[Federal Register Volume 63, Number 88 (Thursday, May 7, 1998)]
[Notices]
[Pages 25245-25247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12148]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23167; 812-10392]


Extended Stay America, Inc.; Notice of Application

April 30, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: Applicant Extended Stay America, Inc. requests 
an order under section 3(b)(2) of the Act declaring that it is 
primarily engaged in a business other than that of investing,

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reinvesting, owning, holding, or trading in securities.

FILING DATES: The application was filed on October 11, 1996, and 
amended on June 4, 1997, and April 14, 1998.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on May 26, 1998, 
and should be accompanied by proof of service on applicant, in the form 
of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicant, 450 East Las Olas Boulevard, Suite 1100, Fort Lauderdale, 
Florida 33301.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mary Kay Frech, 
Branch Chief, at (202) 942-0564 (Division of Investment Management, 
Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch [450 5th Street, NW., Washington, DC 
20549; (202) 942-8090].

Applicant's Representations

    1. Applicant was incorporated in the state of Delaware for the 
purpose of developing, owning, and managing extended stay lodging 
facilities that are designed to appeal to value-conscious guests. 
Applicant's EXTENDED STAYAMERICA Efficiency Studios brand of lodging 
facilities is designed to offer quality accommodations to guests at 
substantially lower rates than most other extended stay lodging 
providers. Applicant's facilities feature fully furnished rooms that 
are rented generally 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, with 
most guests staying for multiple weeks.
    2. Applicant's goal is to become a national provider of economy 
extended stay lodging. Applicant intends to achieve this goal by 
rapidly developing properties in selected markets, providing high value 
accommodations for its guests, actively managing its properties to 
increase revenues and reduce operating costs, and increasing awareness 
of the economy extended stay concept. Applicant's Crossland Economy 
Studios, EXTENDED STAYAMERICA Efficiency Studios, and StudioPLUS Deluxe 
Studios brands of lodging facilities compete in the budget, economy, 
and mid-price segments, respectively, of the extended stay lodging 
market.
    3. The development cycle for a lodging facility from identification 
of a suitable site through completion of construction and commencement 
of operations is eighteen to twenty-four months. To ensure that 
applicant is able to meet its financial obligations for the development 
of these facilities and to facilitate the planned rapid growth of 
applicant, applicant has raised a significant amount of money since its 
organization in 1995. Applicant has raised, in addition to its $60 
million of initial development capital, $572 million in aggregate net 
proceeds from offerings of common stock in December 1995 and June 1996 
and the private placement of common stock in February 1997. In 
addition, in March 1998, applicant consummated an offering of senior 
subordinated notes that raised approximately $194 million in cash, and 
increased and restructured its bank credit facility, pursuant to which 
applicant is required to borrow an additional $250 million over the 
next several months. Pending the use of this money to finance capital 
expenditures and current operations, the money has been invested in 
high quality short-term investments. Applicant represents that, 
depending upon market conditions, it may raise additional capital and/
or conduct additional financings that would have the effect of 
substantially increasing its short-term investments.

Applicant's Legal Analysis

    1. Under section 3(a)(1(C) of the Act, an issuer is an investment 
company if it ``is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding, or trading in securities, and 
owns or proposes to acquire investment securities having a value 
exceeding 40 per centum of the value of such issuer's total assets 
(exclusive of Government securities and cash items) on an 
unconsolidated basis.'' Section 3(a)(2) of the Act defines ``investment 
securities'' to include all securities except Government securities, 
securities issued by employees' securities companies, and securities 
issued by majority-owned subsidiaries of the owner which are not 
investment companies and which are not excepted from the definition of 
investment company by section 3(c)(1) or section 3(c)(7) of the Act.
    2. Section 3(b)(1) of the Act provides that, notwithstanding 
section 3(a)(1)(C), any issuer primarily engaged in a business or 
businesses other than investing, reinvesting, owning, holding, or 
trading in securities is not an investment company. Applicant believes 
that it qualifies for the exemption under section 3(b)(1). Applicant 
states that the application was filed, nonetheless, because others 
might view differently the facts or the applicability of certain 
provisions of the Act to those facts.
    3. Section 3(b)(2) of the Act provides that the SEC may issue an 
order declaring an issuer to be primarily engaged in a business or 
businesses other than that of investing, reinvesting, owning, holding, 
or trading in securities.
    4. Applicant states that approximately 0.1% of its total assets as 
of December 31, 1997 consisted of investment securities. Applicant 
believes that this percentage may rise above 40% following subsequent 
fundraising and pending utilization of those funds in its 
operations.\1\ Applicant seeks an order under section 3(b)(2) of the 
Act declaring that it is primarily engaged in a business other than 
that of investing, reinvesting, owning, holding, or trading in 
securities, and therefore is not an investment company within the 
meaning of the Act.
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    \1\ Applicant states that it will not be able to rely on rule 
3a-1 under the Act in the future without changing significantly the 
way it does business and sharply curtailing its expansion plans so 
that it can meet the asset and income tests of the rule.
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    5. In determining whether a company is ``primarily engaged'' in a 
non-investment company business under section 3(b)(2), the SEC 
considers the following factors: (a) the company's historical 
development; (b) its public representations of policy; (c) the 
activities of its officers and directors; (d) the nature of its present 
assets; and (e) the sources of its present income.\2\
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    \2\ See Tonopah Mining Company of Nevada, 26 S.E.C. 426, 427 
(1947.
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    a. Historical Development. Applicant contends that its efforts 
during its brief history have been devoted solely towards the 
development of its extended stay lodging business. As of December 31, 
1997, applicant had 185 operating facilities, 84 facilities under 
construction, and 146 sites under option. Applicant states that it has 
raised a significant amount of money since its organization in 1995 to 
ensure

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that it is able to meet its financial obligations for the development 
of its extended stay facilities and to facilitate its planned rapid 
growth. Applicant states that pending the use of that money to finance 
capital expenditures and current operations, the money has been 
invested in high quality short-term investments.
    b. Public Representations of Policy. Applicant asserts that it has 
not made any public representations that would suggest that it is 
engaged in any business other than its extended stay lodging business. 
Applicant states that its prospectuses, reports to shareholders, and 
other filings with the SEC have exclusively focused on its lodging 
business. Applicant also states that all of its marketing and 
advertising has focused entirely on its extended stay lodging business.
    c. Activities of Officers and Directors. Applicant represents that 
its directors and executive officers dedicate virtually all of their 
efforts toward furthering applicant's efforts in developing, owning, 
and managing extended stay lodging facilities. Applicant has 
approximately 2,900 employees. Applicant states that its short-term 
investments are managed by an assistant to its Chief Financial Officer. 
Applicant represents that the assistant devotes less than 25% of his 
working time to these activities, and the Chief Financial Officer 
spends less than 2% of his time supervising that activity. Applicant 
states that no other employee is involved in the management of the 
short-term investments.
    d. Nature of Assets. Applicant indicates that its short-term 
investments, which are limited to bank deposits, U.S. Government 
securities, and short-term, high quality fixed income corporate/
Government obligations maturing in less than 90 days from the date of 
investment, constituted approximately 0.1% of applicant's total assets 
as of December 31, 1997. Applicant also represents that if the proceeds 
of its March 1998 financings had been included in applicant's assets at 
December 31, 1997, applicant would have had short-term investments of 
approximately 29% of its total assets. Furthermore, applicant asserts 
that, depending upon market conditions, it may raise additional capital 
and/or conduct additional financings that would increase substantially 
the ratio of its short-term investments to total assets. Applicant 
states that its short-term investments and total assets are valued at 
fair value in accordance with the requirements of section 2(a)(41) of 
the Act.
    e. Sources of Income. Applicant indicates that, as of December 31, 
1997, it derived approximately 0.8% of its total revenues from 
investment income. Applicant states that it may significantly increase 
its short-term investments, as well as the ratio of income from these 
investments to total revenues, if it conducts additional capital 
raising transactions or financings.
    6. Applicant thus believes that it meets the factors that the SEC 
considers in determining whether an issuer is primarily engaged in a 
business other than that of investing, reinvesting, owning, holding, or 
trading in securities.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-12148 Filed 5-6-98; 8:45 am]
BILLING CODE 8010-01-M