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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, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 0-27360
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EXTENDED STAY AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3996573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 N. Pine Street, Spartanburg, SC 29302
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 573-1600
-------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
--------
At August 7, 2002, the registrant had issued and outstanding an aggregate
of 93,770,192 shares of Common Stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
ASSETS
------
June 30, December 31,
2002 2001(1)
---------- ------------
Current assets:
Cash and cash equivalents ................................................... $ 24,304 $ 11,027
Accounts receivable ......................................................... 6,360 6,385
Prepaid income taxes ........................................................ 1,909 10,669
Prepaid expenses ............................................................ 3,712 3,628
Deferred income taxes ....................................................... 37,077 37,589
---------- ----------
Total current assets ................................................... 73,362 69,298
Property and equipment, net .................................................... 2,324,152 2,277,414
Deferred loan costs, net ....................................................... 23,417 24,371
Other assets ................................................................... 772 788
---------- ----------
$2,421,703 $2,371,871
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 20,565 $ 34,433
Accrued retainage ........................................................... 9,075 13,879
Accrued property taxes ...................................................... 14,953 12,174
Accrued salaries and related expenses ....................................... 4,419 4,291
Accrued interest ............................................................ 6,826 7,011
Other accrued expenses ...................................................... 20,779 20,798
Current portion of long-term debt ........................................... 28,324 12,500
---------- ----------
Total current liabilities ................................................. 104,941 105,086
---------- ----------
Deferred income taxes .......................................................... 132,894 126,752
---------- ----------
Long-term debt ................................................................. 1,141,208 1,132,250
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding ....................................................
Common stock, $.01 par value, 500,000,000 shares authorized, 93,743,442 and
93,228,443 shares issued and outstanding, respectively .................... 937 932
Additional paid-in capital .................................................. 799,772 793,484
Retained earnings ........................................................... 241,951 213,367
---------- ----------
Total stockholders' equity ............................................. 1,042,660 1,007,783
---------- ----------
$2,421,703 $2,371,871
========== ==========
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
1
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------------- -----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- --------- --------- ---------
Revenue ............................................................... $ 142,802 $ 143,112 $ 267,594 $ 277,527
Property operating expenses ........................................... 63,110 56,694 123,417 113,533
Corporate operating and property
management expenses ................................................ 12,108 11,773 24,184 23,399
Headquarters relocation costs ......................................... 4,426 4,426
Depreciation and amortization ......................................... 19,696 17,745 38,923 35,287
--------- --------- --------- ---------
Total costs and expenses ...................................... 94,914 90,638 186,524 176,645
--------- --------- --------- ---------
Income from operations before interest, income taxes and
cumulative effect of accounting change ............................ 47,888 52,474 81,070 100,882
Interest expense, net ................................................. 19,929 18,394 39,168 38,092
--------- --------- --------- ---------
Income before income taxes and cumulative effect of
accounting change .................................................. 27,959 34,080 41,902 62,790
Provision for income taxes ............................................ 10,904 13,632 13,318 25,115
--------- --------- --------- ---------
Net income before cumulative effect of accounting change .............. 17,055 20,448 28,584 37,675
Cumulative effect of change in accounting for derivatives,
net of income tax benefit of $466 .................................. (669)
--------- --------- --------- ---------
Net income ............................................................ $ 17,055 $ 20,448 $ 28,584 $ 37,006
========= ========= ========= =========
Net income per common share - Basic:
Net income before cumulative effect of accounting change ........... $ 0.18 $ 0.22 $ 0.31 $ 0.40
Cumulative effect of accounting change ............................. (0.01)
--------- --------- --------- ---------
Net income ......................................................... $ 0.18 $ 0.22 $ 0.31 $ 0.39
========= ========= ========= =========
Net income per common share - Diluted:
Net income before cumulative effect of accounting change ........... $ 0.18 $ 0.21 $ 0.29 $ 0.38
Cumulative effect of accounting change .............................
--------- --------- --------- ---------
Net income ......................................................... $ 0.18 $ 0.21 $ 0.29 $ 0.38
========= ========= ========= =========
Weighted average shares:
Basic .............................................................. 93,668 94,773 93,553 95,256
Effect of dilutive options ......................................... 3,284 3,122 3,405 3,128
--------- --------- --------- ---------
Diluted ............................................................ 96,952 97,895 96,958 98,384
========= ========= ========= =========
See notes to the unaudited condensed consolidated financial statements
2
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended
------------------------------
June 30, June 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income ................................................................... $ 28,584 $ 37,006
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 38,923 35,287
Amortization of deferred loan costs included in interest expense ....... 2,086 2,583
Deferred income taxes .................................................. 6,654 11,445
Cumulative effect of accounting change, net ............................ 669
Changes in operating assets and liabilities ............................ 12,889 10,104
--------- ---------
Net cash provided by operating activities ....................... 89,136 97,094
--------- ---------
Cash flows from investing activities:
Additions to property and equipment .......................................... (104,445) (149,929)
Other assets ................................................................. 16 (87)
--------- ---------
Net cash used in investing activities ........................... (104,429) (150,016)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of Company stock options .............................. 4,919 15,193
Repurchases of Company common stock .......................................... (27,656)
Proceeds from long-term debt ................................................. 100,000 399,000
Principal payments on long-term debt ......................................... (75,218) (331,000)
Additions to deferred loan costs ............................................. (1,131) (7,376)
--------- ---------
Net cash provided by financing activities ....................... 28,570 48,161
--------- ---------
Increase (decrease) in cash and cash equivalents ................................ 13,277 (4,761)
Cash and cash equivalents at beginning of period ................................ 11,027 13,386
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 24,304 $ 8,625
========= =========
Noncash investing and financing transactions:
Capitalized or deferred items included in accounts payable
and accrued liabilities .................................................... $ 15,337 $ 37,931
========= =========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes, net of refunds ............................................... $ (3,471) $ 10,466
========= =========
Interest expense, net of amounts capitalized ............................... $ 37,614 $ 36,430
========= =========
See notes to the unaudited condensed consolidated financial statements
3
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and include the accounts of Extended Stay America, Inc. and subsidiaries (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, 2001 was
derived from audited financial statements of the Company but does not include
all disclosures required by generally accepted accounting principles.
Operating results for the three-month and six-month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The computation of diluted earnings per share for the three months ended
June 30, 2002 and 2001 does not include approximately 2.4 million and 2.3
million weighted average shares, respectively, and for the six months ended June
30, 2002 and 2001 does not include approximately 2.3 million weighted average
shares of common stock, in both periods represented by outstanding options
because the exercise price of the options for the periods was greater than the
average market price of common stock during the periods.
Certain previously reported amounts have been reclassified to conform with
the current period's presentation.
Income Taxes
We expect our estimated annual effective income tax rate for 2002 to
decrease from 40% to 39%, reflecting a reduction in estimated state income taxes
resulting from state tax planning and credits. Accordingly, the provision for
income taxes in the six-month period ended June 30, 2002 reflects a reduction in
expense of approximately $3.0 million which was recorded in the first quarter of
2002 associated with adjusting our deferred tax assets and liabilities to
reflect the lower rate.
Derivative Financial Instruments and Cumulative Effect of a Change in Accounting
We do not enter into financial instruments for trading or speculative
purposes. We use interest rate cap contracts to hedge our exposure on variable
rate debt. Through December 31, 2000, the cost of the caps was included in
prepaid expenses and amortized to interest expense over the life of the cap
contract.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities", as amended, requires all
derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as
amended, is effective for financial statements issued for periods beginning
after December 15, 2000. At December 31, 2000, the carrying value of our
interest rate cap contracts was $1,115,000 and their fair value was zero. We
adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap
contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as
interpreted by the Derivatives Implementation Group, required the transition
adjustment to be allocated between the cumulative-effect-type adjustment of
earnings and the cumulative-effect-type adjustment of other comprehensive income
based on our pre-SFAS No.133 accounting policy for the contracts. Since the fair
value of the interest rate cap contracts at adoption was zero, the entire
4
transition adjustment of $669,000, net of income tax benefit of $446,000, was
recognized in earnings as a cumulative effect adjustment on January 1, 2001.
New Accounting Pronouncements
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," which we are required to
adopt on January 1, 2003, rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." The Statement amends SFAS No. 13, "Accounting for
Leases," to eliminate certain inconsistencies. It also amends other existing
authoritative pronouncements to make technical corrections and clarify meanings.
We have not yet determined the impact of this standard on our consolidated
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The adoption of this statement is not
expected to have a material effect on our financial statements.
Related Party Transactions
The Chairman of our Board of Directors serves as a director of a company to
which we sublease office space. The sublease provides for monthly rent of
$52,157 through December 2004. On December 17, 2001, the company to which we
sublease office space filed a voluntary petition for reorganization under
Chapter 11 of the U. S. Bankruptcy Code.
Commitments and Contingencies
On August 5, 2002, one of the Company's subsidiaries was served with a
complaint against the Company and several of its subsidiaries in the Superior
Court of California, County of Alameda. This action, filed on behalf of an
alleged class of former and existing managers, assistant managers, and manager
trainees for the Company's properties in California, alleges violations of
certain of California's wage and hour laws. In particular, the action alleges
that the Company misclassified these property managers as exempt from
California's laws regarding overtime pay. The plaintiffs are seeking to certify
a class representing all such property managers in California, an injunction,
and damages for back pay, penalties, interest, and attorneys' fees. The case is
captioned Rachelle Reid, et al vs. Extended Stay America, Inc., etc., et al.
The Company is in the beginning stages of this litigation, but management
believes the Company has meritorious defenses against this claim and intends to
defend this case vigorously. The financial impact, if any, of this case cannot
yet be predicted.
From time to time, we may incur expenses due to defects in materials,
construction, or systems installed in our properties. Most significant products
or systems contain manufacturers' warranties. In addition, contractual
agreements with our general contractors typically require general contractors
and subcontractors to maintain insurance designed to cover the faulty
installation of significant systems.
Testing has revealed that certain of our properties have sustained damage
arising from defective materials and/or faulty installation of the Exterior
Insulation Finish System ("EIFS"). At this time, the full extent of damage can
not be reasonably estimated. We have filed suit against the EIFS manufacturers,
certain applicators, certain general contractors, and others seeking necessary
repairs and recovery rights against expected and incurred expenses. The suits
allege, among other things, negligence, breach of warranty, breach of contract,
tort, fraud, and unfair and deceptive trade practices. At this time, the extent
of recovery, if any, can not be reasonably determined.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(000's Omitted)
June 30, December 31,
2002 2001
------------- -------------
Operating Facilities:
Land and improvements ..................................... $ 630,868 $ 593,428
Buildings and improvements ................................ 1,628,789 1,541,091
Furniture, fixtures, equipment and supplies ............... 297,512 284,005
------------- -------------
Total Operating Facilities ............................. 2,557,169 2,418,524
Office furniture, fixtures and equipment ....................... 7,035 6,852
Facilities under development, including land and improvements .. 67,401 120,626
------------- -------------
2,631,605 2,546,002
Less: Accumulated depreciation ................................ (307,453) (268,588)
-------------- -------------
Total property and equipment ................................... $ 2,324,152 $ 2,277,414
============= =============
We utilize general contractors for the construction of our properties.
Pursuant to the terms of our contractual agreements with the general
contractors, amounts are retained from payments made to them until the terms of
the agreement have been satisfactorily completed. Retained amounts are recorded
as accrued retainage.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We own and operate three brands in the extended stay lodging
market--StudioPLUS Deluxe Studios(R) ("StudioPLUS"), EXTENDED STAYAMERICA
Efficiency Studios (R) ("EXTENDED STAY"), and Crossland Economy Studios (R)
("Crossland"). Each brand is designed to appeal to different price points that
are generally below $500 per week. All three brands offer the same core
components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and
a bathroom. StudioPLUS facilities serve the mid-price category and generally
feature guest rooms that are larger than those in our other brands, an exercise
facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in
the economy category. Crossland rooms are typically smaller than EXTENDED STAY
rooms and are targeted for the budget category.
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 six months ended June 30, 2002 and
2001.
Three Months Six Months
Ended June 30, Ended June 30,
--------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Total Facilities Open (at period end) .. 449 405 449 405
Total Facilities Opened ................ 6 5 18 13
Average Occupancy Rate ................. 72% 79% 69% 77%
Average Weekly Room Rate ............... $317 $321 $316 $321
Average occupancy rates are determined by dividing the rooms occupied on a
daily basis by the total number of rooms. Average weekly room rates are
determined by dividing room revenue by the number of rooms occupied on a daily
basis for the applicable period and multiplying by seven. The average weekly
room rates generally will be greater than standard room rates because of (1)
stays of less than one week, which are charged at a higher nightly rate, (2)
higher weekly rates for rooms that are larger than the standard rooms, and (3)
additional charges for more than one person per room. We expect that our future
occupancy and room rates will be impacted by a number of factors, including the
impact of the U.S. economy on demand for lodging products and the number and
geographic location of our new facilities as well as the season in which we open
those facilities. We also cannot assure you that we can maintain our occupancy
and room rates.
At June 30, 2002, we had 449 operating facilities (39 Crossland, 315
EXTENDED STAY, and 95 StudioPLUS) and had 11 EXTENDED STAY facilities under
construction. We expect to complete the construction of the facilities currently
under construction generally within the next twelve months, however, we cannot
assure you that we will complete construction within the time periods we have
historically experienced. Our ability to complete construction may be materially
impacted by various factors including final permitting and obtaining
certificates of occupancy, as well as weather related construction delays.
6
Results of Operations
For the Three Months Ended June 30, 2002 and 2001
Property Operations
The following is a summary of the number of properties in operation at the
end of each period along with the related average occupancy rates and average
weekly room rates during each period:
For the Three Months Ended
-------------------------------------------------------------------
June 30, 2002 June 30, 2001
-------------------------------- ------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- --------- ----------- ---------- --------- -----------
Crossland .......... 39 71% $220 39 78% $ 222
EXTENDED STAY ...... 315 72 328 272 79 332
StudioPLUS ......... 95 71 329 94 78 344
---- -- --- -- -- -----
Total ......... 449 72% $317 405 79% $ 321
==== == ==== === == =====
We realized an overall decrease of 10.0% in revenue per available room
("REVPAR") for the second quarter of 2002 as compared to the second quarter of
2001. The decrease in overall average occupancy rates for the second quarter of
2002 compared to the second quarter of 2001 reflects, primarily, the impact of a
general decline in demand for lodging products as a result of the slowing U.S.
economy and the continued impact on travel resulting from the events of
September 11, 2001 and subsequent terrorism alerts. The decrease in overall
average weekly room rates for the second quarter of 2002 compared to the second
quarter of 2001 is due to decreases in rates charged in previously opened
properties. Particularly for the EXTENDED STAY brand, this decrease in rates was
partially offset by the geographic dispersion of properties opened since June
30, 2001 and the higher standard weekly room rates in certain of those markets.
Comparable hotels, consisting of the 359 properties opened for at least
one year at the beginning of the first quarter of 2001 (excluding three EXTENDED
STAY properties located in Salt Lake City, Utah which were impacted by one-time
rental contracts during the 2002 Winter Olympics (the "Olympic Properties")),
realized the following percentage changes in the components of REVPAR for the
second quarter of 2002 as compared with the second quarter of 2001:
Crossland EXTENDED STAY StudioPLUS Total
--------- ------------- ---------- -----
Number of Comparable Hotels ....... 39 230 90 359
Change in Occupancy Rate .......... (9.5)% (8.8)% (9.2)% (9.0)%
Change in Average Weekly Rate ..... (1.0)% (1.9)% (4.1)% (2.2)%
Change in REVPAR .................. (10.4)% (10.6)% (12.8)% (11.0)%
We believe that the percentage changes in the components of REVPAR for the
StudioPLUS brand differs from the Crossland and EXTENDED STAY brands primarily
as a result of the number and geographic dispersion of the comparable hotels.
While we believe that improvements in the U.S. economy will result in
increased demand for our products, it is difficult to assess the timing and
magnitude of such improvements. Based on trends experienced in the second
quarter and in July, we currently anticipate that we will experience declines in
REVPAR for our comparable hotels when compared to the prior year of 3% to 4% for
the third quarter of 2002. Assuming occupancy improves at a moderate rate
throughout the balance of 2002, we would realize REVPAR declines for our
comparable hotels of 6% to 8% for the year.
We recognized total revenue of $142.8 million for the second quarter of
2002 and $143.1 million for the second quarter of 2001. This is a decrease of
approximately $300,000, or less than 1%. The 400 properties that we owned and
operated throughout both periods experienced an aggregate decrease in revenue of
approximately $14.9 million which was partially offset by approximately $14.6
million of incremental revenue attributable to properties opened after March 31,
2001.
Property operating expenses, consisting of all expenses directly allocable
to the operation of the facilities but excluding any allocation of corporate
operating and property management expenses, depreciation, or interest were $63.1
million (44% of total revenue) for the second quarter of 2002, compared to $56.7
million (40% of total revenue) for the second quarter of 2001. We expect the
ratio of property operating expenses to total revenue to generally fluctuate
inversely relative to REVPAR increases or decreases because the majority of
these expenses do not vary based on REVPAR. We realized an overall decrease of
10.0% in REVPAR for the second quarter of 2002 as compared to the second quarter
of 2001, and our property operating margins were 56% for the second quarter of
2002 and 60% for the second quarter of 2001.
7
The provisions for depreciation and amortization for our lodging facilities
were $19.5 million for the second quarter of 2002 and $17.5 million for the
second quarter of 2001. These provisions were computed using the straight-line
method over the estimated useful lives of the assets. These provisions reflect a
pro rata allocation of the annual depreciation and amortization charge for the
periods for which the facilities were in operation. Depreciation and
amortization for the second quarter of 2002 increased as compared to the second
quarter of 2001 because we operated 44 additional facilities in 2002 and we
operated for a full quarter the 5 properties that were opened in the second
quarter of 2001.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of lodging facilities.
These expenses consist primarily of personnel and certain marketing costs, as
well as development costs that are not directly related to a site that we will
develop. We incurred corporate operating and property management expenses of
$12.1 million (8% of total revenue) in the second quarter of 2002 and $11.8
million (8% of total revenue) in the second quarter of 2001. The increase in the
amount of these expenses for the second quarter of 2002 as compared to the same
period in 2001 reflects the impact of additional personnel and related expenses
in connection with the increased number of facilities we operated. We expect
these expenses will continue to increase in total amount as we develop and
operate additional facilities in the future.
In May 2001, we announced that we would be relocating our corporate
headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. The
relocation was completed in the third quarter of 2001. As a result, we incurred
non-recurring charges of approximately $9.0 million during 2001 in connection
with the move, including approximately $2.1 million in non-cash charges related
to the abandonment of unamortized leasehold improvements and charges associated
with the valuation of stock options for terminated employees. Through June 30,
2001, we had incurred approximately $4.4 million of such charges.
Depreciation and amortization was $194,000 for the quarter ended June 30,
2002 and $275,000 for the comparable period in 2001. These provisions were
computed using the straight-line method over the estimated useful lives of the
assets for assets not directly related to the operation of our facilities. These
assets were primarily office furniture and equipment.
We realized $120,000 of interest income in the second quarter of 2002 and
$170,000 in the second quarter of 2001. This interest income was primarily
attributable to the temporary investment of funds drawn under our credit
facilities. We incurred interest charges of $21.3 million during the second
quarter of 2002 and $20.9 million in the second quarter of 2001. Of these
amounts, $1.2 million in the second quarter of 2002 and $2.3 million in the
second quarter of 2001 were capitalized and included in the cost of buildings
and improvements.
We recognized income tax expense of $10.9 million and $13.6 million (39%
and 40%, respectively, of income before income taxes and the cumulative effect
of an accounting change) for the second quarter of 2002 and 2001, respectively.
Our income tax expense differs from the federal income tax rate of 35% primarily
due to state and local income taxes.
For the Six Months Ended June 30, 2002 and 2001
Property Operations
Operating results for the six-month period ended June 30, 2002 include the
impact of one-time rental contracts during the 2002 Winter Olympics at the
Olympic Properties. We estimate that these contracts generated additional
non-recurring net income of approximately $1.2 million, or $0.01 per diluted
share for the six-month period.
Including the Olympic Properties, we realized average occupancies of 69%
and average weekly room rates of $316 for the six-month period ended June 30,
2002, and we realized average occupancies of 77% and average weekly room rates
of $321 for the six-month period ended June 30, 2001, resulting in a decrease of
12.5% in overall REVPAR for the period when compared to the same period of last
year.
Excluding the Olympic Properties, the following is a summary of the number
of properties in operation at the end of each period along with the related
average occupancy rates and average weekly room rates during each period:
8
For the Six Months Ended
--------------------------------------------------------------------
June 30, 2002 June 30, 2001
-------------------------------- ---------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- --------- ----------- ---------- --------- -----------
Crossland ....... 39 70% $220 39 78% $ 223
EXTENDED STAY ... 312 69 325 269 78 333
StudioPLUS ...... 95 68 328 94 76 345
--- -- ---- --- -- -----
Total ...... 446 69% $314 402 78% $ 322
=== == ==== === == =====
Excluding the Olympic Properties, we realized an overall decrease of 13.2%
in REVPAR for the six months ended June 30, 2002 as compared to the same period
of 2001. The decrease in overall average occupancy rates for the six-month
period ended June 30, 2002 compared to the same period of 2001 reflects,
primarily, the impact of a general decline in demand for lodging products as a
result of the slowing U.S. economy and the continued impact on travel resulting
from the events of September 11, 2001 and subsequent terrorism alerts. The
decrease in overall average weekly room rates for the six months ended June 30,
2002 compared to the same period of 2001 is due to decreases in rates charged in
previously opened properties. Particularly for the EXTENDED STAY brand, this
decrease in rates was partially offset by the geographic dispersion of
properties opened since June 30, 2001 and the higher standard weekly room rates
in certain of those markets.
Comparable hotels, consisting of the 359 properties opened for at least one
year at the beginning of the first quarter of 2001 (excluding the Olympic
Properties), realized the following percentage changes in the components of
REVPAR for the six months ended June 30, 2002 as compared with the same period
of 2001:
Crossland EXTENDED STAY StudioPLUS Total
--------- ------------- ---------- -----
Number of Comparable Hotels ...... 39 230 90 359
Change in Occupancy Rate ......... (10.7)% (10.8)% (11.0)% (10.8)%
Change in Average Weekly Rate .... (1.3)% (3.5)% (4.9)% (3.6)%
Change in REVPAR ................. (11.9)% (13.9)% (15.3)% (14.0)%
We believe that the percentage changes in the components of REVPAR for
the Crossland and Studio Plus brands differ from the EXTENDED STAY brand
primarily as a result of the number and geographic dispersion of the comparable
hotels.
The percentage change in the components of REVPAR for comparable hotels
experienced in the six months ended June 30, 2002 reflects a decrease in REVPAR
of 17.2% in the first quarter and a decrease in REVPAR of 11.0% in the second
quarter.
We recognized total revenue of $267.6 million for the six months ended June
30, 2002 and $277.5 million for the six months ended June 30, 2001. This is a
decrease of $9.9 million or 4%. The 392 properties that we owned and operated
throughout both periods experienced an aggregate decrease in revenue of
approximately $36.1million, net of incremental revenue at the Olympic Properties
of approximately $2.0 million, which was partially offset by approximately $26.2
million of incremental revenue attributed to properties opened after December
31, 2000.
Property operating expenses for the six months ended June 30, 2002 were
$123.4 million (46% of total revenue), compared to $113.5 million (41% of total
revenue) for the six months ended June 30, 2001. We did not incur significant
incremental property operating expenses at the Olympic Properties during the
first quarter of 2002. We expect the ratio of property operating expenses to
total revenue to generally fluctuate inversely relative to REVPAR increases or
decreases because the majority of these expenses do not vary based on REVPAR. We
realized an overall decrease of 12.5% in REVPAR for the six months ended June
30, 2002 as compared to the six months ended June 30, 2001. Our property
operating margins were 54% for the six months ended June 30, 2002 and 59% for
the six months ended June 30, 2001.
The provisions for depreciation and amortization for our lodging facilities
were $38.5 million for the six months ended June 30, 2002 and $34.7 million for
the six months ended June 30, 2001. Depreciation and amortization for the six
months ended June 30, 2002 increased as compared to the same period in 2001
because we operated 44 additional facilities in 2002 and we operated for a full
six months the 13 properties that were opened in the first six months of 2001.
9
Corporate Operations
We incurred corporate operating and property management expenses of $24.2
million (9% of total revenue) in the six months ended June 30, 2002 and $23.4
million (8% of total revenue) in the six months ended June 30, 2001. The
increase in the amount of these expenses for the six-month period ended June 30,
2002 as compared to the same period in 2001 reflects the impact of additional
personnel and related expenses in connection with the increased number of
facilities we operated.
Depreciation and amortization for assets not directly related to operation
of our facilities was $390,000 for the six months ended June 30, 2002 and
$555,000 for the six months ended June 30, 2001.
We realized $360,000 of interest income in the six months ended June 30,
2002 and $331,000 in the six months ended June 30, 2001. This interest income
was attributable to the temporary investment of funds drawn under our credit
facilities. We incurred interest charges of $42.6 million in the six months
ended June 30, 2002 and $43.4 million in the six months ended June 30, 2001. Of
these amounts, $3.1 million in the six months ended June 30, 2002 and $4.9
million in the six months ended June 30, 2001 were capitalized and included in
the cost of buildings and improvements.
We recognized income tax expense of $13.3 million for the six-month period
ended June 30, 2002 and $25.1 million for the six-month period ended June 30,
2001 (32% and 40%, respectively, of income before income taxes and the
cumulative effect of an accounting change). We expect our annual effective
income tax rate for 2002 to decrease from 40% to 39%, reflecting a reduction in
estimated state income taxes resulting from state tax planning and credits.
Accordingly, the provision for income taxes in the first quarter of 2002
reflected a reduction in expense of approximately $3.0 million associated with
adjusting our deferred tax assets and liabilities to reflect the lower rate.
Excluding the impact of our estimated annual effective income tax rate decrease,
our income tax expense differs from the federal income tax rate of 35% primarily
due to state and local income taxes.
Cumulative Effect of a Change in Accounting
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities", as amended, requires all
derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as
amended, is effective for financial statements issued for periods beginning
after December 15, 2000. At December 31, 2000, the carrying value of our
interest rate cap contracts was $1,115,000 and their fair value was zero. We
adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap
contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as
interpreted by the Derivatives Implementation Group, required the transition
adjustment to be allocated between the cumulative-effect-type adjustment of
earnings and the cumulative-effect-type adjustment of other comprehensive income
based on our pre-SFAS No. 133 accounting policy for the contracts. Since the
fair value of the interest rate cap contracts at adoption was zero, the entire
transition adjustment of $669,000, net of income tax benefit of $446,000, was
recognized in earnings as a cumulative effect adjustment on January 1, 2001.
Liquidity and Capital Resources
We had net cash and cash equivalents of $24.3 million as of June 30, 2002
and $11.0 million as of December 31, 2001. At June 30, 2002 we had approximately
$20.3 million invested in short-term money market depository accounts. At
December 31, 2001 we had approximately $13.0 million invested in short-term
demand notes having credit ratings of A1/P1 or the equivalent using 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 $89.1 million during the six
months ended June 30, 2002 and $97.1 million during the six months ended June
30, 2001.
We used $104.4 million to acquire land, develop, or furnish a total of 29
sites opened or under construction in the six months ended June 30, 2002 and
$150.0 million for 51 sites in the six months ended June 30, 2001.
10
Our cost to develop a property varies significantly by brand and by
geographic location due to differences in land and labor costs. Similarly, the
average weekly rate charged and the resulting cash flow from these properties
will vary significantly but generally are expected to be in proportion to the
development costs. For the 398 properties we opened from January 1, 1996 through
December 31, 2001, the average development cost was approximately $5.6 million
with an average of 107 rooms. In 2002, we expect to open a number of properties
in the Northeast and West where average development costs are higher.
Accordingly, we expect our average development cost for 2002 to increase to
approximately $8.4 million per property, with an average of 110 rooms per
property.
We made open market repurchases of 1,987,400 shares of common stock for
approximately $27.7 million in the six months ended June 30, 2001. We made no
such repurchases in the six months ended June 30, 2002. We received net proceeds
from the exercise of options to purchase common stock totaling approximately
$4.9 million in the six months ended June 30, 2002 and $15.2 million in the six
months ended June 30, 2001.
In addition to our $200 million 9.15% Senior Subordinated Notes due 2008
and our $300 million 9.875% Senior Subordinated Notes due 2011, we have a $900
million credit facility (the "Credit Facility") which provides for revolving
loans and term loans on a senior collateralized basis. Loans under the Credit
Facility bear interest, at our option, at either a variable prime-based rate or
a variable LIBOR-based rate, plus an applicable margin. In January 2002, we
borrowed $100 million pursuant to a delayed draw term loan under the Credit
Facility. To minimize interest rates charged under the Credit Facility, we
prepaid $25 million in March 2002. As of June 30, 2002, we did not have
outstanding loans under the revolving facility and had $669.5 million, net of
principal repayments, under the term loans, leaving $200 million available and
committed under the Credit Facility. Availability of the revolving facility is
dependent, however, upon us satisfying certain financial ratios of debt and
interest compared to earnings before interest, taxes, depreciation, and
amortization, with these amounts being calculated pursuant to definitions
contained in the Credit Facility.
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 June 30, 2002, if interest rates changed
by 1.0%, our annual cash flow and net income would change by $4.1 million. We
manage our market risk exposures by periodic evaluation of such exposures
relative to the costs of reducing the exposures by entering into interest rate
swaps or by refinancing the underlying obligations with longer term fixed rate
debt obligations. We do not own derivative financial instruments or derivative
commodity instruments.
In connection with the Credit Facility and the 9.875% Senior Subordinated
Notes, we incurred additions to deferred loan costs of $1.1 million during the
six months ended June 30, 2002 and $7.4 million during the six months ended June
30, 2001.
We plan to open approximately 22 properties with total costs of
approximately $186 million in 2002. We plan to commence construction on a total
of 24 sites during 2002. We expect to open two of the 24 sites in 2002. The
remaining 22 sites, with total costs of approximately $195 million, are expected
to open in 2003. We will continue to seek the necessary approvals and permits
for additional sites and will seek to increase the number of construction starts
in the future. Our current and future development plans will be affected by a
number of factors, including the overall state of the U.S. economy, demand for
lodging products in the overall lodging industry, demand for our extended stay
lodging products, and availability of funds within the constraints of our
financing agreements.
We had commitments not reflected in our financial statements at June
30, 2002 totaling approximately $70 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, including our working capital deficit, through
2003. We may increase our capital expenditures and property openings in future
years, in which case our capital needs will increase. We may also need
additional capital depending on a number of factors, including the number of
properties we construct or acquire, the timing of that development, the cash
flow generated by our properties and the amount of any open market repurchases
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.
11
Our failure to raise additional capital could result in the delay or abandonment
of some or all of our development and expansion plans, and could have a material
adverse effect on us.
New Accounting Pronouncement
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," which we are required to
adopt on January 1, 2003, rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." The Statement amends SFAS No. 13, "Accounting for
Leases," to eliminate certain inconsistencies. It also amends other existing
authoritative pronouncements to make technical corrections and clarify meanings.
We have not yet determined the impact of this standard on our consolidated
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The adoption of this statement is not
expected to have a material effect on our financial statements.
Seasonality and Inflation
Based upon the operating history of our facilities, we believe that
extended stay lodging facilities are not as seasonal in nature as the overall
lodging industry. We do expect, however, that our occupancy rates and revenues
will be lower than average during the first and fourth quarters of each calendar
year. Because many of our expenses do not fluctuate with changes in occupancy
rates, declines in occupancy rates may cause fluctuations or decreases in our
quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on our revenue or operating results during
any of the periods presented. We cannot assure you, however, that inflation will
not affect our future operating or construction costs.
Special Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking
statements. Words such as "expects", "intends", "plans", "projects", "believes",
"estimates", and similar expressions are used to identify these forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. However, these forward-looking
statements are subject to risks, uncertainties, assumptions, and other factors
which may cause our actual results, performance, or achievements to be
materially different. These factors include, among other things:
. uncertainty as to changes in U.S. general economic activity and
the impact of such changes on the consumer demand for lodging
products in general and for extended stay lodging products in
particular;
. increasing competition in the extended stay lodging market;
. our ability to increase or maintain revenue and profitability in
our new and mature properties;
. uncertainty as to the impact on the lodging industry of any
additional terrorist attacks or responses to terrorist attacks;
. uncertainty as to our future profitability;
. our ability to operate within the limitations imposed by financing
arrangements;
. our ability to meet construction and development schedules and
budgets;
. our ability to obtain financing on acceptable terms to finance our
growth;
. the risk of significant one-time or continuing expenses due to
defects in materials, construction, or systems installed
throughout many of our properties;
. our ability to integrate and successfully operate any properties
acquired in the future and the risks associated with these
properties; and
. our ability to develop and implement the operational and financial
systems needed to manage rapidly growing operations.
Other matters set forth in this Quarterly Report may also cause our actual
future results to differ materially from these forward-looking statements. We
cannot assure you that our expectations will prove to be correct. In addition,
all subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements mentioned above. You should not place undue reliance on
these forward-looking statements. All of these forward-looking statements are
based on our expectations as of the date of this Quarterly Report. We do not
intend to update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 2002, one of our subsidiaries was served with a complaint
against us and several of our subsidiaries in the Superior Court of California,
County of Alameda. This action, filed on behalf of an alleged class of former
and existing managers, assistant managers, and manager trainees for our
properties in California, alleges violations of certain of California's wage and
hour laws. In particular, the action alleges that we misclassified these
property managers as exempt from California's laws regarding overtime pay. The
plaintiffs are seeking to certify a class representing all such property
managers in California, an injunction, and damages for back pay, penalties,
interest, and attorneys' fees. The case is captioned Rachelle Reid, et al vs.
Extended Stay America, Inc., etc., et al. We are in the beginning stages of this
litigation, but we believe we have meritorious defenses against this claim and
intend to defend this case vigorously. We cannot yet predict the financial
impact, if any, of this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes the votes at the Annual Meeting of the Company's
stockholders held on May 22, 2002:
Matter For Against Abstain Non-Vote Shares Voted
------ --- ------- ------- -------- ------------
Election of Directors:
H. Wayne Huizenga .................. 86,241,070 -- 350,158 -- 86,591,228
George D. Johnson, Jr. ............. 78,838,607 -- 7,752,621 -- 86,591,228
Donald F. Flynn .................... 86,163,570 -- 427,658 -- 86,591,228
Stewart H. Johnson ................. 86,025,270 -- 565,958 -- 86,591,228
John J. Melk ....................... 86,163,400 -- 427,828 -- 86,591,228
Peer Pedersen ...................... 86,147,125 -- 444,103 -- 86,591,228
Ratification of the appointment of
PricewaterhouseCoopers LLP as
Independent Auditors for the
Company for 2002 ................... 85,018,941 1,550,578 21,709 -- 86,591,228
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit number and Description of Exhibit
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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 August 14, 2002.
EXTENDED STAY AMERICA, INC.
/s/ GREGORY R. MOXLEY
---------------------------------------------
Gregory R. Moxley
Chief Financial Officer
(Principal Financial Officer)
/s/ PATRICIA K. TATHAM
---------------------------------------------
Patricia K. Tatham
Vice President - Corporate Controller
(Principal Accounting Officer)
14