As filed with the Securities and Exchange Commission on August 3, 2001
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------
EXTENDED STAY AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-3996573
(I.R.S. Employer Identification No.)
450 East Las Olas Boulevard
Fort Lauderdale, FL 33301
(954) 713-1600
(Address, including zip code, and telephone
number, including area code, of Registrants'
principal executive offices)
-----------------------------
Gregory R. Moxley
450 East Las Olas Boulevard
Fort Lauderdale, FL 33301
(954) 713-1600
(Name, address, including zip code, and
telephone number, including area code, of agent
for service)
------------------------------------
Copies to:
Andrew R. Schleider, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
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Approximate date of commencement of proposed sale to the public: As soon as
possible following the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration Fee (2)
Securities to be Registered Registered Per Security Price (1)
9 7/8% senior subordinated notes due 2011 $300,000,000 100% $300,000,000 $75,000
(1) Estimated solely for the purposes of calculating the registration
fee in accordance with Rule 457(f) under the Securities Act of
1933, as amended.
(2) Calculated based upon the market value of the securities to be
received by the registrants in the exchange in accordance with Rule
457(f).
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion dated , 2001
EXTENDED STAY AMERICA, INC.
OFFER TO EXCHANGE
Unregistered 9 7/8% Senior Subordinated Notes due 2011
($300,000,000 aggregate principal amount outstanding issued June 27, 2001)
for
9 7/8 % Senior Subordinated Notes due 2011
($300,000,000 aggregate principal amount)
that have been registered under the Securities Act of 1933
--------------------
TERMS OF EXCHANGE OFFER
o The exchange offer will expire at 5:00 p.m., New York City time,
on , 2001, unless we extend the offer.
o Tenders of outstanding unregistered notes may be withdrawn at any
time before 5:00 p.m. on the date of expiration of the exchange offer.
o All outstanding unregistered notes that are validly tendered and not
validly withdrawn will be exchanged.
o The terms of the exchange notes to be issued are substantially
similar to the unregistered notes, except for being registered
under the Securities Act of 1933 and not having any transfer
restrictions.
o The exchange of notes will not be a taxable exchange for U.S.federal
income tax purposes.
o We will not receive any proceeds from the exchange offer.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
exchange offer, nor have any of these organizations determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2001
Each holder of an unregistered security wishing to accept the exchange
offer must deliver the unregistered notes to be exchanged, together with the
letter of transmittal that accompanies this prospectus and any other required
documentation, to the exchange agent identified in this prospectus.
Alternatively, you may effect a tender of unregistered notes by book-entry
transfer into the exchange agent's account at the Depositary Trust Company
("DTC"). All deliveries are at the risk of the holder. You can find detailed
instructions concerning delivery in the section called "The Exchange Offer" in
this prospectus and in the accompanying letter of transmittal.
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If you are a broker-dealer that receives exchange notes for your own
account you must acknowledge that you will deliver a prospectus in connection
with any resale of the exchange notes. The letter of transmittal accompanying
this prospectus states that by so acknowledging and by delivering a prospectus,
you will not be deemed to admit that you are an "underwriter" within the meaning
of the Securities Act. You may use this prospectus, as we may amend or
supplement it in the future, for your resales of exchange notes. We will make
this prospectus available to any broker-dealer for use in connection with any
such resale for a period of 180 days after the date of expiration of this
exchange offer.
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different or additional information. If anyone provides you with different or
additional information, you should not rely on it. You should assume that the
information contained or incorporated by reference in this prospectus is
accurate only as of the date of this prospectus or the date of the document
incorporated by reference. Our business, financial condition, results of
operations and prospects may have changed since then. We are not making an offer
of the notes in any jurisdiction where the offer is not permitted.
TABLE OF CONTENTS
Page
Cautionary Statement Concerning Forward-Looking Statements...............ii
Where You Can Get More Information.......................................ii
Market And Industry Data.................................................iv
Summary...................................................................1
Risk Factors..............................................................8
Use Of Proceeds..........................................................16
Capitalization...........................................................17
Selected Consolidated Financial And Other Data...........................18
The Exchange Offer.......................................................20
Description of the Notes.................................................29
Description of our Other Indebtedness....................................58
Principal United States Federal Income Tax Considerations................60
Plan Of Distribution.....................................................65
Legal Matters............................................................66
Experts ................................................................66
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All references in this prospectus to "we," "us," "our" or "Extended Stay
America" mean Extended Stay America, Inc. and its subsidiaries, unless indicated
otherwise. References to "$" and "dollars" are to United States dollars. Where
we refer to the "outstanding notes" we are referring to the 9 7/8% senior
subordinated notes due 2011, issued on June 27, 2001. Where we refer to the
"exchange notes" we are referring to the 9 7/8% senior subordinated notes due
2011 to be issued pursuant to this exchange offer. Where we refer to the "notes"
we are referring to either the outstanding notes or the exchange notes, as the
context requires.
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this prospectus. You may
obtain documents that we filed with the Securities and Exchange
i
Commission and incorporated by reference in this prospectus by requesting the
documents, in writing or by telephone, from the Securities and Exchange
Commission or from:
Prior to August 31, 2001: After August 31, 2001:
------------------------- ----------------------
Corporate Secretary Corporate Secretary
Extended Stay America, Inc. Extended Stay America, Inc.
450 E. Las Olas Boulevard 101 North Pine Street
Ft. Lauderdale, Florida 33301 Spartanburg, South Carolina 29302
Telephone number (954) 713-1600 Telephone number (864) 573-1600
If you would like to request copies of these documents, please do so by ,
2001, which is five business days before the expiration date of the exchange
offer, in order to receive them before the expiration of the exchange offer. See
"Where You Can Get More Information."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, regarding, among other things, our plans, strategies and
prospects, both business and financial. Although we believe that our plans,
intentions and expectations reflected in or suggested by these forward-looking
statements are reasonable, we cannot assure you that we will achieve or realize
these plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions. Many of the
forward-looking statements contained in this prospectus may be identified by the
use of forward-looking words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential," among others. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth in this
prospectus and include, but are not limited to:
o uncertainty as to changes in economic activity and the impact of such
changes on the consumer demand for lodging products in general and for
extended stay lodging products in particular;
o increasing competition in the extended stay lodging market;
o uncertainty as to our future profitability;
o our ability to meet construction and development schedules and budgets;
o our ability to develop and implement the operational and financial
systems needed to manage rapidly growing operations;
o our ability to integrate and successfully operate any properties
acquired in the future and the risks associated with such properties;
o our ability to increase or maintain revenue and profitability in our new
and mature properties;
o our ability to obtain financing on acceptable terms to finance our
growth;
o our ability to secure alternative financing on commercially reasonable
terms or at all in order to meet amortization requirements under our
existing credit facility; and
o our ability to operate within the limitations imposed by financing
arrangements.
All forward-looking statements attributed to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
You are cautioned not to place undue reliance on these forward-looking
statements. All these forward-looking statements are based on our expectations
as of the date of this prospectus. We do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
WHERE YOU CAN GET MORE INFORMATION
Available Information
We are subject to the information reporting requirements of the Exchange
Act. In addition, the indenture governing the notes provides that regardless of
whether we are at any time required to file reports with the Securities and
Exchange Commission, we will file with the SEC and furnish to the holders of the
notes all such reports and
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other information as would be required to be filed with the SEC if we were
subject to the reporting requirements of the Exchange Act. The Exchange Act file
number of our SEC filings is 0-27360. You may read and copy any document we file
at the following SEC public reference rooms:
Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W 14th Floor Suite 1300
Rm. 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330. We file information
electronically with the SEC. Our SEC filings are available from the SEC's
Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers that file
electronically. You may also inspect our SEC reports and other information at
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Incorporation of Documents by Reference
This prospectus contains summaries, believed to be accurate in all material
respects, of certain terms of certain agreements, but reference is hereby made
to the actual agreements, copies of which will be made available upon request to
us, for complete information with respect thereto, and all such summaries are
qualified in their entirety by this reference. Any such request for the
agreements summarized herein should be directed to Corporate Secretary, Extended
Stay America, Inc., 450 E. Las Olas Boulevard, Ft. Lauderdale, Florida 33301,
telephone number (954) 713-1600. This prospectus incorporates by reference the
following documents:
o Our Annual Report on Form 10-K for the year ended December 31,
2000, dated and filed with the Commission on March 2, 2001;
o Our Quarterly Report on Form 10-Q for the period ended March 31,
2001, dated and filed with the Commission on May 15, 2001;
o Our Current Reports on Form 8-K dated and filed with the Commission on
June 15, 2001 and June 28, 2001; and
o Our Proxy Statement, dated as of March 20, 2001, filed with the
Commission in definitive form on March 20, 2001.
We are also incorporating by reference additional documents we may file
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this prospectus and before:
o the exchange of the exchange notes for the outstanding notes; or
o to the extent this prospectus is used by one or more broker-dealers in
connection with the resale of exchange notes received by that
broker-dealer for its own account in exchange for outstanding notes
acquired as a result of market-making or other trading activities, the
date those resales are complete.
This additional information is a part of this prospectus from the date of
filing of those documents. Any statements made in this prospectus or in a
document incorporated or deemed to be incorporated by reference in this
prospectus will be deemed to be modified or superceded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document which is also incorporated or deemed to be
incorporated by reference in this prospectus modifies or supersedes the
statement. Any statement so modified or superceded will not be deemed, except as
so modified or superseded, to constitute a part of this prospectus. The
information relating to us contained in this prospectus should be read together
with the information in the documents incorporated by reference.
iii
MARKET AND INDUSTRY DATA
Market and industry data used throughout this prospectus were obtained
through company research, surveys and studies conducted by third parties and
industry and general publications. We have not independently verified market and
industry data from third-party sources. While we believe internal company
surveys are reliable and market definitions are appropriate, neither these
surveys nor these definitions have been verified by any independent sources. The
source of the industry information included in this prospectus is Smith Travel
Research, which did not provide any form of consultation, advice, or counsel
regarding any aspect of this exchange offer, and is not in any way associated
with this exchange offer.
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Summary
This summary highlights information contained elsewhere in or incorporated
by reference into this prospectus. This summary is not complete and may not
contain all of the information that you should consider before participating in
the exchange offer. You should read the entire prospectus and accompanying
letter of transmittal carefully, including the "Risk Factors" section and our
financial statements contained elsewhere or incorporated by reference in this
prospectus.
EXTENDED STAY AMERICA
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 $518.0 million for 2000, an
increase of 24% from $417.7 million for 1999, and EBITDA of $259.1 million for
2000, an increase of 32% from $196.3 million for 1999.
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
underserved 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 4.0 million rooms available in the lodging
industry at December 31, 2000, extended stay hotel chains had only approximately
191,000 rooms. Of these 191,000 total extended stay rooms, approximately 118,000
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 42,000 rooms (or about 36% of the lower tier
segment) at the end of 2000. We believe that there exist strong growth
opportunities in the lower tier segment of the extended stay market. As of March
31, 2001, we owned and operated 400 extended stay lodging facilities in 38
states and had 28 facilities under construction. We expect to continue to
rapidly expand our operations and currently expect to make capital expenditures
of about $350 million per year through 2003. We plan to continue an active
development program thereafter, subject to the availability of financing on
reasonable terms. We may also make opportunistic acquisitions of other lodging
companies.
Our Brands
We own and operate three brands in the extended stay lodging
market--StudioPLUS Deluxe Studios(R), EXTENDED STAYAMERICA Efficiency Studios(R)
and Crossland Economy Studios(R). 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 ratings and selective advertising and
promotion, provide our brands with distinct advantages over their local and
regional competitors. We plan to allocate our capital for at least the next two
years primarily to the Extended Stay America brand but will consider additional
StudioPLUS and Crossland properties on an opportunistic basis.
1
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 $309 per week (daily
equivalent--$44); EXTENDED STAY--median rate $279 per week (daily equivalent
$40); and Crossland--median rate $199 per week (daily equivalent--$28). Room
rates at our facilities vary significantly depending upon local market factors.
These rates contrast with average daily rates in 2000 of $68, $52, and $42 for
the midprice, economy, and budget segments, respectively, in the 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 our 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 that 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.
RECENT DEVELOPMENTS
On July 24, 2001 we entered into a credit agreement establishing $900
million of senior credit facilities. We used a portion of the borrowings under
the new credit facilities to repay all indebtedness outstanding under our old
credit facility. The new credit facilities consist of (i) a $50 million A-1 term
loan facility, (ii) a $50 million A-2 delayed draw term loan facility, (iii) a
$100 million A-3 delayed draw term loan facility (iv) a $500 million B term loan
facility and (v) a $200 million revolving credit facility. The new credit
facilities are guaranteed by our subsidiaries and are secured by liens 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). We have not yet
borrowed under the delayed draw term loans and as of July 31, 2001, had only
borrowed a total of $19 million under the revolving credit facility. The
remaining availability under the facilities will be used for general corporate
purposes, which may include acquisitions. We refer to these new credit
facilities, together with the offering of the outstanding notes and the
application of the proceeds, collectively, as the "financing transactions".
On May 18, 2001, we announced that we would be relocating our corporate
headquarters from Ft. Lauderdale, FL to Spartanburg, SC. We expect to incur
non-recurring charges of approximately $8.5 million during 2001 in connection
with the move, including approximately $2.4 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.
--------------------
2
Our principal executive offices are currently located at 450 E. Las Olas
Boulevard, Ft. Lauderdale, Florida 33301. Our telephone number in Ft. Lauderdale
is (954) 713-1600. On May 18, 2001 we announced that we would relocate our
corporate headquarters to Spartanburg, South Carolina in the third quarter of
2001. We expect this move to be completed by August 31, 2001. Our new address
will be 101 North Pine Street, Spartanburg, SC 29302, and our new telephone
number will be (864) 573-1600. We maintain a Web site on the Internet at
www.extstay.com. Our Web site, and the information contained on it, are not to
be considered part of this prospectus.
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SUMMARY OF THE EXCHANGE OFFER
On June 27, 2001, we issued $300 million aggregate principal amount of
unregistered 9 7/8% senior subordinated notes due 2011 under an indenture dated
June 27, 2001. The exchange notes will be our obligations and will be entitled
to the benefits of that indenture. The form and terms of the exchange notes are
identical in all material respects to the form and terms of unregistered notes,
except that the exchange notes have been registered under the Securities Act,
and therefore will contain no restrictive legends. For additional information on
the terms of the exchange offer, see "The Exchange Offer."
The Exchange Offer.............. We are offering to exchange $300 million in
principal amount of our 9 7/8% senior
subordinated notes due 2011, which have been
registered under the federal securities laws,
for $300 million principal amount of our
outstanding unregistered 9 7/8% senior
subordinated notes due 2011, which we issued
on June 27, 2001 in a private placement. You
have the right to exchange your outstanding
notes for an equal principal amount of
exchange notes with substantially identical
terms. In order for your outstanding notes to
be exchanged, you must properly tender them
before the expiration of the exchange offer.
All outstanding notes that are validly
tendered and not validly withdrawn before the
expiration of the exchange offer will be
exchanged. We will issue the exchange notes on
or as promptly as practicable after the
expiration of the exchange offer.
Registration Rights Agreement.....We sold the outstanding notes on June 27, 2001
in a private placement. At that time, we
signed a registration rights agreement which
requires us to conduct this exchange offer.
This exchange offer is intended to satisfy
those registration rights set forth in the
registration rights agreement. After the
exchange offer is complete, you will no longer
be entitled to registration rights with
respect to outstanding notes you do not
exchange.
If you do not exchange your
outstandingnotes.............. If you do not exchange your outstanding notes
for exchange notes in the exchange offer, you
will continue to be subject to the
restrictions on transfer as provided in the
outstanding notes and the indenture governing
those notes. In general, you may not offer or
sell your outstanding notes unless the offer
or sale is registered under the federal
securities laws or unless those notes are sold
in a transaction exempt from or not subject to
the registration requirements of the federal
securities laws and applicable state
securities laws.
Expiration Date.................. The exchange offer will expire at 5:00 p.m.,
Eastern time, on , 2001, unless we extend the
expiration date.
Conditions to the Exchange Offer..The exchange offer is subject to conditions,
which we may waive. The exchange offer is not
conditioned upon any minimum amount of
outstanding notes being tendered for exchange.
We reserve the right:
o to delay the acceptance of the outstanding
notes;
o to terminate the exchange offer if
specified conditions have not been
satisfied;
o to extend the expiration date of the
exchange offer and retain all tendered
outstanding notes subject to the right of
tendering holders to withdraw their tenders
of outstanding notes; and
4
o to waive any condition or otherwise amend
the terms of the exchange offer in any
respect.
Procedures for Tendering
Oustanding Notes............... If you wish to tender your outstanding notes
for exchange, you must:
o complete and sign the enclosed letter of
transmittal by following the related
instructions; and
o send the letter of transmittal, as directed
in the instructions,together with any other
required documents, to the exchange agent,
either (1) with the outstanding notes to be
tendered or (2) in compliance with the
specified procedures for guaranteed
delivery of the outstanding notes.
Brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Please do not
send your letter of transmittal or
certificates representing your outstanding
notes to us. Those documents should only be
sent to the exchange agent.Questions regarding
how to tender and requests for information
should be directed to the exchange agent.
Special Procedures for Beneficial
Owners Withdrawal Rights......... If your outstanding notes are registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee, we urge you to
contact that person promptly if you wish to
tender your outstanding notes in the exchange
offer. You may withdraw the tender of your
outstanding notes at any time before the
expiration date of the exchange offer by
delivering a written notice of your withdrawal
to the exchange agent. You must also follow
the withdrawal procedures as described under
the heading "The Exchange Offer--Withdrawal of
Tenders."
Resales of Exchange Notes........ We believe that you will be able to offer for
resale, resell or otherwise transfer exchange
notes issued in the exchange offer without
compliance with the registration and
prospectus delivery provisions of the federal
securities laws, as long as:
o you are acquiring the exchange notes in the
ordinary course of business;
o you are not participating, and have no
arrangement or understanding with any
person to participate, in a distribution of
the exchange notes; and
o you are not our affiliate. An affiliate of
ours is a person that "controls or is
controlled by or is under common control
with" us.
Our belief is based on interpretations by the
Staff of the Securities and Exchange
Commission, as set forth in no-action letters
issued to third parties unrelated to us. The
Staff has not considered this exchange offer
in the context of a no-action letter, and we
cannot be sure that the Staff would make a
similar determination with respect to this
exchange offer. If our belief is not accurate
and you transfer an exchange note without
delivering a prospectus meeting the
requirements of the federal securities laws or
without an exemption from these laws, you may
incur liability under the federal securities
laws. We do not and will not assume or
indemnify you against this liability.
5
Each broker-dealer that receives exchange
notes for its own account in exchange for
outstanding notes that were acquired by that
broker-dealer as a result of market-making or
other trading activities must agree to deliver
a prospectus meeting the requirements of the
federal securities laws in connection with any
resale of the exchange notes by that
broker-dealer.
Exchange Agent................. The exchange agent for the exchange offer is
Manufacturers and Traders Trust Company. The
address, telephone number and facsimile number
of the exchange agent are set forth in "The
Exchange Offer--Exchange Agent" and in the
letter of transmittal.
SUMMARY DESCRIPTION OF THE NOTES
The following summarized description of the notes, including the
exchange notes, is subject to a number of important exceptions and
qualifications. For additional information on the terms of the notes, see
"Description of the Notes."
Issuer........................... Extended Stay America, Inc.
Securities Offered............... $300,000,000 aggregate principal amount of 9?%
senior subordinated notes due 2011.
Maturity......................... June 15, 2011.
Interest......................... 9?% per annum, payable semi-annually in
arrears on June 15 and December 15, commencing
December 15, 2001. Interest on each exchange
note will accrue from the last interest
payment date on which interest was paid on the
outstanding notes surrendered, or if no
interest has been paid, from June 27, 2001.
Optional Redemption.............. We may redeem any of the notes beginning on
June 15, 2006. The initial redemption price
is 104.938% of their principal amount, plus
accrued interest. The redemption price will
decline each year after 2006 and will be 100%
of their principal amount, plus accrued
interest, beginning on June 15, 2009.
In addition, before June 15, 2004, we may
redeem up to 35% of the aggregate principal
amount of notes originally issued with the
proceeds from sales of certain kinds of our
capital stock at a redemption price equal to
109.875% of their principal amount, plus
accrued interest to the redemption date.We may
make such redemption only if, after any such
redemption, at least 65% of the aggregate
principal amount of notes originally issued
under the indenture remains outstanding.
Change of Control................ Upon a change of control, as defined in
"Description of the Notes," we will be
required to make an offer to purchase the
notes. The purchase price will equal 101% of
the principal amount of the notes on the date
of purchase, plus accrued and unpaid interest
to the date of repurchase.
Ranking.......................... The notes will be senior subordinated
obligations, and will rank:
6
o junior to all of our existing and future
senior indebtedness, including any
borrowings under our credit facilities;
o equally with our 9.15% senior subordinated
notes due 2008 of which $200 million in
aggregate principle amount was outstanding
as of March 31, 2001;
o equally with any of our future senior
subordinated indebtedness and our trade
payables;
o senior to any of our future subordinated
indebtedness; and
o effectively junior to all of the
liabilities of our subsidiaries, including
their trade payables.
As of March 31, 2001, assuming that we had
issued the notes and had entered into the new
credit agreement at that time, the notes would
have ranked junior to:
o $550 million of indebtedness under the new
credit facilities; and
o $183.9 million of liabilities of our
subsidiaries, including trade payables but
excluding intercompany obligations.
In addition, as of July 25, 2001, we would
have had $345 million of availability under
our new credit facilities, subject to
customary conditions.
Certain Covenants................ The terms of the notes limit our ability and
the ability of our restricted subsidiaries to:
o incur additional indebtedness;
o create liens;
o pay dividends, make investments or make
other restricted payments;
o purchase or redeem capital stock;
o issue stock of subsidiaries;
o sell assets;
o engage in transactions with stockholders
and affiliates; and
o effect a consolidation or merger.
These limitations are subject to a number of
important qualifications and exceptions. For
more details, see the section "Description of
the Notes--Certain Covenants."
Use of Proceeds.................. We will not receive any proceeds from the
exchange offer.
7
Risk Factors
You should carefully consider the risks described below and the other
information contained in this prospectus before making a decision participate in
this exchange offer. In addition, the risks described below are not the only
risks we face. We have only described the risks we consider to be the most
material. However, there may be additional risks that are viewed by us as not as
material or that are not presently known to us.
If any of the events described below were to occur, our business,
prospects, financial condition, results of operations, or cash flows could be
materially and adversely affected. When we say below that something could or
will have a material adverse effect on us, we mean that it could or will have
one or more of these effects. In those cases, the price of the notes could
decline and our ability to make interest and principal payments under the notes
could be impaired.
Risk Factors Relating to Our Business and Industry
We are exposed to risks associated with the lodging industry.
The extended stay segment of the lodging industry may be adversely affected
by changes in national or local economic conditions, neighborhood
characteristics and other local market conditions, such as an oversupply of
hotel space or a reduction in demand for hotel space in a geographic area,
changes in travel patterns, extreme weather conditions, changes in governmental
regulations which influence or determine wages, prices, or construction costs,
changes in interest rates, the availability of financing for operating or
capital needs, and changes in real estate tax rates and other operating
expenses. Our principal assets consist of real property, and real estate values
are sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. In addition, due in part to the strong
correlation between the lodging industry's performance and economic conditions,
the lodging industry is subject to cyclical changes in revenues and profits. We
cannot assure you that consumer demand for extended stay hotels will continue or
that we will be able to maintain or increase our occupancy or room rates as our
facilities age. These risks may be exacerbated by the relatively illiquid nature
of real estate holdings. Our ability to vary our portfolio in response to
changes in economic and other conditions will be limited. We cannot assure you
that downturns or prolonged adverse conditions in real estate or capital markets
or in national, state, or local economies, and our inability to dispose of an
investment when we find disposition to be advantageous or necessary, will not
have a material adverse impact on us.
We operate in a highly competitive industry.
The lodging industry is highly competitive. We compete with traditional
lodging facilities (including limited service hotels), other extended stay
facilities (including those owned and operated by competing chains and
individually-owned extended stay facilities), and alternative lodging (including
short-term lease apartments). We compete 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. We consider the location of our lodging facilities, the
reasonableness of our room rates, and the services and guest amenities provided
at our facilities to be among the most important competitive factors.
Demographic or other changes in a given market could impact the convenience or
desirability of the location of our lodging facilities in that market.
We expect that competition within the budget, economy, and mid-price
segments of the extended stay lodging market may continue to increase. A number
of companies have entered these segments and have developed new extended stay
facilities. These competitors include new participants in the lodging industry
generally and participants in other segments of the lodging industry that have
entered the extended stay market. They also include existing participants in the
extended stay market that have increased their product offering to include
facilities in the budget, economy, or mid-price segments. We compete 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 us.
8
We are exposed to substantial risks due to our development of new
facilities.
We intend to grow primarily by developing additional extended stay lodging
facilities that we will own. Our development involves substantial risks,
including:
o development costs exceeding budgeted or contracted amounts;
o delays in completion of construction;
o failure to obtain all necessary zoning and construction permits;
o delays and costs associated with using and replacing contractors and
subcontractors in constructing our properties;
o inability to obtain financing on favorable terms;
o not achieving desired revenue or cash flow levels from developed
properties;
o competition for suitable development sites;
o inability to recover development in the event a project is abandoned;
o changes in governmental rules, and interpretations, including
interpretations of the requirements of the Americans with Disabilities
Act;
o adverse effects in general economic and business conditions; and
o unexpected environmental conditions on the property that may arise and
result in potential environmental liability.
Although we intend to manage our development to reduce these risks, we
cannot assure you that present or future developments will meet our
expectations.
Our success depends on our ability to manage our growth effectively.
Since 1995 we have been rapidly expanding our operations. As of March
31, 2001, we owned and operated 400 extended stay lodging facilities and had 28
facilities under construction. We expect to make capital expenditures of about
$350 million a year through 2003. We plan to continue an active development
program thereafter, subject to the availability of capital on reasonable terms.
We may increase our capital expenditures and property openings in future years,
in which case our capital needs will increase. In addition we may make
acquisitions. We cannot assure you, however, that we will complete the
development and construction of the facilities or that these facilities will be
completed in a timely manner or within budget. Our failure to expand according
to our plans or to manage our growth could have a material adverse effect on us.
The success of our rapid development depends on several factors, including
the implementation of enhanced operational and financial systems and the use of
additional management, operational, and financial resources. For example, we
need to recruit and train property managers and other personnel for each new
lodging facility as well as additional accounting personnel. We cannot assure
you that we will be able to manage our expanding operations effectively. Our
failure to implement these enhanced systems and add resources on a
cost-effective basis could have a material adverse effect on us.
We may not be able to obtain the capital necessary to grow as quickly as we
intend.
We expect to continue to rapidly expand our operations. We expect to make
capital expenditures of about $350 million a year through 2003. We may increase
our capital expenditures and property openings in future years, in which case
our capital needs will increase. In addition, we may make acquisitions. After
2003 we anticipate needing additional funding to continue expansion as currently
planned. However, the timing and the amount of financing needed depend on a
number of factors, including:
o the number and cost of properties we construct or acquire;
o the timing of the development;
o whether we complete any acquisitions;
o the cash flow generated by our facilities; and
o any open market repurchases of our common stock.
9
Our need for capital may also be affected by other factors that are beyond
our control, including:
o competitive conditions;
o governmental regulations; and
o capital costs and market conditions.
Also, if capital markets provide favorable opportunities, our plans or
assumptions change or prove to be inaccurate, or our existing sources of funds
prove to be insufficient to fund our growth and operations, we may seek
additional capital sooner than we currently anticipate. If we do make
acquisitions or if we increase the amount of planned capital expenditures, our
capital needs will increase. Sources of financing 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, which could have a material adverse effect
on us. For example, in 1998 we incurred a $12.0 million valuation allowance for
charges relating to a reduction in our development plans as a result of
unfavorable capital market conditions that required us to abandon certain early
stage development projects and renegotiate the terms of a number of sites under
option.
We are subject to additional risks when we acquire existing extended stay
facilities or companies.
We have made, may continue to make, and from time to time engage in
discussions about, acquisitions of other lodging facilities or other properties
that are suitable for conversion to the extended stay concept and acquisitions
of other companies that own extended stay lodging facilities. There are
additional risks associated with making these acquisitions, including:
o possible environmental and other regulatory costs;
o potential disruption of our ongoing business;
o incurring additional debt;
o diversion of our attention;
o potential inability to integrate the acquired business with existing
operations: and
o unanticipated problems or liabilities.
Some or all of these risks could have a material adverse effect on us.
We cannot assure you that we will be able to acquire other lodging
facilities or companies on favorable terms or at all, or that facilities we
acquire will perform as expected. We may be competing for facilities and
companies with entities that have substantially greater financial resources than
we do or can accept more risk than we can prudently manage. This competition may
reduce the number of suitable opportunities for us and increase the cost of
acquiring extended stay lodging facilities and companies.
Our revenues are subject to seasonal fluctuations.
The lodging industry is seasonal in nature. Our occupancy rates and
revenues generally are lower than average during the first and fourth quarter of
each calendar year. Seasonal variations in revenues at facilities may adversely
affect our near-term operating revenues and cash flow from operations, which in
turn could impact our ability to make any interest and principal payments on our
debt.
We have fixed expenses and variable revenues.
The majority of our expenses remain constant even if our revenues drop.
The expenses of owning and operating a lodging facility are not significantly
reduced when circumstances such as market and economic factors and competition
cause a reduction in revenues. Accordingly, a significant decline in our
revenues would have a disproportionately adverse effect on our cash flow and
ability to make interest and principal payments on our debt.
10
We cannot readily dispose of assets to generate cash.
Our principal assets consist of real property. Real estate values are
sensitive to changes in local market and economic conditions and to fluctuations
in the economy as a whole. Risks we are exposed to may be exacerbated by the
relatively illiquid nature of our real estate holdings. Our ability to vary our
portfolio of assets in response to changes in economic and other conditions is
limited. Downturns or prolonged adverse conditions in real estate or capital
markets or in national, state, or local economies, and our inability to dispose
of a property when advantageous or necessary, may have a material adverse impact
on us.
We may be adversely affected by the cost of complying with existing and
future environmental regulations.
As an owner or operator of real property, we may be liable under various
federal, state, and local environmental laws for the costs of removal or
remediation of hazardous or toxic substances on our property. These laws may
impose liability whether or not we are aware of, or are responsible for, the
presence of those hazardous or toxic substances. The presence of contamination
from hazardous or toxic substances on our property, or the failure to properly
treat contaminated property, also may adversely affect our ability to sell the
real property or to borrow money using that real property as collateral.
Further, if we arrange for the disposal or treatment of hazardous or toxic
substances we also may be liable for the costs of removal or treatment of those
substances at the disposal or treatment facility, even though that facility was
never owned or operated by us. Some environmental laws and principles could also
be used to impose on us liability for releases of hazardous materials, including
asbestos-containing materials, into the environment, and third parties may seek
recovery from us for personal injury associated with exposure to those released
materials. We may be adversely affected by the obligation to pay for the cost of
complying with environmental laws or defending against third party claims. In
addition, in the event any future legislation is adopted, we may be required to
make significant capital and operating expenditures in response to that
legislation.
Environmental laws may also impose restrictions on the manner in which we
can use or transfer our property or conduct our business. Compliance with these
restrictions may also require substantial expenditures. Our ownership of real
property could cause us to be liable for these expenses.
We attempt to minimize exposure to potential environmental liability
through our site-selection procedures. We typically secure an option to purchase
land subject to some contingencies. Prior to exercising the option and
purchasing the property, we conduct a Phase I environmental assessment, which
generally involves a physical inspection and database search, but not soil or
groundwater analyses, and conduct Phase II assessments, which generally involve
soil or groundwater analyses, as we think necessary. Our efforts to minimize
exposure to potential environmental liability may not be successful. Despite our
efforts, the cost of defending against claims of liability, remediating
contaminated property, or complying with environmental laws could materially and
adversely affect us.
Our insurance may not fully compensate us for our losses.
We maintain comprehensive insurance on each of our properties, including
liability, fire, and extended coverage, in the types and amounts we believe are
adequate and customary in the lodging industry. Nevertheless, there are some
types of losses, generally of a catastrophic nature, such as hurricanes,
earthquakes, and floods, that may be uninsurable or not economically insurable.
We use our discretion in determining amounts, coverage limits, and deductibility
provisions of insurance, with a view to obtaining appropriate insurance on our
properties at a reasonable cost and on suitable terms. Our insurance coverage
may not be sufficient to cover the full current market value or replacement
value of our investment in a facility in the event of a loss. Inflation, changes
in building codes and ordinances, environmental considerations, and other
factors might make it impossible or impractical to use insurance proceeds to
replace or repair a facility that has been damaged or destroyed. Under these and
other circumstances, insurance proceeds may not be adequate to restore our
economic position with respect to a damaged or destroyed property.
11
We are highly dependent on our senior management.
Our success depends to a significant extent upon the efforts and abilities
of senior management and other key employees, particularly Mr. H. Wayne
Huizenga, the Chairman of our Board of Directors, Mr. George D. Johnson, Jr. our
Chief Executive Officer, and Mr. Robert A. Brannon, our President and Chief
Operating Officer. The loss of the services of any of these individuals could
have a material adverse effect upon us. We do not have employment or consulting
agreements with any officers nor do we carry key-man life insurance on any
officers.
Investors with significant equity ownership may have interests that
conflict with your interests.
As of March 31, 2001, H. Wayne Huizenga, the Chairman of our Board of
Directors, George D. Johnson, Jr., our Chief Executive Officer, and Stewart H.
Johnson, one of our directors, beneficially owned a significant amount of our
common stock. Some decisions concerning our operations or financial structure
may present conflicts of interest between the owners of our capital stock and
the holders of the notes. For example, if we encounter financial difficulties,
or are unable to pay our debts as they mature, the interests of equity investors
might conflict with your interests as a holder of the notes. In addition, equity
investors may have an interest in pursuing acquisitions, divestitures,
financings, or other transactions that, in their judgment, could enhance their
equity investment, even though these transactions might involve risk to you.
Risk Factors Relating to the Notes
Our debt could adversely affect our financial results and prevent us from
fulfilling our obligations under the notes.
We have a substantial amount of debt. Assuming we had issued the notes and
entered into the new credit agreement as of March 31, 2001 and applied the
proceeds, as of March 31, 2001 our total debt would have been $1.05 billion. Our
total stockholders' equity would have been $978.5 million, and our debt to
equity ratio would have been 1.07 times.
In addition, as of July 25, 2001, we had the ability to borrow an
additional $345 million under our new credit facilities, all of which would be
senior to the notes. The terms of our debt, including the notes, allow us to
incur a significant amount of additional debt. Assuming all of the financing
transactions were completed at the beginning of the period, our EBITDA less
capital expenditures and cash interest would have been $(86.8) million for the
year ended December 31, 2000 and $(29.4) million for the three months ended
March 31, 2001. We expect to continue to incur significant negative cash flow
after capital expenditures as we continue to expand our operations.
Our substantial debt could have important consequences to you. For example,
our debt could:
o make it more difficult for us to satisfy our obligations with respect to
the
o hinder our ability to borrow or reborrow under our credit facility;
o hinder our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, or general
corporate purposes;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our flexibility in planning for and reacting to changes in our
business industry;
o require us to dedicate a substantial portion of our cash flow from
operations to the payment of principal and interest on our debt, thereby
reducing the cash flow available for working capital, capital
expenditures, acquisitions, or general corporate purposes; and
o disadvantage us compared to our competitors with less debt.
Our ability to service our debt depends on many factors beyond our control.
Our ability to make payments on our debt, including the notes, will depend
on our ability to generate cash in the future. Whether we generate sufficient
cash depends, in part, on general economic, financial, competitive, legislative,
regulatory, and other factors.
12
We expect to continue to incur significant negative cash flow (after
capital expenditures) as we continue to grow. We expect to make capital
expenditures of about $350 million a year through 2003. We plan to continue an
active development program thereafter, subject to the availability of financing
on reasonable terms. Based on our current performance, we believe we will be
able to fund our continued expansion through 2003 with our expected cash flow
from operations, cash on hand, and borrowings expected to be available under our
new credit facilities. 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.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations. If our properties do not perform as we expect, we may
be unable to make required payments under our debt, including the notes and we
may need to refinance all or a portion of our debt or sell assets in order to
repay these obligations.
We may have to refinance the indebtedness under our new credit facilities,
which begin to mature on July 19, 2007, and our 9.15% senior subordinated notes
will mature prior to these notes. In addition, our new credit facilities will
mature before the notes. Furthermore, the notes permit us to incur additional
indebtedness, which may mature and need to be refinanced prior to the maturity
date of the notes. We cannot assure you that, if necessary, we will be able to
refinance our debt, including our new credit facilities, our 9.15% senior
subordinated notes due 2008 and the notes, on acceptable terms or at all. Our
ability to refinance our debt will depend on, among other things, our financial
condition at the time, the restrictions in the instruments governing our
outstanding indebtedness and other factors, including market conditions, which
are beyond our control. In the absence of any refinancing, we could be forced to
dispose of assets in order to make up for any shortfall in the payments due on
our indebtedness under circumstances that might not be favorable to realizing
the highest price for these assets.
Our credit facility prohibits us from purchasing notes. In addition, we may
not have sufficient funds to satisfy our obligations.
The indenture governing the notes requires us to offer to repurchase the
notes upon the occurrence of a change of control. Certain important corporate
events that would increase the level of our indebtedness, such as leveraged
recapitalizations, may not constitute a "change of control" under the indenture.
Our new credit facilities generally prohibit us from repurchasing the notes and
provide that any change of control under the notes will be a default. Any future
credit or other debt agreements to which we become a party may contain similar
restrictions and provisions. If a change of control occurs at a time when we are
prohibited from repurchasing notes, we could seek the consent of our lenders to
repurchase the notes or we could attempt to refinance the debt that contains
that prohibition. However, we cannot assure you that we will be able to obtain
lender consent or refinance those borrowings. Even if such a consent were
obtained or the debt is refinanced, we cannot assure you that we would have the
funds necessary to repurchase the notes. Our failure to repurchase the notes
would be a default under the indenture which would, in turn, be a default under
our other debt agreements. If our debt were to be accelerated, we may be unable
to repay these amounts and make the required repurchase of our notes.
The notes are subordinate to our senior debt and to the debt of our
subsidiaries.
The notes are unsecured and are expressly subordinated to all of our senior
debt. Our 9.15% senior subordinated notes due 2008 rank equally with the notes
being offered in this offering but mature prior to those notes. Debt under our
new credit facilities is secured, and our new credit facilities are guaranteed
by our subsidiaries and secured by liens on all stock of our subsidiaries and
all other current and future assets owned by us and our subsidiaries (other than
mortgages on our real property). In the event we become bankrupt or insolvent,
or we liquidate, reorganize, dissolve, or otherwise wind up our business, or
upon the acceleration of any debt, the lenders under our credit facilities and
any other holder of our senior debt must be paid in full before any payments are
made on the notes being offered in this offering. In addition, under some
circumstances, no payment may be made with respect to the principal of or
interest on the notes if a payment default or some other defaults exist with
respect to some senior debt.
The notes rank equally with our other senior subordinated debt. As of March
31, 2001, we had $200.0 million of existing senior subordinated debt
outstanding. If assets remain after the repayment of all of our senior
13
debt in event we become bankrupt or insolvent, or we liquidate, reorganize,
dissolve, or otherwise wind up our business, the notes would share
proportionately with our other senior subordinated debt.
Substantially all of our business is conducted, and assets are owned, by
our subsidiaries. All existing and future liabilities (including trade payables)
of these subsidiaries will be effectively senior to the notes. Each of our
subsidiaries guarantees our debt under the new credit facilities. In the event
of a bankruptcy, insolvency, liquidation, reorganization, dissolution, or other
winding up of any of our subsidiaries, creditors of our subsidiaries will
generally be entitled to payment of their claims from the assets of those
subsidiaries before any remaining assets are made available for distribution to
us. As of March 31, 2001, our subsidiaries had $183.9 million of liabilities,
excluding inter-company payables and their guarantees of our debt.
Our credit facility and indentures limit our discretion in managing our
business.
The terms and covenants of our new credit facilities, the indenture
governing the 9.15% senior subordinated notes due 2008 and the indenture
governing the notes impose significant operating and financial restrictions on
us. These restrictions will affect, and in many respects, significantly limit or
prohibit, our ability to:
o incur additional debt;
o pay dividends on our stock or repurchase stock;
o prepay, redeem, or purchase including the notes;
o make investments;
o create liens;
o engage in with stockholders or affiliates;
o sell assets; and
o engage in and consolidations.
In addition, our new credit facilities require us to maintain specified
financial ratios. We cannot assure you that we will be able to maintain these
ratios or that these covenants will not adversely affect our ability to finance
future operations and capital needs or to engage in other business activities
that may be in our interest.
A breach of any of these covenants or our failure to comply with the
required financial ratios could result in a default under our credit facilities,
the indenture governing the 9.15% senior subordinated notes due 2008, or the
indenture. In the event of a default, the lenders under our credit facilities
could prevent us from making payments of principal or interest on the notes
being offered in this offering. Those lenders could also elect to declare all
amounts borrowed under our new credit facilities, together with accrued
interest, to be immediately due and payable. If the debt under our new credit
facilities were accelerated, our assets might not be sufficient to repay that
debt, the 9.15% senior subordinated notes due 2008, and the notes being offered
in this offering in full. Please read the "Description of the Notes" section
later in this prospectus.
There may not be a public market for the notes.
There is no existing trading market for the outstanding notes. We cannot be
sure that any trading market for the exchange notes will develop. If such a
market were to develop, the outstanding notes and the exchange notes could trade
at prices that may be lower than the initial offering price, depending on many
factors, including prevailing interest and dividend rates, our operating results
and the market for similar securities.
If you do not exchange your outstanding notes, you may have difficulty
transferring them at a later time.
We will issue exchange notes in exchange for the outstanding notes after
the exchange agent receives your outstanding notes, the letter of transmittal
and all related documents before the expiration of the exchange offer. You
should allow adequate time for delivery if you choose to tender your outstanding
notes for exchange. Outstanding notes that are not exchanged will remain subject
to restrictions on transfer and will not have any rights to registration. If you
do participate in the exchange offer for the purpose of participating in the
distribution of the exchange notes, you must comply with the registration and
prospectus delivery requirements of the Securities Act of
14
1933 for any resale Each broker-dealer who holds outstanding notes for its own
account to market-making or other trading activities and who receives exchange
notes its own account must acknowledge that it will deliver a prospectus in
connection with any resale of the notes. If any outstanding notes are not
tendered in the exchange or are tendered but not accepted, the trading market
those outstanding notes could be negatively affected due to the limited of
outstanding notes expected to remain outstanding following the of the exchange
offer.
15
Use Of Proceeds
We will not receive any proceeds from the exchange offer. In consideration
for issuing the exchange notes contemplated by this prospectus, we will receive
unregistered notes from you in like principal amount. The unregistered notes
surrendered in exchange for the exchange notes will be retired and canceled.
Accordingly, issuance of the exchange notes will not result in any change in our
indebtedness.
16
Capitalization
The following table sets forth our consolidated capitalization as of March
31, 2001 (1) on a historical basis, and (2) as adjusted for completion of all of
the financing transactions as if they had each occurred on March 31, 2001. This
table should be read in conjunction with the information included elsewhere in
this prospectus.
As of March 31, 2001
--------------------
As Adjusted
for the
Financing
Actual Transactions
------ ------------
(in thousands)
Long-Term Debt (including current portion):
Old credit facility (1) ................. $ 798,000 $ --
New credit facilities (2) ............... -- 555,000
9.15% Senior Subordinated Notes ......... 200,000 200,000
Notes offered pursuant to the financing
transactions .......................... -- 300,000
Total long-term debt (including current
portion) .............................. 998,000 1,055,000
------- ---------
Stockholders' Equity:
Common Stock, $.01 par value, 500,000,000
shares authorized and 94,496,823 shares
issued and outstanding ................ 945 945
Additional paid-in capital .............. 811,043 811,043
Retained earnings (3) ................... 172,481 166,481
-- ------- -------
Total stockholders' equity ......... 984,469 978,469
------- -------
Total capitalization ............... $1,982,469 $2,033,469
========== ==========
- -------------
(1) The as adjusted column for the completion of the financing transactions
reflects the repayment of $798 million of debt outstanding on March 31,
2001 under our old credit facility but does not reflect the repayment of
additional borrowings made by us under our old credit facility after March
31, 2001. As of July 25, 2001, we had no debt outstanding under our old
credit facility.
(2) As of July 25, 2001 we had $195 million available under our revolving
credit facility and the $150 million available under the delayed draw term
loan under the new credit facilities, subject to customary conditions. All
of these borrowings would be senior to the exchange notes offered by this
prospectus.
(3) As a result of the financing transactions, we expect to write off
approximately $6 million of capitalized debt issuance costs, net of tax,
relating to our old credit facility in the quarter ending September 30,
2001.
17
Selected Consolidated Financial And Other Data
The selected income statement data for the years ended December 31, 1998,
1999 and 2000 and the selected balance sheet data as of December 31, 1999 and
2000 are derived from the financial statements of Extended Stay America,
including the notes, audited by PricewaterhouseCoopers LLP, independent
accountants, incorporated by reference into this prospectus. The selected income
statement data for the years ended December 31, 1996 and 1997 and the selected
balance sheet data as of December 31, 1996, 1997 and 1998 have been derived from
audited financial statements of Extended Stay America not included in this
prospectus. The selected financial data for the three months ended March 31,
2000 and 2001 and as of March 31, 2001 are derived from the unaudited
consolidated financial statements of Extended Stay America, incorporated by
reference into this prospectus and as of March 31, 2000, from unaudited
consolidated financial statements previously filed with the Securities and
Exchange Commission. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which, in the opinion of Extended Stay
America, are necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the three months
ended March 31, 2001 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2001. The selected consolidated
financial and other operating data set forth below should be read together with
the information contained elsewhere in or incorporated by reference into this
prospectus.
Year Ended December 31,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------------------------------------
(in thousands, except per share and operating data)
Income Statement Data:
Revenue ................................ $ 38,809 $ 130,800 $ 283,087 $ 417,662 $ 518,033
Property operating expenses ............ 16,560 60,391 122,469 180,429 214,500
Corporate operating and property
management expenses .................. 16,867 29,951 39,073 42,032 44,433
Other charges (income) ................. -- 19,895 12,000 (1,079) --
Depreciation and amortization .......... 6,139 21,331 42,293 60,198 66,269
----- ------ ------ ------ ------
Income (loss) from operations .......... (757) (768) 67,252 136,082 192,831
Interest expense (income), net (1) ..... (13,744) (9,242) 20,521 56,074 76,136
Provision for income taxes ............. 5,231 5,838 18,693 32,004 46,678
Cumulative effect of accounting
change, net (2) ...................... -- -- -- 779 --
---------- ----------- ----------- ----------- -----------
Net income from continuing operations .. $ 7,756 $ 2,636 $ 28,038 $ 47,225 $ 70,017
========== =========== =========== =========== ===========
Net income from continuing operations
per share:
Basic .................................. $ 0.11 $ 0.03 $ 0.29 $ 0.49 $ 0.73
========== =========== =========== =========== ===========
Diluted ................................ $ 0.10 $ 0.03 $ 0.29 $ 0.49 $ 0.72
========== ============ =========== =========== ===========
Weighted average shares outstanding:
Basic .................................. 71,933 94,233 95,896 96,254 95,372
====== ====== ====== ====== ======
Diluted ................................ 73,935 95,744 96,800 96,939 96,601
====== ====== ====== ====== ======
Ratio of earnings to fixed charges (3) . 39.13x 4.90x 1.76x 2.04x 2.21x
===== ==== ==== ==== ====
Operating Data:
Average occupancy rates (4) ............ 73% 73% 73% 74% 80%
Average weekly rate (5) ................ $ 261 $ 263 $ 286 $ 292 $ 304
RevPAR ................................. 189 193 207 216 242
Operating facilities (at period end) ... 75 185 305 362 392
Weighted average rooms available (6) ... 3,783 12,558 25,334 36,054 39,871
Rooms (at period end) .................. 7,611 19,299 32,189 38,301 41,585
Facilities under construction (at
period end) .......................... 61 84 51 23 19
Rooms under construction (at period
end) ................................. 6,864 8,953 5,320 2,515 2,074
Balance Sheet Data (at period end):
Cash and cash equivalents .............. $ 224,325 $ 3,212 $ 623 $ 6,449 $ 13,386
Total assets ........................... 668,435 1,070,891 1,694,582 1,927,249 2,121,602
Long-term debt (including current
portion) ............................. -- 135,000 653,000 853,000 947,000
Stockholders' equity ................... 628,714 834,659 866,751 915,590 982,633
Three Months Ended
March 31,
-------------------
2000 2001
-------------------
(unaudited)
Income Statement Data:
Revenue ................................ $ 113,940 $ 134,414
Property operating expenses .............. 50,931 56,839
Corporate operating and property
management expenses .................... 10,913 11,626
Other charges (income) ................... -- --
Depreciation and amortization ............ 16,149 17,542
Income (loss) from operations ............ 35,947 48,407
Interest expense (income), net (1) ....... 17,144 19,697
Provision for income taxes ............... 7,521 11,483
Cumulative effect of accounting
change, net (2) ........................ -- 669
Net income from continuing operations .... $ 11,282 $ 16,558
Net income from continuing operations
per share:
Basic ................................... $ 0.12 $ 0.17
Diluted ................................. $ 0.12 $ 0.17
Weighted average shares outstanding:
Basic .................................... 95,632 95,745
Diluted .................................. 96,078 98,874
Ratio of earnings to fixed charges (3) ... 1.86x 2.14x
Operating Data:
Average occupancy rates (4) .............. 73% 76%
Average weekly rate (5) ................ $ 299 $ 321
RevPAR ................................... 220 244
Operating facilities (at period end) ..... 372 400
Weighted average rooms available (6) ..... 38,751 41,917
Rooms (at period end) .................... 39,337 42,492
Facilities under construction (at
period end) ............................ 20 28
Rooms under construction (at period
end) ................................... 2,243 2,957
Balance Sheet Data (at period end):
Cash and cash equivalents .............. $ 5,451 $ 8,737
Total assets ............................. 1,958,209 2,168,175
Long-term debt (including current
portion) ............................... 882,000 993,000
Stockholders' equity ..................... 922,846 984,46
(footnotes appear on following page)
18
- -----------
(1) Excludes interest of $0.3 million, $1.7 million, $17.6 million, $10.2
million and $10.9 million for 1996, 1997, 1998, 1999, and 2000
respectively, and $2.2 million and $2.6 million for the three months
ended March 31, 2000 and March 31, 2001, respectively, capitalized
during the construction of our facilities under Statement of Financial
Accounting Standards Statement No. 34 "Capitalization of Interest
Cost."
(2) In 1999, pursuant to Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities", 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. In the
quarter ended March 31, 2001, we adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended, and designated our interest rate
cap contracts as cash-flow hedges of our variable rate debt. Since the
fair value of the interest rate cap contracts at adoption was zero, the
entire transition adjustment was recognized in earnings.
(3) For purposes of calculating this ratio, earnings include income from
continuing operations before income taxes plus fixed charges other than
capitalized expenses. Fixed charges consist of interest, whether
expensed or capitalized.
(4) Average occupancy rates are determined by dividing the rooms occupied
on a daily basis by the total number of rooms. Due to our rapid
expansion, our overall average occupancy rate has been negatively
impacted by the lower occupancy typically experienced during the
pre-stabilization period for newly opened facilities. We expect the
negative impact on overall average occupancy to decline as the ratio of
newly opened properties to total properties in operation declines.
(5) 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.
(6) Weighted average rooms available is calculated by dividing total room
nights available during the year by the number of days in the period.
19
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
On June 27, 2001, we sold $300 million in principal amount of senior
subordinated notes in a private placement to a limited number of qualified
institutional buyers and non-US persons outside the United States. In connection
with the sale of those senior subordinated notes we entered into a registration
rights agreement where we agreed to use commercially reasonable efforts to file
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 covering the exchange offer and to cause that
registration statement to become effective under that act. Upon the
effectiveness of that registration statement, we must offer each holder of the
outstanding notes the opportunity to exchange its outstanding notes for an equal
principal amount of exchange notes. For the purposes of the exchange offer, you
will be considered a holder of the outstanding notes if you are a person in
whose name any outstanding notes are registered or if you have obtained a
properly completed assignment of outstanding notes from a registered holder.
We are making the exchange offer to comply with our obligations under
the registration rights agreement. A copy of the registration rights agreement
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
In order to participate in the exchange offer, you must represent to us,
among other things, that:
o the exchange notes being acquired in the exchange offer are being obtained
in the ordinary course of your business;
o you are not engaging in, and do not intend to engage in, a distribution of
the exchange notes;
o you do not have an arrangement or understanding with any third person to
participate in a distribution of the exchange notes; and
o you are not an affiliate of ours. An affiliate is any person who "controls
or is controlled by or is under common control with" us.
Resale of the Exchange Notes
Based on previous interpretations by the Staff of the Commission set forth
in no-action letters issued to third parties, including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), Mary Kay Cosmetics, Inc. (available June 5, 1991),
Warnaco, Inc. (available October 11, 1991), and K-III Communications Corp.
(available May 14, 1993), we believe that the exchange notes issued in the
exchange offer may be offered for resale, resold, and otherwise transferred by
you without compliance with the registration and prospectus delivery provisions
of the Securities Act of 1933, as long as you can properly make the
representations set forth above in "--Purpose and Effect of the Exchange Offer."
If you tender in the exchange offer with the intention of participating
in a distribution of the exchange notes, you cannot rely on the interpretation
by the Staff of the Commission and you must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with a resale transaction. Each broker-dealer that receives exchange notes for
its own account in exchange for outstanding notes, where the outstanding notes
were acquired by that broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes by that broker-dealer. In order
to facilitate the disposition of exchange notes by broker-dealers participating
in the exchange offer, we have agreed, subject to specific conditions, to make
this prospectus, as it may be amended or supplemented from time to time,
available for delivery by those broker-dealers to satisfy their prospectus
delivery obligations under the Securities Act of 1933 for up to 120 days after
the expiration date of the exchange offer. Any broker-dealer that acquired
outstanding notes directly from us, and not as a result of market making or
other trading activities, may not rely on the interpretation of the Staff of the
Commission as discussed above or participate in the
20
exchange offer, and must comply with all the registration and prospectus
delivery requirements of the Securities Act in order to sell these notes. See
"Plan of Distribution."
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance of the exchange offer would not be in
compliance with the securities or blue sky laws of the particular jurisdiction.
We are obligated to deal with only one entity representing the broker-dealers
participating in the exchange offer, which is Morgan Stanley & Co. Incorporated,
unless it elects not to act as the representative of the broker-dealers. Any
holder that is a broker-dealer participating in the exchange offer must notify
Morgan Stanley & Co. Incorporated at the telephone number listed in the enclosed
letter of transmittal and must comply with the procedures for brokers-dealers
participating in the exchange offer. Under the registration rights agreement, we
are not required to amend or supplement the prospectus for a period exceeding
180 days after the expiration date of the exchange offer, except in limited
circumstances where we suspend use of the registration statement. We have not
entered into any arrangement or understanding with any person to distribute the
exchange notes to be received in the exchange offer. See "Plan of Distribution."
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all outstanding notes
validly tendered and not withdrawn before 5:00 p.m., Eastern time, on the day
the exchange offer expires. We will issue $1,000 in principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding notes accepted
in the exchange offer.
As of the date of this prospectus, $300 million in principal amount of the
notes are outstanding. This prospectus, together with the enclosed letter of
transmittal, is being sent to all registered holders of the outstanding notes on
this date. There will be no fixed record date for determining registered holders
of the outstanding notes entitled to participate in the exchange offer; however,
holders of the outstanding notes must tender their certificates or cause their
outstanding notes to be tendered by book-entry transfer before the expiration
date of the exchange offer to participate.
The form and terms of the exchange notes will be the same as the form and
terms of the outstanding notes except that the exchange notes will be registered
under the Securities Act of 1933 and therefore will not bear legends restricting
their transfer. Following completion of the exchange offer, our obligations
under the registration rights agreement will terminate.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement and applicable federal securities laws.
Outstanding notes that are not tendered for exchange under the exchange offer
will remain outstanding and will be entitled to the rights under the related
indenture. Any outstanding notes not tendered for exchange will not retain any
rights under the registration rights agreement and will remain subject to
transfer restrictions. See "--Consequences of Failure to Exchange."
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we will have given written notice, or oral notice that is promptly
confirmed in writing, of our acceptance to the exchange agent. The exchange
agent will act as agent for the tendering holders for the purposes of receiving
the exchange notes from us. If any tendered outstanding notes are not accepted
for exchange because of an invalid tender, the occurrence of other events set
forth in this prospectus, or for any other reason, certificates for any
unaccepted outstanding notes will be returned, or, in the case of outstanding
notes tendered by book-entry transfer, those unaccepted outstanding notes will
be credited to an account maintained with The Depository Trust Company, without
expense to the tendering holder of those outstanding notes as promptly as
practicable after the expiration date of the exchange offer. See "--Procedures
for Tendering.
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the enclosed letter of transmittal, transfer taxes with respect to the exchange
of notes in the exchange offer. We will pay all charges and expenses, other than
applicable taxes and other fees described below, in connection with the exchange
offer. See "--Fees and Expenses."
21
Expiration Date; Extensions; Amendments
The expiration date will 5:00 p.m., Eastern time, on , 2001, unless we, in
our sole discretion, extend the exchange offer, in which case the expiration
date will be the latest date and time to which the exchange offer is extended.
We may, in our sole discretion, extend the expiration date of, or terminate, the
exchange offer.
To extend the exchange offer, we must notify the exchange agent by written
notice, or oral notice that is promptly confirmed in writing, before 9:00 a.m.,
Eastern time, on the next business day after the previously scheduled expiration
date and make a public announcement of the extension. Without limiting the
manner in which we may choose to make a public announcement of any delay,
extension, amendment, or termination of the exchange offer, we will have no
obligation to publish, advertise, or otherwise communicate that public
announcement, other than by making a timely release to an appropriate news
agency.
We reserve the right:
o to delay accepting any outstanding notes, to extend the exchange offer or
to terminate the exchange offer if any of the conditions listed below under
"--Conditions" are not satisfied, by giving written notice, or oral notice
that is promptly confirmed in writing, of the delay, extension, or
termination to the exchange agent; or
o to amend the terms of the exchange offer in any manner consistent with the
registration rights agreement.
Any delay in acceptances, extension, termination, or amendment will be
followed as promptly as practicable by oral or written notice of the delay to
the registered holders of the outstanding notes. If we amend the exchange offer
in a manner that constitutes a material change, we will promptly disclose the
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the outstanding notes, and we will extend the exchange
offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of disclosure to the registered holders of the
outstanding notes, if the exchange offer would otherwise expire during this
period.
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept, promptly after the expiration date of the exchange offer, all
outstanding notes properly tendered and will issue the exchange notes promptly
after acceptance of the outstanding notes. See "--Conditions" below. For
purposes of the exchange offer, we will be deemed to have accepted properly
tendered outstanding notes for exchange when, as and if we will have given
written notice, or oral notice that is promptly confirmed in writing, of our
acceptance to the exchange agent.
Interest on the New Notes
The exchange notes will bear interest from the date of the last interest
payment on the outstanding notes or, if no interest has been paid, from the date
of original issuance of the outstanding notes (June 27, 2001). Holders whose
outstanding notes are exchanged will be deemed to have waived the right to
receive any interest accrued, but not paid, on the outstanding notes.
Conditions
Without regard to any other terms of the exchange offer, we will
not be required to exchange any exchange notes for any outstanding notes and may
terminate the exchange offer before the acceptance of any outstanding notes for
exchange, if:
o any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the exchange offer which,
in our reasonable judgment, might materially impair our ability to proceed
with the exchange offer;
22
o the Staff of the Commission proposes, adopts or enacts any law, statute,
rule or regulation or issues any interpretation of any existing law,
statute, rule or regulation, which, in our reasonable judgment, might
materially impair our ability to proceed with the exchange offer; or
o any governmental approval or approval by holders of the outstanding notes
has not been obtained, which approval we will, in our reasonable judgment,
deem necessary for the completion of the exchange offer.
These conditions are for our sole benefit and may be asserted by us regardless
of the circumstances giving rise to any such conditions, or may be waived by us
in whole or in part at any time at our sole discretion. If we determine that any
of these conditions are not satisfied, we may:
o refuse to accept any outstanding notes and return all tendered outstanding
notes to the tendering holders, or, in the case of outstanding notes
tendered by book-entry transfer, credit those outstanding notes to an
account maintained with The Depository Trust Company;
o extend the exchange offer and retain all outstanding notes tendered before
the expiration of the exchange offer, subject to the rights of holders who
tendered the outstanding notes to withdraw their tendered outstanding
notes; or
o subject to applicable law, waive unsatisfied conditions with respect to the
exchange offer and accept all properly tendered outstanding notes that have
not been withdrawn. If the waiver constitutes a material change to the
exchange offer, we will promptly disclose the waiver by means of a
prospectus supplement that will be distributed to the registered holders of
the outstanding notes, and we will extend the exchange offer for a period
of five to ten business days, depending upon the significance of the waiver
and the manner of disclosure to the registered holders of the outstanding
notes, if the exchange offer would otherwise expire during this period.
Procedures for Tendering
To tender in the exchange offer, you must complete, sign and date an
original or facsimile letter of transmittal, have the signatures on the letter
of transmittal guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal to the exchange agent for receipt
before the expiration date of the exchange offer. In addition:
o certificates for the outstanding notes must be received by the exchange
agent, along with the letter of transmittal;
o a timely confirmation of transfer by book-entry of those outstanding notes,
if the book-entry procedure is available, into the exchange agent's account
at The Depository Trust Company, as set forth in the procedure for
book-entry transfer described below, must be received by the exchange agent
before the expiration date of the exchange offer; or
o you must comply with the guaranteed delivery procedures described below.
To be tendered effectively, the exchange agent must receive the letter of
transmittal and other required documents at the address listed below under
"--Exchange Agent" before the expiration of the exchange offer.
If you tender your outstanding notes and do not withdraw them before the
expiration date of the exchange offer, you will be deemed to have an agreement
with us in accordance with the terms and subject to the conditions set forth in
this prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange is at your risk. Instead of
delivery by mail, it is recommended that you use an overnight or hand delivery
service, properly insured. In all cases, sufficient time should be allowed to
assure delivery to the exchange agent before the expiration date of the exchange
offer. No letter of transmittal or
23
outstanding notes should be sent to us. You may request your brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for you.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company, or other nominee and who
wishes to tender its outstanding notes should contact the registered holder
promptly and instruct that registered holder to tender the outstanding notes on
the beneficial owner's behalf. If the beneficial owner wishes to tender its
outstanding notes on the owner's own behalf, that owner must, before completing
and executing the letter of transmittal and delivering its outstanding notes,
either make appropriate arrangements to register ownership of the outstanding
notes in that owner's name or obtain a properly completed assignment from the
registered holder. The transfer of registered ownership of outstanding notes may
take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless the related outstanding notes are
tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal; or
o for the account of an eligible institution.
Each of the following is deemed an eligible institution:
o a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
o a commercial bank;
o a trust company having an office or correspondent in the United States; or
o an eligible guarantor institution as provided by Rule 17Ad-15 of the
Securities Exchange Act of 1934.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes, the outstanding notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as his, her or its name appears on the outstanding notes.
If the letter of transmittal, or any outstanding notes or bond powers, are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing, and evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal, unless we waive that requirement.
We will determine all questions as to the validity, form, eligibility,
including time of receipt, acceptance of tendered outstanding notes, and
withdrawal of tendered outstanding notes, in our sole discretion. All of these
determinations by us will be final and binding. We reserve the absolute right to
reject any and all outstanding notes not properly tendered or any outstanding
notes our acceptance of which would, in the opinion of our counsel, be unlawful.
We also reserve the right to waive any defects, irregularities or conditions of
tender as to particular outstanding notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of outstanding notes must
be cured within the time we determine. Although we intend to notify holders of
outstanding notes of defects or irregularities with respect to tenders of
outstanding notes, neither we, nor the exchange agent, or any other person will
incur any liability for failure to give this notification. Tenders of
outstanding notes will not be deemed to have been made until defects or
irregularities have been cured or waived. Any outstanding notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders of outstanding notes, unless otherwise provided
in the letter of transmittal, as soon as practicable following the expiration
date of the exchange offer.
24
In addition, we reserve the right, in our sole to purchase or make offers
for any outstanding notes that remain after the expiration date of the exchange
offer or, as set forth under "--Conditions," to terminate the exchange offer
and, to the extent by applicable law, purchase outstanding notes in the open
market, in negotiated transactions or otherwise. The terms of any purchases or
offers could differ from the terms of the exchange offer.
If the holder of notes is a broker-dealer participating in the exchange
offer that will receive exchange notes for its own account in exchange for
outstanding notes that were acquired as a result of market making or other
trading activities, that broker-dealer will be required to acknowledge in the
letter of transmittal that it will deliver a prospectus in connection with any
resale of the exchange notes and otherwise agree to comply with the procedures
described above under "--Resale of the Exchange Notes"; however, by so
acknowledging and delivering a prospectus, that broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act of
1933.
In all cases, issuance of the exchange notes for outstanding notes that are
accepted for exchange in the exchange offer will be made only after timely
receipt by the exchange agent of certificates for those outstanding notes or a
timely confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at The Depository Trust Company, a properly completed
and duly executed letter of transmittal, and all other required documents. If
any tendered outstanding notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer, if the holder withdraws previously
tendered outstanding notes, or if outstanding notes are submitted for a greater
principal amount of outstanding notes than the holder desires to exchange, then
the unaccepted, withdrawn or portion of non-exchanged outstanding notes, as
appropriate, will be returned as promptly as practicable after the expiration or
termination of the exchange offer, or, in the case of outstanding notes tendered
by book-entry transfer, those unaccepted, withdrawn or portion of non-exchanged
outstanding notes, as appropriate, will be credited to an account maintained
with The Depository Trust Company, without expense to the tendering holder of
those notes.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the outstanding notes at The Depository Trust Company for the purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry delivery of outstanding notes by causing
The Depository Trust Company to transfer the outstanding notes into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer. However, although delivery
of outstanding notes may be effected through book-entry transfer at The
Depository Trust Company, the letter of transmittal or a manually signed
facsimile of the letter of transmittal, with any required signature guarantees
or an agent's message, in the case of a book-entry transfer, and any other
required documents, must, in any case, be transmitted to and received by the
exchange agent at the address set forth below under "--Exchange Agent" on or
before the expiration date of the exchange offer, unless the holder complies
with the guaranteed delivery procedures described below.
The exchange agent and The Depository Trust Company have confirmed that any
financial institution that is a participant in The Depository Trust Company
system may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender the notes.
Any Depository Trust Company participant may make book-entry delivery of
outstanding notes by causing Depository Trust Company to transfer such notes
into the exchange agent's account in accordance with The Depository Trust
Company's ATOP procedures for transfer. However, the exchange for the notes so
tendered will only be made after a book-entry confirmation of such book-entry
transfer of notes into the exchange agent's account, and timely receipt by the
exchange agent of an agent's message and any other documents required by the
letter of transmittal. The term "agent's message" means a message, transmitted
by The Depository Trust Company and received by the exchange agent and forming
part of a book-entry confirmation, which states that The Depository Trust
Company has received an express acknowledgment from a participant tendering the
notes that are the subject of such book-entry confirmation that such participant
has received and agrees to be bound by the terms of the letter of transmittal,
and that we may enforce such agreement against such participant.
25
Guaranteed Delivery Procedures
Holders who wish to tender their outstanding notes and who cannot timely
deliver their outstanding notes, the letter of transmittal, or any other
required documents to the exchange agent before the expiration date, may effect
a tender if:
o the tender is made through an eligible institution;
o before the expiration date of the exchange offer, the exchange agent
receives from that eligible institution a properly completed and duly
executed notice of guaranteed delivery, by facsimile, mail or hand
delivery, listing the name and address of the holder, the certificate
number(s) of the outstanding notes and the principal amount of outstanding
notes tendered and stating that the tender is being made by that notice and
guaranteeing that, within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery, the letter of
transmittal, together with the certificate(s) representing the outstanding
notes in proper form for transfer, or a confirmation of book-entry
transfer, as the case may be, and any other documents required by the
letter of transmittal, will be deposited by the eligible institution with
the exchange agent; and
o the exchange agent receives the properly completed and executed letter of
transmittal, as well as the certificate(s) representing all tendered
outstanding notes in proper form for transfer and other documents required
by the letter of transmittal within three New York Stock Exchange trading
days after the date of execution of the notice of guaranteed delivery.
Withdrawal of Tenders
Except as otherwise provided, tenders of outstanding notes may be withdrawn
at any time before 5:00 p.m., Eastern time, on the expiration date of the
exchange offer. To withdraw a tender of outstanding notes in the exchange offer,
a written or facsimile notice of withdrawal must be received by the exchange
agent at its address listed below before that time. The notice of withdrawal
must:
o specify the name of the person having deposited the outstanding notes to be
withdrawn;
o identify the outstanding notes to be withdrawn;
o be signed by the holder in the same manner as the original signature on the
letter of transmittal by which the outstanding notes were tendered or be
accompanied by documents of transfer sufficient to have the exchange agent
register the transfer of the outstanding notes in the name of the person
withdrawing the tender; and
o specify the name in which any outstanding notes are to be registered, if
different from that of the person who deposited the outstanding notes to be
withdrawn.
We will determine all questions as to the validity, form, and eligibility
of the notices, which determination will be final and binding on all parties.
Any outstanding notes so withdrawn will be deemed not to have been validly
tendered for purposes of the exchange offer, and no exchange notes will be
issued with respect to those outstanding notes unless the outstanding notes so
withdrawn are validly re-tendered.
Any outstanding notes that have been tendered but that are withdrawn or not
accepted for payment will be returned to the holder of those outstanding notes,
or in the case of outstanding notes tendered by book-entry transfer, will be
credited to an account maintained with The Depository Trust Company, without
cost to the holder as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn outstanding notes may
be re-tendered by following one of the procedures described above under
"--Procedures for Tendering" at any time before the expiration date of the
exchange offer.
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Termination of Registration Rights
All rights given to holders of outstanding notes under the registration
rights agreement will terminate upon the completion of the exchange offer,
except with respect to our duty:
o to keep the registration statement effective until the closing of the
exchange offer and for a period not to exceed 180 days after the expiration
date of the exchange offer; and
o to provide copies of the latest version of this prospectus to any broker
dealer that requests copies of this prospectus for use in connection with
any resale by that broker-dealer of exchange notes received for its own
account pursuant to the exchange offer in exchange for outstanding notes
acquired for its own account as a result of market-making or other trading
activities, subject to the conditions described above under "-- Resale of
the Exchange Notes."
Exchange Agent
Manufacturers and Traders Trust Company has been appointed exchange agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or the letter of transmittal, and requests
for copies of the notice of guaranteed delivery with respect to the outstanding
notes, should be addressed to the exchange agent as follows:
By Registered Mail, Certified Mail, Overnight Courier or By Facsimile:
Hand Delivery:
Manufacturers and Traders Trust Company Fax (716) 842-5503
One M&T Plaza, 7th Floor
Buffalo, New York 14203
Attention: Corporate Trust Department
Fees and Expenses.
We will pay the expenses of soliciting tenders in connection with the
exchange offer. The principal solicitation is being made by mail; however,
additional solicitation may be made by facsimile, telephone, or in person by
some of our officers and regular employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket expenses in connection with the exchange
offer.
We estimate that our cash expenses in connection with the exchange offer
will be about $125,000. These expenses include registration fees, fees and
expenses of the exchange agent, accounting and legal fees, and printing costs,
among others.
We will pay all transfer taxes, if any, applicable to the exchange of the
outstanding notes for exchange notes. The tendering holder of outstanding notes,
however, will pay applicable taxes if certificates representing outstanding
notes not tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered, or
o if tendered, the certificates representing outstanding notes are registered
in the name of any person other than the person signing the letter of
transmittal; or
o if a transfer tax is imposed for any reason other than the exchange of the
outstanding notes in the exchange offer.
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If satisfactory evidence of payment of the transfer taxes or exemption from
payment of transfer taxes is not submitted with the letter of transmittal, the
amount of the transfer taxes will be billed directly to the tendering holder and
the exchange notes need not be delivered until the transfer taxes are
paid.
Consequences of Failure to Exchange
Participation in the exchange offer is voluntary. Holders of the
outstanding notes are urged to consult their financial and tax advisors in
making their own decisions on what action to take.
Outstanding notes that are not exchanged for the exchange notes in the
exchange offer will not retain any rights under the registration rights
agreement and will remain restricted securities for purposes of the federal
securities laws. Accordingly, the outstanding notes may not be offered, sold,
pledged, or otherwise transferred except:
o to a "qualified institutional buyer," within the meaning of Rule 144A under
the Securities Act of 1933, purchasing for its own account or for the
account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A;
o in an offshore transaction complying with Rule 903 or 904 of Regulation S
under the Securities Act of 1933;
o under an exemption from registration under the Securities Act of 1933
provided by Rule 144 under that act, if available;
o to an "institutional accredited investor" as defined in Rule 501(a)(1),
(2), (3) or (7) of Regulation D in a transaction exempt from the
registration requirements of the Securities Act of 1933; or
o under an effective registration statement under the Securities Act of 1933;
and
in each case, in accordance with all other applicable securities laws.
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DESCRIPTION OF THE NOTES
General
The outstanding notes were, and the exchange notes will be, issued under
the indenture, dated as of June 27, 2001, between Extended Stay America, as
Issuer, and Manufacturers and Traders Trust Company, as trustee. The terms of
the notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939. The following summary
of certain provisions of the indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the indenture (including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended, and
the notes).
The terms of the exchange notes to be issued are substantially similar to
the outstanding notes, except that the exchange notes will be registered under
the Securities Act and will not bear legends restricting the transfer thereof.
The outstanding notes are, and the exchange notes will continue to be, unsecured
senior subordinated obligations of Extended Stay America, initially limited to
$300.0 million in aggregate principal amount, and will mature on June 15, 2011.
Interest on the notes is payable semi-annually on June 15 and December 15 of
each year commencing on December 15, 2001 to holders of record at the close of
business on June 1 or December 1 immediately preceding the interest payment
date.
Principal of, premium, if any, and interest on the notes will be
payable and the notes may be exchanged or transferred at the office or agency of
Extended Stay America in the Borough of Manhattan, the City of New York (which
initially will be the corporate trust office of the trustee, at 50 Broadway, New
York, New York 10004); provided that, at the option of Extended Stay America,
payment of interest may be made by check mailed to the holders at their
addresses as they appear in the Security Register.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
No service charge will be made for any registration of transfer or exchange of
notes, but Extended Stay America may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, Extended Stay America may issue additional notes under the indenture. The
exchange notes and any outstanding notes not exchanged in the exchange offer and
any additional notes subsequently issued would be treated as a single class for
all purposes under the indenture.
Optional Redemption
The notes will be redeemable, at our option in whole or in part, at any
time or from time to time, on or after June 15, 2006 and prior to maturity, upon
not less than 30 nor more than 60 days' prior notice mailed by first class mail
to each holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued and unpaid
interest, if any, to the redemption date (subject to the right of holders of
record on the relevant regular record date that is on or prior to the redemption
date to receive interest due on the relevant interest payment date), if redeemed
during the 12-month period commencing June 15 of the years set forth below:
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Redemption
Year Price
- ---- -------------
2006................................................ 104.938%
2007................................................ 103.292
2008................................................ 101.646
2009 and thereafter................................. 100.000
In addition, at any time prior to June 15, 2004, we may redeem up to 35% of
the principal amount of the notes with the proceeds of one or more sales of our
Capital Stock (other than Disqualified Stock), at any time or from time to time
in part, at a redemption price (expressed as a percentage of principal amount)
of 109.875% plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 65% of the original principal amount of the notes must remain
outstanding after each such redemption; provided further, that notice of such
redemption is mailed within 60 days after the consummation of such sale or
sales.
In the case of any partial redemption, selection of the notes for
redemption will be made by the trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed or, if the notes are not listed on a national securities exchange, by lot
or by such other method as the trustee in its sole discretion shall deem to be
fair and appropriate; provided that no note of $1,000 in principal amount or
less shall be redeemed in part. If any note is to be redeemed in part only, the
notice of redemption relating to such note shall state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original note.
Sinking Fund
There will be no sinking fund payments for the notes.
Ranking and Subordination
The notes are subordinated to all obligations under our new credit
facilities and our other Senior Indebtedness and will be pari passu with our
9.15% senior subordinated notes. The payment of the principal of, premium, if
any, and interest or other amounts due on the notes is subordinated in right of
payment, as set forth in the indenture, to the prior payment in full in cash or
cash equivalents when due of all our Senior Indebtedness. As of March 31, 2001,
on a pro forma basis giving effect to the financing transactions, our
outstanding Senior Indebtedness would have been $550 million (exclusive of
unused commitments under our new credit facility aggregating $350 million).
Although the indenture contains limitations on the amount of additional
indebtedness that we may incur, under certain circumstances the amount of such
indebtedness could be substantial and, in any case, such indebtedness may be
Senior Indebtedness. See "Certain Covenants--Limitation on Indebtedness" below.
In addition, all existing and future liabilities (including trade payables) of
our subsidiaries will be effectively senior to the notes, and as of March 31,
2001, such subsidiaries had $183.9 million of liabilities (excluding
inter-company payables and guarantees of our indebtedness). Notwithstanding the
foregoing, payment from the money or the proceeds of U.S. Government Obligations
held in any defeasance trust described under "--Defeasance" below, will not be
contractually subordinated in right of payment to any Senior Indebtedness or
subject to the restrictions described herein.
"Senior Indebtedness" means the following obligations of Extended Stay
America, whether outstanding on the date the notes are issued or thereafter
Incurred:
(1) all our Indebtedness and all other monetary obligations
(including, without limitation, expenses, fees, principal, interest,
reimbursement obligations under letters of credit and indemnities payable
in connection therewith) under (or in respect of) the Credit Agreement or
any Interest Rate Agreement or Currency Agreement relating to the
Indebtedness under the Credit Agreement; and
30
(2) all our other Indebtedness and all other monetary obligations
(other than the notes), including principal and interest on such
Indebtedness, unless such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, is
pari passu with, or subordinated in right of payment to, the notes;
provided that the term "Senior Indebtedness" shall not include:
(A) our 9.15% senior subordinated notes;
(B) any of our Indebtedness which, when incurred, was without
recourse to Extended Stay America;
(C) any Indebtedness of Extended Stay America to a Subsidiary of
Extended Stay America, or to a joint venture in which Extended Stay
America has an interest;
(D) any Indebtedness of Extended Stay America, to the extent not
permitted by the "Limitation on Indebtedness" covenant or the
"Limitation on Senior Subordinated Indebtedness" covenant described
below; (but as to any such Indebtedness under the Credit Agreement, no
such violation shall be deemed to exist if the Bank Agent shall have
received an officer's certificate of Extended Stay America to the
effect that the issuance of such Indebtedness does not violate the
indenture);
(E) any repurchase, redemption or other obligation in respect of
Disqualified Stock;
(F) any Indebtedness to any employee of Extended Stay America or any
of its respective Subsidiaries;
(G) any liability for taxes owed or owing by Extended Stay America;
or
(H) any Trade Payables.
Senior Indebtedness will also include interest accruing subsequent to
events of bankruptcy of Extended Stay America and its Subsidiaries at the rate
provided for in the document governing such Senior Indebtedness, whether or not
such interest is an allowed claim enforceable against the debtor in a bankruptcy
case under bankruptcy law.
Except with respect to the money, securities or proceeds held under any
defeasance trust established in accordance with the indenture, upon any payment
or distribution of the assets or securities of Extended Stay America of any kind
or character, whether in cash, property or securities, upon any dissolution or
winding up or upon a total or partial liquidation, or reorganization of Extended
Stay America, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness (including any interest accruing subsequent to an event of
bankruptcy at the rate provided in such Senior Indebtedness, whether or not such
interest is an allowed claim enforceable against the debtor under the United
States Bankruptcy Code or other applicable law) shall first be paid in full, in
cash or cash equivalents, before the holders of the notes or the trustee on
behalf of the holders of the notes shall be entitled to receive any payment by
(or on behalf of) Extended Stay America on account of Senior Subordinated
Obligations or any payment to acquire any of the notes for cash, property or
securities, or any distribution with respect to the notes of any cash, property
or securities. Before any payment may be made by, or on behalf of, Extended Stay
America on any Senior Subordinated Obligations (other than with the money,
securities or proceeds held under any defeasance trust established in accordance
with the Indenture), upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of Extended
Stay America of any kind or character, whether in cash, property or securities,
to which the holders of the notes or the trustee on behalf of the holders of the
notes would be entitled, but for the subordination provisions of the Indenture,
shall be made by Extended Stay America or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person making such
payment or distribution or by the holders of the notes or the trustee if
received by them or it, directly to the holders of the Senior
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Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to any
trustee or trustees under any indenture pursuant to which any such Senior
Indebtedness may have been issued, as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of Extended Stay America of
Senior Subordinated Obligations (other than with the money, securities or
proceeds held under any defeasance trust established in accordance with the
indenture), whether pursuant to the terms of the notes or upon acceleration or
otherwise shall be made if, at the time of such payment, there exists a default
in the payment of all or any portion of the obligations on any Senior
Indebtedness of Extended Stay America and such default shall not have been cured
or waived or the benefits of this sentence waived by or on behalf of the holders
of such Senior Indebtedness. In addition, during the continuance of any other
event of default with respect to any Designated Senior Indebtedness pursuant to
which the maturity thereof may be accelerated, upon receipt by the trustee of
written notice from the trustee or other representative for the holders of such
Designated Senior Indebtedness (or the holders of at least a majority in
principal amount of such Designated Senior Indebtedness then outstanding), no
payment of Senior Subordinated Obligations (other than with the money,
securities or proceeds held under any defeasance trust established in accordance
with the indenture) may be made by or on behalf of Extended Stay America upon or
in respect of the notes for a period (a "Payment Blockage Period") commencing on
the date of receipt of such notice and ending 179 days thereafter (unless, in
each case, such Payment Blockage Period shall be terminated by written notice to
the trustee from such trustee of, or other representatives for, such holders or
by payment in full in cash or cash equivalents of such Designated Senior
Indebtedness or such event of default has been cured or waived). Not more than
one Payment Blockage Period may be commenced with respect to the notes during
any period of 360 consecutive days. Notwithstanding anything in the indenture to
the contrary, there must be 180 consecutive days in any 360-day period in which
no Payment Blockage Period is in effect. No event of default (other than an
event of default pursuant to the financial maintenance covenants under the
Credit Agreement) that existed or was continuing (it being acknowledged that any
subsequent action that would give rise to an event of default pursuant to any
provision under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose) on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period shall be, or shall
be made, the basis for the commencement of a second Payment Blockage Period by
the representative for, or the holders of, such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
To the extent any payment of Senior Indebtedness (whether by or on behalf
of Extended Stay America, as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then if such payment is recovered by, or
paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person, the Senior Indebtedness or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as if
such payment had not occurred. To the extent the obligation to repay any Senior
Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under
any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law,
then the obligation so declared fraudulent, invalid or otherwise set aside (and
all other amounts that would come due with respect thereto had such obligation
not been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes hereof as if such declaration, invalidity or
setting aside had not occurred.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of Extended Stay America who are not
holders of Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than holders of the notes.
Change of Control
Upon the occurrence of any of the following events (each a "Change of
Control") Extended Stay America must commence and consummate, within the time
periods set forth in the indenture, an Offer to Purchase for all
32
notes then outstanding, at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest (if any) to the Payment Date:
(1) such time as a "person" or "group" (as those terms are used in
Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Existing
Stockholders and their respective Affiliates, becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the Voting Stock of Extended
Stay America on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of
Extended Stay America, on a fully diluted basis, than is held by or for the
Existing Stockholders and their Affiliates on such date; or
(2) such time as individuals who on the Closing Date constitute the
Board of Directors (together with any new or replacement directors whose
election by the Board of Directors or whose nomination by the Board of
Directors for election by Extended Stay America's stockholders was approved
by a vote of at least a majority of the members of the Board of Directors
then still in office who either were members of the Board of Directors on
the Closing Date or whose election or nomination for election was so
approved) cease for any reason to constitute a majority of the members of
the Board of Directors then in office.
"Existing Stockholders" means H. Wayne Huizenga, George D. Johnson, Jr. and
Stewart H. Johnson, their spouses and any one or more of their lineal
descendants and their spouses or any trust created solely for the benefit of any
such Persons.
There can be no assurance that Extended Stay America will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of notes) required by the foregoing covenant (as well as
may be contained in other securities of Extended Stay America which might be
outstanding at the time). The above covenant requiring Extended Stay America to
repurchase the notes will, unless consents are obtained, require Extended Stay
America to repay all indebtedness then outstanding which by its terms would
prohibit such note repurchase, either prior to or concurrently with such note
repurchase.
Extended Stay America will not be required to make an Offer to Purchase
pursuant to this covenant if a third party makes an Offer to Purchase in
compliance with this covenant and repurchases all notes validly tendered and not
withdrawn under such Offer to Purchase.
Covenants
Limitation on Indebtedness
(a) Extended Stay America will not, and will not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness (other than the notes, the
Existing Notes and Indebtedness existing on the Closing Date); provided that
Extended Stay America or any Restricted Subsidiary may Incur Indebtedness if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Interest Coverage Ratio would be
greater than 2.00 to 1.00.
Notwithstanding the foregoing, Extended Stay America and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(1) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $900 million (together with any refinancings thereof)
under this clause (1), less any amount of such Indebtedness permanently
repaid since the date of the indenture as provided under the "Limitation on
Asset Sales" covenant described below;
(2) Indebtedness owed (A) by a Restricted Subsidiary to Extended
Stay America; provided that if such Indebtedness exceeds $500,000 it shall
be evidenced by a promissory note or (B) by Extended Stay America or a
Restricted Subsidiary to any Restricted Subsidiary; provided that any event
which results
33
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to Extended Stay
America or another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this clause
(2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (2), (4) or (6) of this paragraph) and
any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the notes shall only be permitted
under this clause (3) if (A) in case the notes are refinanced in part or
the Indebtedness to be refinanced is pari passu with the notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
pari passu with, or subordinate in right of payment to, the remaining
notes, (B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the notes, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes at least to the extent that
the Indebtedness to be refinanced is subordinated to the notes and (C) such
new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded (or, if earlier, the stated
maturity of the notes), and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded (or, if less, the remaining Average Life of the
notes); and provided further that in no event may Indebtedness of Extended
Stay America that is pari passu with or subordinated in right of payment to
the notes be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (3);
(4) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency
Agreements and Interest Rate Agreements; provided that such agreements (a)
are designed solely to protect Extended Stay America or its Restricted
Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder; and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of Extended Stay America or any
of its Restricted Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by
Extended Stay America or any Restricted Subsidiary in connection with such
disposition;
(5) Indebtedness of Extended Stay America, to the extent the net
proceeds thereof are promptly (A) used to purchase notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited
to defease the notes as described below under "Defeasance";
(6) Guarantees of the notes and Guarantees of Indebtedness of
Extended Stay America by any Restricted Subsidiary provided the Guarantee
of such Indebtedness is permitted by and made in accordance with the
"Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant
described below;
(7) Indebtedness, Incurred to finance Extended Stay Assets, in an
aggregate amount (together with any refinancings thereof) not to exceed at
any one time outstanding the Net Cash Proceeds, or the fair market value of
property other than cash, received by Extended Stay America after the
Closing Date from the issuance and sale of its Capital Stock (other than
Disqualified Stock), including an Incurrence (permitted by the indenture)
of Indebtedness of Extended Stay America upon conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of Extended
Stay America, to a Person that is not a Subsidiary of Extended Stay
America, to the extent such sale of Capital Stock has not been used
34
pursuant to clause (C)(2) of the first paragraph, or clause (3), (4) or (6)
of the second paragraph, of the "Limitation on Restricted Payments"
covenant to make a Restricted Payment; and
(8) Indebtedness, in addition to Indebtedness permitted under
clauses (1) through (7) above, in an aggregate principal amount outstanding
at any time (together with any refinancings thereof) not to exceed $30
million less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that Extended Stay
America or a Restricted Subsidiary may Incur pursuant to this "Limitation on
Indebtedness" covenant shall not be deemed to be exceeded, with respect to any
outstanding Indebtedness due solely to the result of fluctuations in the
exchange rates of currencies.
(c) For purposes of determining any particular amount of
Indebtedness this "Limitation on Indebtedness" covenant, (1) Indebtedness
Incurred the Credit Agreement on or prior to the Closing Date shall be treated
as pursuant to clause (1) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted above (other
than Indebtedness referred to in clause (1) of the preceding sentence), Extended
Stay America, in its sole discretion, shall classify, and from time to time may
reclassify, such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
Limitation on Senior Subordinated Indebtedness
Extended Stay America shall not Incur any Indebtedness that is subordinate
in right of payment to any Senior Indebtedness unless such Indebtedness is pari
passu with, or subordinated in right of payment to, the notes; provided that the
foregoing limitation shall not apply to distinctions between categories of
Senior Indebtedness of Extended Stay America that exist by reason of any Liens
or Guarantees arising or created in respect of some but not all such Senior
Indebtedness.
Limitation on Liens
Extended Stay America shall not Incur any Indebtedness secured by a Lien
("Secured Indebtedness") which is not Senior Indebtedness unless
contemporaneously therewith effective provision is made to secure the notes
equally and ratably with (or, if the Secured Indebtedness is subordinated in
right of payment to the notes, prior to) such Secured Indebtedness for so long
as such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments
Extended Stay America will not, and will not permit any Restricted
Subsidiary to, directly or indirectly:
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire shares of such
Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons
other than Extended Stay America or any of its Restricted Subsidiaries;
(2) purchase, redeem, retire or otherwise acquire for value any
shares of Capital Stock of (A) Extended Stay America or an Unrestricted
Subsidiary (including options, warrants or other rights to acquire such
shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Affiliate of Extended Stay
35
America (other than a Wholly Owned Restricted Subsidiary) or any
holder (or any Affiliate of such holder) of 5% or more of the Capital
Stock of Extended Stay America;
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of Extended Stay America that is
subordinated in right of payment to the notes; or
(4) make any Investment, other than a Permitted Investment, in any Person
(such payments or any other actions described in clauses (1) through
(4) above being collectively "Restricted Payments"), if, at the time
of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have
occurred and be continuing;
(B) Extended Stay America could not Incur at least
$1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant; or
(C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) made after
March 10, 1998 shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or,
if the Adjusted Consolidated Net Income is a loss, minus 100%
of the amount of such loss) (determined by excluding income
resulting from transfers of assets by Extended Stay America or
a Restricted Subsidiary to an Unrestricted Subsidiary) accrued
on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal
quarter immediately following March 10, 1998 and ending on the
last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed with the Commission or
provided to the trustee pursuant to the "Commission Reports
and Reports to holders" covenant plus (2) the aggregate Net
Cash Proceeds received by Extended Stay America after March
10, 1998 from the issuance and sale permitted by the indenture
(or, if prior to the Closing Date, the terms of the Existing
Notes) of its Capital Stock (other than Disqualified Stock) to
a Person who is not a Subsidiary of Extended Stay America,
including an issuance or sale permitted by the indenture (or,
if prior to the Closing Date, the terms of the Existing Notes)
of Indebtedness of Extended Stay America for cash subsequent
to March 10, 1998 upon the conversion of such Indebtedness
into Capital Stock (other than Disqualified Stock) of Extended
Stay America, or from the issuance to a Person who is not a
Subsidiary of Extended Stay America of any options, warrants
or other rights to acquire Capital Stock of Extended Stay
America (in each case, exclusive of any Disqualified Stock or
any options, warrants or other rights that are redeemable at
the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the notes), in each case
except to the extent such Net Cash Proceeds are used to Incur
Indebtedness outstanding under clause (7) of the "Limitation
on Indebtedness" covenant, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances,
or other transfers of assets, in each case to Extended Stay
America or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included
in the calculation of Adjusted Consolidated Net Income), or
from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by Extended Stay America
or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes including premium, if any, and accrued
36
and unpaid interest, with the proceeds of, or in exchange for, Indebtedness
Incurred under clause (3) of the second paragraph of part (a) of the
"Limitation on Indebtedness" covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock
of Extended Stay America or an Unrestricted Subsidiary (or options,
warrants or other rights to acquire such Capital Stock) in exchange for, or
out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Disqualified Stock) of Extended Stay America (or
options, warrants or other rights to acquire such Capital Stock);
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of
Extended Stay America which is subordinated in right of payment to the
notes in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of Extended Stay America (or options, warrants or other
rights to acquire such Capital Stock);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of Extended Stay America;
(6) Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of Extended Stay America; or
(7) Restricted Payments in an aggregate amount not to exceed $100
million; provided that, except in the case of clauses (1) and (3), no
Default or Event of Default shall have occurred and be continuing or occur
as a consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (2) or (7) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (3) or (4) thereof and an Investment referred to in clause (6) thereof),
and the Net Cash Proceeds from any issuance of Capital Stock referred to in
clauses (3) and (4), shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of Extended Stay America
are used for the redemption, repurchase or other acquisition of the notes, or
Indebtedness that is pari passu with the notes, then the Net Cash Proceeds of
such issuance shall be included in clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant only to the extent such proceeds
are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Extended Stay America will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
Extended Stay America or any other Restricted Subsidiary;
(2) pay any Indebtedness owed to Extended Stay America or any other
Restricted Subsidiary;
(3) make loans or advances to Extended Stay America or any other
Restricted Subsidiary; or
(4) transfer any of its property or assets to Extended Stay America or
any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
37
(1) existing on the Closing Date in the Credit Agreement, the
indenture or any other agreements in effect on the Closing Date, and any
modifications, extensions, refinancings, renewals, substitutions or
replacements of such agreements; provided that the encumbrances and
restrictions in any such modifications, extensions, refinancings, renewals,
substitutions or replacements are no less favorable in any material respect
to the holders than those encumbrances or restrictions that are then in
effect and that are being modified, extended, refinanced, renewed,
substituted or replaced;
(2) existing under or by reason of applicable law;
(3) existing with respect to any Person or the property or assets of
such Person acquired by Extended Stay America or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired and any modifications,
extensions, refinancings, renewals, substitutions or replacements of such
agreements; provided that the encumbrances and restrictions in any such
modifications, extensions, refinancings, renewals, substitutions or
replacements are no less favorable in any material respect to the holders
of notes than those encumbrances or restrictions that are then in effect
and that are being modified, extended, refinanced, renewed, substituted or
replaced;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of Extended Stay
America or any Restricted Subsidiary not otherwise prohibited by the
indenture or (C) arising or agreed to in the ordinary course of business,
not relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of Extended Stay
America or any Restricted Subsidiary in any manner material to Extended
Stay America or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
(6) contained in the terms of any Indebtedness or any agreement pursuant to
which such Indebtedness was issued if (A) the encumbrance or
restriction applies only in the event of a payment default or a default
with respect to a financial covenant contained in such Indebtedness or
agreement, (B) the encumbrance or restriction is not materially more
disadvantageous to the holders of the notes than is customary in
comparable financings (as determined by Extended Stay America) and (C)
Extended Stay America determines that any such encumbrance or
restriction will not materially affect Extended Stay America's ability
to make principal or interest payments on the notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent Extended
Stay America or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of Extended Stay America or any of its Restricted Subsidiaries that secure
Indebtedness of Extended Stay America or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Extended Stay America will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase shares of such Capital Stock) except:
(1) to Extended Stay America or a Wholly Owned Restricted Subsidiary;
38
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation
on Restricted Payments" covenant if made on the date of such issuance or
sale; or
(4) issuances or sales of Common Stock of a Restricted Subsidiary,
provided that Extended Stay America or such Restricted Subsidiary applies
the Net Cash Proceeds, if any, of any such sale in accordance with clause
(A) or (B) of the "Limitation on Asset Sales" covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Extended Stay America will not permit any Restricted Subsidiary, directly
or indirectly, to Guarantee any Indebtedness of Extended Stay America, other
than Designated Debt ("Guaranteed Indebtedness"), unless (1) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
indenture providing for a senior subordinated Guarantee (a "Subsidiary
Guarantee") of payment of the notes by such Restricted Subsidiary and (2) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Extended Stay America or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (1) senior to the notes, then the
Guarantee of such Guaranteed Indebtedness shall be senior to or pari passu with,
the Subsidiary Guarantee or (2) pari passu with the notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (3) subordinated to the notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (1) any sale, exchange or transfer,
to any Person not an Affiliate of Extended Stay America, of all of Extended Stay
America's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the indenture) or (2) the release or
discharge of the Guarantee which resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under such
Guarantee.
Limitation on Transactions with Shareholders and Affiliates
Extended Stay America will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any holder
(or any Affiliate of such holder) of 5% or more of any class of Capital Stock of
Extended Stay America or with any Affiliate of Extended Stay America or any
Restricted Subsidiary, except upon fair and reasonable terms no less favorable
to Extended Stay America or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which Extended Stay America or
a Restricted Subsidiary delivers to the trustee a written opinion of a
nationally recognized investment banking firm stating that the transaction
is fair to Extended Stay America or such Restricted Subsidiary from a
financial point of view;
39
(2) any transaction solely between Extended Stay America and any of
its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(3) the payment of reasonable and customary fees and expenses to
directors of Extended Stay America who are not employees of Extended Stay
America;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between Extended Stay America and any other Person with which
Extended Stay America files a consolidated tax return or with which
Extended Stay America is part of a consolidated group for tax purposes; or
(5) any Permitted Investments or Restricted Payments not prohibited by
the "Limitation on Restricted Payments" covenant. Notwithstanding the
foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (2) through (5) of this
paragraph, (a) the aggregate amount of which exceeds $5 million in value,
must be approved or determined to be fair in the manner provided for in
clause (1)(A) or (B) above and (b) the aggregate amount of which exceeds
$10 million in value, must be determined to be fair in the manner provided
for in clause (1)(B) above.
Limitation on Asset Sales
Extended Stay America will not, and will not permit any Restricted
Subsidiary to, consummate any Asset Sale, unless:
(1) the consideration received by Extended Stay America or such
Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of; and
(2) at least 75% of the consideration received consists of cash or
Temporary Cash Investments or the assumption of Senior Indebtedness of
Extended Stay America or Indebtedness of a Restricted Subsidiary, provided
that Extended Stay America or such Restricted Subsidiary is irrevocably
released from all liability under such Indebtedness.
In the event and to the extent that the Net Cash Proceeds received by
Extended Stay America or any of its Restricted Subsidiaries from one or more
Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of Extended Stay America and its
Subsidiaries has been filed with the Commission or provided to the trustee
pursuant to the "Commission Reports and Reports to Holders" covenant), then
Extended Stay America shall or shall cause the relevant Restricted Subsidiary to
(1) within twelve months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets:
(A) apply an amount equal to such excess Net Cash
Proceeds to permanently repay Senior Indebtedness of Extended
Stay America, or any Restricted Subsidiary providing a
Subsidiary Guarantee pursuant to the "Limitation on Issuances
of Guarantees by Restricted Subsidiaries" covenant described
above or Indebtedness of any other Restricted Subsidiary, in
each case owing to a Person other than Extended Stay America
or any of its Restricted Subsidiaries, or the Existing Notes;
or
(B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the
date of such agreement), in property or assets (other than
current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a
nature or type, or engaged in a business) similar or related
to the nature or type of the property and assets of, or the
business of, Extended Stay America and its Restricted
Subsidiaries existing on the date of such investment; and
40
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (1)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such 12-month period as set forth in
clause (1) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $35 million, Extended Stay
America must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the holders of notes and all holders of
other Indebtedness that is pari passu with the notes containing provisions
similar to those set forth in the indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum principal
amount of notes and such other pari passu Indebtedness that may be purchased out
of the Excess Proceeds. The offer price in any such Offer to Purchase will be
equal to 100% of principal amount plus accrued and unpaid interest to the date
of purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Offer to Purchase, Extended Stay America may use those Excess
Proceeds for any purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of notes and other pari passu Indebtedness tendered
into such Offer to Purchase exceeds the amount of Excess Proceeds, the trustee
will select the notes and such other pari passu Indebtedness to be purchased on
a pro rata basis. Upon completion of each Offer to Purchase, the amount of
Excess Proceeds will be reset at zero.
Commission Reports and Reports to Holders
Whether or not Extended Stay America is then required to file reports
with the Commission, Extended Stay America shall file with the Commission all
such reports and other information as it would be required to file with the
Commission by Sections 13(a) or 15(d) under the Securities Exchange Act of 1934
if it were subject thereto; provided that, if filing such documents by Extended
Stay America with the Commission is not permitted under the Exchange Act,
Extended Stay America shall provide such documents to the trustee and upon
written request supply copies of such documents to any prospective holder.
Extended Stay America shall supply the trustee and each holder who so requests
or shall supply to the trustee for forwarding to each such holder, without cost
to such holder, copies of such reports and other information.
Events of Default
The following events will be defined as "Events of Default" in the
indenture:
(1) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise, whether or not such payment is
prohibited by the provisions described above under "--Ranking and
Subordination";
(2) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days, whether or not such payment is prohibited by the provisions described
above under "--Ranking and Subordination";
(3) default in the performance or breach of the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of Extended Stay America or the failure to
make or consummate an Offer to Purchase in accordance with the "Limitation
on Asset Sales" or "Repurchase of notes upon a Change of Control" covenant;
(4) Extended Stay America defaults in the performance of or breaches
any other covenant or agreement of Extended Stay America in the indenture
or under the notes (other than a default specified in clause (1), (2) or
(3) above) and such default or breach continues for a period of 30
consecutive days after written notice by the trustee or the holders of 25%
or more in aggregate principal amount of the notes;
41
(5) there occurs with respect to any issue or issues of Indebtedness
of Extended Stay America or any Significant Subsidiary having an
outstanding principal amount of $25 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now exists
or shall hereafter be created, (a) an event of default that has caused the
holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full
or such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (b) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment
default;
(6) any final judgment or order (not covered by insurance) for the
payment of money in excess of $25 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against Extended Stay America or any Significant Subsidiary and
shall not be paid or discharged, and there shall be any period of 60
consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $25 million
during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect;
(7) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of Extended Stay America or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B) appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of Extended Stay America or any Significant Subsidiary or
for all or substantially all of the property and assets of Extended Stay
America or any Significant Subsidiary or (C) the winding up or liquidation
of the affairs of Extended Stay America or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for
a period of 60 consecutive days; or
(8) Extended Stay America or any Significant Subsidiary (A) commences
a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents to
the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of Extended
Stay America or any Significant Subsidiary or for all or substantially all
of the property and assets of Extended Stay America or any Significant
Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(7) or (8) above that occurs with respect to Extended Stay America) occurs and
is continuing under the indenture, the trustee or the holders of at least 25% in
aggregate principal amount of the notes, then outstanding, by written notice to
Extended Stay America (and to the trustee if such notice is given by the
holders), may, and the trustee at the request of such holders shall, declare the
principal of, premium, if any, and accrued interest on the notes to be
immediately due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and payable;
provided that any such declaration of acceleration shall not become effective
until the earlier of (A) five Business Days after receipt of the acceleration
notice by the Bank Agent and Extended Stay America or (B) acceleration of the
Indebtedness under the Credit Agreement; provided further that such acceleration
shall automatically be rescinded and annulled without any further action
required on the part of the holders in the event that any and all Events of
Default specified in the acceleration notice under the indenture shall have been
cured, waived or otherwise remedied as provided in the indenture prior to the
expiration of the period referred to in the preceding clauses (A) and (B). In
the event of a declaration of acceleration because an Event of Default set forth
in clause (5) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (5) shall be
remedied or cured by Extended Stay America or the relevant Significant
Subsidiary or waived by the holders of the relevant Indebtedness within 60 days
after the declaration of acceleration with respect thereto. If an Event of
Default specified in clause (7) or (8) above occurs with respect to Extended
Stay America, the principal of, premium, if any, and accrued interest on the
notes then outstanding shall become and be immediately due and payable without
any declaration or other act on the part of the trustee or any holder. The
holders of at least a majority in principal amount of the outstanding notes by
written notice to Extended Stay America and to the trustee, may waive all past
42
defaults and rescind and annul a declaration of acceleration and its
consequences if (1) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the notes that have become
due solely by such declaration of acceleration, have been cured or waived and
(2) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"--Modification and Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee. However, the trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the trustee
in personal liability, or that the trustee determines in good faith may be
unduly prejudicial to the rights of holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from holders of notes. A holder
may not pursue any remedy with respect to the indenture or the notes unless:
(1) the holder gives the trustee written notice of a continuing Event
of Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the trustee to pursue the
remedy;
(3) such holder or holders offer the trustee indemnity satisfactory to
the trustee against any costs, liability or expense;
(4) the trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount of the outstanding notes do not give the trustee a
direction that is inconsistent with the request. However, such limitations
do not apply to the right of any holder of a note to receive payment of the
principal of, premium, if any, or interest on, such note or to bring suit
for the enforcement of any such payment, on or after the due date expressed
in the notes, which right shall not be impaired or affected without the
consent of the holder.
The indenture will require certain officers of Extended Stay America to
certify, on or before a date not more than 105 days after the end of each fiscal
year, that a review has been conducted of the activities of Extended Stay
America and its Restricted Subsidiaries and Extended Stay America's and its
Restricted Subsidiaries' performance under the indenture and that Extended Stay
America has fulfilled all obligations thereunder, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
and the nature and status thereof. Extended Stay America will also be obligated
to notify the trustee of any default or defaults in the performance of any
covenants or agreements under the indenture.
Consolidation, Merger and Sale of Assets
Extended Stay America will not consolidate with, merge with or into, or
sell, convey, transfer, lease or otherwise dispose of all or substantially all
of its property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into Extended Stay America unless:
(1) Extended Stay America shall be the continuing Person, or the
Person (if other than Extended Stay America) formed by such consolidation
or into which Extended Stay America is merged or that acquired or leased
such property and assets of Extended Stay America shall be a corporation
organized and validly existing under the laws of the United States of
America or any state or jurisdiction thereof and shall expressly assume, by
a supplemental indenture, executed and delivered to the trustee, all of the
obligations of Extended Stay America on all of the notes and under the
indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
43
(3) immediately after giving effect to such transaction on a pro forma
basis, Extended Stay America or any Person becoming the successor obligor
of the notes shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of Extended Stay America immediately prior to
such transaction;
(4) immediately after giving effect to such transaction on a pro forma
basis Extended Stay America, or any Person becoming the successor obligor
of the notes, as the case may be, could Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (4) shall not apply to a consolidation,
merger or sale of all (but not less than all) of the assets of Extended
Stay America if all Liens and Indebtedness of Extended Stay America or any
Person becoming the successor obligor on the notes, as the case may be, and
its Restricted Subsidiaries outstanding immediately after such transaction
would, if Incurred at such time, have been permitted to be Incurred (and
all such Liens and Indebtedness, other than Liens and Indebtedness of
Extended Stay America and its Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the indenture; and
(5) Extended Stay America delivers to the trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (3) and (4)) and Opinion of Counsel, in each case
stating that such consolidation, merger or transfer and such supplemental
indenture complies with this provision and that all conditions precedent
provided for herein relating to such transaction have been complied with;
provided, however, that clauses (3) and (4) above do not apply if, in the
good faith determination of the Board of Directors of Extended Stay
America, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of
incorporation of Extended Stay America and that any such transaction shall
not have as one of its purposes the evasion of the foregoing limitations.
Defeasance
Defeasance and Discharge. The indenture will provide that Extended Stay
America will be deemed to have paid and will be discharged from any and all
obligations in respect of the notes on the 123rd day after the deposit referred
to below, and the provisions of the indenture will no longer be in effect with
respect to the notes (except for, among other matters, certain obligations to
register the transfer or exchange of the notes, to replace stolen, lost or
mutilated notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things:
(1) Extended Stay America has deposited with the trustee, in trust,
money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms
will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the notes on the Stated Maturity
or on the applicable redemption dates, as the case may be, of such payments
in accordance with the terms of the indenture and the notes;
(2) Extended Stay America has delivered to the trustee (a) either (x)
an Opinion of Counsel to the effect that holders will not recognize income,
gain or loss for federal income tax purposes as a result of Extended Stay
America's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no
longer required or (y) a ruling directed to the trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion
of Counsel and (b) an Opinion of Counsel to the effect that the creation of
the defeasance trust does not violate the Investment Company Act of 1940
and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law;
(3) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall
44
have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and such
deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which Extended Stay
America or any of its Subsidiaries is a party or by which Extended Stay
America or any of its Subsidiaries is bound;
(4) Extended Stay America is not prohibited from making payments in
respect of the notes by the provisions described under "--Ranking and
Subordination"; and
(5) if at such time the notes are listed on a national securities
exchange, Extended Stay America has delivered to the trustee an Opinion of
Counsel to the effect that the notes will not be delisted as a result of
such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
indenture further will provide that the provisions of the indenture will no
longer be in effect with respect to clauses (3) and (4) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (3) under "Events of Default" with respect to such clauses
(3) and (4) under "Consolidation, Merger and Sale of Assets," clause (4) under
"Events of Default" with respect to such other covenants and clauses (5) and (6)
under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
notes on the Stated Maturity or on the applicable redemption dates, as the case
may be, of such payments in accordance with the terms of the indenture and the
notes, the satisfaction of the provisions described in clauses (2)(b), (3), (4)
and (5) of the preceding paragraph and the delivery by Extended Stay America to
the trustee of an Opinion of Counsel to the effect that, among other things, the
holders will not recognize income, gain or loss for federal income tax purposes
as a result of such deposit and defeasance of certain covenants and Events of
Default and will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such deposit
and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event Extended Stay
America exercises its option to omit compliance with certain covenants and
provisions of the indenture with respect to the notes as described in the
immediately preceding paragraph and the notes are declared due and payable
because of the occurrence of an Event of Default that remains applicable, the
amount of money and/or U.S. Government Obligations on deposit with the trustee
will be sufficient to pay amounts due on the notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the notes at the time
of the acceleration resulting from such Event of Default. However, Extended Stay
America will remain liable for such payments.
Modification and Waiver
Modifications and amendments of the indenture may be made by Extended Stay
America and the trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding notes; provided,
however, that no such modification or amendment may, without the consent of each
holder affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note;
(2) reduce the principal amount of, or premium, if any, or interest
on, any note;
(3) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note;
(4) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any note;
(5) reduce the above-stated percentage of outstanding notes the
consent of whose holders is necessary to modify or amend the indenture;
45
(6) waive a default in the payment of principal of, premium, if any,
or interest on the notes;
(7) modify the subordination provisions in a manner adverse to the
holders; or
(8) reduce the percentage or aggregate principal amount of outstanding
notes the consent of whose holders is necessary for waiver of compliance
with certain provisions of the indenture or for waiver of certain defaults.
No Personal Liability of Incorporators, Stockholders, Officers, Directors, or
Employees
The indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of Extended Stay America in the indenture, or
in any of the notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee or controlling person of Extended Stay America or of any successor
Person thereof. Each holder, by accepting the notes, waives and releases all
such liability.
Concerning the Trustee
The indenture provides that, except during the continuance of a Default,
the trustee will not be liable, except for the performance of such duties as are
specifically set forth in such indenture. If an Event of Default has occurred
and is continuing, the trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the trustee, should it become a creditor of Extended Stay America, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
The trustee is one of the lenders that are parties to the Credit Agreement.
Book-Entry; Delivery and Form
The exchange notes will initially be issued in the form of one or more
global certificates. The global exchange notes will be deposited on the date the
exchange offer is completed with or on behalf of The Depository Trust Company
and registered in the name of The Depository Trust Company or its nominee.
Extended Stay America understands that The Depository Trust Company is a
limited purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. The Depository
Trust Company was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include other organizations. Indirect access to The Depository Trust
Company system is available to other banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
So long as The Depository Trust Company, or its nominee, is the registered
owner or holder of the global exchange notes, The Depository Trust Company or
its nominee, as the case may be, will be considered the sole owner or holder of
the notes represented by the global exchange notes for all purposes under the
indenture and the notes. No beneficial owner of an interest in a global exchange
note will be able to transfer that interest except in
46
accordance with The Depository Trust Company's applicable procedures, in
addition to those provided for under the indenture.
Payments made with respect to a global exchange note will be made to The
Depository Trust Company or its nominee, as the case may be, as the registered
owner of the note. Extended Stay America will not have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global exchange note or for maintaining,
supervising or reviewing any records relating to beneficial ownership interests.
Extended Stay America expects that The Depository Trust Company or its
nominee, upon receipt of any payments made with respect to a global exchange
note, will credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of the global
exchange notes as shown on the records of The Depository Trust Company or its
nominee. Extended Stay America also expects that payments by participants to
owners of beneficial interests in the global exchange notes held through
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for the customers. These payments will be the
responsibility of the participants.
Transfers between participants in The Depository Trust Company will be
effected in the ordinary way in accordance with The Depository Trust Company
rules and will be settled in same-day funds.
Extended Stay America understands that The Depository Trust Company will
take any action permitted to be taken by a holder of notes, including the
presentation of outstanding notes for exchange in the exchange offer, only at
the direction of one or more participants to whose account The Depository Trust
Company interests in the global notes are credited and only in respect of the
portion of the aggregate principal amount of notes as to which the participant
or participants has or have given direction.
Although The Depository Trust Company is expected to follow the above procedures
in order to facilitate transfers of interests in the global exchange notes among
participants of The Depository Trust Company, it is under no obligation to
perform or continue to perform these procedures, and the procedures may be
discontinued at any time. Extended Stay America will not have any responsibility
for the performance by The Depository Trust Company or its respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Glossary of Defined Terms
A glossary of some of the defined terms used in the indenture is set out
below. Reference is made to the indenture for the full definition of all terms,
including those below, as well as any other capitalized term used herein for
which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition from such Person by a Restricted Subsidiary and not Incurred
by such Person in connection with, or in anticipation of, such Person becoming a
Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of
such Person which is redeemed, defeased; retired or otherwise repaid at the time
of or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of Extended Stay America and its Restricted Subsidiaries for
such period determined on a consolidated basis in conformity with GAAP; provided
that the following items shall be excluded in computing Adjusted Consolidated
Net Income (without duplication):
(1) the net income of any Person (other than Extended Stay America or
a Restricted Subsidiary), except to the extent of the amount of dividends
or other distributions actually paid to Extended Stay America or any of its
Restricted Subsidiaries by such Person during such period;
47
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant described below (and in
such case, except to the extent includable pursuant to clause (1) above),
the net income (or loss) of any Person accrued prior to the date it becomes
a Restricted Subsidiary or is merged into or consolidated with Extended
Stay America or any of its Restricted Subsidiaries or all or substantially
all of the property and assets of such Person are acquired by Extended Stay
America or any of its Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income to Extended Stay America or any
Restricted Subsidiary is not at the time of such determination permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(5) except for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant described below, any
amount paid or accrued as dividends on Preferred Stock of Extended Stay
America or any Restricted Subsidiary owned by Persons other than Extended
Stay America and any of its Restricted Subsidiaries; and
(6) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of Extended Stay America and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (1) all current liabilities of Extended Stay America and its
Restricted Subsidiaries (excluding intercompany items) and (2) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of Extended Stay America and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission or
provided to the trustee pursuant to the "Commission Reports and Reports to
holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (1) an investment by Extended Stay America or any
of its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with Extended Stay America or any of its Restricted Subsidiaries; provided that
such Person's primary business is related, ancillary or complementary to the
businesses of Extended Stay America and its Restricted Subsidiaries on the date
of such investment or (2) an acquisition by Extended Stay America or any of its
Restricted Subsidiaries of the property and assets of any Person other than
Extended Stay America or any of its Restricted Subsidiaries that constitute
substantially all of a division or line of business, or one or more hotel
properties, of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of Extended Stay America
and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by Extended Stay
America or any of its Restricted Subsidiaries (other than to Extended Stay
America or another Restricted Subsidiary) of (1) all or substantially all of the
Capital Stock of any Restricted Subsidiary of Extended Stay America or (2) all
or substantially all of the assets that constitute a division or line of
business, or one or more hotel properties, of Extended Stay America or any of
its Restricted Subsidiaries.
48
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by Extended Stay America or any of its
Restricted Subsidiaries to any Person other than Extended Stay America or any of
its Restricted Subsidiaries of (1) all or any of the Capital Stock of any
Restricted Subsidiary, (2) all or substantially all of the property and assets
of an operating unit or business of Extended Stay America or any of its
Restricted Subsidiaries or (3) any other property and assets of Extended Stay
America or any of its Restricted Subsidiaries (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) outside the ordinary course of
business of Extended Stay America or such Restricted Subsidiary and, in each
case, that is not governed by the provisions of the indenture applicable to
mergers, consolidations and sales of assets of Extended Stay America; provided
that "Asset Sale" shall not include (a) sales or other dispositions of
inventory, receivables and other current assets, (b) sales, transfers or other
dispositions of assets with a fair market value not in excess of $5 million in
any transaction or series of related transactions, (c) sales, transfers or other
dispositions of assets constituting a Restricted Payment permitted to be made
under the "Limitation on Restricted Payments" covenant, (d) sales or other
dispositions of assets for consideration at least equal to the fair market value
of the assets sold or disposed of, to the extent that the consideration received
would satisfy clause (B) of the "Limitation on Asset Sales" covenant or (e)
sales, transfers or other dispositions of property or equipment that has become
worn out, obsolete or damaged or otherwise unsuitable for use in connection with
the business of Extended Stay America or its Restricted Subsidiaries.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (2) the sum of all such principal payments.
"Bank Agent" means The Industrial Bank of Japan, Limited, or its successors
as agent for the lenders under the Credit Agreement.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Closing Date" means the date on which the notes are originally issued
under the indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all series and
classes of common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, (A) to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (1) Consolidated Interest
Expense, (2) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary gains or losses or sales of assets), (3)
depreciation expense, (4) amortization expense and (5) all other non-cash items
reducing Adjusted Consolidated Net Income less all non-cash items increasing
Adjusted Consolidated Net Income, provided that increases or decreases from
changes in the amounts of current assets or current liabilities, respectively,
shall not result in adjustments to Adjusted Consolidated Net Income pursuant to
this clause (5), all as determined on a consolidated basis for Extended Stay
America and its Restricted Subsidiaries in conformity with GAAP, and (B) $10
million (for fiscal periods ending after December 31, 1999 and on or prior to
December 31, 2000); provided that, if any Restricted Subsidiary is not a Wholly
Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent
not otherwise reduced in accordance with GAAP) by an amount equal to (X) the
amount of the Adjusted Consolidated Net Income attributable to such Restricted
Subsidiary
49
multiplied by (Y) the percentage ownership interest in the income of
such Restricted Subsidiary not owned on the last day of such period by Extended
Stay America or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by Extended Stay America or any of
its Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by Extended Stay America and its Restricted Subsidiaries during
such period; excluding, however, (1) any amount of such interest of any
Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (3) of the definition thereof (but only in the same proportion as the net
income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (3) of the definition
thereof) and (2) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the Financing Transactions, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of Extended Stay America and its Restricted
Subsidiaries (which shall be as of a date not more than 135 days prior to the
date of such computation, and which shall not take into account Unrestricted
Subsidiaries), less any amounts attributable to Disqualified Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of Extended Stay America or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding the
effects of foreign currency exchange adjustments under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 52).
"Credit Agreement" means the credit agreement dated as of September 26,
1997, and amended and restated as of March 10, 1998 and further amended and
restated as of June 7, 2000, among Extended Stay America, various banks, Morgan
Stanley Senior Funding, Inc., as sole book runner and sole lead arranger, and
the Industrial Bank of Japan, Limited, as administrative agent, together with
any agreements, instruments and documents executed or delivered pursuant to or
in connection with such credit agreement (including without limitation any
Guarantees and security documents), in each case as such credit agreement or
such agreements, instruments or documents may be amended (including any
amendment and restatement thereof), supplemented, extended, renewed, replaced or
otherwise modified from time to time and including any agreement extending the
maturity of, refinancing (including the refinancing of such credit agreement as
contemplated by the commitment letter, dated June 1, 2001, between Extended Stay
America and Morgan Stanley Senior Funding, Inc.) or otherwise restructuring
(including, but not limited to, the inclusion of additional borrowers thereunder
that are Subsidiaries of Extended Stay America) all or any portion of the
Indebtedness under such agreement or any successor agreement, as such agreement
may be amended, renewed, extended, substituted, replaced, restated and otherwise
modified from time to time).
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Debt" means Senior Indebtedness that: (1) is incurred under a
Credit Facility; (2) is a Capitalized Lease Obligation or other Indebtedness
Incurred to pay all or a portion of the purchase price of any equipment or
machinery used in the ordinary course of business; (3) is an obligation to pay
the deferred and unpaid purchase price of property or services; (4) is a
performance or surety bond or other similar obligation Incurred in the ordinary
course of business; (5) are obligations secured by Liens Incurred in the
50
ordinary course of business or arising out of contested judgments; (6) are
guarantees of Senior Indebtedness existing as of the Closing Date; (7)
Indebtedness under Currency Agreements or Interest Rate Agreements; or (8) is
any one or more items of Indebtedness that have been designated by Extended Stay
America as "Designated Debt;" provided that the aggregate principal amount of
Indebtedness outstanding under this clause (8) at any time may not exceed $75
million.
"Designated Senior Indebtedness" means (1) any Indebtedness under the
Credit Agreement (except that any Indebtedness which represents a partial
refinancing of Indebtedness theretofore outstanding pursuant to the Credit
Agreement, rather than a complete refinancing thereof, shall only constitute
Designated Senior Indebtedness if such partial refinancing meets the
requirements of clause (2) below) and (2) any other Indebtedness constituting
Senior Indebtedness that, at the date of determination, has an aggregate
principal amount outstanding of at least $25 million and that is specifically
designated by Extended Stay America, in the instrument creating or evidencing
such Senior Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (1) required to be redeemed prior to
the Stated Maturity of the notes, (2) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the notes or (3) convertible into or exchangeable for Capital Stock referred
to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the notes; provided that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the Stated Maturity of the notes shall not constitute Disqualified
Stock if the "asset sale" or "change of control" provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions contained in "Limitation on Asset Sales" and "Repurchase of notes
upon a Change of Control" covenants described below and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provision prior to Extended Stay America's repurchase of
such notes as are required to be repurchased pursuant to the "Limitation on
Asset Sales" and "Repurchase of notes upon a Change of Control" covenants
described below.
"Existing Notes" means the 9.15% Senior Subordinated Notes due 2008 of
Extended Stay America.
"Extended Stay Assets" means (1) an investment by Extended Stay America or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary or shall be merged into or
consolidated with Extended Stay America or any of its Restricted Subsidiaries;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of Extended Stay America and its Restricted
Subsidiaries on the Closing Date; (2) an acquisition by Extended Stay America or
any of its Restricted Subsidiaries of the property and assets of any Person
other than Extended Stay America or any of its Restricted Subsidiaries, that are
related, ancillary or complementary to the businesses of Extended Stay America
and its Restricted Subsidiaries on the Closing Date; or (3) the construction or
development of property or assets that are related, ancillary or complementary
to the businesses of Extended Stay America and its Restricted Subsidiaries on
the Closing Date, in each case including the costs and expenses in connection
therewith (including, the cost of design, development, construction, acquisition
or improvement).
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Financing Transactions" means the issuance of the oustanding notes, the
entering into of the new credit agreement, and the use of the net proceeds from
the sale of the notes and borrowings under such new credit agreement to repay
all outstanding debt under the Credit Agreement.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as
51
approved by a significant segment of the accounting profession. All ratios and
computations contained or referred to in the indenture shall be computed in
conformity with GAAP applied on a consistent basis, except that calculations
made for purposes of determining compliance with the terms of the covenants and
with other provisions of the indenture shall be made without giving effect to
(1) the amortization of any expenses incurred in connection with the Financing
Transactions (including the write-off of debt issuance costs in connection
therewith), (2) the costs related to the acquisition of Studio Plus Hotels Inc.,
and (3) except as otherwise provided, the amortization of any amounts required
or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (2) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (1) all indebtedness of such Person for
borrowed money, (2) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (3) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (1) or (2) above or (5), (6) or
(7) below) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement), (4) all obligations of
such Person to pay the deferred and unpaid purchase price of property or
services, which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (5) all Capitalized Lease
Obligations, (6) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (7) all Indebtedness of other Persons Guaranteed by
such Person to the extent such Indebtedness is Guaranteed by such Person and (8)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided (A) that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP, (B) that money borrowed and set aside at the time of the Incurrence of any
Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money is
held to secure the payment of such interest, and (C) that Indebtedness shall not
include any liability for federal, state, local or other taxes.
52
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of (1)
the aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters prior to such Transaction Date for which reports have been filed with
the Commission or provided to the trustee pursuant to the "Commission Reports
and Reports to holders" covenant (the "Four Quarter Period") to (2) the
aggregate Consolidated Interest Expense during such Four Quarter Period. In
making the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness Incurred or repaid during the period (the "Reference Period")
commencing on the first day of the Four Quarter Period and ending on the
Transaction Date (other than Indebtedness Incurred or repaid under a revolving
credit or similar arrangement to the extent of the commitment thereunder (or
under any predecessor revolving credit or similar arrangement) in effect on the
last day of such Four Quarter Period unless any portion of such Indebtedness is
projected, in the reasonable judgment of the senior management of Extended Stay
America, to remain outstanding for a period in excess of 12 months from the date
of the Incurrence thereof), in each case as if such Indebtedness had been
Incurred or repaid on the first day of such Reference Period (and pro forma
effect shall be given to the purchase of any U.S. government securities required
to be purchased with the proceeds of any such Indebtedness and set aside to
prefund the payment of interest on such Indebtedness at the time such
Indebtedness is Incurred); (B) Consolidated Interest Expense attributable to
interest on any Indebtedness (whether existing or being Incurred) computed on a
pro forma basis and bearing a floating interest rate shall be computed as if the
rate in effect on the Transaction Date (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months or, if shorter, at least equal to the
remaining term of such Indebtedness) had been the applicable rate for the entire
period; (C) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of proceeds
of any Asset Disposition) and the designation of Unrestricted Subsidiaries as
Restricted Subsidiaries that occur during such Reference Period as if they had
occurred and such proceeds had been applied on the first day of such Reference
Period; and (D) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into Extended Stay America or
any Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; provided that to the
extent that clause (C) or (D) of this sentence requires that pro forma effect be
given to an Asset Acquisition or Asset Disposition, such pro forma calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed for which financial information is available.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers, suppliers or
contractors in the ordinary course of business that are, in conformity with
GAAP, recorded as accounts receivable, prepaid expenses or deposits on the
balance sheet of Extended Stay America or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
(1) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and
(2) the fair market value of the Capital Stock (or any other Investment), held
by Extended Stay America or any of its Restricted Subsidiaries, of (or in) any
Person that has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by clause (3) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant; provided that the fair market value of the Investment
remaining in any Person that has ceased to be a Restricted Subsidiary shall not
exceed the aggregate amount of Investments previously made in such Person valued
at the time such Investments were made less the net reduction of such
Investments. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described above, (a) "Investment"
shall include the fair market value of the assets (net of liabilities (other
than liabilities to Extended Stay America or any of its Restricted
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (b) the fair market value
of the assets (net of liabilities (other than liabilities to Extended Stay
America or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted
53
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (c) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to Extended Stay America or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (1) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (2) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of Extended Stay America and its
Restricted Subsidiaries, taken as a whole, (3) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (4) appropriate amounts to be
provided by Extended Stay America or any Restricted Subsidiary as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other postemployment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to Extended Stay America or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase notes by Extended Stay
America from the holders commenced by mailing a notice to the trustee and each
holder stating: (1) the covenant pursuant to which the offer is being made and
that all notes validly tendered will be accepted for payment on a pro rata
basis; (2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Payment Date"); (3) that any note not tendered will
continue to accrue interest pursuant to its terms; (4) that, unless Extended
Stay America defaults in the payment of the purchase price, any note accepted
for payment pursuant to the Offer to Purchase shall cease to accrue interest on
and after the Payment Date; (5) that holders electing to have a note purchased
pursuant to the Offer to Purchase will be required to surrender the note,
together with the form entitled "Option of the holder to Elect Purchase" on the
reverse side of the note completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (6) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such holder, the
principal amount of notes delivered for purchase and a statement that such
holder is withdrawing his election to have such notes purchased; and (7) that
holders whose notes are being purchased only in part will be issued new notes
equal in principal amount to the unpurchased portion of the notes surrendered;
provided that each note purchased and each new note issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment Date,
Extended Stay America shall (a) accept for payment on a pro rata basis notes or
portions thereof tendered pursuant to an Offer to Purchase; (b) deposit with the
Paying Agent money sufficient to pay the purchase price of all notes or portions
thereof so accepted; and (c) deliver, or cause to be delivered, to the trustee
all notes or portions thereof so accepted together with an Officers' Certificate
specifying the notes or portions thereof accepted for payment by Extended Stay
America. The Paying Agent shall promptly mail to the holders of notes so
accepted payment in an amount equal to the purchase price, and the trustee shall
promptly authenticate and mail to such holders a new note
54
equal in principal amount to any unpurchased portion of the note surrendered;
provided that each note purchased and each new note issued shall be in a
principal amount of $1,000 or integral multiples thereof. Extended Stay America
will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The trustee shall act as the Paying Agent
for an Offer to Purchase. Extended Stay America will comply with Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable, in the event that
Extended Stay America is required to repurchase notes pursuant to an Offer to
Purchase.
"Permitted Investment" means (1) an Investment in Extended Stay America or
a Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, Extended Stay
America or a Restricted Subsidiary; provided that such person's primary business
is related, ancillary or complementary to the businesses of Extended Stay
America and its Restricted Subsidiaries on the date of such Investment; (2)
Temporary Cash Investments; (3) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (4) stock, obligations or securities
received in satisfaction of judgments; (5) an Investment in an Unrestricted
Subsidiary consisting solely of an Investment in another Unrestricted
Subsidiary; (6) Interest Rate Agreements and Currency Agreements designed solely
to protect Extended Stay America or its Restricted Subsidiaries against
fluctuations in interest rates or foreign currency exchange rates; (7) loans or
advances to employees in the ordinary course of business in aggregate amount
outstanding not to exceed $35 million; provided that not more than an aggregate
of $5 million of such loans at any time outstanding may be to senior executive
officers; and (8) Investments in any Person the primary business of which is
related, ancillary or complementary to the businesses of Extended Stay America
and its Restricted Subsidiaries; provided that the aggregate amount of such
Investments does not exceed $50 million plus the net reduction in such
Investments.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Restricted Subsidiary" means any Subsidiary of Extended Stay America other
than an Unrestricted Subsidiary.
"Senior Subordinated Obligations" means any principal of, premium, if any,
interest, or other amounts due, on the notes payable pursuant to the terms of
the notes or upon acceleration, including any amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the notes or
amounts corresponding to such principal, premium, if any, or interest on the
notes.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (1) for the most
recent fiscal year of Extended Stay America, accounted for more than 10% of the
consolidated revenues of Extended Stay America and its Restricted Subsidiaries
or (2) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of Extended Stay America and its Restricted Subsidiaries,
all as set forth on the most recently available consolidated financial
statements of Extended Stay America for such fiscal year.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, and its successors.
"Stated Maturity" means, (1) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (2) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
55
"Subsidiary" means, with respect to any Person, any corporation,
association, business trust or other business entity of which more than 50%r, of
the voting power of the outstanding Voting Stock is owned, directly or
indirectly, by such Person and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (1) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (2) time deposit accounts, certificates of deposit, demand
accounts and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $50
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (3) repurchase obligations with a term
of not more than 30 days for underlying securities of the types described in
clause (1) above entered into with a bank meeting the qualifications described
in clause (2) above, (4) commercial paper, maturing not more than one year after
the date of acquisition, issued by a corporation (other than an Affiliate of
Extended Stay America) organized and in existence under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P, (5) securities with maturities of one year or less from the
date of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's and (6) other dollar denominated securities issued by any Person
incorporated in the United States rated at least "A" or the equivalent by S&P or
at least "A2" or the equivalent by Moody's and in each case either (A) maturing
not more than one year after the date of acquisition or (B) which are subject to
a repricing arrangement (such as a Dutch auction) not more than one year after
the date of acquisition (and reprices at least yearly thereafter) which the
Person making the investment believes in good faith will permit such Person to
sell such security at par in connection with such repricing mechanism.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services, including without limitation, obligations under (or in respect of)
construction contracts (to the extent such obligations do not constitute
Indebtedness for borrowed money).
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by Extended Stay America or any of its Restricted Subsidiaries, the
date such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (1) any Subsidiary of Extended Stay America
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board of Directors in the manner provided below; and (2) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of Extended Stay America) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, Extended Stay America or any Restricted Subsidiary; provided that (A) any
Guarantee by Extended Stay America or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by Extended Stay America
or such Restricted Subsidiary (or both, if applicable) at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant described above: and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described above. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (1) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (2) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for
56
all purposes of the indenture. Any such designation by the Board of Directors
shall be evidenced to the trustee by promptly filing with the trustee a copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
57
DESCRIPTION OF OUR OTHER INDEBTEDNESS
New Credit Facilities
We entered into an agreement dated July 24, 2001 with various banks
establishing $900 million principal amount of senior credit facilities, subject
to certain conditions. These new credit facilities consist of (i) a $50 million
A-1 term loan facility, (ii) a $50 million A-2 delayed draw term loan facility,
(iii) a $100 million A-3 delayed draw term loan facility (iv) a $500 million B
term loan facility and (v) a $200 million revolving credit facility. The
proceeds of the credit facilities are to be used for general corporate purposes
and to refinance existing indebtedness under the amended and restated credit
agreement dated as of June 7, 2000. The new credit facilities also provide for
up to an additional $700 million in uncommitted facilities.
The following summary of the material provisions of the new credit
facilities does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the credit agreement
Availability of the revolving facility is dependent upon our:
(a) satisfying financial ratios of leverage and interest
calculated pursuant to definitions contained in the new credit
facilities; and
(b) not being in default under the credit agreement.
The loans under the new credit facilities will mature on the dates set
forth in the table below. The A-1, A-2 and A-3 term loans will be amortized in
quarterly installments of varying amounts over six years 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.
We are required to repay indebtedness outstanding under the new credit
facilities 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 new credit facilities
annually in an amount equal to 50% of our excess cash flow, as calculated
pursuant to the new credit facilities.
Applicable Margin
Over
----
Description Prime LIBOR Maturity
----------- ----- ----- --------
Revolving Facility..................................... 1.25% 2.25% 6 years
Tranche A-1 Facility (term loan)....................... 1.25% 2.25% 6 years
Tranche A-2 Facility (term loan)....................... 1.25% 2.25% 6 years
Tranche B Facility (term loan)......................... 1.75% 2.75% January 15, 2008
Loans under the new credit facilities bear interest, at our option, at
either a prime-based rate or a LIBOR-based rate plus an applicable margin. The
table above illustrates the interest on loans made under the new credit
facilities.
Our obligations under the new credit facilities are guaranteed by each
of our subsidiaries. The new credit facilities are also secured by liens 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 agreement contains a number of negative covenants,
including, among others, covenants that limit our ability 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 agreement contains affirmative covenants,
including, among others, covenants that require us, and our subsidiaries, to
maintain our corporate existence, comply with laws, maintain our properties and
insurance, and deliver financial and other information to the lenders. The
58
credit agreement 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 new credit facilities, notwithstanding our ability to meet our debt
service obligations. The loan documentation includes other customary and usual
events of default for these 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 new credit facilities and to foreclose on
the collateral.
9.15% Senior Subordinated Notes
In March 1998, we issued $200 million aggregate principal amount of
9.15% senior subordinated notes due 2008. The 9.15% senior subordinated 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 9.15%
senior subordinated 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.
The 9.15% senior subordinated notes are unsecured and are subordinated
to all of our senior indebtedness. The 9.15% senior subordinated notes rank pari
passu with our senior subordinated debt, including the notes offered under this
offering memorandum.
The indenture pursuant to which the 9.15% senior subordinated notes
were issued contains certain covenants that affect, and in certain cases
significantly limit or prohibit, among other things, our ability or the ability
of our subsidiaries 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, and contain certain
covenants for the benefit of the holders of the 9.15% senior subordinated notes.
These covenants are substantially similar to the covenants which govern the
notes offered by this offering memorandum.
If we undergo a change of control as defined in the indenture, we will
be required to make an offer to purchase the 9.15% senior subordinated notes at
a purchase price equal to 101% of their principal amount, plus accrued interest.
Failure to satisfy any of the covenants would constitute an event of
default under the indenture, notwithstanding our ability to meet our debt
service obligations, and may accelerate our payment obligations. The indenture
also includes other customary events of default, including without limitation,
for failure to make payments and other failures to fulfill covenants, a
cross-default to other indebtedness, undischarged judgments, bankruptcy and
change of control. These events of default are substantially similar to the
events of default as defined under the indenture governing the notes offered by
this offering memorandum.
59
PRINCIPAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States
federal income tax consequences relevant to the Exchange Offer and the purchase,
ownership and disposition of the notes, but does not purport to be a complete
analysis of all potential tax effects. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), United States Treasury
Regulations issued thereunder, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time. Any such change may be applied retroactively in a manner
that could adversely affect a holder of the notes. This discussion does not
address all of the United States federal income tax consequences that may be
relevant to a holder in light of such holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions, U.S.
expatriates, insurance companies, dealers in securities or currencies, traders
in securities, holders whose functional currency is not the U.S. dollar,
tax-exempt organizations, investors in pass-through entities, such as
partnerships, and persons holding the notes as part of a "straddle," "hedge,"
"conversion transaction" or other integrated transaction. Moreover, the
discussion deals only with notes held as "capital assets" within the meaning of
Section 1221 of the Code. The effect of any applicable state, local or foreign
tax laws is not discussed.
As used herein, "United States Holder" means a beneficial owner of the
note who or that is:
An individual that is a citizen or resident of the United
States, including an alien individual who is a lawful permanent
resident of the United States or meets the "substantial presence" test
under section 7701(b) of the Code;
A corporation or other entity taxable as a corporation created
or organized in or under the laws of the United States or political
subdivision thereof;
An estate, the income of which is subject to United States
federal income tax regardless of its source; or
A trust, if a United States court can exercise primary
supervision over the administration of the trust and one or more United
States persons, within the meaning of section 7701(a)(30) of the Code,
can control all substantial trust decisions, or, if the trust was in
existence on August 20, 1996, has elected to continue to be treated as
a United States person.
We have not sought and will not seek any rulings from the Internal
Revenue Service (the "IRS") with respect to the matters discussed below. There
can be no assurance that the IRS will not take a different position concerning
the tax consequences of the purchase, ownership or disposition of the notes or
that any such position would not be sustained. If a partnership or other entity
taxable as a partnership is holder of the notes, the U.S. tax treatment of a
partner will generally depend on the status of the partner and the activities of
the partnership.
Prospective Investors Should Consult Their Own Tax Advisors with Regard
to the Application of the Tax Consequences Discussed Below to Their Particular
Situations as well as the Application of any State, Local, Foreign or Other Tax
Laws, Including Gift and Estate Tax Laws.
United States Holders
Interest
Payments of stated interest on the notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
Sale or Other Taxable Disposition of the Notes
A United States Holder will recognize gain or loss on the sale,
exchange, redemption, retirement or other taxable disposition of a note equal to
the difference between the amount realized upon the disposition (less a portion
60
allocable to any accrued and unpaid interest, which will be taxable as ordinary
income) and the United States Holder's adjusted tax basis in the note. Subject
to the market discount and amortizable premium rules described below, a United
States Holder's adjusted tax basis in a note generally will be the United States
Holder's cost therefor, less any principal payments received by such holder and
this gain or loss generally will be a capital gain or loss that will be a
long-term capital gain or loss if the United States Holder has held the note for
more than one year. Otherwise, such gain or loss will be a short-term capital
gain or loss. For both corporate and non-corporate taxpayers, the deductibility
of capital losses is subject to limitations.
Exchange Offer
The exchange of the notes for the Exchange Notes, which have terms
identical to the notes (except the Exchange Notes will not bear legends
restricting transfers thereof), will not constitute a taxable exchange. As a
result, (1) a United States Holder will not recognize a taxable gain or loss as
a result of exchanging such holder's notes; (2) the holding period of the
Exchange Notes received will include the holding period of the notes exchanged
therefor; and (3) the adjusted tax basis of the Exchange Notes received will be
the same as the adjusted tax basis of the notes exchanged therefor immediately
before such exchange.
Market Discount
The acquisition and resale of the notes may be affected by the market
discount provisions of the Code. Subject to a de minimis exception, the market
discount on a note generally will equal the amount, if any, by which the stated
redemption price at maturity of the note immediately after its acquisition
exceeds the United States Holder's adjusted tax basis in the note. If
applicable, the market discount provisions generally require a United States
Holder who acquires a note at a market discount to treat as ordinary income any
gain recognized on the disposition of that note to the extent of the accrued
market discount on that note at the time of disposition, unless the United
States Holder elects to include market discount in income currently as it
accrues with a corresponding increase in the adjusted tax basis in the note.
This election to include market discount in income currently, once
made, applies to all market discount obligations acquired on or after the first
day of the first taxable year to which the election applies and may not be
revoked without the consent of the IRS. In general, market discount will be
treated as accruing on a straight line basis over the remaining term of the note
at the time of acquisition, or, at the election of the United States Holder,
under a constant yield method. A United States Holder who acquires a note at a
market discount and who does not elect to include accrued market discount in
income currently may be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry the
note until the note is disposed of in a taxable transaction.
Amortizable Premium
A United States Holder who purchases a note at a premium over its
stated principal amount, plus accrued interest, generally may elect to amortize
that premium (referred to as Section 171 premium) with a corresponding decrease
in tax basis from the purchase date to the note's maturity date under a
constant-yield method that reflects semiannual compounding based on the note's
payment period, but subject to special limitations if the note is subject to
optional redemption at a premium. Amortized Section 171 premium is treated as an
offset to interest income on a note and not as a separate deduction. The
election to amortize premium on a constant yield method, once made, applies to
all debt obligations held or subsequently acquired by the electing United States
Holder on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
Backup Withholding
A United States Holder may be subject to a backup U.S. withholding tax
when such holder receives interest and principal payments on the notes held or
upon the proceeds received upon the sale or other disposition of such notes.
Certain holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. A United States
Holder will be subject to this backup withholding tax if such holder is not
otherwise exempt and such holder:
61
(I) fails to furnish its taxpayer identification number
("TIN"), which, for an individual, is ordinarily his or her
social security number;
(J) furnishes an incorrect TIN;
(K) is notified by the IRS that it has failed to properly
report payments of interest or dividends; or
(L) fails to certify, under penalties of perjury, that it has
furnished a correct TIN and that the IRS has not notified the
United States Holder that it is subject to backup withholding.
United States Holders should consult their personal tax advisor
regarding their qualification for an exemption from backup withholding and the
procedures for obtaining such an exemption, if applicable. The backup
withholding lax is not an additional tax and taxpayers may use amounts withheld
as a credit against their United States federal income tax liability or may
claim a refund as long as they timely provide certain information to the IRS.
Non-United States Holders
Definition of Non-United States Holders
A Non-United States Holder is a beneficial owner of the notes who is
not a United States Holder.
Interest
Interest paid on the notes to a Non-United States Holder will not be
subject to United States federal withholding tax of 30% (or, if applicable, a
lower treaty rate) provided that:
(M) such holder does not directly or indirectly, actually or
constructively own 10% or more of the total combined voting
power of all of our classes of stock;
(N) such holder is not a controlled foreign corporation that
is related to us through stock ownership and is not a bank
that received interest on the notes as an extension of credit
made pursuant to a loan agreement entered into in the ordinary
course of its trade or business; and
(O) either (1) the Non-United States Holder certifies in a
statement provided to us or our paying agent, under penalties
of perjury, that it is not a "United States person" within the
meaning of the Code and provides its name or address, or (2) a
securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds the notes on behalf
of the Non-United States Holder certifies to us or our paying
agent under penalties of perjury that it, or the financial
institution between it and the Non-United States Holder, has
received from the Non-United States holder a statement, under
penalties of perjury, that such holder is not a "United States
person" and provides us or our paying agent with a copy of
such statement.
The certification requirement described above may require a Non-United
States Holder that provides an IRS form, or that claims the benefit of an income
tax treaty, to also provide its United States taxpayer identification number.
The applicable regulations generally also require, in the case of a note held by
a foreign partnership, that
(P) the certification described above be provided by the
partners, and
(Q) the partnership provide certain information.
62
Further, a look-through rule will apply in the case of tiered
partnerships. Special rules are also applicable to intermediaries. Prospective
investors should consult their tax advisors regarding the certification
requirements for Non-United States persons.
Sale or other Taxable Disposition of the Notes
A Non-United States Holder will generally not be subject to United
States federal income tax or withholding tax on gain recognized on the sale,
exchange, redemption, retirement or other disposition of a note. However, a
Non-United States Holder may be subject to tax on such gain if such holder is an
individual who was present in the United States for 183 days or more in the
taxable year of the disposition and certain other conditions arc met, in which
case such holder may have to pay a United States federal income tax of 30% (or,
if applicable, a lower treaty rate) on such gain.
Effectively Connected Income
If interest or gain from a disposition of the notes is effectively
connected with a Non-United States Holder's conduct of a United States trade or
business, or if an income tax treaty applies and the Non-United States Holder
maintains a United States "permanent establishment" to which the interest or
gain is generally attributable, the Non-United States Holder may be subject to
United States federal income tax on the interest or gain on a net basis in the
same manner as if it were a United States Holder. If interest income received
with respect to the notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided). A foreign corporation that is a holder of a note also may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty. For this
purpose, interest on a note or gain recognized on the disposition of a note will
be included in earnings and profits if the interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
Exchange Offer
See discussion entitled "United States Holders--Exchange Offer," above.
Backup Withholding And Information Reporting
Backup withholding and information reporting will not apply to payments
made by us or our paying agents, in their capacities as such, to a Non-United
States Holder of a note if the holder has provided the required certification
that it is not a United States person as described above, provided that neither
we nor our paying agent has actual knowledge, or reason to know, that the holder
is a United States person. Payments of the proceeds from a disposition by a
Non-United States Holder of a note made to or through a foreign office of a
broker will not be subject to information reporting or backup withholding,
except that information reporting (but generally not backup withholding) may
apply to those payments if the broker is:
(R) A United States person;
(S) A controlled foreign corporation for United States federal
income tax purposes:
(T) A foreign person 50% or more of whose gross income is
effectively connected with a United States trade or business
for a specified three-year period; or
(U) A foreign partnership, if at any time during its tax year,
one or more of its partners are United States persons, as
defined in Treasury regulations, who in the aggregate hold
more than 50% of the income or capital interest in the
partnership or if, at any time during its tax year, the
foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a Non-United States
Holder of a note made to or through the United States office of a broker is
generally subject to information reporting and backup withholding unless the
63
holder or beneficial owner certifies as to its taxpayer identification number or
otherwise establishes an exemption from information reporting and backup
withholding.
Non-United States Holders should consult their own tax advisors
regarding application of backup withholding in their particular circumstance and
the availability of and procedure for obtaining an exemption from backup
withholding under current Treasury regulations. Any amounts withheld under the
backup withholding rules from a payment to a Non-United States Holder will be
allowed as a credit against the holder's United States federal income tax
liability, or the holder may claim a refund, provided the required information
is furnished timely to the IRS.
64
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for unregistered notes where such unregistered notes were acquired as a
result of market-making or other trading activities. We have agreed that, for a
period of 180 days after the expiration of the exchange offer, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer,
other than commissions and concessions of any broker-dealers. Under the
registration rights agreement we have agreed to indemnify the holders of the
exchange notes, including any broker-dealers, against specified liabilities,
including specified liabilities under the Securities Act.
65
LEGAL MATTERS
The validity of the notes will be passed upon for Extended Stay
America, Inc. by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements incorporated in this prospectus by reference
to the Annual Report on Form 10-K of Extended Stay America, Inc. for the year
ended December 31, 2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify any of its directors or officers who was or is a party,
or is threatened to be made a party, to any third party proceeding by reason of
the fact that such person is or was a director or officer of the corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe that such person's conduct was unlawful. In
a derivative action, i.e., one by or in the right of a corporation, the
corporation is permitted to indemnify directors and officers against expenses
(including attorneys' fees) actually and reasonably incurred by them in
connection with the defense or settlement of an action or suit if they acted in
good faith and in a manner that they reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors or
officers are fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Expenses, including attorneys' fees, incurred by any such person in
defending any such action, suit or proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by the corporation.
Delaware law does not permit a corporation to indemnify persons against
judgments in actions brought by or in the right of the corporation unless the
Delaware Court of Chancery approves the indemnification.
Our certificate of incorporation provides that we shall indemnify to
the fullest extent authorized or permitted in the manner provided by law, each
person who was or is a party, or is threatened to be made a party, to any
action, suit, or proceeding (whether civil, criminal, or otherwise) because that
person as a person of whom he or she is the legal representative is or was a
director or officer of Extended Stay America, or by reason of the fact that such
director or officer, at the request of Extended Stay America, is or was serving
any other corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise, in any capacity. This does not affect any right to
indemnification to which an employee or agent may be entitled by law. Those
rights are not exclusive of any other rights to which any person may be entitled
under any statute, provision of the certificate, bylaw, agreement, vote, or
otherwise. We may enter into contracts of indemnification.
Extended Stay America maintains standard directors and officers
insurance policies on behalf of its directors and officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
See the index to exhibits that appears immediately following the
signature pages of this Registration Statement.
(b) Financial Statement Schedules
Not applicable.
II-i
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant, pursuant to the provisions described in Item 20, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that the
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(6) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed after the effective date of this
Registration Statement through the date of responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-ii
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
undersigned Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on August 3, 2001.
EXTENDED STAY AMERICA, INC.
By: /s/ George D. Johnson
--------------------------------------
Name: George D. Johnson
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
hereby constitutes and appoints George D. Johnson, Jr., Robert A. Brannon, and
Gregory R. Moxley, and each of them, his or her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign (1)
a registration statement or statements on Form S-3, S-4 or S-8 or such other
form as may be recommended by counsel, to be filed with the Securities and
Exchange Commission (the "Commission"), and any and all amendments and
post-effective amendments thereto, and any and all post-effective amendments to
registration statements or statements previously filed with the Commission, and
supplements to the Prospectus contained therein, and any and all instruments and
documents filed as a part of or in connection with such registration statements
or amendments thereto or supplements or amendments to such Prospectus, and (2)
any registration statements, reports and applications to be filed by the Company
with the Commission and/or any national securities exchanges under the
Securities Exchange Act of 1934, as amended, and any and all amendments thereto,
and any and all instruments and documents filed as part of or in connection with
such registration statements or reports or amendments thereto; granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully for all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that the said attorney-in-fact and agent, shall do or cause
to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto signed my name
this 3rd day of August, 2001.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated.
Signatures Title Date
---------- ----- ----
/s/ H. Wayne Huizenga Chairman of the Board of Directors August 3, 2001
- -----------------------------------------
H. Wayne Huizenga
/s/ George D. Johnson Chief Executive Officer and Director
- ----------------------------------------- (Principal Executive Officer) August 3, 2001
George D. Johnson
/s/ Robert A. Brannon President, Chief Operating Officer,
- ----------------------------------------- Secretary and Treasurer August 3, 2001
Robert A. Brannon
Chief Financial Officer and Vice
/s/ Gregory R. Moxley President - Finance
- ----------------------------------------- (Principal Financial Officer) August 3, 2001
Gregory R. Moxley
/s/ Patricia K. Tatham Vice President - Corporate Controller
- ----------------------------------------- (Principal Accounting Officer) August 3, 2001
Patricia K. Tatham
/s/ Donald F. Flynn Director August 3, 2001
- -----------------------------------------
Donald F. Flynn
/s/ Stewart H. Johnson Director August 3, 2001
- -----------------------------------------
Stewart H. Johnson
/s/ John J. Melk Director August 3, 2001
- -----------------------------------------
John J. Melk
/s/ Peer Pedersen Director August 3, 2001
- -----------------------------------------
Peer Pedersen
INDEX TO EXHIBITS
Exhibit
Number Description
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4.1 Indenture, dated June 27, 2001, among Extended Stay America,
Inc., and Manufacturers and Traders Trust Company, Trustee
(incorporated herein by reference to the Company's Current
Report on Form 8-K dated and filed with the Commission on June
28, 2001).
4.2 Form of Exchange Note (included in Exhibit A to Exhibit 4.1 of
this registration statement).
4.3* Registration Rights Agreement dated June 27, 2001 among
Extended Stay America, Inc. and the Placement Agents.
5.1* Opinion and Consent of Shearman & Sterling regarding validity
of the exchange notes.
8.1* Opinion and Consent of Shearman & Sterling regarding certain
tax matters.
10.1* Credit Agreement dated July 24, 2001 among Extended Stay
America, Inc., 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.
12.1* Statements regarding computation of ratios.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Shearman & Sterling (included in Exhibit 5.1).
24.1 Powers of Attorney (included in the signature pages of this
registration statement).
25.1* Statement of Eligibility of the Trustee on Form T-1.
99.1* Form of Letter of Transmittal for the Exchange Notes.
99.2* Form of Notice of Guaranteed Delivery for the Exchange Notes.
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* Filed herewith.