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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 001-13125
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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 North Pine Street, Spartanburg, SC 29302
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 573-1600
-------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At October 31, 2002, the registrant had issued and outstanding an aggregate
of 93,819,942 shares of Common Stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
ASSETS
September 30, December 31,
2002 2001(1)
------------ ------------
Current assets:
Cash and cash equivalents................. $ 32,455 $ 11,027
Accounts receivable....................... 5,899 6,385
Prepaid income taxes...................... 1,207 10,669
Prepaid expenses.......................... 4,188 3,628
Deferred income taxes..................... 34,624 37,589
------------ ------------
Total current assets................. 78,373 69,298
Property and equipment, net.................. 2,343,002 2,277,414
Deferred loan costs, net..................... 22,525 24,371
Other assets................................. 795 788
------------ ------------
$ 2,444,695 $ 2,371,871
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 20,429 $ 34,433
Accrued retainage......................... 7,353 13,879
Accrued property taxes.................... 17,840 12,174
Accrued salaries and related expenses..... 6,543 4,291
Accrued interest.......................... 9,477 7,011
Other accrued expenses.................... 21,628 20,798
Current portion of long-term debt......... 20,490 12,500
------------ ------------
Total current liabilities............... 103,760 105,086
------------ ------------
Deferred income taxes........................ 139,864 126,752
------------ ------------
Long-term debt............................... 1,136,386 1,132,250
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized, no shares
issued and outstanding..................
Common stock, $.01 par value, 500,000,000
shares authorized, 93,816,942 and
93,228,443 shares issued and
outstanding, respectively............... 938 932
Additional paid-in capital................ 800,626 793,484
Retained earnings......................... 263,121 213,367
------------ ------------
Total stockholders' equity........... 1,064,685 1,007,783
------------ ------------
$ 2,444,695 $ 2,371,871
============ ============
- -------------------
(1) Derived from audited financial statements
See notes to the unaudited condensed consolidated financial statements
1
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------ ------------- ------------ -------------
Revenue .............................................. $153,463 $145,717 $421,058 $423,243
Property operating expenses ... ...................... 66,485 59,874 189,902 173,407
Corporate operating and property management expenses . 12,170 12,003 36,355 35,402
Headquarters relocation costs ........................ 4,593 9,019
Depreciation and amortization ........................ 19,858 18,243 58,781 53,530
-------- -------- -------- --------
Total costs and expenses ..................... 98,513 94,713 285,038 271,358
-------- -------- -------- --------
Income from operations before interest, income
taxes, extraordinary item and cumulative effect
of accounting change .............................. 54,950 51,004 136,020 151,885
Interest expense, net ................................ 20,245 19,524 59,413 57,616
-------- -------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change ............ 34,705 31,480 76,607 94,269
Provision for income taxes ........................... 13,535 12,592 26,853 37,707
-------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change ....................... 21,170 18,888 49,754 56,562
Extraordinary write-off of unamortized debt issue
costs, net of income tax benefit of $3,942 ........ (5,912) (5,912)
Cumulative effect of change in accounting for
derivatives, net of income tax benefit of $446 .... (669)
-------- -------- -------- --------
Net income ........................................... $ 21,170 $ 12,976 $ 49,754 $ 49,981
======== ======== ======== ========
Net income per common share - Basic:
Income before extraordinary item and cumulative
effect of accounting change ..................... $ 0.23 $ 0.20 $ 0.53 $ 0.60
Extraordinary item ................................ (0.06) (0.06)
Cumulative effect of accounting change ............ (0.01)
-------- -------- -------- --------
Net income ........................................... $ 0.23 $ 0.14 $ 0.53 $ 0.53
======== ======== ======== ========
Net income per common share - Diluted:
Income before extraordinary item and cumulative
effect of accounting change ..................... $ 0.22 $ 0.20 $ 0.51 $ 0.58
Extraordinary item ................................ (0.06) (0.06)
Cumulative effect of accounting change ............ (0.01)
-------- -------- -------- --------
Net income ........................................... $ 0.22 $ 0.14 $ 0.51 $ 0.51
======== ======== ======== ========
Weighted average shares:
Basic ............................................. 93,784 93,094 93,631 94,527
Effect of dilutive options ........................ 2,354 2,580 3,077 2,951
-------- -------- -------- --------
Diluted ........................................... 96,138 95,674 96,708 97,478
======== ======== ======== ========
See notes to the unaudited condensed consolidated financial statements
2
EXTENDED STAY AMERICA, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
----------------------------
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income ........................................................... $ 49,754 $ 49,981
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 58,781 53,530
Amortization of deferred loan costs included in interest expense 3,128 3,552
Deferred income taxes .......................................... 16,077 17,762
Non-cash charges included in headquarters relocation costs ..... 2,106
Extraordinary item, net ........................................ 5,912
Cumulative effect of accounting change, net .................... 669
Changes in operating assets and liabilities .................... 23,064 26,683
--------- ----------
Net cash provided by operating activities .................. 150,804 160,195
--------- ----------
Cash flows from investing activities:
Additions to property and equipment .................................. (145,860) (233,320)
Other assets ......................................................... (7) (187)
--------- ----------
Net cash used in investing activities ...................... (145,867) (233,507)
--------- ----------
Cash flows from financing activities:
Proceeds from long-term debt ......................................... 100,000 1,008,625
Repayments of credit facilities ...................................... (87,874) (882,000)
Proceeds from issuance of common stock ............................... 5,646 17,548
Repurchases of Company common stock .................................. (58,362)
Additions to deferred loan costs ..................................... (1,281) (21,468)
--------- ----------
Net cash provided by financing activities .................. 16,491 64,343
--------- ----------
Increase (decrease) in cash and cash equivalents ....................... 21,428 (8,969)
Cash and cash equivalents at beginning of period ....................... 11,027 13,386
--------- ----------
Cash and cash equivalents at end of period ............................. $ 32,455 $ 4,417
========= ==========
Noncash investing and financing transactions:
Capitalized or deferred items included in accounts payable
and accrued liabilities ............................................ $ 13,547 $ 34,448
========= ==========
Supplemental cash flow disclosures:
Cash paid for:
Income taxes, net of refunds ....................................... $ (158) $ 15,930
========= ==========
Interest expense, net of amounts capitalized ....................... $ 54,357 $ 52,115
========= ==========
See notes to the unaudited condensed consolidated financial statements
3
EXTENDED STAY AMERICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and include the accounts of Extended Stay America, Inc. and subsidiaries. In
this Quarterly Report on Form 10-Q, the words "Extended Stay America",
"Company", "we", "our", "ours", and "us" refer to Extended Stay America, Inc.
and its subsidiaries unless the context suggests otherwise. All significant
intercompany accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The condensed consolidated balance sheet data at December 31, 2001 was
derived from our audited financial statements but does not include all
disclosures required by generally accepted accounting principles.
Operating results for the three-month and nine-month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the financial statements and footnotes thereto included in our Annual Report
on Form 10-K for the year ended December 31, 2001.
The computation of diluted earnings per share for the three months ended
September 30, 2002 and 2001 does not include approximately 2.8 million and 2.6
million weighted average shares, respectively, and for the nine months ended
September 30, 2002 and 2001 does not include approximately 2.4 million weighted
average shares of our common stock in both periods represented by outstanding
options because the exercise price of the options for the periods was greater
than the average market price of our common stock during the periods.
Certain previously reported amounts have been reclassified to conform with
the current period's presentation.
Income Taxes
We expect our estimated annual effective income tax rate for 2002 to
decrease from 40% to 39%, reflecting a reduction in estimated state income taxes
resulting from state tax planning and credits. Accordingly, the provision for
income taxes in the nine-month period ended September 30, 2002 reflects a
reduction in expense of approximately $3.0 million, which was recorded in the
first quarter of 2002, associated with adjusting our deferred tax assets and
liabilities to reflect the lower rate.
Derivative Financial Instruments and Cumulative Effect of a Change in Accounting
We do not enter into financial instruments for trading or speculative
purposes. We have used interest rate cap contracts to hedge our exposure on
variable rate debt in the past. Through December 31, 2000, the cost of the caps
was included in prepaid expenses and amortized to interest expense over the life
of the cap contract.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended, requires all
derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as
amended, is effective for financial statements issued for periods beginning
after December 15, 2000. At December 31, 2000, the carrying value of our
interest rate cap contracts was $1,115,000 and their fair value was
4
zero. We adopted SFAS No. 133 on January 1, 2001 and designated our interest
rate cap contracts as cash-flow hedges of our variable rate debt. SFAS No. 133,
as interpreted by the Derivatives Implementation Group, required the transition
adjustment to be allocated between the cumulative-effect-type adjustment of
earnings and the cumulative-effect-type adjustment of other comprehensive income
based on our pre-SFAS No.133 accounting policy for the contracts. Because the
fair value of the interest rate cap contracts at adoption was zero, the entire
transition adjustment of $669,000, net of income tax benefit of $446,000, was
recognized in earnings as a cumulative effect adjustment on January 1, 2001.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," which we are required to
adopt on January 1, 2003. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases," to eliminate certain inconsistencies, and amends other
existing authoritative pronouncements to make technical corrections and clarify
meanings. The adoption of this statement is not expected to have a material
effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
adoption of this statement is not expected to have a material effect on our
financial statements.
Related Party Transactions
The Chairman of our Board of Directors serves as a director of a company to
which we sublease office space. The sublease provides for monthly rent of
$52,157 through December 2004. On December 17, 2001, the company to which we
sublease office space filed a voluntary petition for reorganization under
Chapter 11 of the U. S. Bankruptcy Code. We have continued to receive rent
payments under the sublease, and the company has not repudiated the sublease.
Commitments and Contingencies
On August 5, 2002, one of our subsidiaries was served with a complaint
against us and several of our subsidiaries in the Superior Court of California,
County of Alameda. This action, filed on behalf of an alleged class of former
and existing managers, assistant managers, and manager trainees for our
properties in California, alleges violations of certain of California's wage and
hour laws. In particular, the action alleges that we misclassified these
property managers as exempt from California's laws regarding overtime pay. The
plaintiffs are seeking to certify a class representing all such property
managers in California, an injunction, and damages for back pay, penalties,
interest, and attorneys' fees. The case is captioned Rachelle Reid, et al vs.
Extended Stay America, Inc., etc., et al. We are in the beginning stages of this
litigation, but we believe we have meritorious defenses against this claim and
intend to defend this case vigorously. The financial impact, if any, of this
case cannot yet be predicted.
From time to time, we may incur expenses due to defects in materials,
construction, or systems installed in our properties. Most significant products
or systems include manufacturers' warranties. In addition, contractual
agreements with our general contractors typically require general contractors
and subcontractors to maintain insurance designed to cover the faulty
installation of significant systems.
Testing has revealed that certain of our properties have sustained damage
arising from defective materials and/or faulty installation of the Exterior
Insulation Finish System ("EIFS"). At this time, the full extent of damage
cannot be reasonably estimated. We have filed suit against the EIFS
manufacturers, certain applicators, certain general contractors, and others
seeking necessary repairs and recovery rights against expected and incurred
5
expenses. The suits allege, among other things, negligence, breach of warranty,
breach of contract, tort, fraud, and unfair and deceptive trade practices. At
this time, the extent of recovery, if any, cannot be reasonably determined.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(000's Omitted)
September 30, December 31,
2002 2001
------------- ------------
Operating Facilities:
Land and improvements ................................... $ 637,904 $ 593,428
Buildings and improvements .............................. 1,645,527 1,541,091
Furniture, fixtures, equipment and supplies ............. 299,334 284,005
---------- ----------
Total Operating Facilities ............................ 2,582,765 2,418,524
Office furniture, fixtures and equipment .................... 7,313 6,852
Facilities under development, including land and improvements 80,231 120,626
---------- ----------
2,670,309 2,546,002
Less: Accumulated depreciation .............................. (327,307) (268,588)
---------- ----------
Total property and equipment ................................ $2,343,002 $2,277,414
========== ==========
We utilize general contractors for the construction of our properties.
Pursuant to the terms of our contractual agreements with the general
contractors, amounts are retained from payments made to them until the terms of
the agreement have been satisfactorily completed. Retained amounts are recorded
as accrued retainage.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We own and operate three brands in the extended stay lodging
market--StudioPLUS Deluxe Studios(R) ("StudioPLUS"), EXTENDED STAYAMERICA
Efficiency Studios(R) ("EXTENDED STAY"), and Crossland Economy Studios(R)
("Crossland"). Each brand is designed to appeal to different price points that
are generally below $500 per week. All three brands offer the same core
components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and
a bathroom. StudioPLUS facilities serve the mid-price category and generally
feature guest rooms that are larger than those in our other brands, an exercise
facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in
the economy category. Crossland rooms are typically smaller than EXTENDED STAY
rooms and are targeted for the budget category.
The table below provides a summary of our selected development and
operational results for the three months and nine months ended September 30,
2002 and 2001.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Total Facilities Open (at period end) ..................... 451 413 451 413
Total Facilities Opened ................................... 2 8 20 21
Average Occupancy Rate .................................... 74% 77% 71% 77%
Average Weekly Room Rate .................................. $325 $323 $319 $322
Average occupancy rates are determined by dividing the number of rooms
occupied on a daily basis by the total number of rooms. Average weekly room
rates are determined by dividing room revenue by the number of rooms occupied on
a daily basis for the applicable period and multiplying by seven. The average
weekly room rates generally will be greater than standard room rates because of
(1) stays of less than one week, which are charged at a higher nightly rate, (2)
higher weekly rates for rooms that are larger than the standard rooms, and (3)
additional charges for more than one person per room. We expect that our future
occupancy and room rates will be impacted by a number of factors, including the
impact of the U.S. economy on demand for lodging products, the number and
geographic location of our new facilities, and the season in which we open those
facilities. We also cannot assure you that we can maintain our occupancy and
room rates.
At September 30, 2002, we had 451 operating facilities (39 Crossland, 317
EXTENDED STAY, and 95 StudioPLUS) and had 15 EXTENDED STAY facilities under
construction. We expect to complete the construction of the facilities currently
under construction generally within the next twelve months, however, we cannot
assure you that we will complete construction within the time periods we have
historically experienced. Our ability to complete construction may be materially
impacted by various factors, including final permitting, obtaining certificates
of occupancy, and weather related construction delays.
7
Results of Operations
For the Three Months Ended September 30, 2002 and 2001
Property Operations
The following is a summary of the number of properties in operation at the
end of each period along with the related average occupancy rates and average
weekly room rates during each period:
For the Three Months Ended
------------------------------------------------------------------
September 30, 2002 September 30, 2001
------------------------------- --------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- --------- ----------- ---------- --------- -----------
Crossland 39 73% $ 222 39 80% $ 222
EXTENDED STAY 317 74 338 280 78 335
StudioPLUS 95 74 332 94 75 345
---- -- ------ --- -- -----
Total 451 74% $ 325 413 77% $ 323
==== == ====== === == =====
We realized an overall decrease of 4.0% in revenue per available room
("REVPAR") for the third quarter of 2002 as compared to the third quarter of
2001. The decrease in overall average occupancy rates for the third quarter of
2002 compared to the third quarter of 2001 reflects, primarily, the impact of a
general decline in demand for lodging products as a result of the weakened U.S.
economy, the continued impact on travel resulting from the events of September
11, 2001 and subsequent terrorism alerts, and a decline in demand surrounding
the anniversary of the events of September 11, 2001. The increase in overall
average weekly room rates for the third quarter of 2002 compared to the third
quarter of 2001 is due to the geographic dispersion of properties opened since
September 30, 2001 and the higher standard weekly room rates in certain of those
markets, which was partially offset by decreases in rates charged in previously
opened properties.
Comparable hotels, consisting of the 359 properties opened for at least one
year at the beginning of the first quarter of 2001 (excluding three EXTENDED
STAY properties located in Salt Lake City, Utah, which were impacted by one-time
rental contracts during the 2002 Winter Olympics (the "Olympic Properties")),
realized the following percentage changes in the components of REVPAR for the
third quarter of 2002 as compared with the third quarter of 2001:
Crossland EXTENDED STAY StudioPLUS Total
--------- ------------- ---------- -----
Number of Comparable Hotels ......... 39 230 90 359
Change in Occupancy Rate ............ (7.9)% (5.5)% (2.1)% (5.2)%
Change in Average Weekly Rate ....... 0.0% (0.3)% (3.5)% (0.8)%
Change in REVPAR .................... (7.9)% (5.8)% (5.5)% (5.9)%
We believe that the percentage changes in the components of REVPAR for our
brands differ primarily as a result of the number and geographic dispersion of
the comparable hotels.
While we believe that improvements in the U.S. economy will result in
increased demand for our products, it is difficult to assess the timing and
magnitude of these improvements. Based on trends experienced in the third
quarter and in October of 2002, we currently anticipate that we will experience
changes in REVPAR for our comparable hotels when compared to the prior year of
zero to 2% for the fourth quarter of 2002. In this event, we would realize
annual REVPAR declines for our comparable hotels of 8% to 9% for 2002.
8
We recognized total revenue of $153.5 million for the third quarter of 2002
and $145.7 million for the third quarter of 2001. This is an increase of
approximately $7.7 million, or 5%. The 405 properties that we owned and operated
throughout both periods experienced an aggregate decrease in revenue of
approximately $8.2 million, which was offset by approximately $15.9 million of
incremental revenue attributable to properties opened after June 30, 2001.
Property operating expenses, consisting of all expenses directly allocable
to the operation of the facilities but excluding any allocation of corporate
operating and property management expenses, depreciation, and interest were
$66.5 million (43% of total revenue) for the third quarter of 2002, compared to
$59.9 million (41% of total revenue) for the third quarter of 2001. We expect
the ratio of property operating expenses to total revenue to generally fluctuate
inversely relative to REVPAR increases or decreases because the majority of
these expenses do not vary based on REVPAR. We realized an overall decrease of
4.0% in REVPAR for the third quarter of 2002 as compared to the third quarter of
2001, and our property operating margins were 57% for the third quarter of 2002
and 59% for the third quarter of 2001.
The provisions for depreciation and amortization for our lodging facilities
were $19.7 million for the third quarter of 2002 and $18.0 million for the third
quarter of 2001. These provisions were computed using the straight-line method
over the estimated useful lives of the assets. These provisions reflect a pro
rata allocation of the annual depreciation and amortization charge for the
periods for which the facilities were in operation. Depreciation and
amortization for the third quarter of 2002 increased as compared to the third
quarter of 2001 because we operated 38 additional facilities in 2002 and because
we operated for a full quarter the 8 properties that were opened in the third
quarter of 2001.
Corporate Operations
Corporate operating and property management expenses include all expenses
not directly related to the development or operation of lodging facilities.
These expenses consist primarily of personnel and certain marketing costs, as
well as development costs that are not directly related to a site that we will
develop. We incurred corporate operating and property management expenses of
$12.2 million (8% of total revenue) in the third quarter of 2002 and $12.0
million (8% of total revenue) in the third quarter of 2001. The increase in the
amount of these expenses for the third quarter of 2002 as compared to the same
period in 2001 reflects the impact of additional personnel and related expenses
in connection with the increased number of facilities we operated. We expect
these expenses will continue to increase as we develop and operate additional
facilities in the future.
In May 2001, we announced that we would be relocating our corporate
headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. We
completed the relocation in the third quarter of 2001. As a result, we incurred
non-recurring charges of approximately $9.0 million during 2001 in connection
with the move, including approximately $2.1 million in non-cash charges related
to the abandonment of unamortized leasehold improvements and charges associated
with the valuation of stock options for terminated employees.
Depreciation and amortization was $178,000 for the quarter ended September
30, 2002 and $238,000 for the comparable period in 2001. These provisions were
computed using the straight-line method over the estimated useful lives of the
assets for assets not directly related to the operation of our facilities. These
assets were primarily office furniture and equipment.
We realized $191,000 of interest income in the third quarter of 2002 and
$105,000 in the third quarter of 2001. This interest income was primarily
attributable to the temporary investment of funds drawn under our credit
facilities. We incurred interest charges of $21.5 million during the third
quarter of 2002 and $22.5 million in the third quarter of 2001. Of these
amounts, $1.2 million in the third quarter of 2002 and $2.9 million in the third
quarter of 2001 were capitalized and included in the cost of buildings and
improvements.
We recognized income tax expense of $13.5 million and $12.6 million (39%
and 40%, respectively, of income before income taxes, extraordinary item, and
cumulative effect of an accounting change) for the third quarter of 2002 and
2001, respectively. Our income tax expense differs from the federal income tax
rate of 35% primarily due to state and local income taxes.
9
For the Nine Months Ended September 30, 2002 and 2001
Property Operations
Operating results for the nine-month period ended September 30, 2002
include the impact of one-time rental contracts during the 2002 Winter Olympics
at the Olympic Properties. We estimate that these contracts generated additional
non-recurring net income of approximately $1.2 million, or $0.01 per diluted
share, for the nine-month period.
Including the Olympic Properties, we realized average occupancies of 71%
and average weekly room rates of $319 for the nine-month period ended September
30, 2002, and we realized average occupancies of 77% and average weekly room
rates of $322 for the nine-month period ended September 30, 2001, resulting in a
decrease of 9.6% in overall REVPAR for the period when compared to the same
period of last year.
Excluding the Olympic Properties, the following is a summary of the number
of properties in operation at the end of each period along with the related
average occupancy rates and average weekly room rates during each period:
For the Nine Months Ended
-------------------------------------------------------------------
September 30, 2002 September 30, 2001
-------------------------------- --------------------------------
Average Average Average Average
Facilities Occupancy Weekly Room Facilities Occupancy Weekly Room
Open Rate Rate Open Rate Rate
---------- --------- ----------- ---------- --------- -----------
Crossland ................................ 39 71% $220 39 79% $222
EXTENDED STAY ............................ 314 71 330 277 78 334
StudioPLUS ............................... 95 70 329 94 76 345
--- -- ---- --- -- ----
Total ............................... 448 71% $318 410 78% $323
=== == ==== === == ====
Excluding the Olympic Properties, we realized an overall decrease of 10.0%
in REVPAR for the nine months ended September 30, 2002 as compared to the same
period in 2001. The decrease in overall average occupancy rates for the nine
month period ended September 30, 2002 compared to the same period in 2001
reflects, primarily, the impact of a general decline in demand for lodging
products as a result of the weakened U.S. economy and the continued impact on
travel resulting from the events of September 11, 2001 and subsequent terrorism
alerts. The decrease in overall average weekly room rates for the nine months
ended September 30, 2002 compared to the same period in 2001 is due to decreases
in rates charged in previously opened properties. Particularly for the EXTENDED
STAY brand, this decrease in rates was partially offset by the geographic
dispersion of properties opened since September 30, 2001 and the higher standard
weekly room rates in certain of those markets.
Comparable hotels, consisting of the 359 properties opened for at least one
year at the beginning of the first quarter of 2001 (excluding the Olympic
Properties), realized the following percentage changes in the components of
REVPAR for the nine months ended September 30, 2002 as compared with the same
period in 2001:
Crossland EXTENDED STAY StudioPLUS Total
--------- ------------- ---------- -----
Number of Comparable Hotels 39 230 90 359
Change in Occupancy Rate (9.7)% (9.0)% (8.0)% (8.9)%
Change in Average Weekly Rate (0.9)% (2.4)% (4.4)% (2.6)%
Change in REVPAR (10.5)% (11.2)% (12.1)% (11.3)%
10
We believe that the percentage changes in the components of REVPAR for our
brands differ primarily as a result of the number and geographic dispersion of
the comparable hotels.
The percentage change in the components of REVPAR for comparable hotels
experienced in the nine months ended September 30, 2002 reflects a decrease in
REVPAR of 17.2% in the first quarter, a decrease in REVPAR of 11.0% in the
second quarter, and a decrease in REVPAR of 5.9% in the third quarter.
We recognized total revenue of $421.1 million for the nine months ended
September 30, 2002 and $423.2 million for the nine months ended September 30,
2001. This is a decrease of $2.1 million or less than 1%. The 392 properties
that we owned and operated throughout both periods experienced an aggregate
decrease in revenue of approximately $45.1 million, net of incremental revenue
at the Olympic Properties of approximately $2.0 million, which was partially
offset by approximately $43.0 million of incremental revenue attributed to
properties opened after December 31, 2000.
Property operating expenses for the nine months ended September 30, 2002
were $189.9 million (45% of total revenue), compared to $173.4 million (41% of
total revenue) for the nine months ended September 30, 2001. We did not incur
significant incremental property operating expenses at the Olympic Properties
during the first quarter of 2002. We expect the ratio of property operating
expenses to total revenue to generally fluctuate inversely relative to REVPAR
increases or decreases because the majority of these expenses do not vary based
on REVPAR. We realized an overall decrease of 9.6% in REVPAR for the nine months
ended September 30, 2002 as compared to the nine months ended September 30,
2001. Our property operating margins were 55% for the nine months ended
September 30, 2002 and 59% for the nine months ended September 30, 2001.
The provisions for depreciation and amortization for our lodging facilities
were $58.2 million for the nine months ended September 30, 2002 and $52.7
million for the nine months ended September 30, 2001. Depreciation and
amortization for the nine months ended September 30, 2002 increased as compared
to the same period in 2001 because we operated 20 additional facilities in 2002
and because we operated for a full nine months the 21 properties that were
opened in the first nine months of 2001.
Corporate Operations
We incurred corporate operating and property management expenses of $36.4
million (9% of total revenue) in the nine months ended September 30, 2002 and
$35.4 million (8% of total revenue) in the nine months ended September 30, 2001.
The increase in the amount of these expenses for the nine-month period ended
September 30, 2002 as compared to the same period in 2001 reflects the impact of
additional personnel and related expenses in connection with the increased
number of facilities we operated.
Depreciation and amortization for assets not directly related to operation
of our facilities was $568,000 for the nine months ended September 30, 2002 and
$794,000 for the nine months ended September 30, 2001.
We realized $552,000 of interest income in the nine months ended September
30, 2002 and $437,000 in the nine months ended September 30, 2001. This interest
income was attributable to the temporary investment of funds drawn under our
credit facilities. We incurred interest charges of $64.1 million in the nine
months ended September 30, 2002 and $65.8 million in the nine months ended
September 30, 2001. Of these amounts, $4.2 million in the nine months ended
September 30, 2002 and $7.8 million in the nine months ended September 30, 2001
were capitalized and included in the cost of buildings and improvements.
11
We recognized income tax expense of $26.9 million for the nine-month period
ended September 30, 2002 and $37.7 million for the nine-month period ended
September 30, 2001 (35% and 40%, respectively, of income before income taxes,
extraordinary item, and cumulative effect of an accounting change). We expect
our annual effective income tax rate for 2002 to decrease from 40% to 39%,
reflecting a reduction in estimated state income taxes resulting from state tax
planning and credits. Accordingly, the provision for income taxes in the first
quarter of 2002 reflected a reduction in expense of approximately $3.0 million
associated with adjusting our deferred tax assets and liabilities to reflect the
lower rate. Excluding the impact of our estimated annual effective income tax
rate decrease, our income tax expense differs from the federal income tax rate
of 35% primarily due to state and local income taxes.
Cumulative Effect of a Change in Accounting
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended, requires all
derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as
amended, is effective for financial statements issued for periods beginning
after December 15, 2000. At December 31, 2000, the carrying value of our
interest rate cap contracts was $1,115,000 and their fair value was zero. We
adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap
contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as
interpreted by the Derivatives Implementation Group, required the transition
adjustment to be allocated between the cumulative-effect-type adjustment of
earnings and the cumulative-effect-type adjustment of other comprehensive income
based on our pre-SFAS No. 133 accounting policy for the contracts. Because the
fair value of the interest rate cap contracts at adoption was zero, the entire
transition adjustment of $669,000, net of income tax benefit of $446,000, was
recognized in earnings as a cumulative effect adjustment on January 1, 2001.
Liquidity and Capital Resources
We had net cash and cash equivalents of $32.5 million as of September 30,
2002 and $11.0 million as of December 31, 2001. At September 30, 2002 we had
approximately $27.4 million invested in short-term money market depository
accounts. Deposits in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation. At December 31, 2001 we had approximately $13.0 million
invested in short-term demand notes of companies having credit ratings of A1/P1
or the equivalent using domestic commercial banks and other financial
institutions. We also invested excess funds during these periods in an overnight
sweep account with a commercial bank, which in turn invested these funds in
short-term, interest-bearing reverse repurchase agreements. Due to the
short-term nature of these investments, we did not take possession of the
securities, which were instead held by the financial institutions. The market
value of the securities held pursuant to these arrangements approximates the
carrying amount.
Our operating activities generated cash of $150.8 million during the nine
months ended September 30, 2002 and $160.2 million during the nine months ended
September 30, 2001.
We used $145.9 million to acquire land, develop, or furnish a total of 35
sites opened or under construction in the nine months ended September 30, 2002
and $233.3 million for 59 sites in the nine months ended September 30, 2001.
Our cost to develop a property varies significantly by brand and by
geographic location due to differences in land and labor costs. Similarly, the
average weekly rate charged and the resulting cash flow from these properties
will vary significantly but generally are expected to be in proportion to the
development costs. For the 398 properties we opened from January 1, 1996 through
December 31, 2001, the average development cost was approximately $5.6 million
with an average of 107 rooms. In 2002, we expect to open a number of properties
in the Northeast and West, where average development costs are higher.
Accordingly, we expect our average development cost for 2002 to increase to
approximately $8.5 million per property, with an average of 110 rooms per
property.
We made open market repurchases of 4,189,100 shares of common stock for
approximately $58.4 million in the nine months ended September 30, 2001. We made
no such repurchases in the nine months ended September 30, 2002. We received net
proceeds from the exercise of options to purchase common stock totaling
approximately $5.6
12
million in the nine months ended September 30, 2002 and $17.6 million in the
nine months ended September 30, 2001.
In addition to our $200 million 9.15% Senior Subordinated Notes due 2008
and our $300 million 9.875% Senior Subordinated Notes due 2011, we have a $900
million credit facility (the "Credit Facility") which provides for revolving
loans and term loans on a senior collateralized basis. Loans under the Credit
Facility bear interest, at our option, at either a variable prime-based rate or
a variable LIBOR-based rate, plus an applicable margin. In January 2002, we
borrowed $100 million pursuant to a delayed draw term loan under the Credit
Facility. To minimize interest rates charged under the Credit Facility, we
prepaid $25 million in March 2002. As of September 30, 2002, we did not have
outstanding loans under the $200 million revolving facility and had $656.9
million, net of principal repayments, outstanding under the term loans.
Availability of the revolving facility is dependent, however, upon us satisfying
certain financial ratios of debt and interest compared to earnings before
interest, taxes, depreciation, and amortization, with these amounts being
calculated pursuant to definitions contained in the Credit Facility documents.
As of September 30, 2002, we had $1.3 million in outstanding letters of credit.
These letters of credit are being maintained as security for construction
related performance and will expire between October 2002 and May 2003. If
required, use of the letters of credit would draw against the revolving
facility.
Effective October 31, 2002, the Credit Facility was amended to provide
additional flexibility in managing the development of new hotels. The amendment
increased the total leverage covenant (defined as the ratio of our consolidated
debt to our consolidated EBITDA, each as defined in the Credit Facility
documents) from 4.50 to 5.00 for the period from April 1, 2003 to March 31, 2004
and from 4.50 to 4.75 for the period from April 1, 2004 to June 30, 2004.
Beginning July 1, 2004, the leverage covenant will return to the previously
scheduled level of 4.50. The amendment also modified the definition of EBITDA to
exclude non-cash stock based compensation expenses.
Our primary market risk exposures result from the variable nature of the
interest rates on borrowings under the Credit Facility. We entered into the
Credit Facility for purposes other than trading or speculation. Based on the
levels of borrowings under the Credit Facility at September 30, 2002, if
interest rates changed by 1.0%, our annual cash flow and net income would change
by $4.0 million. We manage our market risk exposures by periodic evaluation of
such exposures relative to the costs of reducing the exposures by entering into
interest rate swaps or by refinancing the underlying obligations with longer
term fixed rate debt obligations. We do not own derivative financial instruments
or derivative commodity instruments.
In connection with the Credit Facility, the 9.15% Senior Subordinated
Notes, and the 9.875% Senior Subordinated Notes, we incurred additions to
deferred loan costs of $1.3 million during the nine months ended September 30,
2002 and $21.5 million during the nine months ended September 30, 2001.
We plan to open approximately 22 properties with total costs of
approximately $186 million in 2002. We plan to commence construction on a total
of 31 sites during 2002 with total development costs of approximately $250
million. We expect to open two of the 31 sites in 2002. We expect to open the
remaining 29 sites, with total costs of approximately $235 million, in 2003. In
addition, we plan to commence construction on 31 sites with total development
costs of approximately $270 million in 2003 and have identified 10 additional
sites with total development costs of approximately $86 million for which we
could commence construction in 2003. We will continue to seek the necessary
approvals and permits for additional sites and may seek to increase the number
of construction starts in the future. Our current and future development plans
will be affected by a number of factors, including the overall state of the U.S.
economy, demand for lodging products in the overall lodging industry, demand for
our extended stay lodging products, and availability of funds within the
constraints of our financing agreements.
13
At September 30, 2002, we had commitments not reflected in our financial
statements totaling approximately $84 million to complete construction of
extended stay properties and $12 million to complete construction of our
corporate headquarters. We believe that the remaining availability under the
Credit Facility, together with our cash on hand and cash flows from operations,
will provide sufficient funds to continue our expansion as presently planned and
to fund our operating expenses, including our working capital deficit, for the
next twelve months. We may increase our capital expenditures and property
openings in future years, which would increase our capital needs. We may also
need additional capital depending on a number of factors, including the number
of properties we construct or acquire, the timing of that development, the cash
flow generated by our properties and the amount of any open market repurchases
of our common stock we make. Also, if capital markets provide favorable
opportunities, our plans or assumptions change or prove to be inaccurate, our
existing sources of funds prove to be insufficient to fund our growth and
operations, or if we consummate acquisitions, we may seek additional capital
sooner than currently anticipated. In the event we obtain additional capital, we
may seek to increase property openings in future years. Sources of capital may
include public or private debt or equity financing. We cannot assure you that we
will be able to obtain additional financing on acceptable terms, if at all. Our
failure to raise additional capital could result in the delay or abandonment of
some or all of our development and expansion plans, and could have a material
adverse effect on us.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," which we are required to
adopt on January 1, 2003. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases," to eliminate certain inconsistencies, and amends other
existing authoritative pronouncements to make technical corrections and clarify
meanings. The adoption of this statement is not expected to have a material
effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
adoption of this statement is not expected to have a material effect on our
financial statements.
Seasonality and Inflation
Based upon the operating history of our facilities, we believe that
extended stay lodging facilities are not as seasonal in nature as the overall
lodging industry. We do expect, however, that our occupancy rates and revenues
will be lower than average during the first and fourth quarters of each calendar
year. Because many of our expenses do not fluctuate with changes in occupancy
rates, declines in occupancy rates may cause fluctuations or decreases in our
quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on our revenue or operating results during
any of the periods presented. We cannot assure you, however, that inflation will
not affect our future operating or construction costs.
14
Special Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements.
Words such as "expects", "intends", "plans", "projects", "believes",
"estimates", and similar expressions are used to identify these forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. However, these forward-looking
statements are subject to risks, uncertainties, assumptions, and other factors
which may cause our actual results, performance, or achievements to be
materially different. These factors include, among other things:
. uncertainty as to changes in U.S. general economic activity and the
impact of such changes on the consumer demand for lodging products in
general and for extended stay lodging products in particular;
. increasing competition in the extended stay lodging market;
. our ability to increase or maintain revenue and profitability in our
new and mature properties;
. uncertainty as to the impact on the lodging industry of any additional
terrorist attacks or responses to terrorist attacks;
. uncertainty as to our future profitability;
. our ability to operate within the limitations imposed by financing
arrangements;
. our ability to meet construction and development schedules and
budgets;
. our ability to obtain financing on acceptable terms to finance our
growth;
. the risk of significant one-time or continuing expenses due to defects
in materials, construction, or systems installed throughout many of
our properties;
. our ability to integrate and successfully operate any properties
acquired in the future and the risks associated with these properties;
and
. our ability to develop and implement the operational and financial
systems needed to manage rapidly growing operations.
Other matters set forth in this Quarterly Report may also cause our actual
future results to differ materially from these forward-looking statements. We
cannot assure you that our expectations will prove to be correct. In addition,
all subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements mentioned above. You should not place undue reliance on
these forward-looking statements. All of these forward-looking statements are
based on our expectations as of the date of this Quarterly Report. We do not
intend to update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
15
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
(1) that information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms,
and (2) that this information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In October
2002, under the supervision and review of our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them in a timely
manner to material information regarding us (including our consolidated
subsidiaries) that is required to be included in our periodic reports to the
SEC. In addition, there have been no significant changes in our internal
controls or in other factors that could significantly affect those controls
since our October 2002 evaluation. We cannot assure you, however, that our
system of disclosure controls and procedures will always achieve its stated
goals under all future conditions, no matter how remote.
16
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit number and Description of Exhibit
10.1 Time Sharing Agreement, dated as of July 22, 2002, by and between ESA
Services, Inc. and Advance America, Cash Advance Centers, Inc. for the
Learjet 55 (serial No. 132) N242RB
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 12, 2002, announcing
that President and Chief Operating Officer Robert A. Brannon is taking a
leave of absence while recovering from a stroke.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 6, 2002.
EXTENDED STAY AMERICA, INC.
/s/ GREGORY R. MOXLEY
-------------------------------------
Gregory R. Moxley
Chief Financial Officer
(Principal Financial Officer)
/s/ PATRICIA K. TATHAM
-------------------------------------
Patricia K. Tatham
Vice President - Corporate Controller
(Principal Accounting Officer)
17
CERTIFICATIONS
I, George D. Johnson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Extended Stay
America, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 6, 2002
/s/ GEORGE D. JOHNSON, JR.
- ---------------------------
George D. Johnson, Jr.
Chief Executive Officer
18
CERTIFICATIONS
I, Gregory R. Moxley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Extended Stay
America, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 6, 2002
/s/ GREGORY R. MOXLEY
- ---------------------
Gregory R. Moxley
Chief Financial Officer
and Vice President - Finance
19