September 30, 2000
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 November 3, 2000, the registrant had issued and outstanding an aggregate
of 95,352,454 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)
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
2000 1999(1)
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 8,490 $ 6,449
Accounts receivable.................................................................. 7,880 6,094
Prepaid expenses..................................................................... 2,900 2,810
Deferred income taxes................................................................ 49,850 39,053
Other current assets................................................................. 27 27
---------- ----------
Total current assets............................................................. 69,147 54,433
Property and equipment, net........................................................... 1,987,161 1,856,517
Deferred loan costs, net.............................................................. 18,203 15,746
Other assets.......................................................................... 792 553
---------- ----------
$2,075,303 $1,927,249
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable..................................................................... $ 32,592 $ 34,020
Income taxes payable................................................................. 10,900 2,888
Accrued retainage.................................................................... 8,640 8,834
Accrued property taxes............................................................... 15,997 8,871
Accrued salaries and related expenses................................................ 5,075 2,633
Accrued interest..................................................................... 2,071 7,059
Other accrued expenses............................................................... 16,686 14,187
Current portion of long-term debt.................................................... 3,000 3,000
---------- ----------
Total current liabilities........................................................ 94,961 81,492
---------- ----------
Deferred income taxes................................................................. 95,561 77,167
---------- ----------
Long-term debt........................................................................ 917,000 853,000
---------- ----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and
outstanding........................................................................
Common stock, $.01 par value, 500,000,000 shares authorized, 95,456,578 and
95,996,884 shares issued and outstanding, respectively............................. 955 960
Additional paid-in capital........................................................... 825,659 828,724
Retained earnings.................................................................... 141,167 85,906
---------- ----------
Total stockholders' equity............................................................ 967,781 915,590
---------- ----------
$2,075,303 $1,927,249
========== ==========
</TABLE>
-------------------
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
1
<PAGE>
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue........................................................ $142,162 $116,491 $389,338 $312,397
Property operating expenses.................................... 56,081 48,231 158,984 133,277
Corporate operating and property
management expenses.......................................... 11,171 10,589 33,153 31,335
Increase (decrease) in valuation allowance..................... (1,079)
Depreciation and amortization.................................. 16,643 15,637 49,150 44,464
-------- -------- -------- --------
Total costs and expenses.................................. 83,895 74,457 241,287 207,997
-------- -------- -------- --------
Income from operations before interest, income taxes and
cumulative effect of accounting change...................... 58,267 42,034 148,051 104,400
Interest expense, net.......................................... 20,385 14,942 55,949 40,210
-------- -------- -------- --------
Income before income taxes and cumulative effect of
accounting change........................................... 37,882 27,092 92,102 64,190
Provision for income taxes..................................... 15,151 10,837 36,840 25,677
-------- -------- -------- --------
Net income before cumulative effect of accounting change....... 22,731 16,255 55,262 38,513
Cumulative effect of change in accounting for start-up
activities, net of income tax benefit of $520............... 779
-------- -------- -------- --------
Net income..................................................... $ 22,731 $ 16,255 $ 55,262 $ 37,734
======== ======== ======== ========
Net income per common share- Basic:
Net income before cumulative effect of accounting change.. $ 0.24 $ 0.17 $ 0.58 $ 0.40
Cumulative effect of accounting change.................... (0.01)
-------- -------- -------- --------
Net income..................................................... $ 0.24 $ 0.17 $ 0.58 $ 0.39
======== ======== ======== ========
Net income per common share- Diluted:
Net income before cumulative effect of accounting change.... $ 0.23 $ 0.17 $ 0.57 $ 0.40
Cumulative effect of accounting change...................... (0.01)
-------- -------- -------- --------
Net income..................................................... $ 0.23 $ 0.17 $ 0.57 $ 0.39
======== ======== ======== ========
Weighted average shares:
Basic....................................................... 95,192 96,523 95,351 96,260
Effect of dilutive options.................................. 2,164 712 971 778
-------- -------- -------- --------
Diluted..................................................... 97,356 97,235 96,322 97,038
======== ======== ======== ========
</TABLE>
See notes to the unaudited condensed consolidated financial statements
2
<PAGE>
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 55,262 $ 37,734
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 49,150 44,464
Amortization of deferred loan costs included in interest expense..... 3,428 2,894
Deferred income taxes................................................ 7,597 16,404
Cumulative effect of accounting change, net.......................... 779
Changes in operating assets and liabilities.......................... 15,947 (12,753)
--------- ---------
Net cash provided by operating activities......................... 131,384 89,522
--------- ---------
Cash flows from investing activities:
Additions to property and equipment....................................... (183,033) (251,622)
Other assets.............................................................. (239) 121
--------- ---------
Net cash used in investing activities............................. (183,272) (251,501)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.............................................. 313,000 315,000
Repayments of revolving credit facility................................... (249,000) (150,000)
Proceeds from issuance of common stock.................................... 4,268 5,489
Repurchases of Company common stock....................................... (8,578)
Additions to deferred loan costs.......................................... (5,761) (345)
--------- ---------
Net cash provided by financing activities......................... 53,929 170,144
--------- ---------
Increase in cash and cash equivalents........................................ 2,041 8,165
Cash and cash equivalents at beginning of period............................. 6,449 623
--------- ---------
Cash and cash equivalents at end of period................................... $ 8,490 $ 8,788
========= =========
Noncash investing and financing transactions:
Capitalized or deferred items included in accounts payable
and accrued liabilities................................................. $ 26,053 $ 26,882
========= =========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes............................................................ $ 19,883 $ 15,402
========= =========
Interest expense, net of amounts capitalized............................ $ 64,942 $ 42,588
========= =========
</TABLE>
See notes to the unaudited condensed consolidated financial statements
3
<PAGE>
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and include the accounts of Extended Stay America, Inc. and subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The condensed consolidated balance sheet data at December 31, 1999 was
derived from audited financial statements of the Company but does not include
all disclosures required by generally accepted accounting principles.
Operating results for the three-month and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Derivative Financial Instruments: The Company does not enter into financial
instruments for trading or speculative purposes. The Company uses interest rate
cap contracts to hedge its exposure on variable rate debt. The cost of the caps
is included in prepaid expenses and is amortized to interest expense over the
life of the cap contract. The interest differential to be received under the
related cap is recognized as a reduction in interest expense in the period
earned. Changes in the fair value of cap contracts that do not qualify as hedges
are recognized in income when they occur.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 was amended in June 2000 by
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133." SFAS No. 133, as amended,
requires all derivatives to be carried on the balance sheet at fair value. SFAS
No. 133, as amended, is effective for financial statements issued for periods
beginning after December 15, 2000. Upon adoption of SFAS No. 133, as amended,
all hedging relationships must be designated and documented pursuant to the
provisions of the statement. The Company intends to designate its interest rate
cap contracts as cash-flow hedges. Accordingly, the difference, net of taxes,
between the fair value of the caps and their carrying value on the balance sheet
under previous hedge-accounting rules will be charged to other comprehensive
income in stockholders' equity. The Company has evaluated the impact of SFAS No.
133 on the financial statements and does not anticipate that adoption will have
a material impact or that it will create a violation of the Company's debt
covenant agreements. At September 30, 2000, the fair value of the caps was
$130,000 and their carrying value was $1.2 million.
Pursuant to the Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" issued by the Accounting Standards Executive Committee,
effective January 1, 1999, the Company changed its method of accounting for
start-up activities, including pre-opening and organizational costs, to expense
them as they are incurred. Accordingly, the Company recorded an expense of
$779,000, net of income tax benefit of $520,000, as the cumulative effect of
this change in accounting.
4
<PAGE>
In the quarter ended September 30, 1998, unfavorable capital market
conditions resulted in a reduction in the Company's development plans for 1999
and 2000. As a result, a valuation allowance of $12.0 million was established
for the write-off of costs related to sites that would not be developed. This
valuation allowance was reduced by $1.1 million in the quarter ended June 30,
1999 due to the renegotiation of the terms of a number of the optioned sites.
The computation of diluted earnings per share for the three months ended
September 30, 2000 and 1999 does not include approximately 3.6 million and 7.4
million weighted average shares, respectively, and for the nine months ended
September 30, 2000 and 1999 does not include approximately 6.3 million and 7.9
million weighted average shares, respectively, of common stock represented by
outstanding options because the exercise price of the options for the periods
was greater than the average market price of common stock during the periods.
Certain previously reported amounts have been reclassified to conform with
the current period's presentation.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
(000's Omitted)
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Operating Facilities:
Land and improvements.......................................... $ 467,040 $ 425,098
Buildings and improvements..................................... 1,288,036 1,194,789
Furniture, fixtures, equipment and supplies.................... 251,637 237,218
---------- ----------
Total Operating Facilities................................. 2,006,713 1,857,105
Office furniture, fixtures and equipment........................... 8,218 8,270
Facilities under development, including land and improvements...... 152,718 122,611
---------- ----------
2,167,649 1,987,986
Less: Accumulated depreciation.................................... (180,488) (131,469)
---------- ----------
Total property and equipment....................................... $1,987,161 $1,856,517
========== ==========
</TABLE>
NOTE 3 -- LONG - TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS
In June 2000, the Company increased availability under its bank credit
facility from $800 million to $1 billion with the addition of a $200 million
Tranche D term loan that matures on June 30, 2007. The proceeds from the new
term loan were used to reduce amounts outstanding under the Company's revolving
loan facility.
In addition to increasing aggregate borrowings and availability under the
credit facility from $800 million to $1 billion, certain other terms of the
credit facility were modified in connection with an amendment and restatement of
the credit facility. The credit facility was amended to allow the Company to
purchase up to an additional $75 million of its common stock and/or subordinated
notes, with a sub-limit of $25 million for the subordinated notes. The credit
facility was also amended to expand the Company's ability to issue its common
stock to effect certain investments. In addition, certain conditions to each
borrowing of revolving loans were eliminated and the permitted ratio of senior
debt to earnings before interest, taxes, depreciation and amortization was
increased to 4.25:1.00 through September 2001 and to 4.00:1.00 thereafter.
Interest on the new Tranche D term loan will be calculated, at the
Company's option, using either the prime rate plus 2.5% or the LIBOR rate plus
3.5%. In connection with the issuance of the new Tranche D term loan and the
amendments discussed above, the interest rate on the revolving loans and the
Tranche A term loan, which previously varied based on the amount of loans
outstanding relative to earnings before interest, taxes, depreciation and
amortization, are now calculated, at the Company's option, using either the
prime rate plus 1.0% or the LIBOR rate plus 2.0%. The commitment fee on the
unused revolving loan capacity is 0.5% per annum on the unused amount.
5
<PAGE>
In connection with these revisions to the credit facility, the Company has
also acquired interest rate cap contracts with a financial institution that
limit the Company's exposure to future increases in the LIBOR rate. These
contracts relate to a total of $800 million and limit the Company's exposure to
a maximum LIBOR rate of 7.88% from June 16, 2000 through June 16, 2001 and to a
maximum LIBOR rate of 8.88% from June 17, 2001 through June 16, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
We own and operate three brands in the extended stay lodging market--
StudioPLUS/TM/ Deluxe Studios ("StudioPLUS"), EXTENDED STAYAMERICA Efficiency
Studios ("EXTENDED STAY"), and Crossland Economy Studios/SM/ ("Crossland"). Each
brand is designed to appeal to different price points below $500 per week. All
three brands offer the same core components: a living/sleeping area; a fully-
equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the
mid-price category and generally feature guest rooms that are larger than those
in our other brands, an exercise facility, and a swimming pool. EXTENDED STAY
rooms are designed to compete in the economy category. Crossland rooms are
typically smaller than EXTENDED STAY rooms and are targeted for the budget
category. In this Quarterly Report on Form 10-Q, the words "Extended Stay
America", "Company", "we", "our", "ours", and "us" refer to Extended Stay
America, Inc. and its subsidiaries unless the context suggests otherwise.
The table below provides a summary of our selected development and
operational results for the three months and nine months ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Facilities Open (at period end).. 383 356 383 356
Total Facilities Developed............. 5 9 21 51
Average Occupancy Rate................. 85% 79% 81% 75%
Average Weekly Room Rate............... $ 307 $ 296 $ 303 $ 292
</TABLE>
Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Due to our rapid expansion, our
overall average occupancy rate has been negatively impacted by the lower
occupancy typically experienced during the pre-stabilization period for newly-
opened facilities. We expect the negative impact on overall average occupancy to
decline as the ratio of newly-opened properties to total properties in operation
declines. Average weekly room rates are determined by dividing room revenue by
the number of rooms occupied on a daily basis for the applicable period and
multiplying by seven. The average weekly room rates generally will be greater
than standard room rates because of (i) stays of less than one week, which are
charged at a higher nightly rate, (ii) higher weekly rates for rooms that are
larger than the standard rooms, and (iii) additional charges for more than one
person per room. We expect that our future occupancy and room rates will be
impacted by a number of factors, including the number and geographic location of
new facilities as well as the season in which we open those facilities. We also
cannot assure you that we can maintain our occupancy and room rates.
At September 30, 2000, we had 383 operating facilities (39 Crossland, 252
EXTENDED STAY, and 92 StudioPLUS ) and had 23 facilities under construction (21
EXTENDED STAY and 2 StudioPLUS). We expect to complete the construction of the
facilities currently under construction generally within the next twelve months,
however, we cannot assure you that we will complete construction within the time
periods we have historically experienced. Our ability to complete construction
may be materially impacted by various factors including final permitting and
obtaining certificates of occupancy, as well as weather-induced construction
delays.
6
<PAGE>
Results of Operations
For the Three Months Ended September 30, 2000 and 1999
Property Operations
The following is a summary of the properties in operation at the end of
each period along with the related average occupancy rates and average weekly
room rates during each period:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------- -----------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Crossland............. 39 85% $215 39 75% $214
EXTENDED STAY......... 252 86 315 228 80 301
StudioPLUS............ 92 82 343 89 77 338
--- -- ---- --- -- ----
Total............... 383 85% $307 356 79% $296
=== == ==== === == ====
</TABLE>
Because newly opened properties typically experience lower occupancies
during their pre-stabilization period, average occupancy rates are impacted by
the ratio of newly opened properties to total properties. Each of our brands
experienced a decline in the ratio of newly opened properties to total
properties for the third quarter of 2000 as compared to the third quarter of
1999. The impact of this decline in the ratio of newly opened properties, along
with increases in occupancy at our mature properties, resulted in an increase in
our overall average occupancy rate to 85% for the third quarter of 2000 compared
to 79% for the third quarter of 1999. The average occupancy rate in the third
quarter of 2000 for the 347 properties we owned and operated as of June 30, 1999
was 86%. Similarly, the average occupancy rate in the third quarter of 1999 for
the 239 properties we owned and operated as of June 30, 1998 was 81%. We believe
that the increase in the average occupancy rate for properties open for at least
one year at the beginning of the quarter of each year reflects, primarily,
increases in the overall demand for lodging products in various markets in which
we operate. In addition, we believe that our occupancies benefited from a
strategy implemented at the beginning of 2000 to establish a more competitive
pricing structure for our products.
The increase in overall average weekly room rates for the third quarter of
2000 as compared to the third quarter of 1999 reflects, primarily, the
geographic dispersion of properties opened since September 30, 1999 and the
higher standard weekly room rates in certain of those markets. The increase also
is due in part to increases in rates charged at previously opened properties.
The average weekly room rate for the 347 properties that we owned and operated
throughout both periods increased by 1% in the third quarter of 2000. We believe
that the average weekly room rate for these properties was impacted by a
strategy implemented at the beginning of 2000 to establish a more competitive
pricing structure. We believe that this pricing strategy contributed to an
increase in the occupancy at these properties.
We recognized total revenue of $142.2 million for the third quarter of 2000
and $116.5 million for the third quarter of 1999. This is an increase of $25.7
million, or 22%. Approximately $14.9 million of the increased revenue was
attributable to properties opened subsequent to June 30, 1999 and approximately
$10.8 million was attributable to an increase in revenue for the 347 properties
that we owned and operated throughout both periods.
Property operating expenses, consisting of all expenses directly allocable
to the operation of the facilities but excluding any allocation of corporate
operating and property management expenses, depreciation, or interest were $56.1
million (39% of total revenue) for the third quarter of 2000, as compared to
$48.2 million (41% of total revenue) for the third quarter of 1999. We expect
the ratio of property operating expenses to total revenue to generally fluctuate
inversely relative to occupancy rate increases or decreases because the majority
of these expenses do not vary based on occupancy. Our overall occupancy rates
were 85% for the third quarter of 2000 and 79% for the third quarter of 1999 and
our property operating margins were 61% for the third quarter of 2000 and 59%
for the third quarter of 1999.
The provisions for depreciation and amortization for our lodging facilities
were $16.3 million for the third quarter of 2000 and $15.2 million for the third
quarter of 1999. These provisions were computed using the straight-
7
<PAGE>
line method over the estimated useful lives of the assets. These provisions
reflect a pro rata allocation of the annual depreciation and amortization charge
for the periods for which the facilities were in operation. Depreciation and
amortization for the third quarter of 2000 increased compared to the third
quarter of 1999 because we operated 27 additional facilities in 2000 and because
we operated for a full quarter the 9 properties that were opened in the third
quarter of 1999.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of lodging facilities.
These expenses consist primarily of personnel and certain marketing costs, as
well as development costs that are not directly related to a site that we will
develop. We incurred corporate operating and property management expenses of
$11.2 million (8% of total revenue) in the third quarter of 2000 and $10.6
million (9% of total revenue) in the third quarter of 1999. The increase in the
amount of these expenses for the third quarter of 2000 as compared to the same
period in 1999 reflects the impact of additional personnel and related expenses
in connection with the increased number of facilities we operated. We expect
these expenses will continue to increase in total amount but decline moderately
as a percentage of revenue as we develop and operate additional facilities in
the future.
Depreciation and amortization was $335,000 for the quarter ended September
30, 2000 and $419,000 for the comparable period in 1999. These provisions were
computed using the straight-line method over the estimated useful lives of the
assets for assets not directly related to the operation of our facilities. These
assets were primarily office furniture and equipment.
We realized $95,000 of interest income in the third quarter of 2000 and
$143,000 in the third quarter of 1999. This interest income was primarily
attributable to the temporary investment of funds drawn under our credit
facilities. We incurred interest charges of $23.5 million during the third
quarter of 2000 and $17.2 million in the third quarter of 1999. Of these
amounts, $3.0 million in the third quarter of 2000 and $2.1 million in the third
quarter of 1999 were capitalized and included in the cost of buildings and
improvements.
We recognized income tax expense of $15.2 million and $10.8 million (40% of
income before income taxes and the cumulative effect of an accounting change, in
both periods) for the third quarter of 2000 and 1999, respectively. Our income
tax expense differs from the federal income tax rate of 35% primarily due to
state and local income taxes. We expect the annualized effective income tax rate
for 2000 will be approximately 40%.
For the Nine Months Ended September 30, 2000 and 1999
Property Operations
The following is a summary of the number of properties in operation at the
end of each period along with the related average occupancy rates and average
weekly room rates during each period:
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------- -----------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Crossland...... 39 80% $213 39 68% $210
EXTENDED STAY.. 252 81 310 228 77 296
StudioPLUS..... 92 79 342 89 74 334
--- -- ---- --- -- ----
Total........ 383 81% $303 356 75% $292
=== == ==== === == ====
</TABLE>
Average occupancy rates for each of the brands increased for the nine-month
period ended September 30, 2000 as compared to the same period in 1999 primarily
due to a decrease in the ratio of newly opened properties to total properties
for those brands. In addition, we believe that our occupancies have benefited
from a strategy implemented at the beginning of 2000 to establish a more
competitive pricing structure for our products. The average occupancy rate in
the nine months ended September 30, 2000 for the 305 properties that we owned
and operated as of December 31, 1998 was 81%. Similarly, the average occupancy
rate in the nine months ended September 30, 1999 for the 185 properties that we
owned and operated as of December 31, 1997 was 79%.
8
<PAGE>
The increase in average weekly room rates for the nine months ended
September 30, 2000 as compared to the same period of 1999 reflects, primarily,
the geographic dispersion of properties opened since September 30, 1999 and the
higher standard weekly room rates in certain of those markets. The increase also
is due in part to increases in rates charged at previously opened properties.
The average weekly room rate for the 305 properties that we owned and operated
throughout both periods increased 1% in the first nine months of 2000. We
believe that the average weekly room rate for these properties was impacted by a
strategy implemented at the beginning of 2000 to establish a more competitive
pricing structure. We believe that this pricing strategy contributed to an
increase in the occupancy at these properties.
We recognized total revenue of $389.3 million for the nine months ended
September 30, 2000 and $312.4 million for the nine months ended September 30,
1999. This is an increase of $76.9 million, or 25%. Approximately $55.7 million
of the increased revenue was attributable to properties opened subsequent to
December 31, 1998 and approximately $21.2 million was attributable to an
increase in revenue for the 305 properties that were owned and operated
throughout both periods.
Property operating expenses were $159.0 million (41% of total revenue) for
the nine months ended September 30, 2000 as compared to $133.3 million (43% of
total revenue) for the nine months ended September 30 1999. We expect the ratio
of property operating expenses to total revenue to generally fluctuate inversely
relative to occupancy rate increases or decreases because the majority of these
expenses do not vary based on occupancy. Our overall occupancy rates were 81%
for the nine months ended September 30, 2000 and 75% for the nine months ended
September 30, 1999 and our property operating margins were 59% for the nine
months ended September 30, 2000 and 57% for the nine months ended September 30,
1999.
The provisions for depreciation and amortization for the lodging facilities
were $48.2 million for the nine months ended September 30, 2000 and $43.4
million for the nine months ended September 30, 1999. Depreciation and
amortization for the nine months ended September 30, 2000 increased compared to
the nine months ended September 30, 1999 because we operated 27 additional
facilities in 2000 and because we operated for a full nine months the 51
properties that were opened in the first nine months of 1999.
Corporate Operations
We incurred corporate operating and property management expenses of $33.2
million (9% of total revenue) in the nine months ended September 30, 2000 and
$31.3 million (10% of total revenue) in the nine months ended September 30,
1999. The increase in the amount of these expenses for the nine-month period
ended September 30, 2000 as compared to the same period of 1999 reflects the
impact of additional personnel and related expenses in connection with the
increased number of facilities we operated. We expect these expenses will
continue to increase in total amount but decline moderately as a percentage of
revenue as we develop and operate additional facilities in the future.
Depreciation and amortization for assets not directly related to operation
of our facilities was $1.0 million for the nine months ended September 30, 2000
and $1.1 million for the comparable period in 1999.
We realized $431,000 of interest income in the nine months ended September
30, 2000 and $544,000 in the nine months ended September 30, 1999. This interest
income was attributable to the temporary investment of funds drawn under our
credit facilities. We incurred interest charges of $63.9 million in the nine
months ended September 30, 2000 and $48.8 million in the nine months ended
September 30, 1999. Of these amounts, $7.5 million in the nine months ended
September 30, 2000 and $8.0 million in the nine months ended September 30, 1999
were capitalized and included in the cost of buildings and improvements.
We recognized income tax expense of $36.8 million for the nine-month period
ended September 30, 2000 and $25.7 million for the nine-month period ended
September 30, 1999 (40% of income before income taxes and the cumulative effect
of an accounting change, in both periods). Income tax expense differs from the
federal income tax rate of 35% primarily due to state and local income taxes.
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Reduction in Valuation Allowance
In the quarter ended September 30, 1998, unfavorable capital market
conditions resulted in a reduction in our development plans for 1999 and 2000.
As a result, a valuation allowance of $12.0 million was established for the
write-off of costs related to sites that would not be developed. This valuation
allowance was reduced by $1.1 million in the quarter ended June 30, 1999 due to
the renegotiation of the terms of a number of the optioned sites.
Cumulative Effect of a Change in Accounting
Pursuant to the Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" issued by the Accounting Standards Executive Committee,
effective January 1, 1999, we changed our method of accounting for start-up
activities, including pre-opening and organizational costs, to expense them as
they are incurred. Accordingly, in the first quarter of 1999 we recorded an
expense of $779,000, net of income tax benefit of $520,000, as the cumulative
effect of this change in accounting.
Liquidity and Capital Resources
We had net cash and cash equivalents of $8.5 million as of September 30,
2000 and $6.4 million as of December 31, 1999. At September 30, 2000 we had
approximately $7.9 million, and at December 31, 1999 we had approximately
$45,000, invested in short-term demand notes having credit ratings of A1/P1 or
equivalent utilizing domestic commercial banks and other financial institutions.
We also deposited excess funds during these periods in an overnight sweep
account with a commercial bank which in turn invested these funds in short-term,
interest-bearing reverse repurchase agreements. Due to the short-term nature of
these investments, we did not take possession of the securities, which were
instead held by the financial institutions. The market value of the securities
held pursuant to these arrangements approximates the carrying amount. Deposits
in excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation.
Our operating activities generated cash of $131.4 million during the nine
months ended September 30, 2000 and $89.5 million during the nine months ended
September 30, 1999.
We used $183.0 million to acquire land, develop, or furnish a total of 44
sites opened or under construction in the nine months ended September 30, 2000
and $251.6 million for 74 sites in the nine months ended September 30, 1999.
Our cost to develop a property varies significantly by brand and by
geographic location due to differences in land and labor costs. Similarly, the
average weekly rate charged and the resultant cash flow from these properties
will vary significantly but generally are expected to be in proportion to the
development costs. For the 329 properties we opened from January 1, 1996 through
December 31, 1999, the average development cost was approximately $5.3 million
with an average of 107 rooms. In 2000, we expect to open a number of properties
in the Northeast and West where average development costs are higher.
Accordingly, we expect our average development cost for 2000 to increase to
approximately $8.3 million per property.
We made open market repurchases of 1,092,900 shares of common stock for
approximately $8.6 million in the nine months ended September 30, 2000. We
received net proceeds from the exercise of options to purchase common stock
totaling $4.3 million in the nine months ended September 30, 2000 and $5.5
million in the nine months ended September 30, 1999.
We have $200 million of 9.15% Senior Subordinated Notes due 2008 (the
"Notes"). In June 2000, we increased availability under our bank credit facility
from $800 million to $1.0 billion with the addition of a $200 million Tranche D
term loan that matures on June 30, 2007. The amended $1.0 billion credit
facility (the "Credit Facility") provides for a $350 million revolving loan
facility (the "Revolving Facility"), a $150 million term loan facility (the
"Tranche A Facility"), a $198 million (net of scheduled principal repayments of
$2 million made in 1999) term loan facility (the "Tranche B Facility"), a $100
million term loan facility (the "Tranche C Facility"), and a $200 million term
loan facility (the "Tranche D Facility"). The proceeds from the Tranche D
Facility were used to
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reduce amounts outstanding under the Revolving Facility. As of September 30,
2000, we had outstanding loans of $72 million under the Revolving Facility and
$648 million under the term loans, leaving $278 million available and committed
under the Credit Facility.
In addition to increasing aggregate borrowings and availability under the
Credit Facility from $800 million to $1.0 billion, certain other terms of the
Credit Facility were modified in connection with an amendment and restatement
of the Credit Facility. The Credit Facility was amended to allow us to purchase
up to an additional $75 million of our common stock and/or subordinated notes,
with a sub-limit of $25 million for the subordinated notes. The Credit Facility
also was amended to expand our ability to issue common stock to effect certain
investments. In addition, certain conditions to borrowings of revolving loans
were eliminated and the permitted ratio of senior debt to earnings before
interest, taxes, depreciation, and amortization was increased to 4.25:1.00
through September 2001 and to 4.00:1.00 thereafter.
Loans under the Credit Facility bear interest, at our option, at either a
variable prime-based rate or a variable LIBOR-based rate, plus an applicable
margin. Interest rates on the Tranche B Facility and Tranche C Facility were not
affected by the amendment. Interest on the Tranche D Facility is calculated, at
our option, using either the prime rate plus 2.5% or the LIBOR rate plus 3.5%.
In connection with the issuance of the new Tranche D Facility and the amendments
discussed above, the interest rate on loans under the Revolving Facility and the
Tranche A Facility, which previously varied based on the amount of loans
outstanding relative to earnings before interest, taxes, depreciation, and
amortization, are now calculated, at our option, using either the prime rate
plus 1.0% or the LIBOR rate plus 2.0%. The commitment fee on the unused
revolving loan capacity is 0.5% per annum on the unused amount.
Our primary market risk exposures result from the variable nature of the
interest rates on borrowings under the Credit Facility. We entered into the
Credit Facility for purposes other than trading. Based on the levels of
borrowings under the Credit Facility at September 30, 2000, if interest rates
changed by 1.0%, our annual cash flow and net income would change by $4.3
million. We manage our market risk exposures by periodic evaluation of such
exposures relative to the costs of reducing the exposures by entering into
interest rate swap or cap agreements or by refinancing the underlying
obligations with longer term fixed rate debt obligations. We do not own
derivative financial instruments or derivative commodity instruments other than
interest rate cap contracts on a total of $800 million that limit our exposure
to LIBOR increases to a maximum LIBOR rate of 7.88% from June 16, 2000 through
June 16, 2001 and to a maximum LIBOR rate of 8.88% from June 17, 2001 through
June 16, 2002. At September 30, 2000 the fair value of the interest rate cap
contracts was $130,000 and their carrying value was $1.2 million.
In connection with the Credit Facility, we incurred additions to deferred
loan costs of $5.8 million during the nine months ended September 30, 2000 and
$345,000 during the nine months ended September 30, 1999.
We plan to develop approximately 30 properties with total costs of
approximately $250 million in each of 2000 and 2001. We will seek to increase
our annual investment in extended-stay properties to $350 million for 2002. We
had commitments not reflected in our financial statements at September 30, 2000
totaling approximately $95 million to complete construction of extended-stay
properties. We believe that the remaining availability under the Credit
Facility, together with cash on hand and cash flows from operations, will
provide sufficient funds to continue our expansion as presently planned and to
fund our operating expenses through 2002. We may need additional capital
depending on a number of factors, including the number of properties we
construct or acquire, the timing of that development, the cash flow generated by
our properties, and the amount of open market repurchases we make of our common
stock. Also, if capital markets provide favorable opportunities, our plans or
assumptions change or prove to be inaccurate, our existing sources of funds
prove to be insufficient to fund our growth and operations, or if we consummate
acquisitions, we may seek additional capital sooner than currently anticipated.
In the event we obtain additional capital, we may seek to increase property
openings in future years. Sources of capital may include public or private debt
or equity financing. We cannot assure you that we will be able to obtain
additional financing on acceptable terms, if at all. Our failure to raise
additional capital could result in the delay or abandonment of some or all of
our development and expansion plans, and could have a material adverse effect
on us.
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New Accounting Releases
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 was amended in June 2000 by
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133." SFAS No. 133, as amended,
requires all derivatives to be carried on our balance sheet at fair value. SFAS
No. 133, as amended, is effective for financial statements issued for periods
beginning after December 15, 2000. Upon adoption of SFAS No. 133, as amended,
all hedging relationships must be designated and documented pursuant to the
provisions of the statement. We intend to designate our interest rate cap
contracts as cash-flow hedges. Accordingly, the difference, net of taxes,
between the fair value of the caps and their carrying value on our balance sheet
under previous hedge-accounting rules will be charged to other comprehensive
income in stockholders' equity. We have evaluated the impact of SFAS No. 133 on
our financial statements and do not anticipate that adoption will have a
material impact or that it will create a violation of our debt covenant
agreements. At September 30, 2000, the fair value of the interest rate cap
contracts was $130,000 and their carrying value was $1.2 million.
Seasonality and Inflation
Based upon the operating history of our facilities, we believe that
extended stay lodging facilities are not as seasonal in nature as the overall
lodging industry. We do expect, however, that our occupancy rates and revenues
will be lower than average during the first and fourth quarters of each calendar
year. Because many of our expenses do not fluctuate with changes in occupancy
rates, declines in occupancy rates may cause fluctuations or decreases in our
quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on our revenue or operating results during
any of the periods presented. We cannot assure you, however, that inflation will
not affect our future operating or construction costs.
Special Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements.
Words such as "expects", "intends", "plans", "projects", "believes",
"estimates", and similar expressions are used to identify these forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. However, these forward-looking
statements are subject to risks, uncertainties, assumptions, and other factors
which may cause our actual results, performance, or achievements to be
materially different. These factors include, among other things:
. our limited operating history and uncertainty as to our future
profitability;
. our ability to meet construction and development schedules and
budgets;
. our ability to develop and implement the operational and financial
systems needed to manage rapidly growing operations;
. uncertainty as to the consumer demand for extended stay lodging;
. increasing competition in the extended stay lodging market;
. our ability to integrate and successfully operate acquired properties
and the risks associated with such properties;
. our ability to obtain financing on acceptable terms to finance our
growth; and
. our ability to operate within the limitations imposed by financing
arrangements.
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Other matters set forth in this Quarterly Report may also cause our actual
future results to differ materially from these forward-looking statements. We
cannot assure you that our expectations will prove to be correct. In addition,
all subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements mentioned above. You should not place undue reliance on
these forward-looking statements. All of these forward-looking statements are
based on our expectations as of the date of this Quarterly Report. We do not
intend to update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
27.1 Financial Data Schedule (for EDGAR filings only)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 2000.
EXTENDED STAY AMERICA, INC.
/s/ Gregory R. Moxley
----------------------------
Gregory R. Moxley
Chief Financial Officer
(Principal Financial Officer)
/s/ Patricia K. Tatham
-----------------------------
Patricia K. Tatham
Vice President - Corporate Controller
(Principal Accounting Officer)
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