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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




| |  | For the fiscal year ended December 31, 2001
| |  | -------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission File No. 0-27360





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EXTENDED STAY AMERICA, INC.


(Exact name of Registrant as specified in its charter)





Delaware

36-3996573(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification Number)





101 N. Pine Street

29302Spartanburg, SC

(Zip Code)(Address of Principal Executive Offices)





Registrants telephone number, including area code: (864) 573-1600





Securities registered pursuant to Section 12(b) of the Act:





Title of Each Class

Name of Exchange On Which RegisteredCommon Stock, par value $.01 per share

New York Stock Exchange





Securities registered pursuant to Section 12(g) of the Act:





None





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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  ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x





The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately $1,337,791,195 at February 27, 2002 (based on the closing sale price on the New York Stock Exchange, Inc. (NYSE) on February 27, 2002). At February 27, 2002 the
registrant had issued and outstanding an aggregate of 93,527,101 shares of common stock.





Documents Incorporated by Reference





Those sections or portions of the registrants proxy statement for the Annual Meeting of Stockholders to be held on
May 22, 2002, described in Part III hereof, are incorporated by reference in this report.





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PART I





Item
1.Business





Our Company





We develop, own, and operate extended stay lodging facilities which provide an affordable and attractive lodging alternative at a variety of price points for value-conscious guests. Our
facilities are designed to offer a superior product at lower rates than most other lodging providers within their respective price segments. Our facilities feature fully furnished rooms which are generally rented on a weekly basis to guests such as
business travelers, professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home. We had revenue of $541.5 million in 2001, an increase of 5% from $518.0 million in 2000, and earnings
before interest, income taxes, depreciation, and amortization (EBITDA) of $263.9 million in 2001, excluding headquarters relocation costs of $9.0 million, and $259.1 million in 2000.





We believe that extended stay properties generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels,
primarily as a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. In addition, we believe the extended stay market is one of the most rapidly growing and under-served segments of the U.S. lodging
industry, with demand for extended stay lodging significantly exceeding the current and anticipated near-term supply of dedicated extended stay rooms. Of the 4.1 million rooms available in the lodging industry at December 31, 2001, extended stay
hotel chains had only approximately 208,000 rooms. Of these 208,000 total extended stay rooms, approximately 128,000 rooms operated in the lower tier segment of the extended stay market, a segment defined by weekly room rates generally below $500
and the segment in which we operate. We had approximately 46,000 rooms (or about 36% of the lower tier segment) at the end of 2001. We believe that there exist strong growth opportunities in the lower tier segment of the extended stay market.





As of December 31, 2001, we owned and operated 431 extended stay lodging facilities and had 20 facilities under construction in
a total of 42 states. We currently plan to commence construction on 15 additional sites with total costs of approximately $150 million during 2002, the majority of which are expected to open in 2003. We may increase the number of sites upon which we
commence construction in 2002, however, depending upon 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 plan to continue an active development program in 2003 and thereafter. We also may make opportunistic acquisitions of other lodging companies or facilities.





Our Brands





We own and operate three brands in the extended stay lodging
marketStudioPLUS Deluxe Studios   ® , EXTENDED STAYAMERICA Efficiency Studios   ® , and Crossland Economy Studios   ® . Each brand is designed to appeal to different price points 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. 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, and StudioPLUS facilities serve the mid-price category and generally feature larger guest rooms, an exercise room, and a swimming pool.





Our Strategy





Our objective is to be the leading
national provider of extended stay lodging. Our goal is to maximize value to customers by providing a superior, newly-constructed, and well-maintained product at each price point while maintaining high operating margins. We attempt to achieve this
goal through the following strategies:





Build Brand Awareness.    We believe that guests value a
recognizable brand when selecting lodging accommodations. We believe our increasing national presence, high customer satisfaction, and selective advertising and promotion have established our brands with distinct advantages over their local and
regional




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competitors. We plan to allocate our capital for at least the next two years primarily to the EXTENDED STAYAMERICA brand but we may include additional
StudioPLUS and Crossland properties on an opportunistic basis.





Provide a Superior Product at a Lower
Price.    We have designed our facilities to offer a superior product at lower rates than most other lodging providers within their respective price segments. Each of our brands is targeted to a different price point:
StudioPLUSmedian rate $279 per week (daily equivalent$40); EXTENDED STAYmedian rate $269 per week (daily equivalent$38); and Crosslandmedian rate $179 per week (daily equivalent$26). Room rates at our facilities
vary significantly depending upon market factors affecting their locations. These rates contrast with average daily rates in 2001 of $70, $54, and $41 for the mid-price, economy, and budget segments, respectively, of the general lodging industry.





Achieve Operating Efficiencies.    We believe that the design and price level of our facilities
attract guest stays of several weeks. This creates a more stable revenue stream which, together with low cost amenities, should lead to reduced administrative and operational costs and higher operating margins. We also use sophisticated control and
information systems to manage individual facility-specific factors such as pricing, payroll, and occupancy levels, on a company-wide basis.





Optimize Low Cost Amenities.    We seek to provide the level of amenities needed to offer quality accommodations while maintaining high operating margins. Our facilities contain a variety of
non-labor intensive features that are attractive to extended stay guests. These features include a fully-equipped kitchen or kitchenette, weekly housekeeping, color television with cable or satellite hook-up, coin-operated laundromat, and telephone
service with voice mail messaging, and, at many StudioPLUS facilities, an exercise room and swimming pool. To help maintain affordability of room rates, labor-intensive services such as daily cleaning, room service, and restaurants are not provided.





Employ a Standardized Concept.    We have developed standardized plans and specifications for our
facilities. This provides for lower construction and purchasing costs and establishes uniform quality and operational standards. We believe the uniformity of our facilities is advantageous when consumers are faced with a variety of lodging options.





Targeted Expansion.    We will continue to expand nationally into regions of the country that
contain the demographic factors we think are necessary to support one or more of our facilities. We target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally
have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.





Industry
Overview





Traditional Lodging Industry





The U.S. lodging industry is estimated to have generated approximately $76.6 billion in annual room revenues in 2001 and had approximately 4.1 million rooms at the end of 2001. The U.S.
lodging industrys performance has historically been strongly correlated to economic activity. Room supply and demand historically have been sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room
and occupancy rates.





The following table indicates the annual growth in revenue per available room (REVPAR),
available rooms, and available room nights for 1994 through 2001 for the lodging industry based on data provided by Smith Travel Research.





1994


1995


1996


1997


1998


1999


2000


2001Annual Growth in:REVPAR

5.9
%

5.8
%

6.3
%

4.9
%

3.4
%

3.5
%

6.0
%

(6.9
%)Available Rooms

1.8
%

2.6
%

2.5
%

3.6
%

4.1
%

3.9
%

2.9
%

2.4
%Available Room Nights (millions)

20.9


31.1


30.7


45.5


54.2


53.7


47.2


34.5




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Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply
of rooms. We believe this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. From the early 1990s through 2000, we believe that
the lodging industry benefited from an improved supply and demand balance, as evidenced by the compound annual growth rate of 5.1% in REVPAR from 1994 through 2000. The number of available rooms in the industry grew at a compound annual growth rate
of 3.0% during the same time period. However, the decline in the annual rate of growth of REVPAR from 6.3% in 1996 to 3.4% in 1998, along with concerns of a decline in the U.S. economy in general and tightening of credit standards by many financial
institutions, resulted in a significant contraction in capital available for the development of new lodging products in 1999 through 2001. Consequently, the annual growth in the supply of total available rooms in the lodging industry, as measured in
available room nights, decreased from 54.2 million additional room nights in 1998 to 34.5 million additional room nights in 2001. REVPAR for 2001 was negatively impacted by a recession in the U.S. economy and was further negatively impacted by the
terrorist events of September 11, 2001. As a result of continuing concerns about the U.S. economy, the impact of further terrorist events on the travel and leisure industries, and the sustained tightening of credit standards by many financial
institutions, we expect the rate of growth of new rooms to continue to moderate for the next few years.





The lodging industry
generally can be segmented by the level of service provided and the pricing of the rooms. Level of service can be divided into the following categories:





| |  |  | full service hotels, which offer food and beverage services, meeting rooms, room service, and similar guest services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------




| |  |  | limited service hotels, which generally offer only rooms with amenities such as swimming pools, continental breakfast, or similar limited services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | all-suite hotels, which generally have limited public spaces but provide guests with two rooms or distinct partitioned areas and which may or may not offer food and
beverage service to guests.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The lodging industry may also be segmented by price level and is generally
divided into categories based on average daily room rates, which in 2001 were $41 for budget, $54 for economy, $70 for mid-price, $93 for upscale, and $145 for luxury.





The all-suite segment of the lodging industry is a relatively new segment. It is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels
were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all-suite hotels began to offer suites
with additional space and, in some cases, an efficiency kitchen. In addition, guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. We believe the extended stay market in which
we participate is a distinct and emerging segment of the traditional lodging industry similar to the all-suite segment.





Extended Stay Market





We believe that extended stay hotels generally have higher operating margins, lower
occupancy break-even thresholds, and higher returns on capital than traditional hotels. This is primarily a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. In addition, we believe the extended stay
market is one of the most rapidly growing and under-served segments of the U.S. lodging industry, with demand for extended stay lodging significantly exceeding the current and anticipated near-term supply of dedicated extended stay rooms. Of the 3.5
million rooms available in the lodging industry in 1996, extended stay hotel chains had approximately 66,000 rooms. For 2001, there were 4.1 million rooms available in the lodging industry, of which approximately 208,000 rooms were at extended stay
hotel chains. Of these extended stay rooms, approximately 128,000 rooms operated in the lower tier (less than $500 per week) segment of the extended stay market.




3




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As of December 31, 2001, the inventory of dedicated extended stay rooms based on data provided
by Smith Travel Research for the following extended stay hotel chains totaled approximately 208,000 rooms.





Upscale Extended Stay Chains

Other Extended Stay ChainsHawthorn Inn & SuitesSM

Bradford Homesuites®

Lexington®Hotel SuitesHawthorn Suites®

Candlewood Hotel®

MainStay SuitesSMHomewood Suites®

Crossland

Sierra SuitesSMResidence Inn®

EXTENDED STAY

Studio 6SMStayBridge Suites®

Homegate Studios & Suites®

StudioPLUSSummerfield Suites®

Homestead Village®

Suburban Lodge®Woodfin Suites®

InnSuites Hotels

TownPlace Suites®Inn Town Suites®

Villager Lodges®





We believe that these chains represent the majority of dedicated extended stay
rooms available in the U.S. lodging industry.





An upscale extended stay room generally has a weekly rate of $500 or more, while
a lower tier room generally has a weekly rate less than $500. Our weekly room rates are generally less than $500. Approximately 62% of the supply of extended stay rooms were in the lower tier segment and we owned approximately 36% of the rooms
operated in the lower tier segment. The following table indicates the approximate number of total rooms for the extended stay chains listed above, the total rooms for the upscale chains, the total rooms for the lower tier chains and the total rooms
owned by us at the end of each of the last five years.





1997

1998

1999

2000

2001Total extended stay rooms available

96,000

140,000

170,000

191,000

208,000Upscale extended stay rooms

43,000

52,000

62,000

72,000

80,000Lower tier extended stay rooms

53,000

83,000

101,000

119,000

128,000Extended stay rooms owned by us

19,000

32,000

38,000

42,000

46,000





As a segment of the total U.S. lodging industry, extended stay hotel chains
experienced a significant contraction in the availability of capital that began during 1998 and has continued through 2001. As a result, we expect the growth in available dedicated extended stay rooms to continue to moderate for the next few years.





We believe the continuing significant demand/supply imbalance and the longer average length of stay have caused occupancy rates
for extended stay hotels to significantly exceed occupancy rates in the overall U.S. lodging industry. The table below shows that average occupancy rates for extended stay hotel chains have exceeded the rates in the overall U.S. lodging industry for
each of the previous five years based on data provided by Smith Travel Research.





Year Ended December 31,1997


1998


1999


2000


2001Average Occupancy Rates:Lower tier extended stay hotel chains

67.9
%

68.4
%

70.1
%

74.6
%

70.1
%Extended stay hotel chains

73.4
%

72.0
%

72.3
%

75.1
%

70.6
%All U.S. Lodging Industry

64.4


63.7


63.2


63.7


60.1





We believe the decline in occupancy rates for extended stay hotel chains in 1998
was, in part, the result of an increase in the proportion of newly-opened hotels, which generally experience lower occupancies during their pre-stabilization period. We believe the increase in occupancy rates for extended stay hotel chains in 2000
reflects the moderation of additional supply during the year as well as the stabilization of existing supply. We believe that the overall decline in occupancies in 2001 reflect the impact of the recession in the U.S. economy and the impact of
terrorist events.




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Property Development





Our goal is to be the leading provider of extended stay facilities in the United States. We expect that our primary means of expansion will be the construction and development of new extended stay lodging facilities.
We have also acquired, and we may make additional acquisitions of, existing extended stay lodging facilities or other properties that we can convert to the extended stay concept.





Our strategy is to continue to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We
target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores,
restaurants, and shopping centers.





We have approximately 30 real estate professionals and approximately 25 construction
professionals who perform site selection, entitlement, and construction activities according to our established criteria and procedures from offices throughout the United States. It generally takes us at least twenty-four months to identify a site
and complete construction of a facility, but this process may be substantially longer in certain markets. We try to minimize our capital outlays incurred in this process until after the commencement of construction.





The site selection process includes assessing the characteristics of a market area based on our development standards, identifying sites for development
within a qualified market area, and negotiating an option to purchase qualified sites. Although the time required to complete the selection process in a market varies significantly based on local market conditions, we typically need approximately
six to eight months to assess a market and obtain an option to purchase a site in a qualified market.





After we obtain an option
to purchase a site, our legal, environmental, and business due diligence begins. During this period, our real estate and construction professionals evaluate whether the site is financially suitable for development, obtain necessary approvals and
permits, and negotiate construction contracts with third party general contractors. It generally takes us eight to ten months to complete this process, however, the time needed can vary significantly by market area due to local regulations and
restrictions.





The site selection and due diligence processes are reviewed periodically by our senior management and our
approval to begin construction is based on a detailed review of the demographic, physical, and financial qualifications of each site. Once our senior management approves the development of a site, it is purchased, the construction contract is
executed, and construction generally begins immediately. We use a number of general contractors. The selection of a contractor for a specific site depends upon the geographic area, the negotiated construction costs, and the financial and physical
capacities of the contractors. The construction process is regularly inspected by our construction professionals to monitor both the quality and timeliness of completion of construction. Although the construction period varies significantly based on
local construction requirements and weather conditions, it generally takes us eight to ten months to complete construction once it has begun.





Our development status as of December 31, 2001 was as follows:





StudioPLUS

EXTENDED STAY

Crossland

TotalProperties

Rooms

Properties

Rooms

Properties

Rooms

Properties

RoomsOperating

94

7,575

298

33,129

39

5,068

431

45,772Under Construction

1

86

19

2,117

0

0

20

2,203




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The design plans for our lodging facilities call for a newly-constructed apartment style
complex. They generally consist of two- to four-story buildings with laundromat and office areas and use interior and exterior corridor building designs, depending primarily on local zoning and weather factors. All three of our brands offer the same
core components: a living/sleeping area; a fully-equipped kitchen or kitchenette with a refrigerator, stovetop, microwave, and sink; and a bathroom. The typical building design criteria for each of our brands is shown in the table below:





Average Number Of Rooms

Average Living Space Per Room (Ft.2)StudioPLUS

80

425EXTENDED STAY

100

300Crossland

120

225





The actual number of rooms and living space per room may vary significantly
depending on location and date of construction. In addition, each facility may include certain non-standard room types.





Property Operations





Each of our facilities employs a property manager who is responsible for the operations of that particular property. The
property manager shares duties with and oversees a staff typically consisting of an assistant manager, desk clerks, maintenance personnel, and a housekeeping/laundry staff of approximately 210 persons (many of whom are part-time employees).
The office at each of our facilities is generally open daily as follows: Crosslandfrom 8:00 a.m. to 7:00 p.m.; EXTENDED STAYfrom 7:00 a.m. to 11:00 p.m.; and StudioPLUSfrom 7:00 a.m. to 11:00 p.m., although an employee normally is
on duty at all facilities twenty-four hours a day to respond to guests needs.





The majority of daily operational decisions
are made by the property managers. Each property manager is under the supervision of one of our district managers, who typically are responsible for five to seven facilities, depending on geographic location. Our district managers oversee the
performance of our property managers in such areas as guest service, property maintenance, and payroll and cost control. The district managers report to a regional director who is responsible for the supervision of 8 to 10 district managers. Each
facility is evaluated against a detailed revenue and expense budget, as well as against the performance of our other facilities. Our corporate offices use sophisticated information systems to support the district managers and regional directors.





Our facilities are kept up to date through a program of continued renovation. We do not plan to renovate an entire facility at
one time but rather renovate individual parts of each facility on an as needed and ongoing basis. We believe this most effectively ensures that our facilities remain modern and clean.





Marketing Strategy





We believe that guests value a recognizable brand when selecting
lodging accommodations. To date, we have created brand awareness primarily by increasing the number of hotels through a rapid national development program, with sites that typically are in highly-visible locations. We have established a toll free
reservation number (1-800-EXT-STAY) and a web site (www.extendedstay.com) to provide information about our locations and to reserve rooms. We have maintained a national consumer advertising campaign in USA Today and a national direct mail
campaign since 1999. We plan to continue both advertising initiatives. We think that we can increase demand for our facilities by building awareness for both the extended stay concept as well as our various brands.




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Lodging Facilities





As of December 31, 2001, we had 431 extended stay lodging facilities in operation (94 StudioPLUS, 298 EXTENDED STAY, and 39 Crossland) and 20 facilities under construction (1 StudioPLUS, and 19 EXTENDED STAY) in a
total of 42 states. The average age of our properties at December 31, 2001 was three years and eleven months. The following table shows certain information regarding those facilities.





Operating Properties

Under ConstructionState

Facilities

Number of Rooms

Facilities

Number of RoomsAlabama

6

557



Arizona

9

1,002



Arkansas

3

306



California

48

5,726

5

528Colorado

9

1,074

1

109Connecticut

2

195



Florida

9

2,906

1

98Georgia

20

2,187



Idaho

1

107



Illinois

7

3,000

1

128Indiana

0

879



Iowa

2

190



Kansas

3

251



Kentucky

9

798



Louisiana

7

792



Maine

1

92



Maryland

10

1,021



Massachusetts

4

374

1

103Michigan

14

1,492

1

98Minnesota

8

817



Mississippi

2

179



Missouri

11

1,201



Montana





1

104Nebraska

1

86



Nevada

4

634

1

104New Hampshire

1

101



New Jersey

11

1,171

2

287New Mexico

3

351



New York

9

1,117



North Carolina

26

2,549



Ohio

23

2,124

1

113Oklahoma

5

475



Oregon

4

482



Pennsylvania

9

955



Rhode Island

2

208



South Carolina

9

918



Tennessee

13

1,261

1

114Texas

39

4,135

3

310Utah

3

378



Virginia

2

1,231



Washington

17

1,923

1

107Wisconsin

5

527



Total

431

45,772

20

2,203




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Competition





The lodging industry is highly competitive. This competition is based on a number of factors including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems,
name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments and limited service hotels. All of our facilities are located in developed areas and compete with budget, economy, and
mid-price segment hotels and other companies focusing on the extended stay market. The greater the number of competitive lodging facilities in a particular area, the more likely it is that those competitors may have a material adverse effect on the
occupancy levels and average weekly room rates of our facilities.





We expect that competition within the budget, economy, and
mid-price segments of the extended stay lodging market will continue to increase. Although we expect the contraction of capital available to the lodging industry that began during 1998 and continued through 2001 to slow the rate of growth of new
lodging products in general, we expect our existing competitors to continue to develop extended stay facilities to the extent that their capital permits and we expect them to increase their development in the event that additional capital should
become available in the future. Competitors may include new participants in the lodging industry generally and participants in other segments of the lodging industry that may enter the extended stay market. They may also include existing
participants in the extended stay market that may increase their product offerings to include facilities in the budget, economy, or mid-price segments. Competition is for both quality locations to build new facilities and for guests to fill and pay
for those facilities. A number of our competitors have greater financial resources than we do and better relationships with lenders and sellers, and may therefore be able to find and develop the best sites before we can. Also, we cannot assure you
that our competitors will not reduce their rates, offer greater convenience, services, or amenities, or build new hotels in direct competition with our existing facilities, all of which could have a material adverse effect on our operations.





Environmental Matters





Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on that property. These laws often impose liability
without regard to whether the owner knew of, or was responsible for, the presence of those hazardous or toxic substances. Furthermore, a person who arranges for the disposal or transports for disposal or treatment of a hazardous substance at a
property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. These costs may be substantial, and the presence of hazardous substances, or the failure to
properly remediate hazardous substances, may adversely affect the owners ability to sell the real estate or to borrow using that real estate as collateral. We may be liable for any of these costs that occur in connection with our properties.





We have obtained Phase I environmental site assessments (Phase I Surveys) on our existing properties and we intend
to obtain Phase I Surveys before the purchase of any future properties. Phase I Surveys are intended to identify potential environmental contamination. A Phase I Survey generally includes an historical review of the relevant property, a review of
certain public records, a preliminary investigation of the site and surrounding properties, and the preparation of a written report. A Phase I Survey generally does not include invasive procedures, such as soil sampling or ground water analysis.





We have also obtained Phase II environmental site assessment (Phase II Surveys) on a limited number of our existing
properties. Phase II Surveys are intended to provide additional information on potential environmental contamination identified in a Phase I Survey. A Phase II Survey generally involves soil sampling and/or groundwater analysis.





None of our Phase I or Phase II Surveys have revealed any environmental liability that we believe would have a material adverse effect on our
business, assets, results of operations, or liquidity, and we are not aware of any such liability. With respect to environmental conditions existing at some of our properties, we have obtained a determination from the appropriate federal, state, or
local agency that we will not be held liable for those conditions by that agency. This determination, however, does not preclude other agencies or private parties from bringing actions against us based upon those environmental conditions. In certain
circumstances, we also have received indemnification agreements with the previous owner of the property. Despite our customary precautionary and due




8




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diligence measures, it is possible that our Phase I and/or Phase II Surveys did not reveal all environmental liabilities or that there are material
environmental liabilities or compliance problems of which we will not be aware. Moreover new or changed laws, ordinances, or regulations may impose material environmental liabilities. In addition, the environmental condition of our properties may
also be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.





Governmental Regulation





A number of states regulate the licensing of hotels by requiring registration,
disclosure statements, and compliance with specific standards of conduct. We believe that each of our facilities has the necessary permits and approvals to operate its respective business and we intend to continue to obtain these permits and
approvals for our new facilities. We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate,
employee benefit costs, or other costs associated with employees could adversely affect our business. There are frequently proposals under consideration, at the federal and state level, to increase the minimum wage.





Under the Americans With Disabilities Act (ADA), all public accommodations are required to meet certain federal requirements related to
access and use by disabled persons. We attempt to satisfy ADA requirements in the designs for our facilities, but we cannot assure you that we will not be subjected to a material ADA claim. If that were to happen, we could be ordered to spend
substantial sums to achieve compliance, fines could be imposed against us, and we could be required to pay damage awards to private litigants. The ADA and other regulatory initiatives could adversely affect our business as well as the lodging
industry in general.





Insurance





We currently have the types and amounts of insurance coverage that we consider appropriate for a company in our business. While we believe that our insurance coverage is adequate, our business, results of operations, and financial condition
could be materially and adversely affected if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside of the scope of our insurance coverage.





Employees





At December 31, 2001, we employed approximately 6,725 persons, of
which approximately 4,200 were part-time employees. We expect that we will significantly increase the number of our employees as our business expands. Our employees are not subject to any collective bargaining agreements and we believe that our
relationship with our employees is good.





Item 2.Properties





In addition to our lodging facilities described in Item 1. BusinessLodging Facilities above, our principal executive offices are
located in Spartanburg, South Carolina and we maintain regional offices throughout the United States. We generally rent our office space on a short-term basis. Our offices are sufficient to meet our present needs and we do not anticipate any
difficulty in securing additional office space, as needed, on terms acceptable to us.





Item 3.Legal Proceedings





We are not a party to any significant litigation or claims, other than routine matters incidental to the
operation of our business. To date, we have had no material claims and we do not expect that the outcome of any pending claims will have a material adverse effect on us.





Item 4.Submission of Matters to a Vote of Security Holders





None.




9




---




PART II





Item 5.Market For Registrants Common Equity and Related Stockholder Matters





Our common stock is traded on the New York Stock Exchange, Inc. (the NYSE) under the symbol ESA. On December 31, 2001, the last reported sale price of our common stock on the NYSE was $16.40
per share. At December 31, 2001, there were approximately 301 record holders of our common stock. The table below sets forth the high and low sales prices of shares of common stock on the NYSE for the periods indicated.





Market Information





Common StockHigh

LowYear Ended December 31, 2000:1st Quarter

$
8.81

$
6.002nd Quarter


10.19


7.193rd Quarter


16.31


9.194th Quarter


13.90


10.63Year Ended December 31, 2001:1st Quarter


19.35


12.502nd Quarter


17.98


14.463rd Quarter


17.40


11.454th Quarter


17.18


12.95





We have not paid any dividends on our common stock. We intend to continue to
retain our earnings to finance our growth and for general corporate purposes. We do not anticipate paying any dividends in the foreseeable future. In addition, our credit facility and senior subordinated notes contain, and future financing
agreements may contain, financial covenants and limitations on payment of any cash dividends or other distributions of assets.




10




---

|Item |  | 6.Selected Financial Data
|---- |  | -------------------------




The following selected financial data should be read together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.





Year Ended December 31,1997


1998


1999


2000


2001(in thousands, except per share and operating data)Income Statement Data:Revenue

$
130,800


$
283,087


$
417,662


$
518,033


$
541,535Property operating expenses


60,391



122,469



180,429



214,500



230,204Corporate operating and property management expenses


29,951



39,073



42,032



44,433



47,479Other charges (income)


19,895



12,000



(1,079
)






9,019Depreciation and amortization


21,331



42,293



60,198



66,269



72,141Income (loss) from operations


(768
)


67,252



136,082



192,831



182,692Interest expense (income), net (1)


(9,242
)


20,521



56,074



76,136



75,985Provision for income taxes


5,838



18,693



32,004



46,678



42,682Net income from continuingoperations

$
2,636


$
28,038


$
47,225


$
70,017


$
57,444Net income from continuing operations per share:Basic

$
0.03


$
0.29


$
0.49


$
0.73


$
0.61Diluted

$
0.03


$
0.29


$
0.49


$
0.72


$
0.59Weighted average shares outstanding:Basic


94,233



95,896



96,254



95,372



94,170Diluted


95,744



96,800



96,939



96,601



97,075Operating Data:Average occupancy rates (2)


73
%


73
%


74
%


80
%


74
%Average weekly rate

$
263


$
286


$
292


$
304


$
320Operating facilities (at period end)


185



305



362



392



431Weighted average rooms available (3)


12,558



25,334



36,054



39,871



43,139Rooms (at period end)


19,299



32,189



38,301



41,585



45,772Facilities under construction (at period
end)


84



51



23



19



20Rooms under construction (at period
end)


8,953



5,320



2,515



2,074



2,203Other Financial Data:Cash flows provided by (used in):Operating activities

$
50,263


$
118,145


$
124,059


$
169,978


$
176,902Investing activities


(609,064
)


(630,027
)


(320,095
)


(248,648
)


(311,950
)Financing activities


337,689



509,292



201,862



85,607



132,689EBITDA (4)


20,563



109,545



196,280



259,100



254,833Adjusted EBITDA (5)


40,458



121,545



195,201



259,100



263,852Capital expenditures


607,649



630,276



320,181



248,475



311,888Balance Sheet Data (at period end):Cash and cash equivalents

$
3,213


$
623


$
6,449


$
13,386


$
11,027Total assets


1,070,891



1,694,582



1,927,249



2,121,602



2,371,871Long-term debt


135,000



653,000



853,000



947,000



1,132,250Stockholders equity


834,659



866,751



915,590



982,633



1,007,783


---

|(1) |  | Excludes interest of $1.7 million, $17.6 million, $10.2 million, $10.9 million, and $10.4 million for 1997, 1998, 1999, 2000, and 2001 respectively, capitalized during the
construction of our facilities under Statement of Financial Accounting Standards (SFAS) Statement No. 34 Capitalization of Interest Cost.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Average occupancy rates are determined by dividing the rooms occupied on a daily basis by the total number of rooms. Due to our rapid expansion, our overall average occupancy
rate for 1997 through 1999 was negatively impacted by the lower occupancy typically experienced during the pre-stabilization period for newly opened facilities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Weighted average rooms available is calculated by dividing total room nights available during the year by 365.
|--- |  | --------------------------------------------------------------------------------------------------------------

|(4) |  | EBITDA represents earnings before extraordinary item and cumulative effect of an accounting change, interest, income taxes, depreciation, and amortization. EBITDA is provided
because it is a measure commonly used in
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|
|



11




---




|
|

| |  | the lodging industry. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered an alternative to net
income as a measure of performance or to cash flow as a measure of liquidity. EBITDA is not necessarily comparable with similarly titled measures for other companies.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Adjusted EBITDA excludes one-time pretax charges of $19.9 million in 1997, $12.0 million in 1998, $9.0 million in 2001, and a pretax credit of ($1.1) million in 1999. We
believe these charges are non-recurring in nature and will not affect our future results of operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12




---




|Item |  | 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|---- |  | ---------------------------------------------------------------------------------------




General





Extended
Stay America Inc. was organized on January 9, 1995 as a Delaware corporation. We own and operate three brands in the extended stay lodging marketStudioPLUS Deluxe Studios ® , EXTENDED STAYAMERICA Efficiency Studios ® , and Crossland
Economy Studios ® . Each brand is designed to appeal to different price points 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. 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, and StudioPLUS facilities serve the mid-price category and generally feature larger guest rooms, an exercise room, and a swimming pool.





During 1999, we repositioned 14 StudioPLUS properties as EXTENDED STAY properties. All operating statistics reflect the repositioning of these properties as EXTENDED STAY properties for
all of the periods presented. The table below provides a summary of our selected development and operational results for 1999, 2000, and 2001.








Year Ended December 31,1999


2000


2001Total Facilities Open (at period end)


362



392



431Total Facilities Developed


57



30



39Average Occupancy Rate


74
%


80
%


74
%Average Weekly Room Rate

$
292


$
304


$
320





Average occupancy rates are determined by dividing the rooms occupied on a daily
basis by the total number of rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates generally will
be greater than standard room rates because of (1) stays of less than one week, which are charged at a higher nightly rate, (2) higher weekly rates for rooms that are larger than the standard rooms, and (3) additional charges for more than one
person per room. We expect that our future occupancy and room rates will be impacted by a number of factors, including the number and geographic location of new facilities as well as the season in which we open those facilities. We also cannot
assure you that we can maintain our occupancy and room rates.





At December 31, 2001, we had 431 operating facilities (39
Crossland, 298 EXTENDED STAY, and 94 StudioPLUS) and had 20 facilities under construction ( 19 EXTENDED STAY and 1 StudioPLUS). We expect to complete the construction of the facilities currently under construction generally within the next twelve
months, however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors including final permitting and
obtaining certificates of occupancy, as well as weather-induced construction delays.




13




---




Results of Operations





2001 Compared to 2000





Property Operations





The following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average
weekly room rates during each year:





Year Ended December 31, 2001

Year Ended December 31, 2000Facilities Open

Average Occupancy Rate


Average Weekly Room Rate

Facilities Open

Average Occupancy Rate


Average Weekly Room RateCrossland

39

76
%

$
221

39

80
%

$
214EXTENDED STAY

298

74



331

260

80



311StudioPLUS

94

72



342

93

77



341Total

431

74
%

$
320

392

80
%

$
304





The decrease in overall average occupancy rates of 7.3% for 2001 compared to 2000
reflects, primarily, the impact of a general decline in demand for lodging products as a result of the slowing U.S. economy and the impact of the terrorist attacks on September 11, 2001. The increase in overall average weekly room rates of 5.1% for
2001 compared to 2000 is due to increases in rates charged in previously opened properties and, particularly for the EXTENDED STAY brand, the geographic dispersion of properties opened since December 31, 2000 and the higher standard weekly room
rates in certain of those markets. We realized an overall decrease of 2.5% in REVPAR for 2001 as compared to 2000. Our overall REVPAR increased 11.0% and 0.5% in the first and second quarters, respectively, and decreased 4.5 % and 15.2% in the third
and fourth quarters, respectively, as compared to the same periods in the prior year.





Comparable hotels, consisting of the 305
properties opened for at least one year at the beginning of the first quarter of 2000, realized the following percentage changes in the components of REVPAR for 2001 as compared with 2000:





Crossland


EXTENDED STAY


StudioPlus


TotalNumber of Comparable Hotels

33


195


77


305Change in Occupancy Rate

(5.4
)%

(7.1
)%

(6.4
)%

(6.7
)%Change in Average Weekly Rate

3.4
%

2.1
%

(1.1
)%

1.5
%Change in REVPAR

(2.2
)%

(5.1
)%

(7.4
)%

(5.3
)%





We believe that the percentage changes in the components of REVPAR for the
Crossland and StudioPLUS brands differ significantly from the EXTENDED STAY brand primarily as a result of the number and geographic dispersion of the comparable hotels.





REVPAR for our comparable hotels increased 5.7% in the first quarter of 2001, then decreased 3.1%, 6.9%, and 16.5% in the second, third, and fourth quarters of 2001, respectively, as
compared to the same periods in the prior year. We believe that the declines in REVPAR experienced in 2001 are less than those experienced in the overall lodging industry and are a result of the slowing U.S. economy and a reaction to the terrorist
attacks of September 11, 2001.





We recognized total revenue of $541.5 million in 2001 and $518.0 million in 2000. This is an
increase of $23.5 million, or 5%. The 362 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $25.5 million which was offset by approximately $49.0 million of incremental
revenue attributable to properties opened after December 31, 1999.





Property operating expenses, consisting of all expenses
directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, or interest were $230.2 million (43 % of total revenue) for 2001, as compared to $214.5 million
(41% of total revenue) for 2000.




14




---




We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to
increases or decreases in REVPAR because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 2.5% in REVPAR for 2001 as compared to 2000, and our property operating margins were 57% for 2001 and 59% for
2000.





The provisions for depreciation and amortization for our lodging facilities were $71.1 million for 2001 and $65.0 million
for 2000. 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 2001 increased compared to 2000 because we operated 39 additional facilities in 2001 and because we operated for a full year the 30 properties that were opened in 2000.





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 $47.5 million (9% of total revenue) in 2001 and $44.4 million (9% of total revenue)
in 2000. The increase in the amount of these expenses for 2001 as compared to 2000 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will
continue to increase in total amount but decline moderately as a percentage of revenue as we develop and operate additional facilities in the future.





In May 2001, we announced that we would relocate our corporate headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. The relocation was completed in the third quarter of 2001. As a result, we
recognized costs associated with the relocation of approximately $9.0 million. These costs include severance and relocation costs and 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 $1.0 million
for 2001 and $1.3 million for 2000. 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 $509,000 of interest income during 2001 and $668,000 of interest income during 2000. This
interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $86.9 million during 2001 and $87.7 million during 2000. Of these amounts, $10.4 million during 2001
and $10.9 million during 2000 was capitalized and included in the cost of buildings and improvements.





We recognized income tax
expense of $42.7 million and $46.7 million (40% of income before income taxes, extraordinary item, and the cumulative effect of an accounting change, in both periods) for 2001 and 2000, respectively. Our income tax expense differs from the federal
income tax rate of 35% primarily due to state and local income taxes. We expect that our annualized effective income tax rate for 2002 will be approximately 39%.





Extraordinary Charge and Cumulative Effect of a Change in Accounting





In connection with the termination of our previously existing credit facility in July 2001, we incurred an extraordinary charge of $5.9 million, net of income taxes of $3.9 million, associated with the write-off of
unamortized deferred debt costs.





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




15




---




the transition adjustment to be allocated between the cumulative-effect-type adjustment of earnings and the
cumulative-effect-type adjustment of other comprehensive income based on our pre-SFAS No.133 accounting policy for the contracts. Since the fair value of the interest rate cap contracts at adoption was zero, the entire transition adjustment was
recognized in earnings.





2000 Compared to 1999





Property Operations





The following is a summary of
the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:





Year Ended December 31, 2000

Year Ended December 31, 1999Facilities Open

Average Rate


Average Weekly Room Rate

Facilities Open

Average Rate


Average Weekly Room RateCrossland

39

80
%

$
214

39

69
%

$
210EXTENDED STAY

260

80



311

233

75



296StudioPLUS

93

77



341

90

73



334Total

392

80
%

$
304

362

74
%

$
292





Each of our brands experienced a decline in the ratio of newly opened properties
to total properties for 2000 as compared to 1999. The impact of this decline in the ratio of newly opened properties, along with increases in occupancy at our mature properties, resulted in an increase in our overall average occupancy rate to 80%
for 2000 compared to 74% for 1999. The average occupancy rate in 2000 for the 305 properties we owned and operated as of January 1, 1999 was 80%. Similarly, the average occupancy rate in 1999 for the 185 properties we owned and operated as of
January 1, 1998 was 77%. We believe that the increase in the average occupancy rate for properties open for at least one year at the beginning of each year reflects, primarily, increases in the overall demand for lodging products in various markets
in which we operate. In addition, we believe that our occupancy rates benefited from a strategy implemented at the beginning of 2000 to establish a more competitive pricing structure for our products.





The increase in overall average weekly room rates for 2000 as compared to 1999 reflects, primarily, the geographic dispersion of properties opened
during 2000 and the higher standard weekly room rates in certain of those markets. The increase also is due in part to increases in rates charged at previously opened properties. The average weekly room rate for the 305 properties that we owned and
operated throughout both periods increased by 1% in 2000. We believe that the average weekly room rate for these properties was impacted by a strategy implemented at the beginning of 2000 to establish a more competitive pricing structure. We believe
that this pricing strategy contributed to an increase in the occupancy at these properties.





We recognized total revenue of
$518.0 million in 2000 and $417.7 million in 1999. This is an increase of $100.3 million, or 24%. Approximately $71.5 million of the increased revenue was attributable to properties that we opened during 2000 and 1999 and approximately $28.8 million
was attributable to an increase in revenue for the 305 properties that we owned and operated throughout both periods.





Property
operating expenses were $214.5 million (41% of total revenue) for 2000, as compared to $180.4 million (43% of total revenue) for 1999. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to
occupancy rate increases or decreases because the majority of these expenses do not vary based on occupancy. Our overall occupancy rates were 80% for 2000 and 74% for 1999 and our property operating margins were 59% for 2000 and 57% for 1999.





The provisions for depreciation and amortization for our lodging facilities were $65.0 million for 2000 and $58.8 million for
1999. Depreciation and amortization for 2000 increased compared to 1999 because we operated 30 additional facilities in 2000 and because we operated for a full year the 57 properties that were opened in 1999.




16




---




Corporate Operations





We incurred corporate operating and property management expenses of $44.4 million (9% of total revenue) in 2000 and $42.0 million (10% of total revenue) in 1999. The increase in the
amount of these expenses for 2000 as compared to 1999 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 the operation of facilities was $1.3 million for 2000 and $1.4 million for 1999.





We realized $668,000 of interest income during 2000 and $700,000 of interest income during 1999. This interest income was primarily attributable to the
temporary investment of funds drawn under our credit facilities. We incurred interest charges of $87.7 million during 2000 and $67.0 million during 1999. Of these amounts, $10.9 million during 2000 and $10.2 million during 1999 was capitalized and
included in the cost of buildings and improvements.





We recognized income tax expense of $46.7 million and $32.0 million (40% of
income before income taxes, extraordinary item, and the cumulative effect of an accounting change in both periods) for 2000 and 1999, respectively. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and
local income taxes.





Other Charges (Income)





In 1998, unfavorable capital market conditions resulted in a reduction in our development plans for 1999 and 2000. As a result, we established a valuation allowance of $12.0 million for
the write-off of costs related to sites that would not be developed. The operating results for 1999 reflect the reversal of $1.1 million of this valuation allowance resulting from the renegotiation of the terms of a number of the optioned sites.





Cumulative Effect of a Change in Accounting





Pursuant to the Statement of Position 98-5, Reporting on the Costs of Start-up Activities issued by the Accounting Standards Executive Committee, effective January 1, 1999,
we changed our method of accounting for compensation and other training related costs incurred prior to the opening of a property to expense them as they are incurred. Accordingly, in 1999 we recorded an expense of $779,000, net of income tax
benefit of $520,000, as the cumulative effect of this change in accounting.





Liquidity and Capital Resources





We had net cash and cash equivalents of $11.0 million at December 31, 2001 and $13.4 million at December 31, 2000. At December 31, 2001 we had
approximately $13.0 million invested and at December 31, 2000 we had approximately $14.0 million invested in short-term demand notes having credit ratings of A1/Pl or equivalent using domestic commercial banks and other financial institutions. We
also deposited excess funds during these periods in an overnight sweep account with a commercial bank which in turn invested those funds in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these
investments, we did not take possession of the securities, which were instead held by the financial institutions. The market value of the securities held pursuant to these arrangements approximates the carrying amount. Deposits in excess of $100,000
are not insured by the Federal Deposit Insurance Corporation.





Our operating activities generated cash of $176.9 million in
2001, $170.0 million in 2000, and $124.1 million in 1999.





We used $311.9 million to acquire land, develop, or furnish 59 sites
opened or under construction in 2001, $248.5 million for 49 sites in 2000, and $320.2 million for 80 sites in 1999.





Our cost to
develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the resultant cash flow from these properties will vary significantly but
generally are expected to be in proportion to the development costs. For the 398




17




---

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.
However, during 2001 and 2000 we opened a number of properties in the Northeast and West where average development costs are higher. Accordingly, our average development cost for 2001 was $8.2 million and for 2000 was $8.5 million per property. We
plan to continue to develop properties in the Northeast and West and expect average development costs to be approximately $8.5 million per property in 2002.





We made open market repurchases of 4,189,100 shares of Common Stock for approximately $58.4 million in 2001, 1,242,900 shares of Common Stock for approximately $10.2 million in 2000, and 549,300 shares of Common Stock
for approximately $4.3 million in 1999. We received net proceeds from the exercise of options to purchase Common Stock totaling $19.8 million in 2001, $5.8 million in 2000, and $5.5 million in 1999.





In July 2001, we entered into an agreement with various banks establishing $900 million in credit facilities (the Credit Facility) that
provide for revolving loans and term loans on a senior collateralized basis. The proceeds of the Credit Facility are to be used for general corporate purposes and to retire existing indebtedness under our previously existing credit agreement. The
Credit Facility also provides for up to an additional $700 million in uncommitted facilities.





In connection with the
termination of our previously existing credit facility, we incurred an extraordinary charge of $5.9 million, net of income taxes of $3.9 million, associated with the write-off of unamortized deferred debt costs.





Loans under the Credit Facility bear interest, at our option, at either a prime-based rate or a LIBOR-based rate plus an applicable margin. In addition,
the commitment fee on the unused revolving facility and the unused delayed draw term loan facility is 0.5% per annum. The following table illustrates the amounts committed under the Credit Facility, their final maturities, and the interest on loans
made under the Credit Facility, subject to the terms of the amendment discussed below:





Applicable Margin OverDescription

Total Amount

Prime


LIBOR


MaturityRevolving F acility

$20 million

1.25
%

2.25
%

July 24, 2007A-1 Facility (term loan)

50 million

1.25
%

2.25
%

July 24, 2007A-2 Facility (term loan)

50 million

1.25
%

2.25
%

July 24, 2007A-3 Facility (delayed draw term loan)

100 million

1.25
%

2.25
%

July 24, 2007B Facility (term loan)

500 million

1.75
%

2.75
%

January 15, 2008





In December 2001, the Credit Facility was amended to provide additional
flexibility in managing the development of new hotels. The amendment modified certain definitions and increased the total leverage covenant from 4.75 to 5.25 for the period from January 1, 2002 to March 31, 2003. The leverage covenant returns to the
previously scheduled level of 4.50 beginning April 1, 2003. The amendment instituted a pricing grid which increased the interest rate on outstanding loans under the Credit Facility by 0.25% from January 1, 2002 through March 31, 2002. Thereafter,
the interest rate is increased by 0.25% if total leverage is greater than or equal to 4.25 or by 0.75% if total leverage is greater than or equal to 4.75.





As of December 31, 2001, we had outstanding loans, net of scheduled maturities, of $46 million under the revolving facility and $598.75 million under the term loans, leaving $254 million available and committed under
the Credit Facility. In January 2002, we borrowed $100 million pursuant to the delayed draw A-3 Facility. The proceeds of this borrowing were used to repay amounts outstanding under the revolving facility and for working capital purposes.





The loans under the Credit Facility will mature on the dates set forth in the table above. The A-1, A-2, and A-3 term loans
will be amortized in quarterly installments of varying amounts through July 24, 2007, and the B term loan will be subject to principal payments of 1% of the initial loan amounts in each of the first six years following the closing date with the
remaining principal balance to be repaid during the seventh year. Availability of the Credit Facility depends upon the Company satisfying certain financial ratios of debt and interest compared to earnings




18




---

before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the credit agreement, as
amended.





We are required to repay indebtedness outstanding under the Credit Facility with the net cash proceeds from certain
sales of our, and our subsidiaries, assets, from issuances of debt by us or our subsidiaries, and from insurance recovery events (subject to certain reinvestment rights). We are also required to repay indebtedness outstanding under the Credit
Facility annually in an amount equal to 50% of our excess cash flow, as calculated pursuant to the Credit Facility.





Our
obligations under the Credit Facility are guaranteed by each of our subsidiaries. The Credit Facility is also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our
subsidiaries (other than mortgages on real property).





The Credit Facility contains a number of negative covenants, including,
among others, covenants that limit our ability under certain circumstances to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make
capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply
with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests on a consolidated basis, including a maximum total leverage
ratio, a maximum senior leverage ratio, and a minimum interest coverage ratio.





Failure to satisfy any of the covenants
constitutes an event of default under the Credit Facility, notwithstanding our ability to meet our debt service obligations. The loan documentation includes other customary and usual events of our default for the types of credit facilities,
including without limitation, an event of default if a change of control occurs. Upon the occurrence of an event of default, the lenders have the ability to accelerate all amounts then outstanding under the Credit Facility and to foreclose on the
collateral.





Our primary market risk exposures result from the variable nature of the interest rates on borrowings under the
Credit Facility. We entered into the Credit Facility for purposes other than trading. Based on the levels of borrowings under the Credit Facility at December 31, 2001, if interest rates changed by 1.0%, our annual cash flow and net income would
change by $3.9 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 contracts or by refinancing the underlying obligations with longer
term fixed rate debt obligations. We do not own derivative financial instruments or derivative commodity instruments other than an interest rate cap contract on a total of $800 million that limits our exposure to LIBOR increases to a maximum LIBOR
rate of 8.88% from June 17, 2001 through June 16, 2002.





In March 1998, we issued $200 million aggregate principal amount of
senior subordinated notes (the 2008 Notes). The 2008 Notes bear interest at an annual rate of 9.15%, payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. We may redeem the 2008 Notes beginning on
March 15, 2003. The initial redemption price is 104.575% of their principal amount, plus accrued interest. The redemption price declines each year after 2003 and is 100% of their principal amount, plus accrued interest, after 2006.





In June 2001, we issued $300 million aggregate principal amount of senior subordinated notes (the 2011 Notes and together with
the 2008 Notes, the Notes). The net proceeds on the 2011 Notes were used to reduce amounts outstanding under a previously existing credit facility. The 2011 Notes bear interest at an annual rate of 9.875%, payable semiannually on June 15
and December 15 of each year and mature on June 15, 2011. We may redeem the 2011 Notes beginning on June 15, 2006. The initial redemption price is 104.938% of their principal amount, plus accrued interest. The redemption price declines each year
after 2006 and is 100% of their principal amount, plus accrued interest, beginning June 15, 2009. In addition, before June 15, 2004, we may redeem up to $105 million of the 2011 Notes at 109.875% of their principal amount plus accrued interest,
using the proceeds from sales of certain kinds of our capital stock.





The 2011 Notes are pari passu with the 2008 Notes. The
Notes are not collateralized and are subordinated to our senior indebtedness, including the Credit Facility. The Notes contain certain covenants for the benefit of the holders. These covenants, among other things, limit our ability under certain
circumstances to incur additional




19




---




indebtedness, pay dividends, and make investments and other restricted payments, enter into transactions with 5%
stockholders or affiliates, create liens, and sell assets.





In connection with the Credit Facility, a previously existing credit
facility, and the Notes, we incurred additions to deferred loan costs of $21.5 million during 2001, $5.9 million during 2000, and $345,000 during 1999.





Due primarily to uncertainties caused by the terrorist attacks on September 11, 2001, we deferred the commencement of construction of new hotels throughout the fourth quarter of 2001 and began negotiating to obtain
extended periods of time to develop the sites we had under option at September 30, 2001. In addition, we amended our Credit Facility in December 2001 to provide additional flexibility to commence construction on sites during 2002. Contingent upon 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 the demand for the Companys extended stay lodging products, we currently
plan to commence construction on 15 additional sites with total costs of approximately $150 million during 2002, the majority of which are expected to open in 2003. We have also identified 40 additional sites with total development costs of
approximately $300 million for which construction could commence in 2002. We will continue to seek the necessary approvals and permits for these sites so that construction can commence as soon as possible within the constraints of our amended credit
agreement.





We had commitments not reflected in our financial statements at December 31, 2001 totaling approximately $86 million
to complete construction of extended stay properties. We believe that the remaining availability under the Credit Facility, together with cash on hand and cash flows from operations, will provide sufficient funds to continue our expansion as
presently planned and to fund our operating expenses, including our working capital deficit, through 2002. We may increase our capital expenditures and property openings in future years, in which case our capital needs will increase. We may also
need additional capital depending on a number of factors, including the number of properties we construct or acquire, the timing of that development, the cash flow generated by our properties and the amount of open market repurchases we make of our
Common Stock. Also, if capital markets provide favorable opportunities, our plans or assumptions change or prove to be inaccurate, our existing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate
acquisitions, we may seek additional capital sooner than currently anticipated. In the event we obtain additional capital, we may seek to increase property openings in future years. Sources of capital may include public or private debt or equity
financing. We cannot assure you that we will be able to obtain additional financing on acceptable terms, if at all. Our failure to raise additional capital could result in the delay or abandonment of some or all of our development and expansion
plans, and could have a material adverse effect on us.





New Accounting Releases





In July 2001, the Financial Accounting Standards Board (the FASB) issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for by the purchase method. This statement also requires the separate recognition of intangible assets apart from goodwill that can be identified in a purchase and
increases the financial statement disclosures associated with business combinations. This statement is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for
which the date of acquisition is July 1, 2001, or later. SFAS No. 142 requires a non-amortization approach for goodwill in which goodwill will be tested for impairment at least annually by evaluating the fair value of the acquired business. This
statement is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangible assets recognized in an entitys statement of financial position at the beginning of that fiscal year, regardless of
when those previously recognized assets were initially recognized. SFAS No. 141 and SFAS No. 142 will have no impact on our financial statements.





In July 2001, the FASB finalized SFAS No. 143, Accounting for Asset Retirement Obligations, which requires the recognition of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over
the useful life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on our financial statements.




20




---




In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of, and requires that long-lived assets be measured at the lower of carrying amount or fair value less the
cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective beginning January 1, 2002. The adoption of this statement is not expected to have a material effect on our
financial statements.





Seasonality and Inflation





Based upon the operating history of our facilities, we believe that extended stay lodging facilities are not as seasonal in nature as the overall lodging industry. We do expect, however, that our occupancy rates and
revenues will be lower than average during the first and fourth quarters of each calendar year. Because many of our expenses do not fluctuate with changes in occupancy rates, declines in occupancy rates may cause fluctuations or decreases in our
quarterly earnings.





The rate of inflation as measured by changes in the average consumer price index has not had a material
effect on our revenue or operating results during any of the periods presented. We cannot assure you, however, that inflation will not affect our future operating or construction costs.





SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS





This Annual Report on
Form 10-K 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
that 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 these 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;
| | - |  | --------------------------------------------------------------------------




| |  |  | 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 Annual 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




21




---




as of the date of this Annual 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 |  | 7A.Quantitative and Qualitative Disclosures About Market Risk
|---- |  | -------------------------------------------------------------




See Item 7.    Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and
Capital Resources.




22




---




Item 8.Financial Statements and Supplementary Data





INDEX TO FINANCIAL STATEMENTS





PageEXTENDED STAY AMERICA, INC. AND SUBSIDIARIESReport of Independent Accountants

24Consolidated Balance Sheets as of December 31, 2001 and 2000

25Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999

26Consolidated Statements of Stockholders Equity for the years ended December 31, 2001, 2000, and 1999

27Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999

28Notes to Consolidated Financial Statements

29




23




---




REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors


Extended Stay America, Inc.


Spartanburg, South Carolina





In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders equity and of cash flows present fairly, in all material respects, the financial position of Extended Stay
America, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





As discussed
in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivatives and in 1999 the Company changed its method of accounting for start-up activities.





| | PR | ICEWATERHOUSECOOPERS LLP
| | -- | ------------------------




Spartanburg, South Carolina


January 25, 2002







24




---




EXTENDED STAY AMERICA, INC.





CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)





December 31,2001

2000ASSETSCurrent assets:Cash and cash equivalents

$
11,027

$
13,386Accounts receivables


6,385


9,152Prepaid income taxes


10,669


4,731Prepaid expenses


3,628


3,515Deferred income taxes


37,589


37,487Other current assets





27Total current assets


69,298


68,298Property and equipment, net


2,277,414


2,035,492Deferred loan costs


24,371


17,086Other assets


788


726$
2,371,871

$
2,121,602LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
34,433

$
32,587Accrued retainage


13,879


10,076Accrued property taxes


12,174


12,246Accrued salaries and related expenses


4,291


3,644Accrued interest


7,011


6,590Other accrued expenses


20,798


18,602Current portion of long-term debt


12,500


5,000Total current liabilities


105,086


88,745Deferred income taxes


126,752


103,224Long-term debt


1,132,250


947,000Commitments and ContingenciesStockholders equity:Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and outstandingCommon stock, $.01 par value, 500,000,000 shares authorized, 93,228,443 and 95,468,972 shares issued and outstanding,
respectively


932


955Additional paid-in capital


793,484


825,755Retained earnings


213,367


155,923Total stockholders equity


1,007,783


982,633$
2,371,871

$
,121,602











See notes
to consolidated financial statements.




25




---

EXTENDED STAY AMERICA, INC.





CONSOLIDATED STATEMENTS OF INCOME


(In thousands, except per share data)





Year Ended December 31,2001


2000

1999Revenue:Room revenue

$
530,761


$
504,637

$
405,334Other revenue


10,774



13,396


12,328Total revenue


541,535



518,033


417,662Costs and expenses:Property operating expenses


230,204



214,500


180,429Corporate operating and property management expenses


47,479



44,433


42,032Other charges (income)


9,019






(1,079
)Depreciation and amortization


72,141



66,269


60,198Total costs and expenses


358,843



325,202


281,580Income from operations


182,692



192,831


136,082Interest expense, net


75,985



76,136


56,074Income before income taxes, extraordinary item and cumulative effect accounting change


106,707



116,695


80,008Provision for income taxes


42,682



46,678


32,004Income before extraordinary item and cumulative effect of accounting change


64,025



70,017


48,004Extraordinary write-off of unamortized debt issue costs, net of income tax benefit of $3,942


(5,912
)Cumulative effect of changes in accounting, net of income tax benefits of $446 and $520, respectively


(699
)





(779
)Net income

$
57,444


$
70,017

$
47,225Net income per common shareBasic:Net income before extraordinary item and cumulative effect of accounting change

$
0.68


$
0.73

$
0.50Extraordinary item


(0.06
)Cumulative effect of accounting change


(0.01
)





(0.01
)Net income

$
0.61


$
0.73

$
0.49Net income per common shareDiluted:Net income before extraordinary item and cumulative effectof accounting change

$
0.66


$
0.72

$
0.50Extraordinary item


(0.06
)Cumulative effect of accounting change


(0.01
)





(0.01
)Net income

$
0.59


$
0.72

$
0.49Weighted average shares:Basic


94,170



95,372


96,254Effect of dilutive options


2,905



1.229


685Diluted


97,075



96,601


96,939








See notes to consolidated financial statements




26




---




EXTENDED STAY AMERICA, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(In thousands)





Common Stock


Additional Paid-in Capital


Retained Earnings

Total Stockholders EquityBalance as of January 1, 1999

$
960


$
827,110


$
38,681

$
866,751Repurchases of common stock


(5
)


(4,292
)





(4,297
)Stock options exercised, includingtax benefit of $407


5



5,906






5,911Net income










47,225


47,225Balance as of December 31, 1999


960



828,724



85,906


915,590Repurchases of common stock


(12
)


(10,208
)





(10,220
)Stock options exercised, including7



7,239






7,246Net income










70,017


70,017Balance as of December 31, 2000


955



825,755



155,923


982,633Repurchases of common stock


(42
)


(58,330
)





(58,372
)Stock options exercised, includingtax benefit of $4,970


19



26,059






26,078Net income










57,444


57,444Balance as of December 31, 2001

$
932



793,484


$
213,367

$
1,007,783








See notes to consolidated financial statements.




27




---




EXTENDED STAY AMERICA, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)





Year Ended December 31,2001


2000


1999Cash flows from operating activities:Net income

$
57,444


$
70,017


$
47,225Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


72,141



66,269



60,198Amortization of deferred loan costs included in interest expense


4,546



4,825



3,859Deferred income taxes


23,426



27,623



19,359Non-cash charges included in headquarters relocation costs


2,106Extraordinary item, net


5,912Cumulative effect of accounting change, net


669







779Changes in operating assets and liabilities:Accounts receivable


2,767



(3,058
)


(147
)Prepaid income taxes


(5,938
)


(4,730
)Prepaid expenses


(1,228
)


(935
)


(1,066
)Other current assets


2,100







(25
)Accounts payable


621



1,127



(6,273
)Income taxes payable


5,416



(1,406
)


(3,264
)Accrued property taxes


(72
)


3,375



2,014Accrued salaries and related expenses


647



1,011



817Accrued interest


421



(469
)


49Other accrued expenses


5,924



6,329



534Net cash provided by operating activities


176,902



169,978



124,059Cash flows from investing activities:Additions to property and equipment


(311,888
)


(248,475
)


(320,181
)Other assets


(62
)


(173
)


86Net cash used in investing activities


(311,950
)


(248,648
)


(320,095
)Cash flows from financing activities:Proceeds from exercise of Company stock options


19,770



5,764



5,504Repurchases of Company common stock


(58,362
)


(10,220
)


(4,297
)Proceeds from long-term debt


1,110,000



351,000



353,000Principal payments on long-term debt


(917,250
)


(255,000
)


(152,000
)Additions to deferred loan and other costs


(21,469
)


(5,937
)


(345
)Net cash provided by financing activities


132,689



85,607



201,862(Decrease) increase in cash and cash equivalents


(2,359
)


6,937



5,826Cash and cash equivalents at beginning of period


13,386



6,449



623Cash and cash equivalents at end of period

$
11,027


$
13,386


$
6,449Noncash investing and financing transactions:Capitalized or deferred items included in accounts payable and accrued liabilities

$
31,551


$
27,174


$
28,157Supplemental cash flow disclosures:Cash paid for:Income taxes, net of refunds

$
15,837


$
25,191


$
15,909Interest expense, net of amounts capitalized

$
71,544


$
72,449


$
53,008





See notes to consolidated financial statements.




28




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(000s omitted in all tables except per share data)




Note 1Summary of Significant Accounting Policies





Organization and Principles of
Consolidation





Extended Stay America, Inc. and subsidiaries (the Company, ESA, we,
our, ours, or us) was organized on January 9, 1995, as a Delaware corporation to develop, own, and operate extended stay lodging facilities. The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.





Estimates





The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Cash and
Cash Equivalents





Cash and cash equivalents consist of cash on hand and on deposit and highly liquid instruments with
maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at the respective balance sheet date.





At December 31, 2001 and 2000, we had invested approximately $13.0 million and $14.0 million, respectively, in short-term demand notes. In addition, during these periods we invested
excess funds in an overnight sweep account with a commercial bank which invested 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 institution. The market value of the securities held pursuant to the agreements approximates the carrying amount. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation.





Accounts Receivable





Accounts receivable at December 31, 2001 and 2000 is stated net of an allowance for doubtful accounts of $900,000 and $1,050,000, respectively. We wrote-off, net of recoveries, uncollectible accounts of $1,331,000,
$1,268,000, and $966,000 in 2001, 2000, and 1999, respectively.





Property and Equipment





Property and equipment is stated at cost. We capitalize salaries and related costs for site selection, design and construction supervision. We also
capitalize construction period interest.





Depreciation is computed using the straight-line method over the estimated useful
lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition.





The estimated useful lives of the assets are as follows:





Buildings and improvements

40 yearsFurniture, fixtures and equipment

3-10 years





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 such time as the terms of the agreement have been satisfactorily completed. Retained amounts are recorded as accrued
retainage.




29




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Impairment of Long-Lived Assets





In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, assets are generally evaluated on a market-by-market basis in making a determination as to whether such assets are impaired. At each year-end, we review long-lived
assets for impairment based on estimated future nondiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their
estimated fair values.





We performed a comprehensive review of long-lived assets as of the end of December 31, 2001. Based on
this review, no long-lived assets were deemed to be impaired.





In October 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and requires that long-lived assets which are held for disposal be measured at the lower of carrying amount or fair value less the cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective beginning January 1, 2002. The adoption of this statement is not expected to have a material effect on our financial statements.





Preacquisition Costs





We incur costs related to the
acquisition of property sites. These costs are capitalized when it is probable that a site will be acquired. These costs are included in property and equipment. In the event the acquisition of the site is not consummated, the costs are charged to
corporate operating expenses.





Deferred Loan Costs and Extraordinary Charge





We have incurred costs in obtaining financing. These costs have been deferred and are amortized over the life of the respective loans. In connection
with the termination of our previously existing credit facility in July 2001, we incurred an extraordinary charge of $5.9 million, net of income taxes of $3.9 million, associated with the write-off of unamortized deferred debt costs.





Derivative Financial Instruments and Cumulative Effect of a Change in Accounting





We do not enter into financial instruments for trading or speculative purposes. We use interest rate cap contracts to hedge our exposure on variable rate debt. Through December 31,
2000, the cost of the caps was included in prepaid expenses and amortized to interest expense over the life of the cap contract.





SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended, requires all derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as amended, is effective for financial statements
issued for periods beginning after December 15, 2000. At December 31, 2000, the carrying value of our interest rate cap contracts was $1,115,000 and their fair value was zero. We adopted SFAS No. 133 on January 1, 2001 and designated our interest
rate cap contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as interpreted by the Derivatives Implementation Group, required the transition adjustment to be allocated between the cumulative-effect-type adjustment of earnings and
the cumulative-effect-type adjustment of other comprehensive income based on our pre-SFAS No.133 accounting policy for the contracts. Since the fair value of the interest rate cap contracts at adoption was zero, the entire transition adjustment of
$669,000, net of income tax benefit of $446,000, was recognized in earnings.




30




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EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Revenue Recognition





Effective December 31, 2000, we adopted the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition as amended. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue, including specifying basic criteria which must be met before revenue can be recognized. The adoption of SAB No. 101
had no impact on our financial statements.





Room revenue and other revenue are recognized when services are rendered. Amounts
paid in advance are deferred until earned. Room revenue on weekly guests is recognized ratably. In the event guests check-out early making them ineligible for the weekly rate, they are re-assessed at the daily rate with any resulting adjustment
reflected in revenue on the date of check-out. Other revenue consists, primarily, of revenue derived from telephone, vending, guest laundry, and other miscellaneous fees or services.





Other Charges (Income)





In May 2001, we announced that we
would relocate our corporate headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. The relocation was completed in the third quarter of 2001. As a result, we recognized costs associated with the relocation of approximately $9.0
million. These costs include severance and relocation costs and 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.





In 1998, unfavorable capital market conditions resulted in a reduction in our development plans for 1999 and 2000.
As a result, we established a valuation allowance of $12.0 million for the write-off of costs related to sites that would not be developed. This valuation allowance was reduced by $1.1 million in 1999 due to the renegotiation of the terms of a
number of the optioned sites.





Cumulative Effect of a Change in Accounting





Pursuant to the Statement of Position 98-5, Reporting on the Costs of Start-up Activities issued by the Accounting Standards Executive
Committee, effective January 1, 1999, we changed our method of accounting for start-up activities, including pre-opening and organizational costs, to expense them as they are incurred. Accordingly, in 1999 we recorded an expense of $779,000, net of
income tax benefit of $520,000, as the cumulative effect of this change in accounting.





Income Taxes





Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and for operating loss and tax carryforwards.





Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.





Net Income Per Share





We
determine earnings per share (EPS) in accordance with SFAS No. 128, Earnings Per Share. For the years ended December 31, 2001, 2000, and 1999, the computation of diluted EPS does not include approximately 2.4 million, 7.0
million, and 10.8 million weighted average shares, respectively, of common stock, par value $0.01 per share, of ESA (Common Stock) represented by outstanding options because the exercise price of the options was greater than the average
market price of Common Stock during the period.





Business Segment





We operate principally in one business segment which is to develop, own, and operate extended stay lodging facilities.




31




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Reclassification





Certain previously reported amounts have been reclassified to conform with the current presentation.





Note 2Property and Equipment





Property and
equipment consist of the following:





December 31,2001


2000Operating Facilities:Land and improvements

$
593,428


$
499,999Buildings and improvements


1,541,091



1,348,604Furniture, fixtures, equipment, and supplies


284,005



258,212Total operating facilities


2,418,524



2,106,815Office furniture, fixtures and equipment


6,852



8,084Facilities under development, including land and improvements


120,626



118,1102,546,002



2,233,009Less: Accumulated depreciation


(268,588
)


(197,517
)Total property and equipment

$
2,277,414


$
2,035,492





We had commitments totaling approximately $86 million to complete construction of
additional extended stay properties at December 31, 2001.





For the years ended December 31, 2001, 2000, and 1999, we incurred
interest of $86.9 million, $87.7 million, and $67.0 million, respectively, of which $10.4 million, $10.9 million, and $10.2 million, respectively, was capitalized and included in the cost of buildings and improvements.





Note 3Options to Purchase Property Sites





As of December 31, 2001, we had paid approximately $3.8 million in connection with options to purchase parcels of real estate in 59 locations in 20 states. If we do not acquire these parcels, the amounts paid in connection with the options
may be forfeited under certain circumstances. These amounts are included in property and equipment.





Note 4Long-Term Debt





In July 2001, we entered into an agreement with various banks establishing $900 million in credit facilities (the Credit
Facility) that provide for revolving loans and term loans on a senior collateralized basis. The proceeds of the Credit Facility are to be used for general corporate purposes and to retire existing indebtedness under our previously existing
credit agreement.





In connection with the termination of our previously existing credit facility, we incurred an extraordinary
charge of $5.9 million, net of income taxes of $3.9 million, associated with the write-off of unamortized deferred debt costs.




32




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Loans under the Credit Facility bear
interest, at our option, at either a prime-based rate or a LIBOR-based rate plus an applicable margin. The following table illustrates the amounts committed under the Credit Facility, their final maturities, and the interest on loans made under the
Credit Facility, subject to the terms of the amendment discussed below:





Applicable Margin OverDescription

Total Amount

Prime


LIBOR


MaturityRevolving Facility

$200 million

1.25
%

2.25
%

July 24, 2007A-1 Facility (term loan)

50 million

1.25
%

2.25
%

July 24, 2007A-2 Facility (term loan)

50 million

1.25
%

2.25
%

July 24, 2007A-3 Facility (delayed draw term loan)

100 million

1.25
%

2.25
%

July 24, 2007B Facility (term loan)

500 million

1.75
%

2.75
%

January 15, 2008





In December 2001, the Credit Facility was amended to provide additional
flexibility in managing the development of new hotels. The amendment modified certain definitions and increased the total leverage covenant from 4.75 to 5.25 for the period from January 1, 2002 to March 31, 2003. The leverage covenant returns to the
previously scheduled level of 4.50 beginning April 1, 2003. The amendment instituted a pricing grid which increased the interest rate on outstanding loans under the Credit Facility by 0.25% from January 1, 2002 through March 31, 2002. Thereafter,
the interest rate is increased by 0.25% if total leverage is greater than or equal to 4.25 or by 0.75% if total leverage is greater than or equal to 4.75.





As of December 31, 2001, we had outstanding loans, net of scheduled maturities, of $46 million under the revolving facility and $598.75 million under the term loans, leaving $254 million available and committed under
the Credit Facility. In January 2002, we borrowed $100 million pursuant to the delayed draw A-3 Facility. The proceeds of this borrowing were used to repay amounts outstanding under the revolving facility and for working capital purposes.





The loans under the Credit Facility will mature on the dates set forth in the table above. The A-1, A-2, and A-3 term loans
will be amortized in quarterly installments of varying amounts through July 24, 2007, and the B term loan will be subject to principal payments of 1% of the initial loan amounts in each of the first six years following the closing date with the
remaining principal balance to be repaid during the seventh year. Availability of the Credit Facility depends upon the Company 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 agreement, as amended.





Our
obligations under the Credit Facility are guaranteed by each of our subsidiaries. The Credit Facility is also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our
subsidiaries (other than mortgages on real property).





The Credit Facility contains a number of negative covenants, including,
among others, covenants that limit our ability under certain circumstances to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make
capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply
with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests and to maintain certain financial ratios on a consolidated
basis.




33




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







We have acquired an interest rate cap
contract with a financial institution that limits our exposure to future increases in the LIBOR rate. This contract relates to a total of $800 million and limits our exposure to a maximum LIBOR rate of 8.88% from June 17, 2001 through June 16, 2002.
The fair value of the contract at December 31, 2001 is zero.





In March 1998, we issued $200 million aggregate principal amount
of senior subordinated notes (the 2008 Notes). The 2008 Notes bear interest at an annual rate of 9.15%, payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. We may redeem the 2008 Notes beginning
on March 15, 2003. The initial redemption price is 104.575% of their principal amount, plus accrued interest. The redemption price declines each year after 2003 and is 100% of their principal amount, plus accrued interest, after 2006.





In June 2001, we issued $300 million aggregate principal amount of senior subordinated notes (the 2011 Notes and together with
the 2008 Notes, the Notes). The 2011 Notes bear interest at an annual rate of 9.875%, payable semiannually on June 15 and December 15 of each year and mature on June 15, 2011. We may redeem the 2011 Notes beginning on June 15, 2006. The
initial redemption price is 104.938% of their principal amount, plus accrued interest. The redemption price declines each year after 2006 and is 100% of their principal amount, plus accrued interest, beginning June 15, 2009. In addition, before June
15, 2004, we may redeem up to $105 million of the 2011 Notes at 109.875% of their principal amount plus accrued interest, using the proceeds from sales of certain kinds of our capital stock.





The 2011 Notes are pari passu with the 2008 Notes. The Notes are not collateralized and are subordinated to our senior indebtedness. The Notes contain certain covenants for the benefit
of the holders. These covenants, among other things, limit our ability under certain circumstances to incur additional indebtedness, pay dividends, and make investments and other restricted payments, enter into transactions with 5% stockholders or
affiliates, create liens, and sell assets.





At December 31, 2001, aggregate maturities of long-term debt were as follows:





2002

$
12,5002003


13,7502004


20,0002005


27,5002006


33,750Thereafter


1,037,250$
1,144,750





An aggregate of $1,144.8 million and $952.0 million was outstanding at December
31, 2001 and 2000, respectively, with a weighted average interest rate of 6.78% and 9.24%, respectively. The fair value of long-term debt is based on quoted market prices. The Credit Facility had an estimated fair value of approximately $639 million
at December 31, 2001, and the previously existing credit facility had an estimated fair value of approximately $751 million at December 31, 2000. The 2008 Notes had an estimated fair value of approximately $199 million at December 31, 2001 and $186
million at December 31, 2000, and the 2011 Notes had an estimated fair value of approximately $307 million at December 31, 2001.




34




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5Income Taxes





Income tax expense before the extraordinary item and the cumulative effect of a change in accounting consists of the following:





Year Ended December 31,2001

2000

1999Current income taxes:U.S. federal

$
15,693

$
17,016

$
11,096State and local


3,563


2,039


1,54919,256


19,055


12,645Deferred income taxes:U.S. federal


18,773


22,932


15,276State and local


4,653


4,691


4,08323,426


27,623


19,359Total income tax expense

$
42,682

$
46,678

$
32,004





Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35.0% to pretax income as a result of the following:





Year Ended December 31,2001


2000


1999Computed expected tax rate

35.0
%

35.0
%

35.0
%Increase in income taxes resulting from:State and local income taxes, net of federal benefit

4.9


4.9


4.9Other

0.1


0.1


0.1Annual effective income tax rate

40.0
%

40.0
%

40.0
%





The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:





2001


2000Deferred tax assets:Alternative minimum tax credit and other carryforwards

$
30,685


$
29,371Other


6,904



8,116Total deferred tax assets


37,589



37,487Deferred tax liabilityProperty and equipment


(126,752
)


(103,224
)$
(89,163
)

$
(65,737
)





At December 31, 2001, we had alternative minimum tax credits of approximately
$30.7 million, which may be carried forward indefinitely.





In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the period in which those
temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income and projections
for future taxable income over the periods which the deferred tax assets are deductible, we believe it is more likely than not we will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.




35




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 6Stockholders Equity





Shares of preferred stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Prior to issuance
of shares of each series, the Board will designate for each such series, the preferences, conversion, or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of
redemption, as are permitted by law. No shares of preferred stock are outstanding and we have no present plans to issue any shares of preferred stock.





Note 7Stock Option Plans





We have six stock option plans including the 1995, 1996, 1997, 1998, and 2001
Employee Stock Option Plans (the Employee Plans) and the Amended and Restated 1995 Stock Option Plan for Non-Employee Directors (the Directors Plan). The Employee Plans and the Directors Plan provide for grants to
certain officers, directors, and key employees of stock options to purchase shares of Common Stock. Options granted under the Employee Plans and the Directors Plan expire ten years from the date of grant. Options granted under the Employee
Plans generally vest ratably over a four year period, and options granted under the Directors Plan vest six months from the date of grant.





In addition, we have two stock option plans associated with an acquisition (the Acquired Plans) in 1997. Two types of options, incentive stock options and nonqualified stock options, were granted under the
Acquired Plans. All options granted under the Acquired Plans were granted at an exercise price equal to the market price of the acquired companys common stock on the date of grant and may not be exercised more than 10 years after the date
granted.





A summary of the status of the Employee Plans, the Directors Plan, and options granted under the Acquired Plans
(collectively the Plans) as of December 31, 2001, 2000, 1999 and changes during the years ending on those dates is presented below:





2001

2000

1999Number of Shares


Price Per Share

Number of Shares


Price Per Share

Number of Shares


Price Per ShareOutstanding at beginning of year

17,189



2.38-21.75

15,271


$
2.38-21.75

14,542


$
2.38-22.38Granted

3,692



12.98-18.55

3,808



6.50-16.03

3,396



7.28-12.03Exercised

(1,949
)


2.38-18.50

(715
)


2.38-13.88

(578
)


2.38-10.50Forfeited

(959
)


6.47-20.63

(1,175
)


7.16-20.50

(2,089
)


2.38-22.38Outstanding at end of Year

17,973


$
2.38-21.75

17,189


$
2.38-21.75

15,271



2.38- 21.75Options exercisable at year-end

9,686



2.38- 21.75

8,310


$
2.38- 21.75

6,606


$
2.38- 21.75Available for future grants

9,796





2,528





5,030Total shares reserved for issuance as of December 31

27,769





19,717





20,301Weighted average fair value of options granted during the year




$
6.80




$
6.10




$
3.90




36




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As permitted by SFAS No. 123,
Accounting for Stock Based Compensation, we have chosen to apply APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for the Plans. Accordingly, no compensation cost
has been recognized for options granted under the Plans. Had compensation cost for the Plans been determined based on the fair value at the date of grant for awards under the Plans consistent with the method of SFAS No. 123, our net income and net
income per share would have been reduced to the pro forma amounts indicated below.





2001

2000

1999As Reported

Pro Forma

As Reported

Pro Forma

As Reported

Pro FormaNet income

$
57,444

$
49,624

$
70,017

$
63,137

$
47,225

$
40,572Net income per share:Basic

$
0.61

$
0.53

$
0.73

$
0.66

$
0.49

$
0.42Diluted

$
0.59

$
0.51

$
0.72

$
0.65

$
0.49

$
0.42





The fair value of each option grant is estimated on the date of grant using the
Black-Scholes multiple option-pricing model with the following assumptions used for grants in 2001, 2000, and 1999: dividend yield of 0%; risk-free interest rate of 6.0% for 1999 and 2000 and 4.8% for 2001; expected life of 5.5 years; and expected
volatility of 42%.





The following table summarizes information about the Companys Plans at December 31, 2001.





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding as of December 31, 2001

Weighted Average Remaining Outstanding ContractualLife

Weighted Average Exercise Price

Number Outstanding as of December 31, 2001

Weighted Average Exercise Price$  2.38  8.15

1,994

4.24

$
5.20

1,821

$
4.97$  8.16  8.16

2,134

7.84


8.16

945


8.16$  8.19  9.50

2,202

6.90


9.45

1,521


9.45$  9.5611.28

2,681

8.71


11.27

686


11.26$11.3111.38

1,695

6.02


11.37

1,232


11.37$11.4113.04

3,351

9.67


12.98

110


12.40$13.0618.38

1,708

6.14


14.18

1,168


13.85$18.5018.50

2,102

5.02


18.50

2,102


18.50$18.5521.75

106

5.23


20.07

101


20.16$  2.3821.75

17,973

7.12

$
11.51

9,686

$
11.49





Note 8Related Party Transactions





In 1996, we entered into a ten year lease for a suite at Pro Player Stadium for a base rental of $115,000 per year, and a 3-year lease which expired in 1999 for a suite at Homestead
Motorsports Complex for a base rental of approximately $53,000 per year. In 1998, we entered into a three year lease for an additional suite at Pro Player Stadium for a base rental or $83,000 per year, which was terminated in 1999, and a seven year
lease for a suite at the National Car Rental Center for a base rental of $120,000 per year, which was terminated in 2001. The leases are subject to certain additional charges and periodic escalation. The Chairman of our Board of Directors owns Pro
Player Stadium and had an approximate 50% ownership interest (which was reduced to approximately 10% in 1997) in Homestead Motorsports Complex. In addition, the Chairman of our Board of Directors is the Chairman of the Board of Directors of a
company which operates the National Car Rental Center.





We incurred charges of approximately $3.0 million in 2001, $2.9 million
in 2000, and $2.2 million in 1999, from a company controlled by our Chief Executive Officer for the use of airplanes. We charged approximately $23,000 in 2001, $276,000 in 2000, and $136,000 in 1999 to our Chief Executive Officer and other companies




37




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




controlled by him for their use of those airplanes. In addition, we incurred charges of $9,000 in 2001 and
$45,000 in 2000 for aviation related services from a company owned by the Chairman of our Board of Directors.





Our Chief
Executive Officer serves as chairman of the board of a company from which we lease office space under various lease agreements. During 2001, 2000, and 1999, we incurred charges of approximately $70,000, $79,000, and $73,000, respectively, related to
these agreements.





The Chairman of our Board of Directors serves as a director of a company to which we sublease office space.
The sublease is effective January 1, 2002 and provides for monthly rent of $52,157 for a period of three years.





Two members of
our Board of Directors also serve on the board of directors of a company which performs employment related services for us. During 2001, 2000, and 1999, we incurred charges of approximately $479,000, $421,000, and $336,000, respectively, for such
services.





Note 9Quarterly Results (Unaudited)





The following is a summary of quarterly operations for the years ended December 31, 2001 and 2000:





2001First Quarter


Second Quarter

Third Quarter


Fourth QuarterTotal revenue

$
134,414


$
143,112

$
145,717


$
118,291Operating income


48,407



52,474


51,004



30,807Income before extraordinary item and cumulative effect of accounting change


17,227



20,448


18,888



7,463Extraordinary itemCumulative effect of accounting change


(669
)





(5,912
)Net income


16,558



20,448


12,976



7,463Net income per shareBasic:Income before extraordinary item and cumulative effect of accounting change.

$
0.18


$
0.22

$
0.20


$
0.08Extraordinary item









(0.06
)Cumulative effect of accounting change


(0.01
)Net income

$
0.17


$
0.22

$
0.14


$
0.08Net income per shareDiluted:Income before extraordinary item and cumulative effect of accounting change.

$
0.17


$
0.21

$
0.20


$
0.08Extraordinary item









(0.06
)Cumulative effect of accounting changeNet income

$
0.17


$
0.21

$
0.14


$
0.08


2000First Quarter

Second Quarter

Third Quarter

Fourth QuarterTotal revenue

$
113,940

$
133,236

$
142,162

$
128,694Operating income


35,947


53,837


58,267


44,780Net income


11,282


21,249


22,731


14,755Net income per share:Basic

$
0.12

$
0.22

$
0.24

$
0.15Diluted

$
0.12

$
0.22

$
0.23

$
0.15




38




---



EXTENDED STAY AMERICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Note 10Commitments and Contingencies





We are not a party to any significant litigation or claims, other than routine matters incidental to the operation of our business. To date, no claims have had a material adverse effect
on us nor do we expect that the outcome of any pending claims will have such an effect.





We lease real property under various
operating leases with terms of one to sixteen years. Rental expense under real property leases for the years ended December 31, 2001, 2000, and 1999, was $1.6 million, $1.6 million, and $1.5 million, respectively.





Future minimum lease obligations under noncancelable real property leases with initial terms in excess of one year at December 31, 2001 are as follows:





Year Ending December 31:2002

$
1,6482003


1,1232004


7092005


6682006


582Thereafter


542$
5,272





Of these lease obligations included in the table above, we sublease to a third
party, under a non-cancelable sublease, office space that includes base rent, parking, and other charges totaling approximately $626,000 per year in 2002, 2003, and 2004.





|Item |  | 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|---- |  | --------------------------------------------------------------------------------------




None




39




---

PART III





Item
10.Directors and Executive Officers of the Registrant





Directors





The information appearing under the caption Election of our Board of Directors in our Proxy Statement for the Annual Meeting of Stockholders
to be held May 22, 2002 (the Proxy Statement) is incorporated herein by reference.





Executive Officers





Our executive officers, their ages at December 31, 2001, and their positions with us are set forth below. Our executive officers are elected by and
serve at the discretion of our Board of Directors.





Name

Age

PositionH. Wayne Huizenga*

64

Chairman of the Board of DirectorsGeorge D. Johnson, Jr.*

59

Chief Executive Officer and DirectorRobert A. Brannon

51

President, Chief Operating Officer, Secretary, and TreasurerGregory R. Moxley

46

Chief Financial Officer and Vice President-Finance


---

|* |  | Member of Executive Committee of the Board of Directors
|- |  | -------------------------------------------------------




H. Wayne Huizenga became one of our directors in August 1995 and serves as the Chairman of our Board of Directors. Mr. Huizenga has also served as Chairman of the Board of AutoNation, Inc., which owns the
nations largest chain of franchised automotive dealerships, since August 1995. From August 1995 to September 1999, Mr. Huizenga served as Chief Executive Officer or Co-Chief Executive Officer of AutoNation, Inc. Since May 1998, Mr. Huizenga
has served as Chairman of the Board of Republic Services, Inc., a leading provider of non-hazardous solid waste collection and disposal services and served as its Chief Executive Officer from May 1998 until December 1998. Since September 1996, Mr.
Huizenga has been Chairman of the Board of Boca Resorts, Inc., which owns and operates luxury resort properties. Since June 1998, Mr. Huizenga has served as a director of NationsRent, Inc., a national chain providing rental equipment primarily to a
broad range of construction and industrial customers. Since May 2000, Mr. Huizenga has been Vice-Chairman of the Board of ZixIt Corporation, which develops and markets products and services that enhance privacy, security, and convenience over the
internet. Mr. Huizenga is not standing for re-election to ZixIts board in 2002. Since June 2000, Mr. Huizenga has served as a director of ANC Rental Corporation, which owns and operates Alamo Rent-A-Car, National Car Rental, and CarTemps USA.
From September 1994 until October 1995, Mr. Huizenga served as the Vice-Chairman of Viacom Inc. (Viacom), a diversified entertainment and communications company. During the same period, Mr. Huizenga also served as the Chairman of the
Board of Blockbuster Entertainment Group, a division of Viacom. From April 1987 through September 1995, Mr. Huizenga served as the Chairman of the Board and Chief Executive Officer of Blockbuster Entertainment Corporation (Blockbuster),
during which time he helped build Blockbuster from a 19-store chain into the worlds largest video rental company. In September 1994, Blockbuster merged into Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc., which he helped build
into the worlds largest integrated solid waste services company, and he served in various capacities, including President, Chief Operating Officer, and a director from its inception until 1984. Mr. Huizenga also owns the Miami Dolphins and Pro
Player Stadium in South Florida.





George D. Johnson, Jr. has been our Chief Executive Officer and a director since
January 1995. Mr. Johnson is the former President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom. In this position he was responsible for all U.S. video and music stores. Mr. Johnson has over 30 years of
experience developing and managing various businesses. He was formerly the managing general partner of WJB Video, the largest Blockbuster franchisee which developed over 200 video stores prior to a merger with Blockbuster in 1993. Mr. Johnson also
is the managing general partner of American Storage, LLC, a chain of 26 self-storage facilities located in the Carolinas and Georgia. He formerly served as a director of Viacom and Chairman of the Board of Home Choice Holdings, Inc. and currently
serves on the board of directors of AutoNation, Inc., Boca




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Resorts, Inc., and Duke Energy Corporation. He has been the Chairman of the Board of Directors of Johnson Development Associates, Inc. since its founding in
1986. Johnson Development Associates, Inc. is a real estate management, leasing, and development company controlling approximately four million square feet of commercial, retail, and industrial property located in the Carolinas and Georgia which are
owned by various partnerships controlled by Mr. Johnson and his brother, Stewart H. Johnson. Mr. Johnson practiced law in Spartanburg, South Carolina from 1967 until 1986 and served three terms in the South Carolina House of Representatives.





Robert A. Brannon has been our President and Chief Operating Officer since April 2000 and Secretary and Treasurer since
August 1995. He is responsible for all aspects of our development, operations, and marketing personnel. Mr. Brannon was our Chief Financial Officer and Senior Vice President from February 1995 until April 2000. Prior to joining Extended Stay
America, Inc., he served as Vice PresidentFinance for the Domestic Home Video division of the Blockbuster Entertainment Group, where he was responsible for financial management and control of over 2,000 video stores. Prior to joining
Blockbuster in 1993, Mr. Brannon was Chief Financial Officer for WJB Video and for American Storage, LLC. In those capacities, Mr. Brannon was responsible for the financial aspects of the development of over 200 video stores and 23 self-storage
facilities. Prior to his participation in these businesses, Mr. Brannon served as a Certified Public Accountant in various management and staff positions with local and national accounting firms.





Gregory R. Moxley  has been Chief Financial Officer and Vice President-Finance of Extended Stay America, Inc. since April 2000. He is
responsible for overseeing accounting procedures and controls, financing, cash management, and financial and tax reporting. Prior thereto, he served as our Vice President-Finance and Controller since October 1995. Prior to joining Extended Stay
America, Inc., Mr. Moxley was Director of Financial Reporting and Assistant Treasurer for One Price Clothing Stores, Inc. and held various positions as a Certified Public Accountant including Senior Manager for Ernst & Young.





Item 11.Executive Compensation





Information appearing under the caption Executive Compensation in the Proxy Statement is incorporated herein by reference.





Item 12.Security Ownership of Certain Beneficial Owners and Management





Information appearing under the caption Principal Stockholders in the Proxy Statement is incorporated herein by reference.





Item 13.Certain Relationships and Related Transactions





Information appearing under the caption Certain Transactions in the Proxy Statement is incorporated herein by reference.





PART IV





Item 14.Exhibits, Financial Statement
Schedules, and Reports on Form 8-K





(a)(1)  Financial Statements





Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.





(a)(2)  Financial Statement Schedules





All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the
related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes thereto.




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(a)(3)  Exhibits





The exhibits to this report are listed in the Exhibit Index included elsewhere herein. Included in the exhibits listed therein are the following exhibits which constitute management
contracts or compensatory plans or arrangements:





10.1

Amended and Restated 1995 Employee Stock Option Plan of the Company10.2

Amended and Restated 1995 Stock Option Plan for Non-Employee Directors of the Company10.3

Amended and Restated 1996 Employee Stock Option Plan of the Company10.5

1997 Employee Stock Option Plan of the Company10.6

1998 Employee Stock Option Plan of the Company10.22

2001 Employee Stock Option Plan of the Company





(b)  Reports on Form 8-K





The Company filed a report on Form 8-K dated December 17, 2001 announcing an amendment, dated as of January 1, 2002, of its credit agreement, dated July 24, 2001, by and among the
Company, the various lenders party thereto, Morgan Stanley Senior Funding, Inc., as sole Lead Arranger, and Bear Stearns Corporate Lending Inc. and Fleet National Bank, as Co-Syndication Agents.





(c)  Exhibits





Exhibit Number

Description of Exhibit3.1(a)

Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(a) to the Companys
Registration Statement on Form S-1, Registration No. 33-98452)3.1(b)

Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 4, 1997 (incorporated by reference to
Exhibit 3.1(b) to the Companys Report on Form 10-K for the year ended December 31, 1997)3.1(c)

Conformed copy of Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1(c) to the
Companys Report on Form 10-K for the year ended December 31, 1997)3.2

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys Registration Statement
on Form S-1, Registration No. 33-98452)4.1

Specimen certificate representing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-1, Registration No. 33-98452)10.1

Amended and Restated 1995 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.3 to the
Companys Report on Form 10-Q for the quarter ended March 31, 1996)10.2

Amended and Restated 1995 Stock Option Plan for Non-Employee Directors of the Company (incorporated by reference to Exhibit 10.9
to the Companys Report on Form 10-Q for the quarter ended June 30, 2000)10.3

Amended and Restated 1996 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.10 to the
Companys Report on Form 10-Q for the quarter ended March 31, 1996)10.4

Joe Robbie Stadium Executive Suite License Agreement dated March 18, 1996 between Robbie Stadium Corporation and the Company
(incorporated by reference to Exhibit 10.14 to the Companys Report on Form 10-Q for the quarter ended March 31, 1996)10.5

1997 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.2 to the Companys Report on Form
10-Q for the quarter ended June 30, 1997)10.6

1998 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit 10.9 to the Companys Report on Form
10-K for the year ended December 31, 1998)




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Exhibit Number

Description of Exhibit10.7

Amended and Restated Credit Agreement, dated as of June 7, 2000, by and between the Company, various banks, Morgan Stanley Senior
Funding, Inc., and The Industrial Bank of Japan, Limited. (incorporated by reference to Exhibit 10.10 to the Companys Report on Form 10-Q for the quarter ended June 30, 2000)10.8(a)

Lease Agreement dated as of November 30, 1998 by and between Bell Hill, LLC and ESA Management, Inc. (incorporated by reference
to Exhibit 10.11(b) to the Companys Report on Form 10-K for the year ended December 31, 1998)10.8(b)

Sublease Agreement dated as of July 1, 1999 by and between Johnson Development Associates, Inc. and ESA Management, Inc.
(incorporated by reference to Exhibit 10.11(b) to the Companys Report on Form 10-K for the year ended December 31, 1999)10.9

Aircraft Dry Sub-Lease Agreement, dated as of July 2, 1998, between the Company and Advance America Cash Advance Centers, Inc.
(incorporated by reference to Exhibit 10.1 to the Companys Report on Form 10-Q for the quarter ended June 30, 1998)10.10

Pro Player Stadium Executive Suite License Agreement, dated as of July 16, 1998, by and between South Florida Stadium Corporation
d/b/a Pro Player Stadium and the Company (incorporated by reference to Exhibit 10.2 to the Companys Report on Form 10-Q for the quarter ended September 30, 1998)10.11

Broward County Arena Executive Suite License Agreement, by and between Arena Operating Company, Ltd. and the Company
(incorporated by reference to Exhibit 10.3 to the Companys Report on Form 10-Q for the quarter ended September 30, 1998)10.12

Aircraft Dry Lease, dated as of July 12, 1999, by and between Wyoming Associates, Inc. and ESA Management, Inc. (Learjet, Serial
No. 132) (incorporated by reference to Exhibit 10.1 to the Companys Report on Form 10-Q for the quarter ended September 30, 1999)10.13

Aircraft Dry Lease, dated as of July 12, 1999, by and between Wyoming Associates, Inc. and ESA Management, Inc. (Challenger,
Serial No. 3042) (incorporated by reference to Exhibit 10.2 to the Companys Report on Form 10-Q for the quarter ended September 30, 1999)10.14

Sublease between Wyoming Associates, Inc. and ESA Services, Inc., for hangar space for the Challenger in Spartanburg, South
Carolina (incorporated by reference to Exhibit 10.3 to the Companys Report on Form 10-Q for the quarter ended June 30, 2000)10.15

Time Sharing Agreement, dated as of March 29, 2000, by and between Advance America Cash Advance Centers, Inc. and ESA Services,
Inc. for the Learjet 31 (Serial No. 99) N1932K (incorporated by reference to Exhibit 10.6 to the Companys Report on Form 10-Q for the quarter ended June 30, 2000)10.16

Time Sharing Agreement, dated as of March 29, 2000, by and between Advance America Cash Advance Centers, Inc. and ESA Services,
Inc. for the Learjet 35 (Serial No. 332) N543WW (incorporated by reference to Exhibit 10.7 to the Companys Report on Form 10-Q for the quarter ended June 30, 2000)10.17

Time Sharing Agreement, dated as of November 6, 2000, by and between ESA Services, Inc. and George Dean Johnson, Jr. for the
Learjet 55; (Serial No. 132) N122SU (incorporated by reference to Exhibit 10.17 to the Companys Report on Form 10-K for the year ended December 31, 2000)10.18

Time Sharing Agreement, dated as of November 6, 2000, by and between ESA Services, Inc. and George Dean Johnson, Jr. for the
Challenger (Serial No. 3042) N333GJ (incorporated by reference to Exhibit 10.18 to the Companys Report on Form 10-K for the year ended December 31, 2000)10.19

Time Sharing Agreement, dated as of November 10, 2000, by and between ESA Services, Inc. and Advance America, Cash Advance
Centers, Inc. for the Challenger; (Serial No. 3042) N333GJ (incorporated by reference to Exhibit 10.19 to the Companys Report on Form 10-K for the year ended December 31, 2000)10.20

Aircraft Dry Lease dated November 13, 2000 by and between Wyoming Associates, Inc. and ESA Services, Inc. for the Learjet 55
(Serial No. 132) N122SU (incorporated by reference to Exhibit 10.20 to the Companys Report on Form 10-K for the year ended December 31, 2000)10.21

Aircraft Dry Lease dated November 13, 2000 by and between Wyoming Associates, Inc. and ESA Services, Inc. for the Challenger
(Serial No. 3042) N333GJ (incorporated by reference to Exhibit 10.21 to the Companys Report on Form 10-K for the year ended December 31, 2000)




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Exhibit Number

Description of Exhibit10.22

2001 Employee Stock Option Plan of the Company (incorporated by reference to Exhibit B to the Companys Definitive Proxy
Statement for the Annual Meeting of Stockholders on May 1, 2001)10.23

Time Sharing Agreement, dated as of January 19, 2001, by and between Advance America Cash Advance Centers, Inc. and ESA Services,
Inc. for the Learjet 31 (Serial No. 99) N1932K (incorporated by reference to Exhibit 10.1 to the Companys Report on Form 10-Q for the quarter ending March 31, 2001)10.24

Time Sharing Agreement, dated as of January 19, 2001, by and between Advance America Cash Advance Centers, Inc. and ESA Services,
Inc. for the Learjet 35; (Serial No. 332) N543WW (incorporated by reference to Exhibit 10.2 to the Companys Report Form 10-Q for the quarter ending March 31, 2001)10.25

Indenture relating to the $300 million 9.875% Senior Subordinated Notes due June 15, 2011 dated as of June 27, 2001 by and
between the Company and Manufacturers and Traders Trust Company, as Trustee (incorporated by reference to Exhibit 99.3 to the Companys Report on Form 8-K dated June 28, 2001)10.26

Registration Rights Agreement relating to the $300 million 9.875% Senior Subordinated Notes due June 15, 2011 dated as of June
27, 2001 by and between the Company and Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., and Fleet Securities, Inc. (incorporated by reference to
Exhibit 99.2 to the Companys Report on Form 8-K dated June 28, 2001)10.27

Credit Agreement, dated July 24, 2001, by and among the Company, the various lenders party thereto, Morgan Stanley Senior
Funding, Inc., as sole Lead Arranger, Bear Stearns Corporate Lending Inc. and Fleet National Bank, as Co-Syndication Agents, and the Industrial Bank of Japan, Limited, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on Form S-4 (Registration No. 333-66702))10.28

First Amendment, dated as of January 1, 2002, among the Company, the Lenders party to the Credit Agreement referred to therein,
Morgan Stanley Senior Funding, Inc., as Sole Lead Arranger and Sole Book Runner, Bear Stearns Corporate Lending Inc. and Fleet National Bank, as Co-Syndication Agents, and The Industrial Bank of Japan, Limited, as Administrative Agent. (incorporated
by reference to Exhibit 99.2 to the Companys Report on Form 8-K dated December 17, 2001)10.29

Sublease Agreement, dated as of September 21, 2001, by and between NationsRent, Inc. and ESA Management, Inc.21.1

List of Subsidiaries of the Company23.1

Consent of PricewaterhouseCoopers LLP




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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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 March 4, 2002.





EXTENDED STAY AMERICA, INC.By:

/s/    GEORGE D. JOHNSON,
JR.George D. Johnson Jr. Chief Executive
Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 4, 2002.











Signature

TitlePrincipal Executive Officer:/s/    GEORGE D. JOHNSON, JR. George D. Johnson, Jr.

Chief Executive OfficerPrincipal Financial Officer:/s/    GREGORY R. MOXLEY Gregory R. Moxley

Chief Finanacial Officer and Vice PresidentFinancePrincipal Accounting Officer:/s/    PATRICIA K. TATHAM Patricia K. Tatham

Vice PresidentCorporate ControllerA Majority of the Directors:/s/    H. WAYNE HUIZENGA H. Wayne Huizenga

Director/s/    DONALD F. FLYNN Donald F. Flynn

Director/s/    GEORGE D. JOHNSON,
JR. George D. Johnson, Jr.

Director/s/    STEWART H. JOHNSON Stewart H. Johnson

Director/s/    JOHN J. MELK John J. Melk

Director/s/    PEER PEDERSEN Peer Pedersen

Director




45