**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM10-Q**

** **

| **ý**                           |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                      |
|--------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   |                                                                                                                                                              |
|                                 |   | **For the Quarterly Period Ended September 30, 2003**                                                                                                             |
|                                 |   |                                                                                                                                                              |
| **OR**                               |
|                                 |   |                                                                                                                                                              |
| **o**                                |   | **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  incorporation or organization)                   |   | (I.R.S. Employer  Identification Number) |
|                                                                               |   |                                     |
| **100 DUNBAR STREET, SPARTANBURG, SC**                                             |   | **29306**                                |
| (Address of Principal  Executive Offices)                                          |   | (Zip Code)                               |
|                                                                               |   |                                     |
| Registrant’s telephone number, including area code:  **(864)  573-1600** |

 

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Indicate bycheck mark whether the registrant:  (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes  ý No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 

Yes  ý No  o

 

At November 6,2003, the registrant had issued and outstanding an aggregate of 97,095,432shares of Common Stock.

 

 

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** **

**PART I**

 

**FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**EXTENDED STAYAMERICA, INC.**

 

**CondensedConsolidated Balance Sheets (Unaudited)**

**(In thousands, exceptshare data)**

 
|                                                                                                                                 |   | **September  30,  2003** |      | **December 31,  2002(1)** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|--------------------------------|--------|
| **ASSETS**                                                                                                                           |   |                     |      |                           |   |
|                                                                                                                                 |   |                     |      |                           |   |
| Current assets:                                                                                                                      |   |                     |      |                           |   |
| Cash and cash equivalents                                                                                                            |   | $                        | 28,863    |                           | $      | 6,583 |   |
| Accounts receivable                                                                                                                  |   | 7,010                    |      | 5,996                          |   |
| Prepaid income taxes                                                                                                                 |   | 10,181                   |      | 7,295                          |   |
| Prepaid expenses                                                                                                                     |   | 7,117                    |      | 5,774                          |   |
| Deferred income taxes                                                                                                                |   | 6,301                    |      | 18,920                         |   |
| Total current assets                                                                                                                 |   | 59,472                   |      | 44,568                         |   |
| Property and equipment, net                                                                                                          |   | 2,408,642                |      | 2,372,939                      |   |
| Deferred loan costs, net                                                                                                             |   | 21,269                   |      | 22,336                         |   |
| Deferred income taxes                                                                                                                |   | 25,114                   |      | 18,000                         |   |
| Other assets                                                                                                                         |   | 962                      |      | 877                            |   |
|                                                                                                                                 |   | $                        | 2,515,459 |                           | $      | 2,458,720 |   |
|                                                                                                                                 |   |                     |      |                           |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        |   |                     |      |                           |   |
|                                                                                                                                 |   |                     |      |                           |   |
| Current liabilities:                                                                                                                 |   |                     |      |                           |   |
| Accounts payable                                                                                                                     |   | $                        | 18,965    |                           | $      | 22,793 |   |
| Accrued retainage                                                                                                                    |   | 7,534                    |      | 6,971                          |   |
| Accrued property taxes                                                                                                               |   | 16,310                   |      | 12,947                         |   |
| Accrued salaries and related expenses                                                                                                |   | 6,899                    |      | 4,834                          |   |
| Accrued interest                                                                                                                     |   | 9,560                    |      | 6,724                          |   |
| Other accrued expenses                                                                                                               |   | 20,476                   |      | 18,977                         |   |
| Current portion of long-term debt                                                                                                    |   | 28,927                   |      | 21,695                         |   |
| Total current liabilities                                                                                                            |   | 108,671                  |      | 94,941                         |   |
| Deferred income taxes                                                                                                                |   | 158,910                  |      | 147,046                        |   |
| Long-term debt                                                                                                                       |   | 1,107,460                |      | 1,143,565                      |   |
|                                                                                                                                 |   |                     |      |                           |   |
| 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, 96,761,328 and 93,923,169 shares issued and outstanding,  respectively |   | 968                      |      | 939                            |   |
| Additional paid-in capital                                                                                                           |   | 832,287                  |      | 801,757                        |   |
| Retained earnings                                                                                                                    |   | 307,163                  |      | 270,472                        |   |
| Total stockholders’ equity                                                                                                      |   | 1,140,418                |      | 1,073,168                      |   |
|                                                                                                                                 |   | $                        | 2,515,459 |                           | $      | 2,458,720 |   |

 

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(1)                                  Derivedfrom audited financial statements

 

See notes to the unaudited condensed consolidated financial statements

 

1

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**EXTENDED STAYAMERICA, INC.**

 

**CondensedConsolidated Statements of Income (Unaudited)**

**(In thousands, exceptper share data)**

 
|                                                     |   | **Three  Months Ended**      |    | **Nine  Months Ended**       |   |
|----------------------------------------------------------|--------|------------------------------|---------|------------------------------|--------|
|                                                     |   | **September 30,  2003** |    | **September 30,  2002** |   | **September 30,  2003** |   | **September  30,  2002** |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Revenue                                                  |   | $                            | 152,960 |                         | $      | 153,463 |   | $ | 419,417 |   | $ | 421,058 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Property operating expenses                              |   | 72,107                       |    | 66,485                       |   | 203,228 |   | 189,902 |   |
| Corporate operating and property management  expenses    |   | 13,287                       |    | 12,170                       |   | 37,628 |   | 36,355 |   |
| Depreciation and amortization                            |   | 20,226                       |    | 19,858                       |   | 60,225 |   | 58,781 |   |
| Total costs and expenses                                 |   | 105,620                      |    | 98,513                       |   | 301,081 |   | 285,038 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Income from operations before interest and  income taxes |   | 47,340                       |    | 54,950                       |   | 118,336 |   | 136,020 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Interest expense, net                                    |   | 20,097                       |    | 20,245                       |   | 58,186 |   | 59,413 |   |
| Income before income taxes                               |   | 27,243                       |    | 34,705                       |   | 60,150 |   | 76,607 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Provision for income taxes                               |   | 10,625                       |    | 13,535                       |   | 23,459 |   | 26,853 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Net income                                               |   | $                            | 16,618  |                         | $      | 21,170 |   | $ | 36,691 |   | $ | 49,754 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Net income per common share:                             |   |                         |    |                         |   |   |   |   |   |
| Basic                                                    |   | $                            | 0.17    |                         | $      | 0.23 |   | $ | 0.39 |   | $ | 0.53 |   |
| Diluted                                                  |   | $                            | 0.17    |                         | $      | 0.22 |   | $ | 0.38 |   | $ | 0.51 |   |
|                                                     |   |                         |    |                         |   |   |   |   |   |
| Weighted average shares:                                 |   |                         |    |                         |   |   |   |   |   |
| Basic                                                    |   | 95,437                       |    | 93,784                       |   | 94,498 |   | 93,631 |   |
| Effect of dilutive options                               |   | 2,463                        |    | 2,354                        |   | 1,644 |   | 3,077 |   |
| Diluted                                                  |   | 97,900                       |    | 96,138                       |   | 96,142 |   | 96,708 |   |

 

See notes to the unaudited condensed consolidated financial statements

 

2

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**EXTENDED STAYAMERICA, INC.**

 

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

**(In thousands)**

 
|                                                                                |   | **Nine  Months Ended**   |   |
|-------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                |   | **September  30,  2003** |   | **September  30,  2002** |   |
|                                                                                |   |                     |   |   |   |
| Cash flows from operating activities:                                               |   |                     |   |   |   |
| Net income                                                                          |   | $                        | 36,691 |   | $ | 49,754 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:  |   |                     |   |   |   |
| Depreciation and amortization                                                       |   | 60,225                   |   | 58,781 |   |
| Amortization of deferred loan costs  included in interest expense                   |   | 3,398                    |   | 3,128 |   |
| Deferred income taxes                                                               |   | 17,369                   |   | 16,077 |   |
| Changes in operating assets and liabilities                                         |   | 15,705                   |   | 23,064 |   |
| Net cash provided by operating activities                                           |   | 133,388                  |   | 150,804 |   |
| Cash flows (used in) investing activities:                                          |   |                     |   |   |   |
| Additions to property and equipment                                                 |   | (102,881                 | )      | (145,860 | ) |
| Other assets                                                                        |   | (85                      | )      | (7 | ) |
| Net cash (used in) investing activities                                             |   | (102,966                 | )      | (145,867 | ) |
| Cash flows from (used in) financing  activities:                                    |   |                     |   |   |   |
| Proceeds from exercise of Company stock  options                                    |   | 23,062                   |   | 5,646 |   |
| Proceeds from long-term debt                                                        |   | 20,000                   |   | 100,000 |   |
| Principal payments on long-term debt                                                |   | (48,874                  | )      | (87,874 | ) |
| Additions to deferred loan costs                                                    |   | (2,330                   | )      | (1,281 | ) |
| Net cash (used in) provided by financing  activities                                |   | (8,142                   | )      | 16,491 |   |
| Increase in cash and cash equivalents                                               |   | 22,280                   |   | 21,428 |   |
| Cash and cash equivalents at beginning of  period                                   |   | 6,583                    |   | 11,027 |   |
| Cash and cash equivalents at end of period                                          |   | $                        | 28,863 |   | $ | 32,455 |   |
|                                                                                |   |                     |   |   |   |
| Noncash investing and financing transactions:                                       |   |                     |   |   |   |
| Capitalized or deferred items included in  accounts payable and accrued liabilities |   | $                        | 11,729 |   | $ | 13,547 |   |
|                                                                                |   |                     |   |   |   |
| Supplemental cash flow disclosures:                                                 |   |                     |   |   |   |
| Cash paid for:                                                                      |   |                     |   |   |   |
| Income taxes, net of refunds                                                        |   | $                        | 1,479  |   | $ | (158 | ) |
| Interest expense, net of amounts  capitalized                                       |   | $                        | 52,088 |   | $ | 54,357 |   |

 

See notes to the unaudited condensed consolidated financial statements

 

3

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**EXTENDED STAYAMERICA, INC.**

 

**NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**September 30, 2003**

 

**NOTE1 — BASIS OF PRESENTATION**

 

Theaccompanying condensed consolidated financial statements are unaudited andinclude the accounts of Extended Stay America, Inc. and subsidiaries (the“Company”). In this Quarterly Report on Form 10-Q, the words “Extended StayAmerica”, “Company”, “we”, “ours”, and “us” refer to Extended Stay America,Inc. and its subsidiaries unless the context suggests otherwise.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

Thesefinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and the instructions ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included.

 

The condensedconsolidated balance sheet data at December 31, 2002 was derived fromaudited financial statements of the Company but does not include alldisclosures required by generally accepted accounting principles.

 

Operatingresults for the three-month and nine-month periods ended September 30, 2003 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003.  Forfurther information, refer to the financial statements and footnotes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

Thecomputation of diluted earnings per share for the three months ended September30, 2003 and 2002, does not include approximately 2.5 million and 2.8 million,respectively, weighted average shares, and for the nine months ended September30, 2003 and 2002 does not include approximately 6.7 million and 2.4 million,respectively, weighted average shares of common stock represented byoutstanding options because the exercise price of the options for the periodswas greater than the average market price of common stock during the period.

 

Certainpreviously reported amounts have been reclassified to conform with the currentperiod’s presentation.

 

*Income Taxes*

 

Our estimatedannual effective income tax rate decreased during 2002 from 40% to 39%, reflectinga reduction in estimated state income taxes resulting from state tax planningand credits.  Accordingly, the provisionfor income taxes in the nine-month period ended September 30, 2002 reflects areduction in expense of approximately $3.0 million, which was recorded in thefirst quarter of 2002, associated with adjusting our deferred tax assets andliabilities to reflect the lower rate.

 

*Stock Option Plans*

 

At September30, 2003, we had six stock-based employee compensation plans. We account forthose plans under the recognition and measurement principles of APB Opinion No.25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  All options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. We incurred approximately $122,000, net of tax, in non-cash chargesassociated with the valuation of stock options for terminated employees duringthe nine months ended September 30, 2003. No other stock-based employee compensation cost is reflected in netincome.  The following table illustratesthe effect on net income and earnings per share for the three-month andnine-month periods ended September 30, 2003, and 2002 as if we had applied thefair value recognition provisions of FASB Statement No. 123, “Accounting forStock Based Compensation,” to stock-based employee compensation.

 

4

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|                                                                                                                                          |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                          |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net income, as reported                                                                                                                       |   | $                                      | 16,618 |                                  | $      | 21,170 |   | $ | 36,691 |   | $ | 49,754 |   |
| Stock – based employee  compensation expense included in reported net income, net of related tax  effects                                |   |                                   |   |                                  |   | 122 |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value-based method for  all awards, net of related tax effects |   | (1,956                                 | )      | (2,414                                | )      | (5,987 | ) | (7,317 | ) |
| Pro forma net income                                                                                                                          |   | $                                      | 14,662 |                                  | $      | 18,756 |   | $ | 30,826 |   | $ | 42,437 |   |
|                                                                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Basic - as reported                                                                                                                           |   | $0.17                                  |   | $0.23                                 |   | $0.39 |   | $0.53 |   |
| Basic - pro forma                                                                                                                             |   | $0.15                                  |   | $0.20                                 |   | $0.33 |   | $0.45 |   |
| Diluted - as reported                                                                                                                         |   | $0.17                                  |   | $0.22                                 |   | $0.38 |   | $0.51 |   |
| Diluted - pro forma                                                                                                                           |   | $0.15                                  |   | $0.20                                 |   | $0.32 |   | $0.44 |   |

 

*New AccountingPronouncements*

 

In January2003, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities,” to expand upon and strengthen existing accounting guidance thataddresses when a company should include the assets, liabilities and activitiesof another entity in its financial statements. To improve financial reporting by companies involved with variableinterest entities (more commonly referred to as special-purpose entities or off-balancesheet structures), FIN 46 requires that a variable interest entity beconsolidated by a company if that company is subject to a majority risk of lossfrom the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns, or both.  Prior to FIN 46, a company generally included another entity inits consolidated financial statements only if it controlled the entity throughvoting interests.  The consolidationrequirements of FIN 46 apply immediately to variable interest entities createdafter January 31, 2003, and to older entities in the first fiscal year orinterim period beginning after December 15, 2003.  The adoption of this interpretation will not have a materialeffect on our financial statements.

 

In April 2003,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,”which is effective for contracts entered into or modified after September 30,2003, and for hedging relationships designated after September 30, 2003.  SFAS No. 149 amends and clarifies thefinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedging activitiesunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The adoption of thisstatement did not have a material effect on our financial statements.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity,” which is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  The adoption of this statement did not havea material effect on our financial statements.

 

*Related Party Transactions*

 

The Chairmanof our Board of Directors serves as a director of a company to which wesublease office space.  Effective June1, 2003, the sublease was amended to extend the sublease term past its originaltermination date of December 2004 and to adjust the monthly rent from $52,157as follows:

 

| June 1, 2003 to December 31, 2003    |   | $39,490 per month |   |
|--------------------------------------|--------|-------------------|--------|
| January 1, 2004 to December 31, 2004 |   | $42,255 per month |   |
| January 1, 2005 to December 31, 2005 |   | $43,440 per month |   |
| January 1, 2006 to December 12, 2006 |   | $47,388 per month |   |

 

5

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The reducedrate was offered to ensure prompt and continued payments under the terms of thesublease and to reflect current market conditions.  In the event of default, the amendment would be nullified and themonthly rent would return to the amount payable under the original subleaseagreement.

 

On December17, 2001, the company to which we sublease this office space filed a voluntarypetition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.  We have continued to receive rent paymentsunder the sublease, and the company has not repudiated the sublease.  The Bankruptcy Court approved the amendmentto the sublease described above.  OnJune 13, 2003, the company announced it had emerged from Chapter 11 bankruptcyprotection.

 

**NOTE 2 — PROPERTY ANDEQUIPMENT**

 

Property andequipment consist of the following:

 
|                                                           |   | **(000’s Omitted)** |      |
|----------------------------------------------------------------|--------|--------------------------|-----------|
|                                                           |   | **September 30,  2003**  |      | **December 31,  2002** |   |
|                                                           |   |                     |      |   |   |
| Operating Facilities:                                          |   |                     |      |   |   |
| Land and improvements                                          |   | $                        | 675,113   |   | $ | 646,189 |   |
| Buildings and improvements                                     |   | 1,729,225                |      | 1,658,888 |   |
| Furniture, fixtures, equipment and supplies                    |   | 317,077                  |      | 306,506 |   |
| Total Operating Facilities                                     |   | 2,721,415                |      | 2,611,583 |   |
| Offices:                                                       |   |                     |      |   |   |
| Land and improvements                                          |   | 1,464                    |      | — |   |
| Buildings and improvements                                     |   | 15,353                   |      | — |   |
| Furniture, fixtures, equipment and supplies                    |   | 8,831                    |      | 7,283 |   |
| Total Offices                                                  |   | 25,648                   |      | 7,283 |   |
| Facilities under development, including  land and improvements |   | 69,057                   |      | 101,410 |   |
|                                                           |   | 2,816,120                |      | 2,720,276 |   |
| Less:   Accumulated depreciation                          |   | (407,478                 | )         | (347,337 | ) |
| Total property and equipment                                   |   | $                        | 2,408,642 |   | $ | 2,372,939 |   |

 

We utilizegeneral contractors for the construction of our properties.  Pursuant to the terms of our contractualagreements with the general contractors, amounts are retained from paymentsmade to them until such time as the terms of the agreement have beensatisfactorily completed.  Retainedamounts are recorded as accrued retainage.

 

6

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**Item 2.****           Management’s Discussionand Analysisof Financial Conditionand Resultsof Operations**

 

**General**

 

We own andoperate three brands in the extended stay lodging market—StudioPLUS DeluxeStudios® (“StudioPLUS”), EXTENDED STAYAMERICA Efficiency Studios® (“EXTENDEDSTAY”), and Crossland Economy Studios® (“Crossland”).  Each brand is designed to appeal to different price pointsgenerally 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-pricecategory and generally feature guest rooms that are larger than those in ourother brands, an exercise facility, and a swimming pool.  EXTENDED STAY rooms are designed to competein the economy category.  Crosslandrooms are typically smaller than EXTENDED STAY rooms and are targeted for thebudget category.

 

The tablebelow provides a summary of our selected development and operational resultsfor the three months and nine months ended September 30, 2003 and 2002.

 
|                                   |   | **Three  Months  Ended September 30,** |       | **Nine  Months  Ended September 30,** |       |
|----------------------------------------|--------|----------------------------------------|------------|--------------------------------------------|------------|
|                                   |   | **2003**                               |       | **2002**                                   |       | **2003** |   | **2002** |   |
|                                   |   |                                   | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| Total  Facilities Open (at period end) |   | 470                                    |       | 451                                        |       | 470 |   | 451 |   |
| Total  Facilities Opened               |   | 7                                      |       | 2                                          |       | 15 |   | 20 |   |
| Average  Occupancy Rate                |   | 71                                     | %          | 74                                         | %          | 66 | % | 71 | % |
| Average  Weekly Room Rate              |   | $328                                   |       | $325                                       |       | $326 |   | $319 |   |

 

Averageoccupancy rates are determined by dividing the number of rooms occupied on adaily basis by the total number of rooms. Average weekly room rates are determined by dividing room revenue by thenumber of rooms occupied on a daily basis for the applicable period andmultiplying by seven.  The averageweekly 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.  Occupancy and room rates for each of ourbrands are affected by a number of factors, including the impact of the U.S.economy on demand for lodging products, the amount of competing lodgingproducts in markets where we operate and the number and geographic location ofour new facilities.  We cannot assure youthat we can maintain our occupancy and room rates.

 

At September30, 2003, we had 470 operating facilities (39 Crossland, 336 EXTENDED STAY, and95 StudioPLUS) and had 6 EXTENDED STAY facilities under construction.  We expect to complete the construction ofthe facilities currently under construction generally within the next twelvemonths; however, we cannot assure you that we will complete construction withinthe time periods we have historically experienced.  Our ability to complete construction may be materially impactedby various factors including final permitting, obtaining certificates ofoccupancy, and weather-induced construction delays.

 

 

**Resultsof Operations**

 

***For the Three Months Ended September 30, 2003and 2002***

 

*Property Operations*

 

The followingis a summary of the number of properties in operation at the end of each periodalong with the related average occupancy rates and average weekly room ratesduring each period:

 

7

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|          |   | **For the  Three Months Ended** |   |
|---------------|--------|---------------------------------|--------|
|          |   | **September  30, 2003**         |   | **September  30, 2002** |   |
|          |   | **Facilities  Open**            |   | **Average  Occupancy  Rate** |   | **Average  Weekly Room  Rate** |   | **Facilities  Open** |   | **Average  Occupancy  Rate** |   | **Average  Weekly Room  Rate** |   |
| Crossland     |   | 39                              |   | 71 | % | $224 |   | 39 |   | 73 | % | $222 |   |
| EXTENDED STAY |   | 336                             |   | 71 |   | 341 |   | 317 |   | 74 |   | 338 |   |
| StudioPLUS    |   | 95                              |   | 69 |   | 332 |   | 95 |   | 74 |   | 332 |   |
| Total         |   | 470                             |   | 71 | % | $328 |   | 451 |   | 74 | % | $325 |   |

 

We realized anoverall decrease of 3.8% in REVPAR (revenue per available room) for the thirdquarter of 2003 as compared to the third quarter of 2002.  The decrease in overall average occupancyrates for the third quarter of 2003 compared to the third quarter of 2002reflects, primarily, the impact of a general decline in demand for lodgingproducts as a result of the weakened U.S. economy.  The increase in overall average weekly room rates for the thirdquarter of 2003 compared to the third quarter of 2002 is due to increases inrates charged in previously opened properties and, for the EXTENDED STAY brand,the geographic dispersion of properties opened since September 30, 2002 and thehigher standard weekly rates in certain of these markets. In addition, thehigher overall average weekly room rate for the EXTENDED STAY brand, relativeto the StudioPLUS brand, reflects a larger concentration for the EXTENDED STAYbrand in higher cost markets with generally higher standard weekly rates.

 

Comparable hotels, consisting of the 389 properties openedfor at least one year at the beginning of the first quarter of 2002 (excludingthree EXTENDED STAY properties located in Salt Lake City, Utah that wereimpacted by one-time rental contracts during the 2002 Winter Olympics, the“Olympic Properties”), realized the following percentage changes in thecomponents of REVPAR for the third quarter of 2003 as compared with the thirdquarter of 2002:

 
|                           |   | **Crossland** |   | **EXTENDED  STAY** |   | **StudioPLUS** |   | **Total** |   |
|--------------------------------|--------|---------------|--------|--------------------|--------|----------------|--------|-----------|--------|
| Number of Comparable Hotels    |   | 39            |   | 257                |   | 93             |   | 389       |   |
| Change in Occupancy            |   | (3.2          | )%     | (4.6               | )%     | (6.4           | )%     | (4.7      | )%     |
| Change in Average Weekly  Rate |   | 1.0           | %      | 0.2                | %      | 0.2            | %      | 0.2       | %      |
| Change in REVPAR               |   | (2.2          | )%     | (4.3               | )%     | (6.2           | )%     | (4.5      | )%     |
|                                |        |               |        |                    |        |                |        |           |        |  |  |  |  |

 

We believethat the percentage changes in the components of REVPAR for our brands differprimarily as a result of  the number andgeographic dispersion of the comparable hotels.

 

We recognizedtotal revenue of $153.0 million for the third quarter of 2003 and $153.5million for the third quarter of 2002. This is a decrease of $500,000, or less than one percent.  Properties that we owned and operatedthroughout both periods (comprised of the 449 properties in operation at June30, 2002) experienced an aggregate decrease in revenue of approximately $6.2million.  This was partially offset byapproximately $5.7 million of incremental revenue attributed to propertiesopened after June 30, 2002.

 

Propertyoperating expenses, consisting of all expenses directly allocable to theoperation of our facilities but excluding any allocation of corporate operatingand property management expenses, depreciation, and interest were $72.1 million(47% of total revenue) for the third quarter of 2003, compared to $66.5 million(43% of total revenue) for the third quarter of 2002.  We expect the ratio of property operating expenses to totalrevenue to generally fluctuate inversely relative to REVPAR increases ordecreases because the majority of these expenses do not vary based onREVPAR.  We realized an overall decreaseof 3.8% in REVPAR for the third quarter of 2003 as compared to the thirdquarter of 2002, and our property operating margins were 53% for the thirdquarter of 2003 and 57% for the third quarter of 2002.  

 

As a lodgingfacility ages, scheduled maintenance and replacement costs for that propertygenerally increase. A significant portion of our operating facilities wereopened during 1997-1998 when we opened 230 properties.  We capitalize major renewals and improvementsbut expense repairs, maintenance, and replacements as incurred.  Approximately one-half of the the decreasein the property operating margin percentage experienced in the third quarter of2003 compared to the same period in 2002 is attributable to an increase inrepairs, maintenance, and replacement charges. We generally expect these expenses to increase as our propertiescontinue to mature.

 

The provisionsfor depreciation and amortization for our lodging facilities were $19.9 millionand $19.7 million  for the third quarterof 2003 and 2002, respectively.  Theseprovisions were computed using the straight-line method over the estimateduseful lives of the assets.  Theseprovisions reflect a pro rata allocation of the annual depreciation and amortizationcharge for the periods for which the facilities were in operation.  Depreciation and amortization for the thirdquarter of 2003 increased as compared to the third quarter of 2002 because weoperated 19 additional facilities in 2003 and because we operated for a fullquarter the 2 properties that were opened in the third quarter of 2002.

 

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*Corporate Operations*

 

Corporateoperating and property management expenses include all expenses not directly relatedto the development or operation of lodging facilities. These expenses consistprimarily of personnel, legal, and certain marketing costs, as well asdevelopment costs that are not directly related to a site that we will develop.  We incurred corporate operating and propertymanagement expenses of $13.3 million (9% of total revenue) in the third quarterof 2003 and $12.2 million (8% of total revenue) in the third quarter of2002.  We generally expect these expensesto increase as we develop and operate additional facilities in the future.

 

Depreciationand amortization was $309,000 in the third quarter of 2003 and $178,000 for thecomparable period in 2002.  Theseprovisions were computed using the straight-line method over the estimateduseful lives of the assets for assets not directly related to the operation ofour facilities.  These assets primarilyconsist of the corporate headquarters building, office furniture, andequipment.

 

We realized$48,000 of interest income in the third quarter of 2003 and $191,000 in thethird quarter of 2002.  This interestincome was primarily attributable to the temporary investment of funds fromoperations as well as funds drawn under our credit facilities.  We incurred interest charges of $21.2million during the third quarter of 2003 and $21.5 million during the thirdquarter of 2002.  Of these amounts, $1.0million in the third quarter of 2003 and $1.2 million in the third quarter of2002 were capitalized and included in the cost of buildings and improvements.

 

We recognizedincome tax expense of $10.6 million and $13.5 million (39% of income beforeincome taxes in each period) for the third quarter of 2003 and 2002,respectively.  Our income tax expensediffers from the federal income tax rate of 35% primarily due to state andlocal income taxes.

 

***Forthe Nine Months Ended September 30, 2003 and 2002***

 

*Property Operations*

 

Operatingresults for the nine months ended September 30, 2002 include the impact ofone-time rental contracts during the 2002 Winter Olympics at the OlympicProperties.  We estimate that thesecontracts generated additional non-recurring net income of approximately $1.2million, or $0.01 per diluted share for that nine-month period.

 

We realizedaverage occupancies of 66% and average weekly room rates of $326 for thenine-month period ended September 30, 2003, and, including the OlympicProperties, we realized average occupancies of 71% and average weekly roomrates of $319 for the nine-month period ended September 30, 2002.  This resulted in a decrease of 4.1% inoverall REVPAR for the period when compared to the same period last year.

 

Excluding theOlympic Properties, the following is a summary of the number of properties inoperation at the end of each period along with the related average occupancyrates and average weekly room rates during each period:

 
|          |   | **For the Nine Months Ended** |   |
|---------------|--------|-------------------------------|--------|
|          |   | **September  30, 2003**       |   | **September  30, 2002** |   |
|          |   | **Facilities  Open**          |   | **Average  Occupancy  Rate** |   | **Average  Weekly Room  Rate** |   | **Facilities  Open** |   | **Average  Occupancy  Rate** |   | **Average  Weekly Room  Rate** |   |
| Crossland     |   | 39                            |   | 67 | % | $223 |   | 39 |   | 71 | % | $220 |   |
| EXTENDED STAY |   | 333                           |   | 67 |   | 339 |   | 314 |   | 71 |   | 330 |   |
| StudioPLUS    |   | 95                            |   | 65 |   | 333 |   | 95 |   | 70 |   | 329 |   |
| Total         |   | 467                           |   | 67 | % | $326 |   | 448 |   | 71 | % | $318 |   |

 

Excluding theOlympic Properties, we realized an overall decrease of 3.6% in REVPAR for thenine months ended September 30, 2003 as compared to the same period of2002.  The decrease in overall averageoccupancy rates for the nine months ended September 30, 2003 compared to thesame period of 2002 reflects, primarily, the impact of a general decline indemand for lodging products as a result of the weakened U.S. economy and thewar in Iraq. The increase in overall average weekly room rates for the ninemonths ended September 30, 2003 compared to the same period of 2002 is due toincreases in rates charged in previously opened properties and, for theEXTENDED STAY brand, the geographic dispersion of properties opened sinceSeptember 30, 2002 and the higher standard weekly rates in certain of thesemarkets. In addition, the higher overall average weekly room rate for theEXTENDED STAY brand, relative to the StudioPLUS brand, reflects a largerconcentration for the EXTENDED STAY brand in higher cost markets with generallyhigher standard weekly rates.

 

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Comparablehotels, consisting of the 389 properties opened for at least one year at thebeginning of the first quarter of 2002 (excluding the Olympic Properties),realized the following percentage changes in the components of REVPAR for thenine months ended September 30, 2003 as compared with the same period of2002:

 
|                          |   | **Crossland** |   | **EXTENDED  STAY** |   | **StudioPLUS** |   | **Total** |   |
|-------------------------------|--------|---------------|--------|--------------------|--------|----------------|--------|-----------|--------|
| Number of Comparable Hotels   |   | 39            |   | 257                |   | 93             |   | 389       |   |
| Change in Occupancy           |   | (5.5          | )%     | (6.7               | )%     | (6.8           | )%     | (6.6      | )%     |
| Change in Average Weekly Rate |   | 1.0           | %      | 2.0                | %      | 1.1            | %      | 1.7       | %      |
| Change in REVPAR              |   | (4.5          | )%     | (4.9               | )%     | (5.7           | )%     | (5.0      | )%     |

 

We believe that the percentage changes in the components of REVPAR forour brands differ primarily as a result of the number and geographic dispersion of the comparable hotels.

 

The percentage changes in the components of REVPAR for comparablehotels experienced in the nine months ended September 30, 2003 reflect adecrease in REVPAR of 4.9% in the first quarter of 2003, a decrease in REVPARof 5.7% in the second quarter of 2003, and a decrease in REVPAR of 4.5% in thethird quarter of 2003 when compared to the same periods in 2002.

 

We recognized total revenue of $419.4 million for the nine months endedSeptember 30, 2003 and $421.1 million for the nine months endedSeptember 30, 2002.  This is adecrease of $1.7 million, or less than one percent. Properties that we ownedand operated throughout both periods (comprised of the 431 properties inoperation at December 31, 2001) experienced an aggregate decrease inrevenue of approximately $20.7 million (including incremental revenue at theOlympic Properties of approximately $2.0 million).  This was partially offset by approximately $19.0 million ofincremental revenue attributed to properties opened after December 31,2001.

 

Property operating expenses for the nine months endedSeptember 30, 2003 were $203.2 million (48% of total revenue), compared to$189.9 million (45% of total revenue) for the nine months endedSeptember 30, 2002.  We did notincur significant incremental property operating expenses at the OlympicProperties during the first quarter of 2002. We expect the ratio of property operating expenses to total revenue togenerally fluctuate inversely relative to REVPAR increases or decreases becausethe majority of these expenses do not vary based on REVPAR.  We realized an overall decrease of 4.1% inREVPAR for the nine months ended September 30, 2003 as compared to thenine months ended September 30, 2002. Our property operating margins were 52% for the nine months endedSeptember 30, 2003 and 55% for the nine months ended September 30,2002.  Approximately one-half of thedecrease in the property operating margin percentage experienced in the ninemonths ended September 30, 2003 compared to the same period in 2002 isattributable to an increase in repairs, maintenance, and replacement charges.

 

The provisions for depreciation and amortization for our lodgingfacilities were $59.5 million and $58.2 million for the nine-month periodsended September 30, 2003 and 2002, respectively.  Depreciation and amortization for the nine months endedSeptember 30, 2003 increased as compared to the same period of 2002because we operated 19 additional facilities in 2003 and because we operatedfor a full nine months the 20 properties that were opened in the first ninemonths of 2002.

 

*Corporate Operations*

 

We incurred corporate operating and property management expenses of$37.6 million (9% of total revenue) in the nine months ended September 30,2003 and $36.4 million (9% of total revenue) in the nine months endedSeptember 30, 2002.

 

Depreciation and amortization for assets not directly related to theoperation of our facilities was $695,000 in the nine months endedSeptember 30, 2003 and $568,000 for the same period in 2002.

 

We realized $148,000 of interest income in the nine months endedSeptember 30, 2003 and $552,000 in the nine months endedSeptember 30, 2002.  This interestincome was primarily attributable to the temporary investment of funds from operationsas well as funds drawn under our credit facilities.  We incurred interest charges of $62.2 million in the nine monthsended September 30, 2003 and $64.1 million in the nine months endedSeptember 30, 2002.  Of theseamounts, $3.8 million in the nine months ended September 30, 2003 and $4.2million in the nine months ended September 30, 2002 were capitalized andincluded in the cost of buildings and improvements.

 

Our effective income tax rate for 2002 decreased from 40% to 39%,reflecting a reduction in estimated state income taxes resulting from state taxplanning and credits.  Accordingly, theprovision for income taxes in the first quarter of 2002 reflected a reductionin expense of approximately $3.0 million associated with adjusting our deferredtax assets and

 

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liabilities to reflect the lower rate. The $3.0 million reduction in tax expense and the decrease in oureffective rate during 2002 resulted in the recognition of income tax expense of$23.5 million and $26.9 million (39% and 35%, respectively, of income beforeincome taxes) for the nine-month periods ended September 30, 2003 and2002, respectively. Excluding the impact of our effective income tax ratedecrease, our income tax expense differs from the federal income tax rate of35% primarily due to state and local income taxes.

 

**Liquidity and Capital Resources**

 

We had net cash and cash equivalents of $28.9 million as ofSeptember 30, 2003 and $6.6 million as of December 31, 2002. We had approximately$25.7 million and $5.6 million invested in short-term money market depositoryaccounts at September 30, 2003 and December 31, 2002, respectively.Deposits in excess of $100,000 are not insured by the Federal Deposit InsuranceCorporation.  During these periods, wealso deposited excess funds in an overnight sweep account with a commercialbank, which in turn invested these funds in short-term, interest-bearingreverse repurchase agreements.  Due tothe short-term nature of these investments, we did not take possession of thesecurities, which were instead held by the financial institutions.  The market value of the securities heldpursuant to these arrangements approximates the carrying amount.

 

Our operating activities generated cash of $133.4 million during thenine months ended September 30, 2003 and $150.8 million during the ninemonths ended September 30, 2002.

 

We used $102.9****million to acquire land and develop andfurnish a total of 21 sites opened or under construction in the nine months endedSeptember 30, 2003, and we used $145.9 million for 35 sites in the ninemonths ended September 30, 2002.

 

Our cost to develop a property varies significantly by brand and bygeographic location due to differences in land and labor costs.  Similarly, the average weekly rate chargedand the resultant cash flow from these properties will vary significantly butgenerally are expected to be in proportion to the development costs.  For the 422 properties we opened fromJanuary 1, 1996 through December 31, 2002, the average developmentcost was approximately $5.9 million with an average of 107 rooms. However,since January 1, 2000, we have opened a number of properties in theNortheast and West, where average development costs are higher.  Accordingly, the average development costper property for the 101 properties we opened from January 1, 2000 throughDecember 31, 2002, was $8.1 million. We plan to continue to develop properties nationwide, including in theNortheast and West, and expect overall average development costs to beapproximately $8.2 million per property in 2003.

 

We incur costs relating to each of our sites prior to the time weactually acquire the property.  Thesepre-acquisition costs relate primarily to qualification of the site and includelegal and environmental expenses and costs pertaining to our developmentprofessionals.  These costs also includeoptions to purchase the parcels of real estate, which we may forfeit undercertain circumstances.  When it isprobable that we will acquire the site, we capitalize these pre-acquisitioncosts.  In the event we do not acquireone of these sites, the costs associated with that site are charged tocorporate operating expenses.  AtSeptember 30, 2003, we had approximately $16.4 million of pre-acquisitioncosts and approximately $3.8 million of option purchase costs included infacilities under development in Property and Equipment.

 

We received net proceeds from the exercise of options to purchasecommon stock totaling $23.1 million in the nine months ended September 30,2003 and $5.6 million in the nine months ended September 30, 2002.

 

In addition to our $200 million 9.15% Senior Subordinated Notes due2008 and our $300 million 9.875% Senior Subordinated Notes due 2011, we have a$900 million credit facility (the “Credit Facility”), which provides forrevolving loans and term loans on a senior collateralized basis.  Loans under the Credit Facility bearinterest, at our option, at either a prime-based rate or a LIBOR-based rate,plus an applicable margin. At September 30, 2003 we had no outstandingloans under the $200 million revolving facility and $636.4 million, net ofprincipal repayments, outstanding under the term loans, leaving $200 millionavailable and committed under the Credit Facility.  Availability of the revolving facility is dependent upon ussatisfying certain financial ratios of debt and interest compared to earningsbefore interest, taxes, depreciation, and amortization, with these amountsbeing calculated pursuant to definitions contained in the Credit Facilitydocuments, as amended.

 

Effective July 1, 2003, the Credit Facility was amended to provideadditional flexibility for future development as well as flexibility inresponse to continued economic uncertainty. The amendment established a total leverage covenant (defined as theratio of our consolidated debt to our consolidated EBITDA, each as defined inthe Credit Facility documents) of 5.50 for the period from July 1, 2003 toJune 30, 2005, 5.25 for the period from July 1, 2005 to June 30,2006,

 

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and 5.00 from July 1, 2006and thereafter. The existing pricing grid pertaining to outstanding loans onthe $200 million revolving facility and $200 million in term loans was amendedto provide for an additional 0.25% of interest if total leverage is greaterthan or equal to 5.00. In addition, the amendment provided for a fixed marginof 3.75% over LIBOR on $500 million in term loans. The amendment limitedcapital expenditures to $65 million in the six months ending December 31,2003, $175 million in 2004, $200 million in 2005, and $250 million in each of2006 and 2007, with a provision permitting up to $25 million of unused capitalexpenditures to be carried forward to the following period. The amendment alsopermits us to pay $20 million in cash dividends annually and to repurchaseup to $35 million of our common stock.

 

We had  $1.5 million inoutstanding letters of credit as of September 30, 2003 andDecember 31, 2002.  These lettersof credit are being maintained as security for construction related performanceand will expire between December 2003 and October 2006.  If required, use of the letters of creditwould draw against the revolving facility.

 

Our primary market risk exposures result from the variable nature ofthe interest rates on borrowings under the Credit Facility. We entered into theCredit Facility for purposes other than trading or speculation. Based on thelevels of borrowings under the Credit Facility at September 30, 2003, ifinterest rates changed by 1.0%, our annual cash flow and net income wouldchange by $3.9 million.  We manage ourmarket risk exposures by periodic evaluation of these exposures relative to thecosts of reducing the exposures, by entering into interest rate swaps, or byrefinancing the underlying obligations with longer term fixed rate debtobligations.  We do not own derivativefinancial instruments or derivative commodity instruments.

 

In connection with the Credit Facility, the 9.15% Senior SubordinatedNotes, and the 9.875% Senior Subordinated Notes, we incurred additions todeferred loan costs of approximately $2.3 million during the nine months endedSeptember 30, 2003 and approximately $1.3 million during the nine monthsended September 30, 2002.

 

At September 30, 2003, we had 6 sites under construction withtotal development costs of approximately $58 million and had acquired twoparcels of real estate for future development. We currently plan to complete construction on 5 of those sites in 2003.  At this time, we believe we will besuccessful in obtaining extensions on a majority of the 26 sites for which wehad purchase options at September 30, 2003, if needed.  We will continue to seek the necessaryapprovals and permits for these sites and for additional sites, and may acquireadditional parcels of real estate for future development.  Construction will commence as soon aspossible within the constraints of our amended Credit Facility and contingentupon a number of factors, including improvements in the overall U.S. economy,improvements in demand for lodging products in the overall lodging industry,and improvements in demand for our extended stay lodging products.  We intend to commence construction, duringthe fourth quarter of 2003, on 9 to 10 sites, which we expect to have totaldevelopment costs of approximately $80 million.

 

At September 30, 2003 we had commitments under cancelableconstruction contracts not reflected in our financial statements totalingapproximately $23 million to complete construction of extended stayproperties.  We believe that theremaining availability under the Credit Facility, together with cash on handand cash flows from operations, will provide sufficient funds to continue ourexpansion as presently planned and to fund our operating expenses, includingour working capital deficit, for the next twelve months. We may increase ourcapital expenditures and property openings in future periods, in which case ourcapital needs will increase. We may also need additional capital depending on anumber of factors, including the number of properties we construct or acquire,the timing of that development, the cash flow generated by our properties, theamount of cash dividends we may pay on our common stock, and the amount of anyopen market repurchases we make of our common stock. Also, if capital marketsprovide favorable opportunities, our plans or assumptions change or prove to beinaccurate, our existing sources of funds prove to be insufficient to fund ourgrowth and operations, or if we consummate acquisitions, we may seek additionalcapital sooner than currently anticipated. In the event we obtain additional capital, we may seek to increaseproperty openings in future periods. Sources of capital may include public or private debt or equityfinancing.  We cannot assure you that wewill be able to obtain additional financing on acceptable terms, if atall.  Our failure to raise additional capitalcould result in the delay or abandonment of some or all of our development andexpansion plans, and could have a material adverse effect on us.

 

**NewAccounting Pronouncements**

 

In January 2003, the FASB issued FIN 46, “Consolidation ofVariable Interest Entities,” to expand upon and strengthen existing accountingguidance that addresses when a company should include the assets, liabilities,and activities of another entity in its financial statements. To improvefinancial reporting by companies involved with variable interest entities (morecommonly referred to as special-purpose entities or off-balance sheetstructures), FIN 46 requires that a variable interest entity be consolidated bya company if that company is subject to a majority risk of loss from thevariable interest entity’s activities or entitled to receive a majority of theentity’s residual returns or both. Prior to FIN 46, a company generallyincluded another entity in its consolidated financial statements only if itcontrolled the entity through voting interests. The consolidation requirementsof FIN 46 apply immediately to variable interest entities

 

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created after January 31,2003, and to older entities in the first fiscal year or interim periodbeginning after December 15, 2003. The adoption of this interpretationwill not have a material effect on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities,” which iseffective for contracts entered into or modified after September 30, 2003and for hedging relationships designated after September 30, 2003.  SFAS No. 149 amends and clarifies thefinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  The adoption ofthis statement did not have a material effect on our financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity,”which is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003.  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  The adoption ofthis statement did not have a material effect on our financial statements.

 

**Seasonality and Inflation**

 

Based upon the operating history of our facilities, we believe thatextended stay lodging facilities are not as seasonal in nature as those in theoverall lodging industry.  We do expect,however, that our occupancy rates and revenues will be lower than averageduring the first and fourth quarters of each calendar year.  Because many of our expenses do notfluctuate with changes in occupancy rates, declines in occupancy rates maycause fluctuations or decreases in our quarterly earnings.

 

The rate of inflation, as measured by changes in the average consumerprice index, has not had a material effect on our revenue or operating resultsduring any of the periods presented.  Wecannot assure you, however, that inflation will not affect our future operatingor construction costs.

 

**Special Note on Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements.  We use the terms “expects”,“intends”, “plans”, “projects”, “believes”, “estimates”, and similarexpressions to identify these forward-looking statements.  We have based these forward-lookingstatements on our current expectations and projections about future events.  However, these forward-looking statementsare subject to risks, uncertainties, assumptions, and other factors that maycause our actual results, performance, or achievements to be materiallydifferent.  These factors include, amongother things:

 

•                     uncertaintyas to changes in U.S. general economic activity and the impact of these changeson the consumer demand for lodging products in general and for extended staylodging products in particular;

 

•                     increasingcompetition in the extended stay lodging market;

 

•                     our abilityto increase or maintain revenue and profitability in our new and matureproperties;

 

•                     uncertaintyas to the impact on the lodging industry of terrorist attacks, responses toterrorist attacks, or any epidemic or similar health-related matters;

 

•                     uncertaintyas to our future profitability;

 

•                     our abilityto operate within the limitations imposed by financing arrangements;

 

•                     our abilityto meet construction and development schedules and budgets;

 

•                     our abilityto obtain financing on acceptable terms to finance our growth;

 

•                     the risk ofsignificant one-time or continuing expenses due to defects in materials,construction, or systems installed throughout many of our properties;

 

•                     our abilityto integrate and successfully operate any properties acquired in the future andthe risks associated with these properties; and

 

•                     our abilityto develop and implement the operational and financial systems needed to managerapidly growing operations.

 

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Other matters set forth in this Quarterly Report may also cause ouractual future results to differ materially from these forward-lookingstatements.  We cannot assure you thatour expectations will prove to be correct. In addition, all subsequent written and oral forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by the cautionary statements mentioned above.  You should not place undue reliance on theseforward-looking statements. All of these forward-looking statements are basedon our expectations as of the date of this Quarterly Report.  We do not intend to update or revise anyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934(the “Exchange Act”) are available free of charge through our website(www.extendedstay.com) as soon as reasonably practicable after weelectronically file the material with, or furnish it to, the Securities andExchange Commission (“SEC”).

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

See Item 2. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources.”

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Wemaintain disclosure controls and procedures that are designed to ensure (1)that information required to be disclosed by us in the reports we file orsubmit under the Exchange Act is recorded, processed, summarized, and reportedwithin the time periods specified in the SEC’s rules and forms, and (2) thatthis information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.  As of September 30, 2003, under the supervision and reviewof our Chief Executive Officer and Chief Financial Officer, we conducted anevaluation of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, our ChiefExecutive Officer and our Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective in alerting them in a timelymanner to material information regarding us (including our consolidatedsubsidiaries) that is required to be included in our periodic reports filedunder the Exchange Act.  In addition,since our evaluation there have been no significant changes in our internalcontrols or in other factors that could significantly affect those controls.

 

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**PART II**

 

**OTHER INFORMATION**

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

**(a)****                                  Exhibits**

 
| **Exhibit  Number** |   | **Description  of Exhibit**                                                                                                                                    |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                           |
| 31.1                |   | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                      |
|                |   |                                                                                                                                                           |
| 31.2                |   | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                      |
|                |   |                                                                                                                                                           |
| 32.1                |   | Certification of Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                |   |                                                                                                                                                           |
| 32.2                |   | Certification of Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

**(b)**                                  **Reports onForm 8-K**

 

OnOctober 29, 2003, the Company filed a report on Form 8-K announcing thedeclaration of a cash dividend of $0.04 per share payable on November 25,2003, to stockholders of record on November 10, 2003.

 

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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 theundersigned, thereunto duly authorized, on November 12, 2003.

 

 
|   | **EXTENDED STAY AMERICA, INC.**     |
|--------|-------------------------------------|
|   |                                |
|   |                                |
|   |   /s/ GREGORY R.  MOXLEY  |   |
|   |                                | Gregory R. Moxley |
|   |                                | Chief Financial Officer, Treasurer, and Secretary |
|   |                                | (Principal Financial Officer) |
|   |                                |
|   |   /s/ PATRICIA K.  TATHAM |   |
|   |                                | Patricia K. Tatham |
|   |                                | Vice President – Corporate Controller |
|   |                                | (Principal Accounting Officer) |
|        |                                     |  |  |

 

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