UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/ X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-28108
Suburban Lodges of America, Inc.
------------------------------------------------------
(Exact Name of registrant as specified in its charter)
Georgia 58-1781184
- - ----------------------- -------------------
(State of Incorporation) (IRS Employer
Identification No.)
300 Galleria Parkway
Suite 1200
Atlanta, Georgia 30339
-----------------------------------------------------------
(Address of principal executive office, including zip code)
770-799-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES / X / NO / /
Number of shares of Common Stock, $.01 par value, outstanding as
of November 11, 1998:
15,431,072
Part 1. Financial Information
Item 1. Financial Information
SUBURBAN LODGES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
1997 1998
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 62,650,048 $ 16,053,604
Restricted cash 11,000,000
Accounts receivable, trade - net of
allowance for doubtful accounts 193,322 902,142
Prepaid expenses and other assets 3,257,483 4,215,505
Prepaid income taxes 835,254 4,025,577
Current deferred tax asset 218,053 218,053
------------- -------------
Total current assets 78,154,160 25,414,881
------------- -------------
OTHER NONCURRENT ASSETS 3,554,748 6,884,450
------------- -------------
INVESTMENT IN FACILITIES - at cost:
Land 19,894,011 30,519,472
Buildings and improvements 108,012,604 157,585,942
Equipment 5,857,306 8,456,369
Furniture and fixtures 6,272,884 8,727,292
Construction-in-progress 26,491,293 51,574,516
------------- -------------
166,528,098 256,863,591
Less accumulated depreciation (5,382,957) (8,998,305)
------------- -------------
Net investment in facilities 161,145,141 247,865,286
------------- -------------
TOTAL ASSETS $ 242,854,049 $ 280,164,617
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Construction accounts payable $ 4,610,971 $ 7,674,285
Accounts payable, trade 1,613,900 1,168,149
Accrued expenses and other 1,741,929 3,546,388
Notes payable 6,585,078
Reserve for public debt transaction 10,714,298
abandonment costs
Other current liabilities 649,955 614,769
------------- -------------
Total current liabilities 8,616,755 30,302,967
LONG-TERM DEBT 25,000,000 40,000,000
NONCURRENT DEFERRED TAX LIABILITIES 99,133 764,355
OTHER NONCURRENT LIABILITIES 85,936 59,574
------------- -------------
Total liabilities 33,801,824 71,126,896
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 154,292 154,311
Additional paid-in capital 200,159,769 200,189,750
Retained earnings 8,738,164 8,693,660
------------- -------------
Total capital 209,052,225 209,037,721
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 242,854,049 $ 280,164,617
============= =============
See accompanying notes to consolidated finanical statements.
Page 2
SUBURBAN LODGES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
Sep 30, 1997 Sep 30, 1998 Sep 30, 1997 Sep 30, 1998
------------ ------------ ------------- ------------
REVENUE:
Room revenue $ 5,737,979 $ 12,356,424 $ 14,174,318 $ 31,123,993
Other hotel revenue 556,781 363,336 1,237,622 1,113,334
Franchise and other revenue 709,813 442,483 1,160,966 1,215,409
----------- ------------- ------------ ------------
Total revenue 7,004,573 13,162,243 16,572,906 33,452,736
----------- ------------- ------------ ------------
COSTS AND EXPENSES:
Hotel operating expenses 3,112,483 6,021,514 7,442,544 15,591,950
Corporate operating expenses 596,033 1,103,285 1,451,632 2,752,303
Site acquisition cancellation expense 2,480,000 2,480,000
Lease termination costs 218,277 218,277
Depreciation and amortization 719,025 1,439,461 1,822,550 3,674,103
----------- ------------- ------------ ------------
Total costs and expenses 4,427,541 11,262,537 10,716,726 24,716,633
----------- ------------- ------------ ------------
OPERATING INCOME 2,577,032 1,899,706 5,856,180 8,736,103
OTHER INCOME AND EXPENSES:
Interest income 464,094 406,308 1,786,090 1,997,932
Interest expense (14,079) (5,103) (26,854) (152,715)
Public debt transaction
abandonment costs (10,714,298) (10,714,298)
Other income 93,162 - 93,162 63,441
----------- ------------- ------------ ------------
3,120,209 (8,413,387) 7,708,578 (69,537)
INCOME TAX EXPENSE (BENEFIT) 994,273 (2,939,633) 2,551,899 (25,033)
----------- ------------- ------------ ------------
NET INCOME (LOSS) $ 2,125,936 $ (5,473,754) $ 5,156,679 $ (44,504)
=========== ============= ============ ============
Earnings (loss) per common share
basic and diluted $ 0.18 $ (0.35) $ 0.43 $ -
=========== ============= ============ ============
Weighted average shares outstanding
basic and diluted 12,129,227 15,431,072 12,000,441 15,430,047
=========== ============= ============ ============
See accompanying notes to consolidated finanical statements.
Page 3
SUBURBAN LODGES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1997 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 5,156,679 $ (44,504)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,822,550 3,674,103
Reserve for abandoned projects 2,480,000
Deferred income tax provision 227,404
Stock compensation expense 30,000
Gain on sale of land (93,162) (63,441)
Changes in assets and liabilities:
Trade receivables, net (116,572) (680,642)
Prepaid expenses and other assets (1,529,390) (1,211,790)
Prepaid income taxes (3,190,323)
Advances to affiliates 50,000
Deferred expenses, net (391,170) (201,913)
Accounts payable, trade (112,090) (557,673)
Accrued expenses and other liabilities 814,345 1,301,647
Other current liabilities (94,042) (211,906)
Unearned franchise fees 65,130 176,720
Other noncurrent liabilities (26,362)
Income taxes payable (222,572)
------------ ------------
Net cash provided by operating activities 5,577,110 1,473,916
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (58,240,154) (82,823,927)
Proceeds from sale of land 375,000 356,096
Increase in construction accounts payable 7,423,100 3,063,314
Acquisitions, net of cash acquired (2,279,071)
Investment in joint venture (200,000)
Other (230,000)
------------ ------------
Net cash used for investing activities (50,442,054) (82,113,588)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 10,000,000 15,000,000
Proceeds from short-term debt 5,000,000
Repayment of debt (12,470,420) (11,784)
Decrease (increase) in restricted cash (16,000,000) 11,000,000
Notes issued to franchisees (2,400,000) (2,660,000)
Payments received on franchise notes 714
Reserve for abandonment of public debt transaction 10,714,298
Offering costs (86,363)
------------ ------------
Net cash provided by (used for) financing activties (15,956,783) 34,043,228
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (60,821,727) (46,596,444)
CASH AND CASH EQUIVALENTS (UNRESTRICTED) AT
BEGINNING OF PERIOD 78,340,278 62,650,048
------------ ------------
CASH AND CASH EQUIVALENTS (UNRESTRICTED) AT
END OF PERIOD $ 17,518,551 $ 16,053,604
============ ============
See accompanying notes to consolidated finanical statements.
Page 4
Suburban Lodges of America, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by
generally accepted accounting principles for complete financial
statements have been omitted. In the opinion of management, all
adjustments that are necessary for a fair presentation of
financial position and results of operations have been made.
These interim financial statements should be read in conjunction
with the consolidated historical financial statements and notes
thereto presented in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
All significant intercompany balances and transactions have been
eliminated.
2. ACQUISITIONS
On July 31, 1998, the Company acquired two companies, each of
which operates a Suburban Lodge hotel in Arlington, Texas, for a
total purchase price of $2,505,504. A director of the Company
was a minority shareholder in these two companies. A second
director had an indirect family interest in the two companies.
Prior to the acquisitions, the Company's Board of Directors
(excluding those members of the Board with a direct or indirect
interest in the companies acquired) reviewed and approved the
terms of the related Purchase Agreements and concluded that such
terms were fair and equitable, and as otherwise would have been
available to the Company under a similar transaction with
independent third parties. The acquisitions are treated as
purchases; accordingly, operations of the acquired companies are
included in the consolidated statements of operations commencing
on the date of acquisition. The hotels acquired by the Company
had opened in December 1997 and March 1998, respectively. Had
the acquisitions occurred on the first day of the previous year,
the Company's operating results for 1997 and the three and nine-
month periods ended September 30, 1998, would not have differed
materially from the reported results.
The Company's preliminary allocation of purchase price to assets
acquired and liabilities assumed is as follows:
Land, building and improvements $ 9,959,221
Other assets 423,101
-----------
10,382,322
Notes payable (6,596,862)
Other liabilities (1,279,956)
-----------
Purchase price 2,505,504
Less cash acquired (226,433)
-----------
Purchase price, net of cash $ 2,279,071
===========
3. CONTINGENCIES
The Company is a defendant in certain shareholder litigation
related to the Company's stock offering on October 14, 1997.
Management believes the claims are without merit and intends to
vigorously defend such litigation. It is the opinion of
management that the outcome of such litigation will not have a
material effect on the financial position, results of operations,
or cash flows of the Company; however, the outcome of such litigation
cannot presently be determined. In addition, the Company is a
Page 5
defendant in other litigation in the ordinary course of business.
In the opinion of management, such other litigation will not have
a material adverse effect on the financial position, results of
operation or cash flows of the Company.
4. RESERVES
On July 9, 1998, the Company purchased an interest rate lock in
connection with the planned public issuance of $100,000,000 in
subordinated debt. Subsequent to the purchase of the rate lock,
demand in the public market for subordinated debt declined
dramatically. Therefore, the Company abandoned the planned debt
offering. Interest rates fell significantly after the purchase
of the interest rate lock, even though such rates were at then-
historical lows at the time of purchase. During the quarter
ended September 30, 1998, the Company established a pre-tax
reserve of $10.7 million against losses incurred under the rate
lock and for certain legal, accounting and other costs associated
with its abandoned debt offering.
As the public debt market demand declined, markets for other
forms of debt also became more volatile. Due to the uncertain
outlook for financing, the Company substantially reduced its
development activities during September 1998. A decision was
made to defer or cancel the purchase of potential hotel sites
that had not yet been acquired. If appropriate terms can be
arranged, the Company or one or more of its franchisees may
ultimately purchase one or more of these sites; however, the
Company believes that a substantial number of sites will
ultimately be abandoned. Accordingly, a reserve was established
in the quarter ended September 30, 1998, to recognize the losses
which would be incurred if all sites in development were
abandoned. In addition, the Company reserved for certain lease
abandonment costs expected to be incurred in connection with its
plans to move to a new headquarters building during the fourth
quarter of 1998. The total amount of these pre-tax reserves was
$2.7 million.
5. RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 1998, the Company entered into
a venture to develop a Suburban Lodge hotel in Atlanta, Georgia.
A director of the Company owns a minority interest in this
venture. As of September 30, 1998, the Company had made an
equity investment of $200,000 in this venture.
During certain periods of 1998 and 1997, certain franchise
locations were partially owned by some of the Company's directors
or members of their immediate families. Franchise and other
revenue recognized for such locations for the quarter ended
September 30, 1998 was approximately $64,000, and for the nine
months ended September 30, 1998 and September 30, 1997 was
approximately $97,000 and $100,000, respectively. All such
revenue was realized under terms and conditions that were
essentially the same as the terms and conditions under which
franchise revenues were recognized under agreements with
unrelated parties. No franchise and other revenue was recognized
for such locations during the quarter ended September 30, 1997.
6. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year presentation.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
The following table sets forth certain information regarding the
performance of the Company's hotels by geographic region for the
quarter ended September 30, 1998.
====================================================================================================
AWR Occupancy REVPAR Total Hotels Average Age
( years )
- - ----------------------------------------------------------------------------------------------------
Mid Atlantic Region $178.69 91.7% $163.88 10 1.8
Midwest Region 174.18 92.0 160.12 12 0.8
Southeast Region 175.45 89.5 157.54 18 3.6
Southwest Region 181.16 66.2 118.22 8 0.4
---------------------------------------------------------
All Company-Owned $179.05 87.6% $156.48 48 1.9
=========================================================
All Mature Company-Owned <F1> $175.97 90.3% $159.30 24 3.3
====================================================================================================
<FN>
<F1> Mature hotels are those which have operated for at least one year
as of the end of the period for which data is presented.
</FN>
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1998 TO THE QUARTER
ENDED SEPTEMBER 30, 1997
Total hotel revenue for the quarter ended September 30, 1998 was
approximately $12,720,000, which was an increase of $6,425,000, or
102%, over the quarter ended September 30, 1997. Room revenue for the
quarter increased by approximately $6,618,000, of which approximately
$5,760,000 was attributable to the opening and full quarter to date
results of the 24 hotels which were not open a full year as of
September 30, 1998. In addition, approximately $858,000 of the
increase in revenue was attributable to mature hotels. The increase
in revenue for the mature hotels was impacted by an increase in the
average weekly rate ("AWR") from $153.82 to $175.97, and a decrease in
occupancy from 92.6% to 90.3%. Occupancy for all Company hotels,
which includes the 24 hotels opened since September 30, 1997,
decreased from 90.5% to 87.6%; however, the AWR for all Company hotels
increased from $158.86 to $179.05. Other hotel revenues decreased
approximately $193,000 for the quarter ended September 30, 1998,
compared to the quarter ended September 30, 1997, due to the Company's
decision to discontinue the separate charge for TV rental.
Franchise and other revenue from corporate operations for the
quarter ended September 30, 1998, which includes management, franchise
and development revenue, was approximately $442,000, compared to
$710,000 for the quarter ended September 30, 1997. Management fees
increased $113,000 as a result of fees earned on nine agreements to
manage hotels for franchisees. Franchise revenue for the quarter
increased approximately $15,000, from $235,000 in 1997 to $250,000 in
1998. The franchise revenue for the quarter ended September 30, 1998
reflects $52,000 in initial franchise fees, representing two hotel
openings, compared to $143,000 and five hotel openings in the quarter
ended September 30, 1997, and approximately $198,000 in royalties and
other revenues on open hotels. Development and construction revenue
decreased approximately $363,000, due to a decrease in new starts,
groundbreakings, and hotel openings.
Hotel operating expenses increased approximately $2,909,000, or
93%, to approximately $6,022,000 for the quarter ended September 30,
1998, from approximately $3,112,000 for the quarter ended September 30,
1997. The majority of this increase, or approximately $2,766,000,
pertains to the opening and quarter to date expenses for the 24 hotels
opened since September 30, 1997. In addition, approximately $143,000 of
the increase is attributable to the mature hotels. Hotel operating margins
at all Company hotels improved from 50.6% for the quarter ended
September 30, 1997 to 52.7% for the quarter ended September 30, 1998.
Page 7
Corporate operating expenses increased $507,000, or approximately
85%, to $1,103,000, due to additional staffing in the financial,
management, training and marketing segments of the business, as well
as office rent, travel expenses, insurance, legal and professional
fees. Depreciation and amortization increased to $1,439,000 from
approximately $719,000 primarily as a result of the hotels opened
since September 30, 1997.
On July 9, 1998, the Company purchased an interest rate lock in
connection with the planned public issuance of $100,000,000 in
subordinated debt. Subsequent to the purchase of the rate lock,
demand in the public market for subordinated debt declined
dramatically. Therefore, the Company abandoned the planned debt
offering. Interest rates fell significantly after the purchase of the
interest rate lock, even though such rates were at then-historical
lows at the time of purchase. During the quarter ended September 30,
1998, the Company established a pre-tax reserve of $10.7 million
against losses incurred under the rate lock and for certain legal,
accounting and other costs associated with its abandoned debt
offering.
As the public debt market demand declined, markets for other
forms of debt also became more volatile. Due to the uncertain outlook
for financing, the Company substantially reduced its development
activities during September 1998. A decision was made to defer or
cancel the purchase of potential hotel sites that had not yet been
acquired. If appropriate terms can be arranged, the Company or one or
more of its franchisees may ultimately purchase one or more of these
sites; however, the Company believes that a substantial number of
sites will ultimately be abandoned. Accordingly, a reserve was
established in the quarter ended September 30, 1998, to recognize the
losses which would be incurred if all sites in development were
abandoned. In addition, the Company reserved for certain lease
abandonment costs expected to be incurred in connection with its plans
to move to a new headquarters building during the fourth quarter of
1998. The total amount of these pre-tax reserves was $2.7 million.
Excess funds were invested to generate interest income for the
quarter ended September 30, 1998 of approximately $406,000 compared to
$464,000 for the quarter ended September 30, 1997. The decrease in
interest income of approximately $58,000 was due to lower average
invested cash balances during the quarter. The Company anticipates
that it will recognize less interest income and more interest expense
in future quarters due to lower cash balances to be used for
investment purposes, higher average debt levels and fewer construction
projects upon which interest is capitalized.
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
The following table sets forth-certain information regarding the
performance of the Company's hotels by geographic region for the nine
months ended September 30, 1998.
==================================================================================================
AWR Occupancy REVPAR Total Hotels Average Age
- - --------------------------------------------------------------------------------------------------
( years )
Mid Atlantic Region $170.28 89.3% $152.07 10 1.8
Midwest Region 173.78 78.9 136.31 12 0.8
Southeast Region 170.49 87.7 149.96 18 3.6
Southwest Region 176.87 66.5 117.14 8 0.4
----------------------------------------------------------
All Company-Owned $171.79 84.1% $144.29 48 1.9
==========================================================
All Mature Company-Owned <F1> $169.24 90.3% $153.23 24 3.3
===================================================================================================
<FN>
<F1> Mature hotels are those which have operated for at least one year
as of the end of the period for which data is presented.
</FN>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997
Total hotel revenue for the nine months ended September 30, 1998
was approximately $32,237,000, which was an increase of $16,825,000,
or 109%, over the nine months ended September 30, 1997. Room revenue
increased by approximately $16,950,000, of which approximately
Page 8
$12,256,000 was attributable to the opening and full year to date
results of the 24 hotels opened since September 30, 1997. In addition,
approximately $4,694,000 of the increase in room revenue was
attributable to the mature hotels. The increase in mature hotel room
revenue was impacted by an increase in the AWR from $149.38 to
$169.24, and a decrease in occupancy from 93.3% to 90.3%. Occupancy
for all Company hotels decreased from 88.0% to 84.1% as a result of
the ramp up associated with the 24 hotels opened after September 30,
1997; however, the AWR for all Company hotels increased from $154.50
to $171.79.
Franchise and other revenue from corporate operations for the
nine months ended September 30, 1998, which includes management,
franchise and development revenue, was approximately $1,215,000,
compared to $1,161,000 for the nine months ended September 30, 1997.
Management fees increased from $6,000 to $219,000 as a result of fees
earned on nine agreements to manage hotels for franchisees. Franchise
revenue for the nine month period increased approximately $264,000,
from $467,000 in 1997 to $731,000 in 1998. The franchise revenue for
the nine months ended September 30, 1998 reflects $262,000 in initial
franchise fees, representing 10 hotel openings compared to $248,000
and nine hotel openings during the nine months ended September 30,
1997, and approximately $469,000 in royalties and other revenues on
open hotels. Development and construction revenue decreased
approximately $355,000.
Hotel operating expenses increased approximately $8,149,000, or
109%, to approximately $15,592,000 for the nine months ended September 30,
1998, from approximately $7,443,000 for the nine months ended September 30,
1997. The majority of this increase, or approximately $6,439,000,
pertains to the opening and year to date expenses for the 24 hotels,
which opened after September 30, 1997. In addition, approximately
$1,710,000 of the increase is attributable to the mature hotels.
Hotel operating margins at all Company hotels remained relatively
constant at 51.7 % to 51.6% from September 30, 1997 to September 30,
1998, reflecting the stabilized margins at 16 hotels which opened
during the fourth quarter of 1997. The remaining eight hotels, which
comprise the balance of the 24 hotels not open a full year as of
September 30, 1998, are in various stages of lease up and
stabilization.
Corporate operating expenses increased $1,301,000, or
approximately 90%, to $2,752,000, due to additional staffing in the
financial, management, training and marketing segments of the
business, as well as office rent, travel expenses, insurance, legal
and professional fees. Depreciation and amortization increased to
$3,674,000 from approximately $1,823,000 as a result of the hotels
opened since September 30, 1997. Interest expense increased to
$153,000 for the nine months ended September 30, 1998. This increase
reflects loan amortization costs associated with the Senior Credit
Facility described under "Liquidity and Capital Resources".
On July 9, 1998, the Company purchased an interest rate lock in
connection with the planned public issuance of $100,000,000 in
subordinated debt. Subsequent to the purchase of the rate lock,
demand in the public market for subordinated debt declined
dramatically. Therefore, the Company abandoned the planned debt
offering. Interest rates fell significantly after the purchase of the
interest rate lock, even though such rates were at then-historical
lows at the time of purchase. During the quarter ended September 30,
1998, the Company established a pre-tax reserve of $10.7 million
against losses incurred under the rate lock and for certain legal,
accounting and other costs associated with its abandoned debt
offering.
As the public debt market demand declined, markets for other
forms of debt also became more volatile. Due to the uncertain outlook
for financing, the Company substantially reduced its development
activities during September 1998. A decision was made to defer or
cancel the purchase of potential hotel sites that had not yet been
acquired. If appropriate terms can be arranged, the Company or one or
more of its franchisees may ultimately purchase one or more of these
sites; however, the Company believes that a substantial number of
sites will ultimately be abandoned. Accordingly, a reserve was
established in the quarter ended September 30, 1998, to recognize the
losses which would be incurred if all sites in development were
abandoned. In addition, the Company reserved for certain lease
abandonment costs expected to be incurred in connection with its plans
to move to a new headquarters building during the fourth quarter of
1998. The total amount of these pre-tax reserves was $2.7 million.
Page 9
Excess funds were invested to generate interest income for the
nine months ended September 30, 1998 of approximately $1,998,000
compared to $1,786,000 for the nine months ended September 30, 1997.
The increase in interest income of approximately $212,000 was due to
higher invested cash balances partially resulting from borrowings
under the Senior Credit Facility. The Company anticipates that it will
recognize less interest income and more interest expense in future
quarters due to lower cash balances to be used for investment
purposes, higher average debt levels and fewer construction projects
upon which interest is capitalized.
SEASONALITY
The Company's mature hotels typically experience lower average
occupancy rates and total revenues during the fourth quarter each
year.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a Senior Credit Facility with PNC Bank,
N.A. and three participating banks under which the banks have
committed to fund a total of $75.0 million. Although the Company has
previously obtained a preliminary agreement from its lenders to
increase the Senior Credit Facility to $150.0 million, subject to
obtaining other participating lenders and the satisfaction of other
conditions, the Company believes that the current credit environment
makes it highly unlikely that an increase in the Senior Credit
Facility to this level will occur. The Senior Credit Facility matures
December 14, 2000, and bears interest, at the Company's option, at (i)
the higher of PNC's prime rate or the federal funds rate plus one half
percent or (ii) the Euro-Rate plus 150-225 basis points, based upon a
variable leverage ratio. The Senior Credit Facility is secured by a
collateral pool of properties. The Senior Credit Facility restricts,
among other items, the incurrence of indebtedness, the sale of assets,
the incurrence of liens, the concentration of hotel locations, and the
payment of cash dividends. In addition, the Company is required to
satisfy, among other items, certain financial performance criteria,
including minimum net worth levels and minimum levels of earnings
before interest, taxes, depreciation and amortization.
As of September 30, 1998, the Company had approximately $16.1
million in cash and cash equivalents, $6.6 million in first mortgages
assumed in connection with the acquisition of two companies that
operate Suburban lodge hotels, and $40.0 million of borrowings under
its Senior Credit Facility.
At September 30, 1998, construction had begun on 15 Company-owned
hotels. These hotels are expected to be completed during the fourth
quarter of 1998 and the first quarter of 1999. The Company anticipates
that the total additional cost to complete construction of these 15
hotels will be approximately $40 million. The Company intends to fund
the construction of these hotels with existing cash balances, cash
flow from operations, and borrowings under the Senior Credit Facility.
While the Company anticipates that there may be some markets where,
due to a number of factors (such as the increased cost of using union
subcontractors), its development costs will be higher, overall the
Company anticipates that in the immediate future a typical 134-guest
room Suburban Lodge hotel will cost approximately $4.6 to $4.8 million
(approximately $34,000 to $36,000 per guest room). The Company believes
that additional capital will be necessary to commence further
construction once these 15 hotels have been completed. The Company
owns nine additional sites upon which there are no immediate plans
to start construction.
In the future, the Company may seek to increase the amount of its
credit facilities, negotiate additional credit facilities or issue
debt or equity securities. Any debt incurred or issued by the Company
may be secured or unsecured, bear fixed or variable rate interest, and
may be subject to such terms and conditions as the Board of Directors
of the Company deems prudent.
YEAR 2000 PREPAREDNESS
The Company utilizes several computer software packages as tools
in running its accounting and operations. Management has either
tested these programs or obtained written confirmation from the
software vendor that such programs will function appropriately after
December 31, 1999. The Company is seeking, and has in some cases already
obtained, assurances from third parties that their products that are on the
Company's premises and are important to its business, such as elevators,
will not be disrupted by the Year 2000. The Company has also begun
corresponding with outside vendors and service suppliers in order to determine
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whether any software problems at these entities could result in an
operational problem for the Company in the Year 2000. The costs of
these activities were minimal.
The Company is presently developing a formal plan, which it expects
to complete by December 31, 1998, for completing its Year 2000 investigation.
The Company presently expects to complete its investigation, as specified
in such plan by June 30, 1999. The Company believes that its most significant
exposure to a disruption of its business is with outside suppliers,
particularly those that supply utilities to the Company's hotels.
Accordingly, an important focus of the formal plan will be to determine the
Year 2000 issues confronting such suppliers. Because of its geographic
dispersion, the Company does not presently anticipate that its operating
results would be materially affected should an isolated Year 2000 failure
be experienced by any one service supplier.
Based upon the activities undertaken to date, the Company does
not believe it will incur significant costs in completing such plan.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q,
including statements regarding the Company's activities pertaining to
the approach of the Year 2000, constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are generally identified by
words such as "expects", "believes", "anticipates," etc., and involve
known and unknown risks, uncertainties and other factors which may
cause the actual results, performances or achievements of the Company
to be materially different from the expectation expressed or implied
in such statements. Such factors include, among other things,
uncertainty as to economic conditions, consumer demand for extended
stay lodging, the level of competition in the extended stay market,
financial markets, the Company's ability to operate within the
limitations imposed by its Senior Credit Facility, development
efficiencies, weather delays, zoning delays, the Company's financial
condition, its ability to maintain operational and financial systems
to manage the rapid growth it has experienced and the accurateness
of the assurances the Company has received from third parties concerning
the impact of the Year 2000 on their products, services and business.
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PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
The Company is a defendant in certain shareholder litigation
related to the Company's stock offering on October 14, 1997. See
Note 3 to the consolidated financial statements included herein
(Part I Item 1).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Suburban Lodges of America, Inc.
Date: November 12, 1998 By: /s/ PAUL A. CRISCILLIS, JR.
Paul A. Criscillis, Jr.
Vice President, Chief Financial Officer
Date: November 12, 1998 By: /s/ TERRY J. FELDMAN
Terry J. Feldman
Vice President, Chief Accounting Officer
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