SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
Commission File No. 000-28108
SUBURBAN LODGES OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Georgia
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(State or other jurisdiction of incorporation or organization)
581781184
-----------------------------------
(I.R.S. Employer Identification No.)
300 Galleria Parkway, Suite 1200, Atlanta, Georgia 30339
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 799-5000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, Par Value $0.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes /x/ No / /.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10K. /x/
The aggregate market value of the voting stock held by non-
affiliates (which for purposes hereof are all holders other than
executive officers and directors) of the Registrant as of March 15,
1999 is $77,999,374 (based on $ 6.5625 per share; the last sales price
on the NASDAQ Stock Market on March 15, 1999).
At March 15, 1999 there were issued and outstanding 15,431,072
shares of Common Stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the
1999 Annual Meeting of Shareholders are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS.
General
Suburban Lodges of America, Inc. (the "Company" or "Suburban") was
incorporated in Georgia in 1987. The Company develops, owns, manages
and franchises Suburban Lodge(R) hotels, which are economy extended stay
hotels designed to appeal to value-conscious guests seeking to "Lodge
for Less." The Company believes that the Suburban Lodge chain is one
of the largest lodging chains (based on number of guest rooms and
hotels) devoted to serving the economy extended stay market. Suburban
Lodge guest rooms are fully furnished and include a combination living
room and bedroom, a bathroom and a fully-equipped kitchenette. Weekly
maid and linen services, access to cable or satellite television and
coin-operated laundromats are also provided to allow guests to stay
comfortably for extended periods. Suburban Lodge hotels offer clean,
comfortable and attractive accommodations to guests at substantially
lower rates than most traditional and other extended stay hotels.
Although daily rates are available, substantially all guests pay the
Company's weekly rates, which currently range from $149 to $279 for
standard guest rooms and from $189 to $324 for larger guest rooms.
The extended stay segment of the lodging industry, which includes
economy extended stay hotels, is a relatively small but growing
segment of the lodging industry. Based upon the high occupancy rates
of the Company's hotels and its franchised hotels, published occupancy
rates for other participants in the extended stay market and industry
sources, the Company believes that demand for extended stay hotels
compares favorably to the existing supply of hotels in this segment of
the market. The Company believes that Suburban Lodge hotels appeal to
an underserved and growing segment of guests in the extended stay
market. These guests include business travelers (particularly those
with limited or no expense accounts), individuals on temporary work
assignments, persons between domestic situations, persons relocating
or purchasing a home, tourists and other value-conscious customers
desiring low-cost, longer-term, quality accommodations with fully
equipped kitchenettes. Individuals on temporary work assignments and
persons relocating or purchasing a home constitute the two largest
groups of guests. Suburban believes that the extended stay market
offers a number of attractive investment characteristics compared to
traditional hotels, including higher than industry average occupancy
rates and operating margins.
The Company believes that several features differentiate Suburban
and its hotels from, and provide a competitive advantage over,
traditional and other extended stay lodging hotels, such as: (i) its
low weekly rates; (ii) guest rooms include fully-equipped
kitchenettes; (iii) marketing and pricing to appeal to longer guest
stays; (iv) higher occupancy rates; (v) operating efficiencies; (vi)
standard design and low construction costs; (vii) attractive unit
economics; and (viii) franchising opportunities.
Business Strategy
Suburban's business objective is to become a national provider of
economy extended stay lodging hotels. The Company intends to achieve
its objective through the execution of its growth and operating
strategies. Suburban's growth strategy is to develop additional
Company-owned hotels and to franchise the Suburban Lodge concept to
independent developers and operators as well as to passive investors
who will retain the Company to develop and manage their Suburban Lodge
hotels. The Company's principal operating strategies are to keep its
guests satisfied through superior customer service and quality
accommodations at competitively lower costs.
-2-
Growth Strategy
---------------
At December 31, 1998, the Company owned and operated 53 Suburban
Lodge hotels and franchised 30 additional Suburban Lodge hotels
located in 18 states. The Company intends to continue the growth of
the Suburban Lodge chain in 1999 by opening approximately 26
additional Suburban Lodge hotels, ten of which are expected to be
Company-owned. The addition of these 26 hotels should result in a
total of 109 Suburban Lodge hotels by the end of 1999. Twenty-four of
these hotels (ten Company-owned and 14 franchised) expected to open in
1999 were under construction at December 31, 1998, and the other two
hotels (both franchised) expected to open in 1999 were under
development at December 31, 1998. In addition, the Company and its
franchisees are developing sites for hotels projected to open in 2000.
It is not certain that the Company and its franchisees will be able to
complete the development of all of these hotels, or to complete them
on schedule.
Company-owned Development. Suburban develops and operates Company-
-------------------------
owned hotels nationwide. In selecting particular cities, the Company
identifies markets that have high levels of employment and
metropolitan statistical areas with populations of 150,000 or more.
In considering specific development sites, the Company reviews
demographic and traffic studies, the availability and pricing of
suitable sites, the costs and risks of development and any other
factors deemed relevant, including the experience of the existing
hotels. In particular, the Company looks for sites that are exposed
to heavily-traveled thoroughfares with nearby retail and restaurant
developments and that are located in areas with a substantial number
of employers. In order to obtain desirable sites, without delay, the
Company may purchase larger sites and sell the excess real estate.
Franchising and Third Party Development and Management Activities.
-----------------------------------------------------------------
In addition to operating Company-owned Suburban Lodge hotels, the
Company franchises the Suburban Lodge system on a nationwide basis to
independent developers and operators and to passive investors who
retain the Company to develop and manage their Suburban Lodge hotels.
Suburban considers its franchisees to be an integral component of its
continued growth and believes its relationship with its franchisees
is excellent. Through franchising, the Company intends to
accelerate the growth of the Suburban Lodge system, thereby increasing
its market presence and brand awareness in both new and existing
markets, while generating incremental revenues at an attractive
margin. Furthermore, the Company anticipates that the development of
a large network of hotels will result in economies of scale in
management, marketing and purchasing. Suburban offers franchising
opportunities on a national level and believes that its existing
infrastructure and experience in franchising the Suburban Lodge
concept will be an important factor in executing its franchising
strategy.
Operating Strategies
--------------------
Suburban's principal operating strategies are to (i) provide its
guests with clean, comfortable and attractive accommodations at weekly
rates substantially lower than those offered by most traditional and
other extended stay hotels; (ii) control the operating costs at each
of its hotels and maintain above industry average operating margins;
and (iii) ensure guest satisfaction through a commitment to customer
service. Suburban's principal operating strategy is to offer its
guests weekly rates substantially lower than those offered by most
traditional and other extended stay hotels. The average weekly rate
at the 53 Company-owned hotels open during 1998 was $174.85. The
average occupancy rate at the 53 Company-owned hotels open during 1998
was 81.8%. The average occupancy rate of the Company's "mature
hotels" (hotels open at least twelve months) during 1998 was 87.0%.
The Company believes that its high average occupancy rate is
primarily a result of the combination of its low weekly rates, which
appeal to a broad base of potential guests, and its guest-room
amenities. In addition, Suburban seeks to minimize costs throughout
its operations. The Company is able to control its operating costs
-3-
because it operates each hotel with a staff of approximately six to
eight full-time employees, which is smaller than the staffs at most
traditional hotels, maintains limited office hours and provides weekly
rather than daily housekeeping. In addition, because the average
guest stay is approximately four weeks, the Company has been able to
minimize its marketing and advertising efforts while maintaining high
occupancies. Longer guest stays also reduce guest check-in traffic
and the administrative costs of the hotels.
Operating Practices
The Company manages its own hotels. Each Suburban Lodge hotel has
a general manager, who resides on-site and is responsible for the
overall operation of the hotel, and an assistant manager. Managers
are trained in all aspects of hotel operations, with particular
emphasis placed on customer service, and are given broad authority to
make day-to-day operating decisions. Managers are supervised through
the Company's management information systems and on-site audits by
area managers. Incentive programs allow managers to earn bonuses
based on achievement of monthly budgets, personal performance and
occupancy rates. The Company provides on-going mandatory training for
the managers.
On-site transactions are processed, and financial records are
maintained through proprietary software. The software provides on-
site management with updated information on items such as available
guest rooms, guest rooms needing cleaning or repairs, room charges due
and guest payment history. Each hotel is connected by modem to
Suburban's corporate office in Atlanta, and operating results are
compiled and reviewed on a regular basis. The corporate office
purchases supplies, pays virtually all property expenses and prepares
monthly financial statements for all properties managed by the
Company.
The Company collects data about its guests and uses the information
as part of its market research and for advertising and sales
materials. Suburban employs various marketing techniques, including
billboard, print (including yellow pages and newspapers) and radio
advertising, as well as direct marketing by sales personnel and area
and general managers to local employers, and a 24-hour 1-800 guest
information line (1-800-951-STAY).
The Company maintains customer service and quality assurance
departments. The customer service function provides customers with
property information and resolves satisfaction problems and billing
discrepancies. The Company's quality assurance department inspects
all hotels, both corporate and franchise, to ensure compliance with
quality guidelines and operational standards.
Franchise, Development and Management Agreements
Franchise Agreements
--------------------
The Company enters into single unit franchise agreements for an
initial term of ten years and three months, with a ten-year renewal
option subject to certain conditions, such as a requirement to
modernize the hotel and to pay a renewal fee. The initial franchise
fee for a single hotel is $30,000 or $225 per guest room, whichever is
greater. A monthly royalty fee of four percent of gross revenues
becomes payable after three months of operations. Agreements signed
prior to August 1, 1997 are subject to an initial fee of $25,000 or
-4-
$190 per room, whichever is greater, and a monthly royalty of three
percent of gross revenues. Upon notice from Suburban, all franchisees
are also required to pay an advertising and marketing fee of one
percent of gross revenues and a reservations/referral fee of one
percent of gross revenues, to cover the franchisee's share of the
costs incurred by Suburban in providing these services. As of March 1,
1999, the Company initiated charges for advertising, and is
collecting a relatively small monthly referral fee to pay the costs of
the 1-800 guest information line. The Company may increase these fees
under certain conditions.
The Company provides materials and services to assist each
franchisee in developing and operating a Suburban Lodge hotel,
including development and operating manuals, training, proprietary
operating software, prototype architectural plans and specifications,
the 1-800 guest information line and Website suburbanlodge.com, semi-
annual inspections by Suburban's corporate staff to ensure quality
control and advertising materials and layouts.
Each franchised hotel's operating system is connected via modem to
the Company's central system, which allows Suburban to download sales
and other operating information on a regular basis.
If a franchisee desires to sell an interest in the franchise
agreement or the hotel, the Company generally has the first right to
buy it. In addition, the current agreement provides that upon
termination of a franchise agreement for a breach by the franchisee,
the Company may purchase the hotel at fair market value less
liquidated damages, attorney's fees and other amounts which the
franchisee may owe the Company. The franchisee has a limited right to
terminate the agreement. Many state franchise laws limit the ability
of a franchisor to terminate or refuse to renew a franchise. Suburban
does not anticipate that the termination of any single franchise
agreement would have a material adverse effect on its financial
condition or results of operations.
Development Agreements
----------------------
The Company sometimes performs development and design services for
its franchisees, including recommending possible sites, negotiating
for the purchase of sites, securing the services of engineers,
architects and other professionals, preparing preliminary design
documents and design/build budgets, negotiating with contractors and
overall monitoring of the development and construction of the Suburban
Lodge hotel. The franchisee pays for the cost of all services and
expenditures associated with the construction of the hotel, including
development fees to the Company. The development agreement terminates
upon the completion of the services described, or upon termination of
the franchise agreement, whichever occurs first. In addition, in the
event either party fails to perform substantially under the agreement,
the party not at fault may terminate the agreement upon seven days'
written notice. As of December 31, 1998, the Company is developing
four Suburban Lodge hotels for individual franchisees pursuant to the
terms of its standard development agreement.
Management Agreements
---------------------
The Company sometimes manages franchised Suburban Lodge hotels for
its franchisees. The Company generally offers a five-year management
agreement with automatic renewals. Under the agreement, the Company
provides certain pre-opening services, operates and manages the hotel
and is responsible for all personnel decisions, the negotiation of
operating leases and contracts, the preparation of advertising
campaigns, the payment of taxes and the general maintenance of the
hotel. Suburban also maintains the right to determine all operating
policies affecting the appearance of the hotel, the maintenance of the
hotel and its standards of operation, the quality of services and
other matters affecting customer satisfaction. In addition to a fixed
fee for pre-opening services, Suburban will charge a management fee
equal to five percent of the hotel's monthly gross revenues. As of the
date of this Report, the Company has 17 such management agreements in
place, although six of the hotels have not yet opened.
-5-
Trademarks
The service marks "Suburban Lodge" and "Lodge for Less" and the
corporate design logo are actively used and are significant to the
Company's business. All of these marks have been registered on the
Principal Register of the United States Patent and Trademark Office.
The term for the registration of the "Suburban Lodge" service mark
extends to November 2004 on the Principal Register, at which time it
may be renewed for successive ten-year periods. The term for the
registration of the corporate design logo extends to March 2009, at
which time it may be renewed for successive ten-year periods. The
term for the registration of the service mark "Lodge for Less" extends
to July 2007, at which time it may be renewed for successive ten-year
periods.
Seasonality
Management believes that extended stay lodging hotels are not as
seasonal in nature as the overall lodging industry due to long-term
guest stays. Nevertheless, based upon the experience of the existing
hotels, management expects that occupancy and revenues will be lower
than normal during the months of November, December and January due to
the holiday season. Because many of Suburban's expenses do not
fluctuate with occupancy, such declines in occupancy may cause
fluctuations or decreases in the Company's quarterly earnings.
Competition
The lodging industry is highly competitive. Competitive factors
within the industry include room rates, quality of accommodations,
name recognition, supply and availability of alternative lodging,
including short-term lease apartments, service levels, reputation,
reservation systems and convenience of location. Each of the existing
hotels and hotels under construction is located, and each of the
hotels under development will be located, in a developed area that
includes competing hotels, including both traditional hotels and other
extended stay hotels. The number of competitive hotels in a
particular area could have a material adverse effect on occupancy,
average weekly rate and weekly room revenue per available guest room
of the existing hotels and the hotels under construction or properties
developed or acquired in the future.
The Company anticipates that competition within the extended stay
lodging market will continue to increase substantially in the
foreseeable future. A number of other lodging chains and developers
are already developing extended stay hotels which may compete with the
Company's hotels. In particular, some of these entities have targeted
the economy segment of the extended stay market in which the Company
competes. The Company may compete for guests and for development
sites with certain of these established entities which have greater
financial resources than the Company and better relationships with
lenders and real estate sellers. These entities may be able to accept
more risk than the Company can prudently manage. Further, new or
existing competitors might reduce their rates or offer greater
convenience, services or amenities or expand or improve hotels in
markets in which the Company competes, thereby adversely affecting the
Company's business and results of operations.
At the present time, the Company's hotels are located principally
in the Southeast, Midwest and Southwest. In these regions, the
Company competes with both traditional hotels and other extended stay
hotels, including independent extended stay hotels and those owned and
operated by competing chains. The Company competes with these hotels
by offering low weekly rates, good customer service and convenient
locations.
-6-
Environmental Matters
Under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on
such property. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence of
hazardous or toxic substances. In connection with the ownership and
operation of its properties, the Company may be potentially liable for
any such costs. Any potential environmental liability the Company may
have solely as a franchisor is less clear; however, the Company's
business and results of operations could be adversely affected if a
franchisee incurred environmental liability. Suburban believes that
the Company-owned hotels are in compliance in all material respects
with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances and other environmental matters.
Neither the Company nor, to the knowledge of the Company, any of the
current owners of the franchised hotels has been notified by any
governmental authority of any material noncompliance, liability or
claim relating to hazardous or toxic substances or other environmental
issues in connection with any of its present or former properties.
Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability or
(ii) the current environmental condition of the Company's existing and
future properties will not be affected by the condition of neighboring
properties (such as the presence of leaking underground storage tanks)
or by third parties unrelated to the Company.
Governmental Regulation
The lodging industry is subject to numerous federal, state and
local government regulations including those relating to building and
zoning requirements and those regulating the licensing of lodging
facilities by requiring registration, disclosure statements and
compliance with specific standards of conduct. For example, certain
communities in the Atlanta metropolitan area have enacted zoning
ordinances restricting the development of new extended stay hotels. To
date, such ordinances have not had an adverse effect on the Company's
business; however, the enactment of new ordinances in other
jurisdictions in which the Company intends to develop hotels may have
an adverse effect on the Company's expansion plans. The Company
believes that each of its hotels has the necessary permits and
approvals to operate its respective business, and the Company intends
to continue to obtain such permits and approvals for its new hotels.
Additionally, the Company is subject to laws governing its
relationship with employees, including minimum wage requirements,
overtime, working conditions and work permit requirements.
Under the Americans With Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. While the
Company believes its existing hotels and hotels under construction are
substantially in compliance with these requirements, a determination
that the Company or one of its franchisees is not in compliance with
the ADA could result in the imposition of fines or an award of damages
to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of
the hotels, including changes to building codes and fire and life-
safety codes, may occur. If the Company were required to make
substantial modifications at its hotels to comply with the ADA or
other changes in governmental rules and regulations, the Company's
financial condition and ability to develop new hotels could be
materially adversely affected.
As a franchisor, Suburban is subject to Federal Trade Commission
("FTC") regulation and various state laws which regulate the offer and
sale of franchises. State laws that regulate the franchisor-
franchisee relationship presently exist or are being considered in a
substantial number of states, and from time to time new legislation is
proposed and bills are introduced in Congress which would provide for
federal regulation of certain aspects of the franchisor-franchisee
relationship. Many state laws impose substantive requirements on
franchise agreements, including limitations on non-competition
provisions and termination or nonrenewal of a franchise. Some states
require that certain materials be approved before franchises can be
offered or sold in that state. These current and proposed franchise
relationship laws may limit, among other things, the duration and
scope of non-competition provisions, the ability of a franchisor to
terminate or refuse to renew a franchise and the ability of a
franchisor to designate sources of supply. The failure to obtain
approvals to sell franchises or an increase in the minimum wage rate,
employee benefit costs or other costs associated with employees could
materially adversely affect the Company.
-7-
Employees
As of December 31, 1998, the Company employed 641 persons.
Suburban expects that it will increase the number of its employees as
it expands its business. The Company's employees are not subject to
any collective bargaining agreements. Management believes that its
relationship with its employees is good.
Executive Officers of the Registrant
Name Age Position
---- --- --------
David E. Krischer 50 Chairman of the Board, Chief Executive Officer and President
Dan J. Berman 34 Vice President Franchising and Director
Seth H. Christian 34 Vice President Operations
Paul A. Criscillis, Jr. 49 Vice President Chief Financial Officer
Terry J. Feldman 55 Vice President Chief Accounting Officer and Treasurer
G. Hunter Hilliard 56 Vice President Construction
Peter Ordal 40 Vice President Marketing
Kevin R. Pfannes 44 Vice President Development and Secretary
David E. Krischer. Mr. Krischer formed the Company in 1987 to
-----------------
develop a national chain of economy extended stay hotels and has
served as its President and Chairman since inception. Mr. Krischer
has over 15 years of experience in real estate development, has been
involved in the hospitality industry for more than 12 years and
currently is the Chairman of the Extended Stay Lodging Council, a
division of the American Hotel & Motel Association. From 1974 to
1986, he was a partner with two Atlanta law firms, Arrington, Rubin,
Winter, Krischer & Goger and Costanzo & Krischer, where his practice
focused on general business and real estate law and real estate
syndication.
Dan J. Berman. Mr. Berman joined the Company in September 1993 as
-------------
its Vice President - Franchising and has been a director since March
1996. Prior to joining the Company, Mr. Berman practiced commercial
law in New York City with the firm Young and Young from September 1990
to May 1993. Mr. Berman received the degrees of Juris Doctor and
Master of Business Administration from Emory University Law and
Business Schools in 1990.
Seth H. Christian. Mr. Christian joined the Company in November
-----------------
1987 and was elected Vice President - Operations in January 1989.
From 1983 through 1987, he served as General Manager of
Hotel/Restaurant Management, Inc., an Atlanta-based hospitality
company. Mr. Christian is a member of the Board of Directors of the
Arthritis Foundation, Georgia Chapter. Mr. Christian received a
Bachelor of Arts degree in economics from Georgia State University in
1988.
Paul A. Criscillis, Jr. Mr. Criscillis joined the Company as
----------------------
Vice President - Chief Financial Officer in August 1998. Prior to
joining the Company, Mr. Criscillis had, since 1985, served as Vice
President - Chief Financial Officer for Atlanta-based Crown Crafts,
Inc., a manufacturer of textile home furnishings products. Prior to
joining Crown Crafts, Mr. Criscillis was associated with the public
accounting firm of Deloitte & Touche from 1971 to 1985, the last two
years as a partner in that firm's New York practice office. Mr.
Criscillis graduated, with honors, from the University of Kentucky in
1971 with a Bachelors degree in Accounting.
-8-
Terry J. Feldman. Mr. Feldman joined the Company in January 1995
----------------
and has been serving as its Treasurer and Chief Accounting Officer
since August 1998. He has over 30 years of experience in real estate
accounting and finance. Prior to joining the Company, Mr. Feldman
served as the Vice President and Chief Financial Officer of Unity
Mortgage, Inc., a home mortgage lender, from July 1992 to July 1994.
Mr. Feldman served as the Vice President and Chief Financial Officer
of Anderson Properties, Inc., a commercial real estate company in
Atlanta, from 1984 to 1992. From 1977 to 1984, he served in treasury
and financial planning capacities at Days Inns of America, Inc. Mr.
Feldman is a Certified Public Accountant.
G. Hunter Hilliard. Mr. Hilliard joined the Company in April 1987
------------------
as its Vice President - Construction. In addition, since 1980, Mr.
Hilliard has been the sole shareholder and Secretary of Acreage
Investment Corporation, a real estate and construction consulting
firm. He has over 26 years of experience in the development and
construction of single and multi-family housing, retail centers and
office space.
Peter Ordal. Mr. Ordal has 19 years of travel related marketing
-----------
experience. Prior to joining the Company in 1998, Mr. Ordal was a
founding executive with South Carolina based Air South Airlines.
Previous affiliations include Director of Marketing for Braniff
Airlines and five years with The Walt Disney Company in the strategic
alliances area. Mr. Ordal has also worked with several major
marketing agencies including BBDO and Interpublic Worldwide. He holds
a B.A. degree from Rollins College in Winter Park, Florida.
Kevin R. Pfannes. Mr. Pfannes joined the Company in January 1996
----------------
and was elected Vice President - Development in February 1996. He has
19 years of legal and business experience in the development,
acquisition, leasing and financing of a broad range of commercial real
estate transactions. From July 1992 through January 1995, Mr. Pfannes
served as counsel and Director of Operations of General Innkeeping
Acceptance Corporation, a wholly-owned subsidiary of Holiday Inns,
Inc., which provided financing for Holiday Inn hotels. From January
1986 to July 1992, Mr. Pfannes was a self-employed attorney, and his
practice focused on hotel and other commercial real estate matters.
Mr. Pfannes served as Development and Real Estate Counsel for Holiday
Inns, Inc. from 1984 to 1986. From 1979 to 1984, Mr. Pfannes worked
for the Chicago law firm of Rooks, Pitts and Poust, where his practice
focused on real estate and lending matters.
The Company's officers serve at the pleasure of the Board of
Directors. Terry J. Feldman has notified the Company that he will
resign from his positions with the Company effective April 9, 1999.
Certain Factors Affecting Forward Looking Statements
Many of the matters discussed in this Annual Report on Form 10-K
are forward looking statements. These statements involve a number of
risks and uncertainties that could cause actual results to differ
materially from any such statement. Some of these risks may include,
but are not limited to: (i) development risks (including the risks
that (A) development costs may exceed budgeted projections; (B)
competition for development sites may limit the sites available to the
Company; (C) the Company may fail to obtain necessary zoning and other
permits; (D) the Company may experience delays in construction; and
(E) changes in government regulations and overall economic conditions
may have a material adverse effect on the Company); (ii) management of
growth (the Company's rapid growth has created new demands on the
Company's management and its operating and financial systems which may
lead to the risk that the Company may not manage this growth
effectively); (iii) dependence on senior management (the Company's
continued success is dependent on the efforts of its key management,
including Mr. Krischer, and the failure or inability of Mr. Krischer
to continue in his leadership role might have a material adverse
effect on the Company); (iv) risks associated with the lodging
industry (the economy extended stay segment of the lodging industry
may be adversely affected by changes in national or local economic
conditions and other local market conditions); (v) the risks
associated with compliance with environmental regulations and other
government regulations which have been set forth elsewhere herein (See
"Environmental Matters" and "Governmental Regulation"); and (vi) risks
associated with financing.
-9-
ITEM 2. DESCRIPTION OF HOTELS.
At December 31, 1998, there were 83 existing Suburban Lodge hotels
located in 18 states. These hotels contain an aggregate of 11,202
guest rooms and have an average of 135 guest rooms. A newly developed
Suburban Lodge hotel is built using either a two-story or three-story
interior or exterior corridor design. The two designs have similar
architectural styles and guest room floor plans. The majority of
Suburban Lodge guest rooms are uniform in size, and weekly rates at
both Company and franchise hotels for single occupancy currently range
from $149 to $279 for standard guest rooms and from $189 to $324 for
larger guest rooms. Each hotel includes guest rooms, a general
manager's apartment, an office and a guest laundry room. Each guest
room includes a combination living room and bedroom, a fully-equipped
kitchenette and access to satellite or cable television. Each
Suburban Lodge hotel also offers weekly housekeeping and linen
service.
The following tables set forth certain information as of December 31,
1998 with respect to both Company-owned and franchised existing
hotels, hotels under construction and hotels under development.
Number
Date of
Existing Hotels (As of 12/31/98) Opened Rooms(1)
-------------------------------- ------ --------
Company-Owned:
Atlanta (Forest Park), GA Mar-88 126
Atlanta (Fulton Industrial), GA Dec-88 107
Atlanta (Norcross), GA Jun-89 128
Birmingham (Oxmoor), AL Jul-90 151
Atlanta (Mableton), GA(2) Jun-93 79
Greenville (Mauldin Road), SC Sep-93 130
Charlotte (Matthews), NC Aug-95 139
Atlanta (Lilburn/Highway 78), GA Nov-95 132
Atlanta (Conyers), GA Apr-96 138
Atlanta (Roswell), GA Jun-96 136
Atlanta (Douglasville), GA Jun-96 132
Louisville (Preston Highway), KY Aug-96 150
Atlanta (Tara Blvd.), GA Sep-96 138
Greenville (Wade Hampton Blvd.), SC Oct-96 126
Atlanta (Indian Trail/I-85), GA Nov-96 149
Knoxville (Kingston Pike), TN Dec-96 132
Atlanta (Northside Drive), GA Jan-97 150
Chesapeake, VA Feb-97 132
Atlanta (Gwinnett Place), GA Feb-97 138
Charlotte (Presley I-77), NC Mar-97 132
Charlotte (University), NC Apr-97 138
Memphis (Hickory Ridge), TN Jun-97 144
Newport News, VA Jul-97 134
Charleston (North Charleston), SC Aug-97 138
Virginia Beach, VA Oct-97 138
Dayton-South, OH Oct-97 129
Chattanooga, TN Oct-97 132
Indianapolis-NW, IN Nov-97 135
Mobile, AL Nov-97 132
St. Louis (Hazelwood), MO Nov-97 136
Cincinnati (Fairfield), OH Nov-97 131
-10-
Number
Date of
Existing Hotels (As of 12/31/98) Opened Rooms (1)
------ --------
Company-Owned (Continued):
--------------------------
Columbus (Eastland),OH Dec-97 139
St. Louis (St. Charles),OH Dec-97 130
Columbia (Broad River), SC Dec-97 132
Dallas-North Central, TX Dec-97 144
San Antonio-North, TX Dec-97 137
Arlington-South, TX(4) Dec-97 132
Jackson, MS Jan-98 132
Columbus-NW (Franklin), OH Jan-98 127
Columbus-Northland, OH Jan-98 135
Indianapolis-East, IN Jan-98 135
Arlington-North, TX(4) Mar-98 132
Chicago (Downers Grove), IL Apr-98 133
El Paso (Airport), TX Jun-98 138
Houston (FM1960), TX Jul-98 138
Houston (NASA), TX Jul-98 132
Dallas (Carrollton), TX Aug-98 138
Chicago (O'Hare Airport) Aug-98 125
San Antonio-NE, TX Sep-98 133
Salt Lake City (Midvale), UT Oct-98 140
Minneapolis (Burnsville), MN Nov-98 135
Cincinnati (Colerain), OH Nov-98 133
Birmingham (Center Point), AL Nov-98 136
-----
Subtotal 7,088
-----
Franchised:
Birmingham (Riverchase/Pelham), AL Jun-92 122
Atlanta (Stone Mountain), GA Nov-92 132
Atlanta (Marietta), GA Aug-94 132
Birmingham (Inverness/Greystone), AL Sep-95 130
Savannah (Abercorn), GA Mar-96 130
Atlanta (Lawrenceville), GA Jun-96 132
Atlanta (Decatur), GA Oct-96 133
Louisville (Jeffersontown), KY Feb-97 144
Jacksonville (Bay Meadows), FL Apr-97 138
Atlanta (Woodstock), GA Jul-97 138
Cincinnati (Florence), KY Aug-97 144
Valdosta (Valdosta-Mall Area), GA Aug-97 138
Montgomery (Montgomery Mall), AL Sep-97 144
Nashville (Harding Place), TN Oct-97 126
Fayetteville (Bragg Blvd), NC Oct-97 138
Charlotte (Pineville), NC Oct-97 137
Raleigh-South, VA Feb-98 144
Augusta-West (Bobby Jones), GA Feb-98 138
Savannah-North, GA Apr-98 138
Eagle (Vail Valley, CO) "Extra" Jun-98 118
Atlanta (Stockbridge), GA Jun-98 150
-11-
Number
Date of
Existing Hotels (As of 12/31/98) Opened Rooms(1)
------------------------------- ------ --------
Franchised (Continued):
Albany (Albany Mall), GA Jun-98 138
Jacksonville (Orange Park), FL Jun-98 144
Greensboro (Wendover I-40), NC Sep-98 144
Louisville-East (Westport Rd), KY Sep-98 128
Orlando (Central Park), FL Oct-98 144
Atlanta (Chamblee), GA Oct-98 150
Memphis (Bartlett), TN Nov-98 144
Phoenix (Gilbert), AZ Nov-98 138
Dothan (Ross Clark Circle), AL Dec-98 138
-----
Subtotal 4,114
------
System-wide Total 11,202
======
Hotels Under Construction
------------------------- Estimated Number of
(As of 12/31/98) Opening(3) Rooms(1)
---------------- ---------- --------
Company Owned:
South Salt Lake, UT 1st Quarter 1999 136
Minneapolis (Coons Rapids),MN 1st Quarter 1999 135
Houston-NW (I-290), TX 1st Quarter 1999 132
Albuquerque, NM 1st Quarter 1999 135
Tampa-Largo, FL 1st Quarter 1999 132
Dallas (Texas Stadium), TX 2nd Quarter 1999 138
San Antonio (Leon Valley),TX 2nd Quarter 1999 132
Denver (Aurora), CO 2nd Quarter 1999 137
Denver (Sheridan), CO 2nd Quarter 1999 135
Richmond, VA 3rd Quarter 1999 137
-----
Subtotal 1,349
-----
Franchised:
Daytona Beach, FL 1st Quarter 1999 135
Houston (Cy Fair-1960), TX 1st Quarter 1999 150
Atlanta (Thornton Rd), GA 1st Quarter 1999 150
Richmond (Broad @ N. Parham), VA 1st Quarter 1999 143
Nashville (Hermitage), TN 1st Quarter 1999 127
Stuart, FL 1st Quarter 1999 126
Melbourne, FL "Extra" 2nd Quarter 1999 132
Atlanta (Sandy Springs), GA "Extra" 2nd Quarter 1999 71
Orlando (Casselberry), FL 2nd Quarter 1999 138
Macon (Eisenhower Pkwy), GA 2nd Quarter 1999 150
-12-
Number
Hotels Under Construction Estimated of
(As of 12/31/98) Opening(3) Rooms (1)
- - ------------------------- ---------- ---------
Franchised (Continued):
Gautier, MS 2nd Quarter 1999 126
Athens (UGA), GA 2nd Quarter 1999 138
Orlando (University Studios-Escape), FL 3rd Quarter 1999 150
Jacksonville (St. John's Bluff), FL 3rd Quarter 1999 138
-----
Subtotal 1,874
-----
Total Under Construction 3,223
=====
Number
Hotels Under Development of
(As of 12/31/98) Rooms (1)
------------------------ ---------
Company-Owned:
Austin-North, TX 132
Tampa (Dale Mabry), FL 144
F. Lauderdale (Oakland Park), FL 135
Tampa (Brandon), FL 149
Houston (Astrodome), TX 138
Kansas City (Lenexa), KS 150
Phoenix (Tempe), AZ 138
Chicago (Villa Park), IL "Extra" 80
Denver (Tech Center), CO 155
Philadelphia (Franklin Mills), PA 132
Pittsburgh (North Hills), PA 129
Plano, TX 132
Detroit (Fraser), MI 140
Philadelphia (Valley Forge), PA 140
Cincinnati (Sharonville), OH 132
-----
2,026
-----
Franchised:
Tampa (Airport-West), FL 136
Pensacola (Warrington), FL 128
--------
Subtotal 264
--------
Total Under Development 2,029
========
- - ----------------------------
(1) The number of guest rooms does not include the general manager's
apartment.
(2) The Mableton hotel was acquired in June 1993 and converted into a
Suburban Lodge hotel in October 1994.
(3) The Company believes that each of the hotels under construction or
development will open during the period indicated. However, the
Company and its franchisees may not be able to complete the
construction and development of all of these hotels on schedule.
See Item 1 "Certain Factors Affecting Forward Looking
Statements."
(4) The Arlington-North, TX and Arlington-South, TX hotels were acquired
from a franchisee in July, 1998.
(5) Total number of guest rooms under development does not reflect
franchise hotels where room counts have not yet been determined.
-13-
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in certain shareholder litigation filed
on December 19, 1997 in federal court, RUDD, ET AL. V. SUBURBAN LODGES
OF AMERICA, ET AL.; Civil Action No. 1 97-CV-3758-HTW (N.D. Ga.),
related to the Company's stock offering on October 14, 1997.
Management believes the claims are without merit and intends to defend
vigorously 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the
Registrant during the fourth quarter of the fiscal year covered by
this Report.
-14-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Price Range of Common Stock
The Common Stock is quoted on The Nasdaq Stock Market under the
symbol "SLAM." The following table sets forth for the periods
indicated the high and low transaction prices of the Common Stock on
The Nasdaq Stock Market. As of March 15, 1999, there were
approximately 100 holders of record and 2,600 beneficial owners,
respectively, of the Common Stock.
Price Range
--------------------
Year Ending December 31, 1998 High Low
---- ----
First Quarter...................................... $18.25 $12.25
Second Quarter . . . . . . . . . . . . . . . . . . $19.38 $14.63
Third Quarter . . . . . . . . . . . . . . . . . . . $16.00 $ 6.25
Fourth Quarter . . . . . . . . . . . . . . . . . . $ 9.81 $ 6.25
Year Ending December 31, 1997
First Quarter.................................. $22.25 $15.39
Second Quarter . . . . . . . . . . . . . . . . . . $22.50 $15.13
Third Quarter . . . . . . . . . . . . . . . . . . . $27.88 $18.25
Fourth Quarter . . . . . . . . . . . . . . . . . . $30.25 $10.50
The Company has not paid dividends on its Common Stock during
fiscal years 1997 and 1998. The Board of Directors intends to
continue a policy of retaining earnings to finance the Company's
growth and, therefore, does not anticipate paying any such dividends
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
SUBURBAN LODGES OF AMERICA, INC.
(In thousands, except per share and operating data)
For the year: 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------
Hotel revenues $ 44,756 $ 21,822 $ 8,349 $ 4,727 $ 4,194
Franchise and other revenue 1,702 1,373 917 460 151
Total revenue 46,458 23,195 9,266 5,187 4,345
Hotel operating expenses 22,754 11,204 3,910 2,072 1,768
Income from operations 12,059 7,107 3,031 1,755 1,424
Net income<F1> 2,562 6,724 2,385 677 632
Earnings per share:
Basic and diluted $ 0.17 $ 0.53
Pro forma <F2> $ 0.31
Operating data<F3>:
Average weekly rate<F4> $ 174.85 $ 157.27 $ 155.84 $136.19 $128.69
Weekly RevPAR <F4> $ 142.60 $ 134.13 $ 138.92 $130.93 $125.74
At year end:
- - ------------------------------------------------------------------------------------------------
Total assets $307,535 $242,854 $131,000 $15,004 $ 9,640
Long-term debt 74,735 25,005 15,000 13,818 10,072
Operating data:
Number of hotels open
Owned 53 39 14 6 5
Franchised 30 17 10 6 4
System-wide 83 56 24 12 9
<FN>
<F1> Prior to the Company's initial public offering on May 29, 1996,
the Company's hotels were owned by entities that were not subject
to income taxes. Accordingly, net income for 1994, 1995 and a
portion of 1996 does not reflect a provision for income taxes with
respect to earnings generated by the Company's hotels.
<F2> Prior to the Company's initial public offering on May 29, 1996,
the number of outstanding shares of the Company was substantially
less than the number of such shares outstanding after the initial
public offering. Accordingly, the Company believes that the
presentation of historical per share information for periods prior
to 1997 is not meaningful. For comparative purposes, pro forma earnings
per share for the year ended December 31, 1996 have been calculated by
dividing net income adjusted to provide for income taxes, assuming a
37.5% effective income tax rate, by the weighted number of shares of
common stock deemed to have been outstanding during the period.
<F3> Data is for Company-owned hotels.
<F4> Information for 1994 and 1995 has been calculated from the date the
hotel was opened or acquired. Commencing in 1996, this data is
calculated starting on the first day of the calendar month following
the date the hotel was opened.
</FN>
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE YEAR ENDED
DECEMBER 31, 1998
The following table sets forth certain information regarding the
performance of the Company's hotels by geographic region for the
year ended December 31, 1998:
Total Average Age
AWR Occupancy RevPAR Hotels (years)
- - -------------------------------------------------------------------------------
Mid Atlantic Region $172.01 86.8% $149.38 10 2.6
Midwest Region 180.46 77.6 138.42 15 .9
Southeast Region 172.03 85.9 148.13 19 3.6
Southwest Region 177.09 66.4 117.51 9 .6
- - -------------------------------------------------------------------------------
All Company-Owned $174.85 81.8% $142.60 53 2.1
- - -------------------------------------------------------------------------------
All Mature
Company-Owned <F1> $167.76 87.0% $146.62 31 3.2
===============================================================================
<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 YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED
DECEMBER 31, 1997
Total hotel revenue for the year ended December 31, 1998 was
approximately $44,756,000, which was an increase of $22,934,000, or
105%, over the year ended December 31, 1997. Room revenue increased by
approximately $23,291,000, of which approximately $11,750,000 was
attributable to the full year results of the 31 mature hotels. The
increase in mature hotel room revenue was impacted by an increase in
the AWR from $152.82 to $167.76, and a decrease in occupancy from 91%
to 87%. On July 31, 1998, the Company acquired two existing hotels
from a franchisee. The total room revenue from these two properties
was approximately $774,000. In addition, approximately $10,767,000 of
the increase in room revenue was attributable to hotels open less than
a full year. Occupancy for all Company hotels decreased from 85% to
82% as a result of the ramp up associated with the 22 hotels open less
than a full year. However, the AWR for all Company hotels increased
from $157.27 to $174.85.
Franchise and other revenue from corporate operations for the year
ended December 31, 1998, which includes management, franchise and
development revenue, was approximately $1,702,000, compared to
$1,373,000 for the year ended December 31, 1997. Management fees
increased from $14,000 to $353,000 as a result of fees earned on 11
agreements to manage hotels for franchisees. Franchise revenue for the
year increased approximately $378,000, from $701,000 in 1997 to $1,079,000
in 1998. The franchise revenue for the year ended December 31, 1998
-16-
reflects $393,000 in initial franchise fees, representing
15 hotel openings compared to $327,000 and 12 hotel openings during
the year ended December 31, 1997. Franchise royalties and other
revenue on open hotels was approximately $686,000 for the year ended
December 31, 1998. Development and construction revenue totaled
approximately $245,000 for the year ended December 31, 1998, compared
to $636,000 for the year ended December 31, 1997.
Hotel operating expenses increased approximately $11,550,000, or 103%,
to approximately $22,754,000 for the year ended December 31, 1998,
from approximately $11,204,000 for the year ended December 31, 1997.
Of this increase, approximately $4,895,000 relates to the increase in
the mature properties, which includes the full year expenses for 17
properties opened or acquired during 1997, and approximately
$6,655,000 pertains to the opening and year to date expenses for the
22 hotels, which opened or were acquired in 1998. Hotel operating
margins at all Company hotels remained relatively constant at 49.2% in
1998 compared to 48.7% for 1997, reflecting the stabilized margins at
the 31 mature hotels.
Corporate operating expenses increased $1,721,000, or approximately
76%, to $3,975,000, due to additional staffing in the financial,
management, training and marketing segments of the business, as well
as office rent, travel expenses, insurance, and legal and professional
fees. Depreciation and amortization increased to $5,492,000 from
approximately $2,630,000 reflecting both the full year expense for the
1997 openings as well as the partial year expense for the 1998
openings and acquisitions. Interest expense increased to $202,000 for
the year ended December 31, 1998. This increase reflects interest, net
of amounts capitalized to construction in progress, and 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, and the Company incurred a $10,440,000 loss upon settlement
of the rate lock on December 3, 1998. In total, approximately $10.6
million was charged against 1998 earnings for losses incurred in
connection with the rate lock and for certain legal, accounting and
other costs associated with the 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 beginning in September 1998. A decision was made to defer
or cancel the purchase of several potential hotel sites that had not
yet been acquired. Accordingly, costs of $1,960,000 were recorded in
1998 to recognize the losses incurred in connection with the
abandonment of such sites. The Company also incurred lease abandonment
costs of $218,000 in connection with its move to a new headquarters
building during the fourth quarter of 1998.
-17-
Excess funds were invested to generate interest income for the year
ended December 31, 1998 of approximately $2,236,000 compared to
$2,924,000 for the year ended December 31, 1997. The decrease in
interest income of approximately $688,000 was due to lower invested
cash balances in 1998, as funds derived from a secondary offering in
October 1997 were deployed in the acquisition of land, construction of
new hotels, and the acquisition of two existing hotels. The Company
anticipates that it will recognize less interest income and more
interest expense in future periods due to lower cash balances to be
used for investment purposes, higher average debt levels and fewer
construction projects upon which interest is capitalized.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED
DECEMBER 31, 1996
Total revenue for the year ended December 31, 1997 was approximately
$23,195,000, which was an increase of $13,929,000 or 150%, over the
year ended December 31, 1996. Room revenue for the year increased by
approximately $12,281,000. Approximately $8,485,000 of this increase
was attributable to the partial year to date room revenue for hotels
which opened in 1997 and approximately $3,796,000 of the increase in
room revenue was attributable to hotels open a full year as of
December 31, 1997. The average weekly rate increased only 1% from
$155.84 to $157.27, primarily because the prior years' AWR was
inflated by the Olympics in Atlanta. Company wide occupancy declined
from 90% to 85%, primarily because of the ramp-up period associated
with the new hotels opened or acquired in 1997. Finally, the total
rooms available increased by 149% over 1996 from 2,093 to 5,208.
Franchise and other revenue from corporate operations for the year
ended December 31, 1997, which includes management, franchise and
development revenue, was approximately $1,373,000, an increase of
$456,000 or approximately 50% over the year ended December 31, 1996.
Franchise fees and other revenue for the year increased $267,000, or
approximately 62%, from $434,000 in 1996 to $701,000 in 1997. Total
franchise revenue reflects initial franchise fees on 12 new Suburban
Lodge hotels opened in 1997 and increased royalties on open hotels.
Development revenue increased approximately $208,000, primarily as a
result of the development of additional hotels on behalf of third-
party investors.
Hotel operating expenses increased $7,294,000 or approximately 187% to
$11,204,000 for the year ended December 31, 1997 from $3,910,000 for
the year ended December 31, 1996. Approximately $2,518,000 of this
increase reflects the full year expenses for the hotels which opened
in 1996, and approximately $4,776,000 was attributable to the hotel
operating expenses at hotels which opened in 1997. Depreciation
increased $1,842,000 or approximately 234% principally as a result of
the hotels that opened in 1997. In addition, the Company incurred loan
amortization costs associated with the Line of Credit. Company wide
hotel operating margins decreased from 53.2% to 48.7% from December
31, 1996 to December 31, 1997, primarily as a result of the fixed
operating costs associated with the new hotels opened in 1997.
Corporate operating expenses increased $717,000 or approximately
47% to $2,254,000 due to additional staffing in the financial,
management and development segments of the business, legal and
professional fees associated with being a public company, and
increases in office, travel, and other general overhead expenses.
Interest expense for the year ended December 31, 1997 decreased to
$179,000 from $556,000 for the year ended December 31, 1996.
The decrease is primarily attributable to the use of a portion of the
net proceeds from the initial public offering ("IPO") to retire all
the then existing debt.
-18-
Interest income for the year was approximately $2,924,000, which was
primarily earned on available proceeds from the follow-on offerings which
were completed on November 25, 1996 and October 20, 1997.
Income tax expense increased by $2,281,000 as compared to 1996.
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
From May 29, 1996, the date of the Company's initial public
offering, through December 30, 1998, its principal sources of capital
were the proceeds from three public offerings of its common stock,
borrowings available under a bank credit facility and operating
cash flow. On December 30, 1998, the Company completed the financing
of 27 hotels with Finova Realty Capital Corporation, totaling
$75,530,000. The loan is collateralized by the real estate associated
with the 27 hotels, bears interest at a fixed rate of 8.25%, amortizes
principal based on a 25 year term, and matures on December 30, 2008.
The loan requirements are related to the payment of debt and no other
provisions restrict or prohibit the Company from future borrowings.
Under the bank credit facility, PNC Bank, N.A., as agent, and three
participating banks had committed to provide the Company with a total
of $75.0 million in borrowing capacity. The bank credit facility bore
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 to 225 basis points, based upon a variable leverage
ratio. Borrowings under the bank credit facility were secured by a
collateral pool of the Company's hotels, many of which were removed
from the banks' collateral pool in order to become security for the
loan described in the preceding paragraph. Upon closing the Finova
loan, the Company repaid $65.0 million that it had borrowed under the
bank credit facility. At December 31, 1998, a total of six hotel
properties remained assigned to the banks' collateral pool, providing
the Company with a borrowing capacity of approximately $14.0 million
from the banks at that date.
Under the related credit agreement with the banks, the Company was
required to satisfy certain operating performance criteria. The bank
credit facility restricted, among other items, acquisitions, the
incurrence of indebtedness or liens, the geographic concentration of
hotel locations and the sale of assets. The bank credit facility also
prohibited certain loans and advances to third parties, investments in
joint ventures and the repurchase of the Company's common equity
securities. Subsequent to December 31, 1998, the Company and the banks
terminated the bank credit facility prior to its otherwise scheduled
maturity of December 15, 2000. At March 28, 1999, the Company had
entered into negotiations with another bank for the establishment of a
new credit facility.
As of December 31, 1998, the Company had approximately $19.2 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 $75.5 million of borrowings with Finova
Realty Capital Corporation.
-19-
At December 31, 1998, construction had begun on ten Company-owned
hotels. These hotels are expected to be completed during the first
half of 1999. The Company anticipates that the total additional cost
to complete construction of these ten hotels will be approximately
$17.6 million. The Company intends to fund the construction of these
hotels with existing cash balances, cash flow from operations and
funds provided by the sale of one hotel to a franchisee. Management
believes that cash flow generated from operations will be sufficient
to fund its operating cash requirements for the next twelve months.
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 ten hotels have been completed. The Company
owns ten additional sites which it plans to develop in the future
utilizing existing cash balances, cash flow from operations, and
future borrowings.
In the future, the Company may seek to negotiate bank credit
facilities to supplement its cash flow, or to 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; however, there are no assurances that the Company can
access the credit markets in the future.
YEAR 2000 PREPAREDNESS
The Year 2000 issue may materialize from the widespread use of
computers that rely on two-digit date codes to perform certain
computations or decision-making functions. Many of these computers or
systems may fail to recognize that the year 1999 is followed by the
Year 2000, that the Year 2000 is a leap year, or that 99 or 00 does
not mean the end of the file or program. Due to this failure, a malfunction
might occur in products/processes using a microprocessor with two-digit
year presentation.
Suburban has established the Suburban Year 2000 Project to identify
potential risk areas and introduce action plans and guidelines for
managing Year 2000 issues. As part of the Year 2000 Project, a task
force was created, directed by the CEO and consisting of
representatives of various Suburban departments. The task force is
performing the following functions: identify systems; inventory
components of systems; assess systems and components for potential
Year 2000 risks; renovate and replace systems or components, if
necessary; and test the renovated and replaced systems and components.
Suburban has completed an initial inventory of its computer
hardware and software and determined that the Company has a
limited number of critical operating systems and applications.
Specifically, those systems and applications include:
the proprietary property management software utilized at all corporate
and franchised hotels ("Property Management System"); software for
accounting applications; ADP payroll processing software; and
commercial software for routine office applications.
The contract developer of the Property Management System has confirmed
to Suburban in writing that the software is Year 2000 compliant. In
addition, the Company has reviewed the system, tested it with live
data, and it appears to function accurately in a Year 2000
environment.
-20-
Suburban has received written documentation from the vendor of the
accounting applications software certifying that the software can
properly interpret dates subsequent to December 31, 1999. Suburban has
not independently tested this system to confirm Year 2000 compliance
but it has plans to do so in the second quarter of 1999.
Suburban has not yet received written certification from ADP that
its payroll software systems are Year 2000 compliant. The Company has
performed remedial work on its ADP payroll software systems and
believes that they are presently compliant. The Company will run tests
during the second quarter of 1999 to verify Year 2000 compliance of
these systems.
The vendor of certain commercial software utilized by Suburban for
routine office applications has indicated that such applications can
be made Year 2000 compliant through specific procedures which Suburban
is in the process of implementing. Upon final implementation of these
procedures, Suburban intends to perform additional testing to ensure
that these applications are Year 2000 compliant. The Company believes
that any required remediation will be complete by December 31, 1999.
The detailed scope of the Year 2000 Project for Suburban facilities
includes an analysis of both information technology and non-
information based systems (such as micro-controllers and other
embedded chips) for such matters as building management, security,
credit card processing, fire safety systems, electronic locks,
elevators, telephones, heating and air-conditioning systems and
general equipment. Suburban expects to complete identification of
relevant Year 2000 issues for such systems and equipment during the
second quarter of 1999 and to implement any necessary upgrades during
the second half of 1999.
Suburban's ability to continue normal business operations into the
Year 2000 will, to a large extent, depend upon the individual Year
2000 compliance efforts of all of its vendors, including basic
utilities and telecommunications companies. In the summer of 1998,
Suburban began consideration of the effect of Year 2000 issues on its
vendors and other business partners. Suburban began categorizing its
suppliers as critical or non-critical and aims during the first half
of 1999 to verify the status of the products from all critical
suppliers, as well as their continued performance into the year 2000.
Written requests have been made of the vendors to provide letters
regarding their Year 2000 status. The Company continues to receive
written responses to its requests, which for the most part indicate
that its vendors and suppliers are currently, or will timely be, Year
2000 compliant. However, notwithstanding these efforts, for certain
vendors and suppliers it may not be possible to determine with
certainty whether they are Year 2000 compliant. To the extent that the
Company cannot reasonably determine the Year 2000 compliance status of
mission-critical vendors, or if it reasonably determines that such
vendors or suppliers will not be timely Year 2000 compliant, the
Company intends to seek alternate sources for such products and
supplies before the end of 1999.
At present, Suburban does not anticipate that material incremental
costs will be incurred in connection with the Year 2000 Project. To
date, Suburban has not experienced any known negative impacts on
operations, management, or financial reporting as a result of Year
2000 issues. No significant costs have been incurred to date. Suburban
anticipates that remaining Year 2000 preparedness activities will be
-21-
completed primarily with existing internal personnel. Accordingly, the total
costs of the Year 2000 Project have not been separately estimated, but
are expected to be minimal over the course of the Project. The Year
2000 Project has not resulted in deferral of spending for other
systems and equipment as planned. Cost estimates may vary in the
future and will be updated as Suburban considers updating and
replacement of any systems and applications or learns additional
information concerning the status of its and third parties' Year 2000
compliance.
Based upon current information, Suburban believes that the Year 2000
problem will not have a material adverse effect on the Company, its
business or its financial condition. There can, however, be no
assurances that Year 2000 remediation by Suburban or third parties
will be properly and timely completed, and failure to do so could have
a material adverse effect on the Company, its business and its
financial condition. Suburban, like other hotels, depends on the
continued support of its customers and the availability of public
utilities. Customers may accelerate or postpone travel and business
affairs based upon Year 2000 concerns. Hotels may not be able to
operate if telecommunications, transportation, energy, water and sewer
availability are disrupted. Each of these "most likely worst case"
scenarios is beyond the immediate control of Suburban and would have a
material and adverse impact on occupancies, revenues and earnings. The
likelihood and costs of these interruptions are not known or presently
quantifiable. Suburban is in the process of developing contingency
plans with respect to certain aspects of these scenarios and other
Year 2000 issues to lessen as much as possible the adverse impacts,
and intends to take steps so that all such contingency plans are implemented
during the second half of 1999. The anticipated costs of implementing these
contingency plans are not presently known. The Company does not expect
to have a plan to overcome the entire effects on its business from a
large scale failure or disruption of passenger transportation or
transportation systems generally, the loss of utility and/or
telecommunications services or errors or failures in financial
transactions, payment processing or banking systems due to the arrival
of the Year 2000.
Factors that could result in additional costs to and disruptions of
the Company's Year 2000 Project and business include, but are not
limited to: new information Suburban may discover concerning the
status of Year 2000 compliance of company systems, software and
facilities; failures of others, including public utilities, financial
institutions, communications companies, transportation providers,
computer manufacturers and software providers, as well as other
providers of resources upon which Suburban relies, to identify,
disclose and address Year 2000 issues accurately and on a timely
basis; the inability of Year 2000 consultants, experts and advisers to
adequately identify and address Year 2000 issues as planned; and the
effectiveness and costs of contingency plans Suburban may develop as
it learns more about the status of its own and others' Year 2000
compliance and readiness.
-22-
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at
fair value. The Company plans to adopt SFAS 133 in 2000, and does
not presently expect such adoption to have any effect on the Company's
financial statements at that time.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report, 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 obtain a new bank line of
credit, 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.
-23-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to
fluctuations from changes in interest rates and foreign currency
exchange rates. The Company's cash and cash equivalents are short-
term, highly liquid investments with original maturities of three
months or less consisting entirely of U.S. Government securities or
government backed securities. As a result of the short-term nature of
the Company's cash and cash equivalents, a change in market interest
rates does not impact the Company's operating results or cash flow.
At December 31, 1998, $6.6 million of the Company's long-term debt
bears interest at floating rates. Because these interest rates are
variable, an increase in interest rates would result in additional
interest expense and a reduction in interest rates would result in
reduced interest expense which would have a corresponding impact on
the Company's earnings and cash flow. The remaining $75.6 million of
the Company's long-term debt bears interest at fixed rates of
approximately 8.25%. A change in market interest rates is not
expected to be material to these fixed rate obligations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Report, the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements that
appear on pages F-1 through F-19 herein are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Information about the
Nominees and the Continuing Directors" in the definitive Proxy
Statement to be used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, to be filed
with the Commission, is incorporated herein by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K,
information relating to the executive officers of the Company is
included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive
Compensation" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Company's 1999
Annual Meeting of Shareholders, to be filed with the Commission, is
incorporated herein by reference. In no event shall the information
contained in the Proxy Statement under the heading "Shareholder Return
Performance Graph" be deemed incorporated herein by such reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information contained under the heading "Beneficial Ownership
of Securities and Voting Rights-Voting Securities and Principal
Holders" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1999 Annual Meeting
of Shareholders, to be filed with the Commission, is incorporated
herein by reference. For purposes of determining the aggregate market
value of the Company's voting stock held by nonaffiliates, shares held
-24-
by all directors and executive officers of the Company have been
excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be
"affiliates" of the Company as defined by the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions"
in the definitive Proxy Statement to be used in connection with the
solicitation of proxies for the Company's 1999 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following financial statements and notes thereto are
incorporated by reference in Item 8 of this Report:
1. Financial Statements
Description
-----------
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule V - Valuation and Qualifying Accounts
All other schedules have been omitted since such information is either
included in the financial statements or notes or is not required.
-25-
3. Exhibits
The exhibits set forth below are required to be filed with this
Report pursuant to Item 601 of Regulation S-K:
<CAPTION
Incorporated by
Reference to Exhibit
Exhibit Registration or File Form of Number in
No. Description Number Report Date of Report Report
- - ---------------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of 333-2876 S-1 March 28, 1996** 3.1
the Company
3.2 Amended and Restated By-laws of the 000-28108 10-K March 28,1997 3.2
Company, Amended as of March 17,
1997
4.1 Form of Common Stock Certificate of 333-2876 Amendment May 7, 1996 4.1
the Company No. 1 to S-
1
10.1 Form of Acquisition Agreement and 333-2876 S-1 March 28, 1996 10.1
Plan of Merger (with accompanying
schedule)
10.2 Purchase and Sale Agreement by and 333-2876 S-1 March 28, 1996 10.2
between Suburban Holdings, L.P. and
Gulf Coast Associates, Ltd.
10.3 Purchase and Sale Agreement by and 333-2876 S-1 March 28, 1996 10.3
between Suburban Holdings, L.P. and
Omnicorp Resources, Inc.
10.4 Form of Agreement and Consent of 333-2876 S-1 March 28, 1996 10.4
Partners of each of the Affiliated
Entities and Third Party Sellers
-26-
Incorporated by
Reference to Exhibit
Exhibit Registration or File Form of Number in
No. Description Number Report Date of Report Report
- - ---------------------------------------------------------------------------------------------------------------------------
10.5 Suburban Lodges of America, Inc. 333-2876 Amendment May 7, 1996 10.5
Stock Option and Incentive Award No. 1 to S-
Plan 1
10.6 Suburban Lodges of America, Inc. 333-2876 Amendment May 7, 1996 10.6
Non-Employee Directors' Stock No. 1 to S-
Option and Fee Plan 1
10.7 Form of Indemnification Agreement 333-2876 S-1 March 28, 1996 10.7
between Suburban Lodges of America,
Inc. and its directors and officers
10.8 Registration Rights Agreement among 333-2876 S-1 March 28, 1996 10.8
Suburban Lodges of America, Inc.
and Certain Shareholders
10.9 Form of Franchise Agreement, as 333-35871 Amendment October 9, 1997 10.9.a.
amended No. 2 to S-
3
10.10 Form of Development and 333-2876 S-1 March 28, 1996 10.10
Design/Building Agreement
10.11 Form of Management Agreement 333-2876 S-1 March 28, 1996 10.11
10.12 Management Agreement between 333-2876 S-1 March 28, 1996 10.12
Suburban Management, Inc. and Gulf
Coast Associates, Ltd.
10.13 Consulting Agreement with Legacy 333-2876 S-1 March 28, 1996 10.13
Securities Corp.
10.14 Acknowledgment and Agreement 333-2876 S-1 March 28, 1996 10.14
between Suburban Lodges of America,
Inc. and Young Consulting, Inc. re.
Company's proprietary computer
software
10.15 Suburban Lodge 401(k) Savings Plan 333-2876 S-1 May 20, 1996 10.15
10.16 Rights Agreement 333-2876 Amendment May 7, 1996 10.16
No. 1 to S-
1
10.17 Commitment Letter for the Line of 333-2876 Amendment May 7, 1996 10.17
Credit No. 1 to S-
1
10.18 Preliminary Agreement for a License 000-28108 10-K March 28, 1997 10.18
to Develop a Suburban Lodge Unit
between Suburban- Franchise
Systems, Inc. and E.E.B. Lodging
Systems LLC
10.19 Preliminary Agreement for a License 000-28108 10-K March 28, 1997 10.19
to Develop a Suburban Lodge Unit
between Suburban-Franchise Systems,
Inc. and E.E.B. Lodging Systems LLC
II
10.20 Development and Design/Build 000-28108 10-K March 28, 1997 10.20
Agreement for Suburban Lodge of
Arlington South
10.21 Development and Design/Build 000-28108 10-K March 28, 1997 10.21
Agreement for Suburban Lodge of
Lewisville, Texas
10.22 Registration Rights Agreement among 000-28108 8-K March 17, 1997 10.19
the Registrant and Certain
Shareholders
-27-
Incorporated by
Reference to Exhibit
Exhibit Registration or File Form of Number in
No. Description Number Report Date of Report Report
- - ---------------------------------------------------------------------------------------------------------------------------
10.23 Office Lease between the Registrant 333-35871 Amendment October 9, 1997 10.20
and Massachusetts Mutual Life No. 2 to S-
Insurance Company 3
10.24 Deed to Secure Debt and Security *
Agreement with Finova Realty
Capital Inc. and schedule of
omitted documents
10.25 Promissory Note to Finova Realty *
Capital Inc. and schedule of
omitted documents
10.26 Security Agreement in favor of *
Finova Realty Capital Inc. and
schedule of omitted documents
10.27 Assignment of Financial Agreements *
and Franchisor's Consent and
Subordination of Franchise
Agreements in favor of Finova
Realty Capital Inc. and schedule of
omitted documents
10.28 Change of Control Agreement *
21.1 Subsidiaries of the Registrant *
23.1 Consent of Deloitte & Touche, *
L.L.P.
27. Financial Data Schedule *
* Filed herewith.
** Originally filed on the date set forth above and
refiled pursuant to Regulation S-T on May 7, 1996.
(b) No reports on Form 8-K have been filed during the last quarter
covered by this report.
-28-
Index to Financial Statements
and Consolidated Financial Statement Schedule
Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1998 F-3
and 1997
Consolidated Statements of Operations for the F-4
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the F-6
years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-7
Schedule V - Valuation and Qualifying Accounts F-20
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Suburban Lodges of America, Inc.
We have audited the accompanying consolidated balance sheets of
Suburban Lodges of America, Inc. ("Suburban Lodges") as of December
31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. Our audits
also include the consolidated financial statement schedule listed in
the Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedule. These consolidated financial statements
and consolidated financial statement schedule are the responsibility
of Suburban Lodges' management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis,evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and the significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Suburban Lodges as of December 31, 1998 and
1997, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in
relation to the basic financial statements as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1999
F-2
Suburban Lodges of America, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1998 1997
- - ----------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 19,178 $ 62,650
Restricted cash 11,000
Accounts receivable, net of reserves of
$99 (1998) and $51 (1997) 568 193
Hotel inventory and supplies 1,684 858
Prepaid and refundable income taxes 2,754 835
Deferred income taxes 904 218
Prepaid expenses and other current assets 2,956 2,400
- - ----------------------------------------------------------------------------------------
Total current assets 28,044 78,154
Property and equipment, net of accumulated depreciation
and amortization of $10,764 (1998) and $5,383 (1997) 272,030 161,145
Notes receivable 5,455 2,800
Deferred loan costs 1,552 661
Other assets 454 94
- - ----------------------------------------------------------------------------------------
Total assets $307,535 $242,854
========================================================================================
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 7,465 $ 126
Construction accounts payable 6,847 4,611
Trade accounts payable 2,448 1,614
Accrued liabilities 2,558 1,742
Income taxes payable 316
Other current liabilities 382 524
- - ----------------------------------------------------------------------------------------
Total current liabilities 20,016 8,617
Long-term debt, excluding current portion 74,735 25,005
Deferred income taxes 1,026 99
Other liabilities 114 81
- - ----------------------------------------------------------------------------------------
Total liabilities 95,891 33,802
- - ----------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $0.01 par value per share,
100,000,000 shares authorized 154 154
Additional paid-in capital 200,190 200,160
Retained earnings 11,300 8,738
- - ----------------------------------------------------------------------------------------
Total shareholders' equity 211,644 209,052
- - ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $307,535 $242,854
========================================================================================
See notes to consolidated financial statements.
F-3
Suburban Lodges of America, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31, 1998 1997 1996
- - -----------------------------------------------------------------------------------------------
Revenue:
Hotel revenues $ 44,756 $21,822 $8,349
Franchise and other revenue 1,702 1,373 917
- - -----------------------------------------------------------------------------------------------
Total revenue 46,458 23,195 9,266
- - -----------------------------------------------------------------------------------------------
Operating costs and expenses:
Hotel operating expenses 22,754 11,204 3,910
Corporate operating expenses 3,975 2,254 1,537
Lease termination costs 218
Site acquisition cancellation expense 1,960
Depreciation and amortization 5,492 2,630 788
- - -----------------------------------------------------------------------------------------------
Total operating costs and expenses 34,399 16,088 6,235
- - -----------------------------------------------------------------------------------------------
Income from operations 12,059 7,107 3,031
Other income (expense):
Interest income 2,236 2,924 957
Interest expense (202) (179) (556)
Public debt transaction abandonment costs (10,633)
Other 294 200
- - -----------------------------------------------------------------------------------------------
Income before income taxes 3,754 10,052 3,432
Provision for income taxes 1,192 3,328 1,047
- - -----------------------------------------------------------------------------------------------
Net income $ 2,562 $ 6,724 $2,385
===============================================================================================
Earnings per common share:
Basic $ 0.17 $ 0.53
Diluted $ 0.17 $ 0.53
Pro forma $ 0.31
Weighted average number of common
shares outstanding:
Basic 15,430 12,693
Diluted 15,430 12,693
Pro forma 6,924
See notes to consolidated financial statements.
F-4
Suburban Lodges of America, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional
-------------------- Paid-in Capital Partners' Total
(Dollars in Thousands) Shares Amount Capital (Deficit) Capital Capital
- - --------------------------------------------------------------------------------------------------------------
Balances - December 31, 1995 3,730,453 $ 1 $ (1,562) $1,660 $ 99
Distributions to partners (700) (700)
Corporate organization (774) 1,191 (960) (543)
Issuances of common stock,
net of offering costs 7,795,359 $115 110,837 110,952
Net income 2,385 2,385
- - -------------------------------------------------------------------------------------------------------------
Balances - December 31, 1996 11,525,812 115 110,064 2,014 -- 112,193
Issuance of common stock
for acquisition of four hotels 601,690 6 10,524 10,530
Issuance of common stock
to non-employee directors 1,725 30 30
Issuance of common stock,
net of offering costs 3,300,000 33 79,542 79,575
Net income 6,724 6,724
- - -------------------------------------------------------------------------------------------------------------
Balances - December 31, 1997 15,429,227 154 200,160 8,738 -- 209,052
Issuance of common stock
to non-employee directors 1,845 30 30
Net income 2,562 2,562
- - -------------------------------------------------------------------------------------------------------------
Balances - December 31, 1998 15,431,072 $154 $200,190 $11,300 $ -- $211,644
See notes to consolidated financial statements.
F-5
Suburban Lodges of America, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 2,562 $ 6,724 $ 2,385
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 5,492 2,630 788
Site acquisition cancellation expense 1,960
Net change in deferred income tax assets and liabilities (368) 310 (397)
Stock compensation 30 30
Gain on sale of land (294)
Changes in operating assets and liabilities:
Accounts receivable (347) (98) (33)
Other current assets (3,233) (2,967) (1,002)
Other assets 117 (19) 389
Trade accounts payable 722 856 676
Other current liabilities 422 1,237 563
Other liabilities 33 86
- - -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,096 8,789 3,369
- - -------------------------------------------------------------------------------------------------------
Investing activities:
Additions to property and equipment (108,957) (89,863) (37,838)
Proceeds from sale of land 885
Increase in construction accounts payable 2,236 2,586 1,481
Acquisitions, net of cash acquired (2,279)
Other (3,086) (2,800)
- - -------------------------------------------------------------------------------------------------------
Net cash used by investing activities (111,201) (90,077) (36,357)
- - -------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuances of common stock 79,575 110,952
Amounts borrowed under line of credit 40,000 10,000 15,000
Repayment of line of credit borrowings (65,000)
Decrease (increase) in restricted cash 11,000 (11,000)
Proceeds from issuance of long-term debt 75,530 2,815
Principal payments on long-term debt (58) (12,507) (15,008)
Net additions to deferred loan costs (839) (470) (250)
Repayment of advances from affiliates (1,625)
Distributions to partners (700)
Distributions associated with the corporate organization (543)
- - -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 60,633 65,598 110,641
- - -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (43,472) (15,690) 77,653
Cash and cash equivalents at beginning of period 62,650 78,340 687
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 19,178 $ 62,650 $ 78,340
========================================================================================================
Supplemental cash flow disclosures:
Cash paid for income taxes $ 3,163 $ 3,975 $ 830
========================================================================================================
Cash paid for interest expense, net of amounts capitalized $ 195 $ 170 $ 588
========================================================================================================
See notes to consolidated financial statements.
F-6
SUBURBAN LODGES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
Suburban Lodges of America, Inc. and its subsidiaries (collectively,
the "Company") own, operate, grant franchise rights to and manage
for third parties extended stay hotels that operate under the
Company's proprietary Suburban Lodge brand name. At February 26,
1999, 92 Suburban Lodge hotels were operating in 19 states. The
Company owns and operates 57 hotels and third parties own 35
hotels. The Company manages the operations of 14 of the third-
party hotels on behalf of the franchisees. At February 26, 1999, an
additional 17 hotels (five Company-owned, 12 franchised) were under
construction.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and operations
of Suburban Lodges of America, Inc. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions are eliminated in
the preparation of such consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Hotel revenues are recognized as earned. Reserves are established for
estimated unrecoverable amounts. Recognition of initial franchise fees,
which are collected at various intervals prior to the opening of the
hotels, is deferred until the franchised hotel has commenced operations.
Development fees, management fees and ongoing franchise fees are
recognized when earned.
PRE-OPENING COSTS
Non-capital expenditures incurred prior to opening new hotels are expensed
as incurred.
EARNINGS PER COMMON SHARE
Prior to the Company's initial public offering on May 29, 1996, a substantial
portion of the Company's operating income was not subject to income taxes
because the hotels were owned by entities that operated as partnerships or
as limited liability companies. Further, prior to May 29, 1996, the number
of outstanding shares of Suburban Lodges of America, Inc. was substantially
less than the number of such shares outstanding after the initial public
offering. Accordingly, the Company believes that the presentation of
historical per share information for the year ended December 31, 1996,
would not be meaningful.
F-7
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Pro forma earnings per common share for the year ended December 31,
1996, have been calculated by dividing net income adjusted to provide
for income taxes assuming a 37.5% effective income tax rate by the
weighted number of shares of common stock deemed to have been
outstanding during the period.
Earnings per common share for 1997 and 1998 have been computed under
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." The net income amounts used in the calculations
of basic and diluted earnings per common share are the same. The
average numbers of common shares used in the calculations of basic and
diluted earnings per common share are also the same as there were no
dilutive common share equivalents. At December 31, 1998 and 1997,
stock options outstanding under the Company's various stock option
plans represented the only securities that could potentially dilute
earnings per common share in the future.
CASH EQUIVALENTS
Cash equivalents are highly liquid unrestricted investments with a
final maturity of no more than three months when acquired.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of land includes
the contractual purchase price of the site, other costs incurred in
connection with its acquisition, such as engineering and environmental
reports, and associated overhead. The cost of hotels includes the
direct costs of construction plus capitalized interest and construction
overhead through the date the hotel is substantially complete and
ready for its intended use.
Hotels are depreciated on a straight-line basis over an estimated
useful life of 40 years. Corporate office leasehold improvements are
amortized on a straight-line basis over the life of the related lease.
Prior to October 1, 1996, depreciation of furniture, fixtures and
equipment was calculated using the double-declining-balance method.
Since that date, furniture, fixtures and equipment are depreciated on
a straight-line basis over estimated useful lives ranging from five to
seven years.
Maintenance and repairs are charged to operations as incurred, and
major renewals and betterments are capitalized. When property or
equipment is sold or otherwise disposed of, the asset and related
accumulated depreciation are removed from the accounts, and the gain
or loss is included in operations.
The Company reviews the net carrying value of its hotels and other
long-lived assets if any facts and circumstances suggest that their
recoverability may have been impaired. The Company believes that no
such impairment exists at December 31, 1998.
DEFERRED LOAN COSTS
Costs associated with obtaining and maintaining debt financing are
capitalized as deferred loan costs, and are amortized over the life
of the related debt instrument.
F-8
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock options using the intrinsic value
method and issues only stock options that have an exercise price that
is equal to or more than the market price of the underlying shares at
the date of grant. Accordingly, no compensation expense is recorded in
the accompanying statements of earnings with respect to the grant of
stock options.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1997 and
1996 financial statements to conform them to the December 31, 1998
presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. The
Company plans to adopt SFAS 133 in 2000, and does not presently expect
such adoption to have any effect on the Company's financial statements
at that time.
NOTE 2 - CORPORATE ORGANIZATION AND HOTEL ACQUISITIONS
On May 29, 1996, in connection with its initial sale of common stock
to the public, the Company acquired from affiliated entities seven
operating hotels and two hotels under construction for 875,062 shares
of common stock, and two additional hotels under construction for $2.5
million in cash (the "Corporate Organization"). The acquisition of
hotels for stock was accounted for in a manner similar to a pooling of
interests on the basis of common ownership and control. The
acquisition of hotels for cash was accounted for as a purchase on the
basis of the cash price paid for the hotels. Additionally, other cash
payments totaling $485,000 were made for the redemption of a minority
partnership interest and other distributions associated with the
Corporate Organization.
At the same time, the Company also acquired from third parties an
operating hotel, two hotels under construction and two hotels in the
development phase for a total purchase price of approximately $10.0
million. Such purchase price was paid by the delivery of $4.7 million
in cash, 144,314 shares of common stock and the assumption of
approximately $2.8 million in debt secured by certain of the acquired
properties. All hotels acquired from third-party sellers were recorded
at the acquisition cost of the hotel.
F-9
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
On February 28, 1997, the Company purchased four Atlanta-area Suburban
Lodge hotels from a third-party franchisee in exchange for 601,690
shares of common stock and the assumption of $12.5 million of debt.
On July 31, 1998, the Company acquired two companies, each of which
operates a Suburban Lodge hotel in Arlington, Texas, for an aggregate
purchase price of approximately $2.5 million. 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. The acquisitions were 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
January 1, 1997, the Company's operating results for 1997 and 1998
would not have differed materially from the reported results.
The Company's allocation of purchase price to assets acquired and
liabilities assumed was as follows (in thousands):
Property and equipment $ 9,971
Other assets 420
- - --------------------------------------------------------------
Total assets 10,391
Notes payable (6,597)
Other liabilities (1,289)
- - --------------------------------------------------------------
Net assets acquired 2,505
Less cash acquired (226)
- - --------------------------------------------------------------
Purchase price, net of cash $ 2,279
==============================================================
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, 1998 1997
- - -----------------------------------------------------------------------------
Land and improvements,
including land under development $ 53,223 $ 30,621
Buildings and improvements 175,198 108,013
Furniture, fixtures and equipment 19,597 12,130
Construction in progress 34,776 15,764
- - -----------------------------------------------------------------------------
Property and equipment, at cost $ 282,794 $ 166,528
=============================================================================
Additions to hotels for the years ended December 31, 1998, 1997 and 1996,
respectively, included $3,885,000, $1,711,000 and $194,000 of
interest incurred on funds borrowed to finance construction.
F-10
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31, 1998 1997
- - -----------------------------------------------------------------------
8.25% fixed rate mortgage loans,
due December 31, 2008 $75,530
Floating rate revolving credit
facility, maturing December 14, 2000 $25,000
Capital leases 103 131
Other 6,567
- - -----------------------------------------------------------------------
82,200 25,131
Less current portion 7,465 126
- - -----------------------------------------------------------------------
Long-term debt, excluding
current portion $74,735 $25,005
=======================================================================
The mortgage loans were issued on December 29, 1998, and require
monthly payments of principal and interest totaling approximately
$596,000 commencing February 1, 1999, based upon a 25-year
amortization schedule. A total of 27 Company-owned hotels, with a net
depreciated value of approximately $99.2 million at December 31, 1998,
are pledged as collateral on these obligations.
The Company's revolving credit facility with a group of four
participating banks was terminated by the Company subsequent to
December 31, 1998. Borrowings under the credit facility bore interest,
at the Company's option, at (i) the higher of the agent bank's prime
rate or the federal funds rate plus one-half percent or (ii) the Euro-
Rate plus 150 to 225 basis points, based upon a variable leverage
ratio. Borrowings under the credit facility were secured by a
collateral pool of properties. The credit facility restricted, among
other things, the incurrence of indebtedness, the sale of assets and
the incurrence of liens. The credit facility also prohibited certain
distributions, including the payment of cash dividends and the
repurchase of the Company's common stock. In addition, the Company was
required to satisfy, among other things, certain financial performance
criteria that included the maintenance of minimum levels of net worth
and earnings before interest, taxes, depreciation and amortization.
On July 31, 1998, in connection with its acquisition of two companies,
the Company assumed certain notes with outstanding principal balances
totaling $6,597,000. At December 31, 1998, the average interest rate
on these notes was 7.5%. Under the terms of the related acquisition
agreement, the Company is obligated to repay these loans in full prior
to July 31, 1999.
F-11
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
During 1998, the Company purchased an interest rate lock in
connection with the planned issuance of $100,000,000 in subordinated
debt. Subsequent to the purchase of the rate lock, public demand for
subordinated debt declined dramatically and the Company abandoned its
planned debt offering. As public debt market demand declined, markets
for other forms of debt also became more volatile, and the Company
decided to defer or cancel the purchase of several potential hotel
sites that had not yet been acquired. As a result of these decisions,
expenses of $8.2 million, net of income taxes, were recognized during
1998 to cover costs associated with the abandoned debt transaction,
including the loss incurred upon settlement of the interest rate lock,
and the termination of negotiations with respect to several hotel
sites.
The aggregate maturities of long-term debt for the five years
subsequent to December 31, 1998, are as follows (in thousands):
Year Ended December 31,
- - ------------------------------------
1999 $7,465
2000 1,063
2001 1,146
2002 1,210
2003 1,311
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, accounts receivable, accounts
payable, and accrued liabilities reflected in the financial statements
approximates fair value because of the short-term nature of these
instruments. Based on interest rates currently available to the
Company for borrowings similar to those reflected in the December 31,
1998 and 1997 balance sheets, the Company estimates that the carrying
value of its long-term debt approximates fair value at such dates.
F-12
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 6 - INCOME TAXES
The provisions for income taxes are summarized as follows (in
thousands):
Year Ended December 31, 1998 1997 1996
- - ---------------------------------------------------------------------
Current income tax provision $1,560 $3,018 $1,059
Deferred income tax provision
(credit) (368) 310 (12)
- - ---------------------------------------------------------------------
Total provision for income taxes $1,192 $3,328 $1,047
=====================================================================
The tax effects of temporary differences that comprise the deferred
tax liabilities and assets are as follows (in thousands):
December 31, 1998 1997
- - --------------------------------------------------------------
Gross deferred income tax liability:
Property and equipment $1,166 $ 99
- - --------------------------------------------------------------
Gross deferred income tax assets:
Net operating loss carryforward - state 414
Unearned franchise fees 189 102
Unearned guest income 180 97
Reserves for site acquisition cancellation 104
Other 157 19
- - --------------------------------------------------------------
Total gross deferred income tax assets 1,044 218
- - --------------------------------------------------------------
Net deferred income tax liability (asset) $ 122 $(119)
- - --------------------------------------------------------------
The following is a reconciliation of the statutory federal income
tax rate to the Company's effective tax rates:
Year Ended December 31, 1998 1997 1996
- - ---------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 0.7 2.0 1.4
Income not subject to tax (4.4) (2.9) (4.5)
Other 1.5 (0.4)
- - ---------------------------------------------------------------------
Effective income tax rate 31.8% 33.1% 30.5%
- - ---------------------------------------------------------------------
F-13
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 7 - STOCK OPTION PLANS
The Company has three stock option plans that provide for the grant of
stock options to employees and non-employee directors. The Company's
Stock Option and Incentive Award Plan (the "1996 Plan") provides for
the grant of up to 750,000 shares of the Company's common stock to
officers and key employees. The Company's Nonemployee Directors' Stock
Option and Fee Plan (the "Directors' Plan") provides for the grant of
up to 100,000 shares to the Company's nonemployee directors. The
Company's Employee Stock Option Plan (the "1997 Plan") provides for
the grant of up to 700,000 shares to all full-time employees who are
not participants in either the 1996 Plan or the Directors' Plan.
At December 31, 1998, 50,000, 86,500 and 248,200 shares, respectively,
were available for grant under the 1996 Plan, the Directors' Plan and
the 1997 Plan. Options outstanding under these Plans were granted at
prices that were either equal to or greater than the market price of
the stock on the date granted, expire either five or ten years from
the date granted and vest over service periods that range from one to
four years.
The following table summarizes stock option activity during each of
the three years ended December 31, 1998:
Number Exercise Price Weighted Avg.
of Shares per Share Exercise Price
- - ----------------------------------------------------------------------------------
Outstanding, January 1, 1996 --
Granted 404,500 $17.00 - $18.70 $17.10
Outstanding, December 31, 1996 404,500 17.00 - 18.70 17.10
Granted 383,221 13.00 - 27.38 20.77
Outstanding, December 31, 1997 787,721 13.00 - 27.38 18.88
Granted 806,155 10.25 - 19.00 13.67
Canceled (428,486) 12.38 - 27.38 17.73
Outstanding, December 31, 1998 1,165,390 10.25 - 18.70 13.92
On December 14, 1998, the Company's Board of Directors adopted a
resolution reducing to $13.50 per share the exercise price of stock
options issued to employees under the 1997 Plan with an original
exercise price per share that was greater than $13.50. As a result,
396,056 options with an average exercise price of $18.75 per share
were repriced. No options held by the Company's officers or directors
were affected by this repricing.
F-14
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
No options were exercisable at December 31, 1996. The number of
options exercisable at December 31, 1997 and 1998 were 104,500 and
232,963, respectively. A summary of stock options outstanding and
exercisable as of December 31, 1998, follows:
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------------------
Average
Range of Number Remaining Average Number Average
Exercise of Life Exercise of Exercise
Prices Options (Years) Price Options Price
- - ------------------------------------------------------------------------------------
$10.25 300,000 9.6 $10.25 -- --
$11.63 - $13.31 48,383 9.1 12.98 -- --
$13.50 403,507 8.9 13.50 23,963 $13.50
$16.25 - $18.70 413,500 7.1 17.09 209,000 17.10
Had the Company recorded compensation expense for its stock option
plans instead of following the intrinsic value method, the Company's
pro forma net income would have been $1,675,000 ($0.11 per share) for
the year ended December 31, 1998, $6,228,000 ($0.49 per share) for the
year ended December 31, 1997, and $1,933,000 ($0.28 per share) for the
year ended December 31, 1996. The fair value of each stock option
grant used in the determination of these pro forma amounts was
determined using the Black-Scholes option pricing model with the
following weighted average assumptions:
1998 1997 1996
- - -------------------------------------------------------
Risk-free interest rate 5.0% 6.0% 6.3%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life (in years) 4.5 4.5 4.0
Expected volatility 58.3% 43.3% 46.0%
Fair value of options granted $7.16 $9.15 $7.05
NOTE 8 - SEGMENT AND RELATED INFORMATION
The Company operates in three reportable segments, hotel operations,
franchising operations, and corporate and support services. The
Company was founded in 1987 as an owner-operator of economy extended-
stay hotels, the first of which opened in 1988. Since that date, the
majority of the Company's revenues have been derived from its hotel
operations segment, primarily in the form of room revenues. Since
1992, the Company has franchised the Suburban Lodge brand to third
parties. The corporate and support services segment provides hotel
management, site development and construction management services to
Company-owned hotels, and information technology, quality assurance,
marketing and customer satisfaction services to both owned and
franchised hotels. The Company also offers fee-based hotel management,
site development and construction management services to third-party
franchisees. For internal reporting purposes, the Company allocates
management fees to Company-owned hotels. These fees appear as
intersegment revenues and fees under the appropriate segments in the
table below.
F-15
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company evaluates the performance of its operating segments based
on net operating income, which is defined as income before income
taxes, nonrecurring items, interest income, interest expense and other
nonoperating income.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
Corporate
Hotel Franchising and Support
Operations Operations Services Total
- - ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Revenues from external customers $ 44,756 $1,079 $ 623 $ 46,458
Intersegment revenues 2,241 2,241
Depreciation and amortization 5,209 10 273 5,492
Intersegment fees 2,241 2,241
Net operating income (loss) 14,552 193 (508) 14,237
Total assets 285,489 867 21,179 307,535
Additions to property and equipment 107,721 17 1,219 108,957
Year Ended December 31, 1997
Revenues from external customers $ 21,822 $ 701 $ 672 $ 23,195
Intersegment revenues 1,090 1,090
Depreciation and amortization 2,475 6 149 2,630
Intersegment fees 1,090 1,090
Net operating income (loss) 7,058 57 (8) 7,107
Total assets 227,469 518 14,867 242,854
Additions to property and equipment 89,124 16 723 89,863
Year Ended December 31, 1996
Revenues from external customers $ 8,349 $ 434 $ 483 $ 9,266
Intersegment revenues 325 325
Depreciation and amortization 713 6 69 788
Intersegment fees 325 325
Net operating income (loss) 2,855 (10) 186 3,031
Total assets 54,263 431 76,306 131,000
Additions to property and equipment 37,561 3 274 37,838
F-16
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The following table provides a reconciliation of total segment net operating
income to the Company's reported income before income taxes (in thousands):
Year Ended December 31, 1998 1997 1996
- - ------------------------------------------------------------------------------------
Total segment net operating income $ 14,237 $ 7,107 $3,031
Interest income 2,236 2,924 957
Other nonoperating income 294 200
Public debt transaction abandonment costs (10,633)
Site acquisition cancellation costs (1,960)
Lease termination costs (218)
Interest expense (202) (179) (556)
- - -------------------------------------------------------------------------------------
Income before income taxes $ 3,754 $ 10,052 $3,432
- - -------------------------------------------------------------------------------------
All of the Company's revenues are derived in the United States of
America. No single external customer accounts for ten percent or more
of the Company's total revenue.
NOTE 9 - LEASES
The Company has operating leases covering its corporate headquarters
and certain satellite television equipment utilized at its hotels. At
December 31, 1998, the Company's future minimum annual rentals under
non-cancelable operating leases were as follows (in thousands) for the
years ended December 31:
1999 $ 1,476
2000 1,636
2001 1,828
2002 1,575
2003 1,299
- - -----------------------
Total 7,814
Thereafter 5,649
- - -----------------------
$13,463
=======================
Total rent expense was approximately $862,000, $454,000 and $126,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 10 - CONTINGENCY
The Company is a defendant in certain shareholder litigation related
to the Company's stock offering of 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 flow of the Company; however,
the outcome of such litigation cannot presently be determined.
F-17
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1998, the Company entered into a venture to develop a Suburban
Lodge hotel in Atlanta, Georgia, investing $200,000 for a 25% equity
position. A non-employee director of the Company also owns a 25%
equity position in this venture. Also during 1998, the Company
acquired an option to purchase the director's interest in this venture
for a total consideration of $300,000, including the amount paid for
the option ($230,000). The hotel owned by the venture is expected to
open in the quarter ending June 30, 1999.
During certain periods of 1998 and 1997, two franchise locations were
partially owned by two of the Company's directors or members of their
immediate families. The Company acquired both locations on July 31,
1998. Franchise and other revenue recognized for such locations prior
to their acquisition by the Company was approximately $97,000 in 1998
and $150,000 in 1997.
Prior to the Company's initial public offering, it paid consulting
fees to a firm owned by an officer of the Company. Total payments,
included in corporate operating expenses, were $10,000 for the year
ended December 31, 1996. No such payments were made during the years
ended December 31, 1998 or 1997.
From time to time, the Company made advances to an officer of the
Company. The balance outstanding under these advances was $50,000 at
December 31, 1996. No such amounts were outstanding at December 31,
1998 or 1997.
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1998 and
1997 are as follows:
First Second Third Fourth
- - --------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Total revenue $9,046 $11,245 $13,162 $13,005
Operating income 2,636 4,200 1,900 3,323
Net income (loss) 2,255 3,174 (5,474) 2,607
Basic and diluted earnings (loss) per share 0.15 0.21 (0.35) 0.17
Year Ended December 31, 1997
Total revenue $3,923 $ 5,645 $ 7,005 $ 6,622
Operating income 1,188 2,091 2,577 1,251
Net income 1,257 1,774 2,126 1,567
Basic and diluted earnings per share 0.11 0.15 0.18 0.11
F-18
Suburban Lodges of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
During the third quarter of the year ended December 31, 1998, the
Company purchased an interest rate lock in connection with the planned
issuance of $100,000,000 in subordinated debt. Subsequent to the
purchase of the rate lock, public demand for subordinated debt
declined dramatically and the Company abandoned its planned debt
offering. As public debt market demand declined, markets for other
forms of debt also became declined, markets for other forms of debt
also became more volatile, and the Company decided to defer or cancel
the purchase of potential hotel sites that had not yet been acquired.
Accordingly, reserves of $8.7 million, net of income taxes, were
established in the third quarter to cover costs associated with the
abandoned debt transaction, including the estimated loss on the
interest rate lock, and the termination of negotiations with respect
to several hotel sites.
During the fourth quarter of the year ended December 31, 1998, the
Company closed the rate lock, incurring a loss that was slightly
smaller than originally anticipated, and determined that it would
acquire certain sites against which cancellation reserves had
previously been established. Accordingly, fourth quarter expenses
were reduced by $492,000, net of income taxes, to reflect the final
outcome of the matters against which reserves had been established in
the third quarter.
F-19
Schedule V - Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- - ----------------------- -------- ---------------------- -------- --------
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- - ----------------------- ------------ ---------- ----------- ---------- ---------
(amounts in thousands)
Reserve for Uncollectible
Accounts Receivable:
Year Ended December 31, 1996 $ - $ 13 $ - $ - $ 13
Year Ended December 31, 1997 13 38 - - 51
Year Ended December 31, 1998 51 138 - 90 <F1> 99
<FN>
<F1> Accounts written off
</FN>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) 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 in
the City of Atlanta, State of Georgia, on the 31st day of March, 1999.
SUBURBAN LODGES OF AMERICA, INC.
By:/s/ David E. Krischer
David E. Krischer
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Company in the capacities set forth and on the 31st day of March, 1999.
Signature Position
/s/ David E. Krischer Chairman of the Board, Chief Executive Officer,
David E. Krischer President and Director (Principal Executive Officer)
/s/ Dan J. Berman Vice President - Franchising and Director
Dan J. Berman
/s/ Paul A. Criscillis, Jr. Vice President and Chief Financial Officer (Principal
Paul A. Criscillis, Jr. Financial Officer)
/s/ Terry J. Feldman Vice President and Chief Accounting Officer
Terry J. Feldman (Principal Accounting Officer)
/s/ James R. Kuse Director
James R. Kuse
/s/ Michael McGovern Director
Michael McGovern
/s/ John W. Spiegel Director
John W. Spiegel
<CAPTION
EXHIBIT INDEX
Incorporated by
Reference to Exhibit
Exhibit Registration or File Form of Number in
No. Description Number Report Date of Report Report
- - ---------------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of 333-2876 S-1 March 28, 1996** 3.1
the Company
3.2 Amended and Restated By-laws of the 000-28108 10-K March 28,1997 3.2
Company, Amended as of March 17,
1997
4.1 Form of Common Stock Certificate of 333-2876 Amendment May 7, 1996 4.1
the Company No. 1 to S-
1
10.1 Form of Acquisition Agreement and 333-2876 S-1 March 28, 1996 10.1
Plan of Merger (with accompanying
schedule)
10.2 Purchase and Sale Agreement by and 333-2876 S-1 March 28, 1996 10.2
between Suburban Holdings, L.P. and
Gulf Coast Associates, Ltd.
10.3 Purchase and Sale Agreement by and 333-2876 S-1 March 28, 1996 10.3
between Suburban Holdings, L.P. and
Omnicorp Resources, Inc.
10.4 Form of Agreement and Consent of 333-2876 S-1 March 28, 1996 10.4
Partners of each of the Affiliated
Entities and Third Party Sellers
10.5 Suburban Lodges of America, Inc. 333-2876 Amendment May 7, 1996 10.5
Stock Option and Incentive Award No. 1 to S-
Plan 1
10.6 Suburban Lodges of America, Inc. 333-2876 Amendment May 7, 1996 10.6
Non-Employee Directors' Stock No. 1 to S-
Option and Fee Plan 1
10.7 Form of Indemnification Agreement 333-2876 S-1 March 28, 1996 10.7
between Suburban Lodges of America,
Inc. and its directors and officers
10.8 Registration Rights Agreement among 333-2876 S-1 March 28, 1996 10.8
Suburban Lodges of America, Inc.
and Certain Shareholders
10.9 Form of Franchise Agreement, as 333-35871 Amendment October 9, 1997 10.9.a.
amended No. 2 to S-
3
10.10 Form of Development and 333-2876 S-1 March 28, 1996 10.10
Design/Building Agreement
10.11 Form of Management Agreement 333-2876 S-1 March 28, 1996 10.11
10.12 Management Agreement between 333-2876 S-1 March 28, 1996 10.12
Suburban Management, Inc. and Gulf
Coast Associates, Ltd.
10.13 Consulting Agreement with Legacy 333-2876 S-1 March 28, 1996 10.13
Securities Corp.
10.14 Acknowledgment and Agreement 333-2876 S-1 March 28, 1996 10.14
between Suburban Lodges of America,
Inc. and Young Consulting, Inc. re.
Company's proprietary computer
software
10.15 Suburban Lodge 401(k) Savings Plan 333-2876 S-1 May 20, 1996 10.15
10.16 Rights Agreement 333-2876 Amendment May 7, 1996 10.16
No. 1 to S-
1
10.17 Commitment Letter for the Line of 333-2876 Amendment May 7, 1996 10.17
Credit No. 1 to S-
1
10.18 Preliminary Agreement for a License 000-28108 10-K March 28, 1997 10.18
to Develop a Suburban Lodge Unit
between Suburban- Franchise
Systems, Inc. and E.E.B. Lodging
Systems LLC
10.19 Preliminary Agreement for a License 000-28108 10-K March 28, 1997 10.19
to Develop a Suburban Lodge Unit
between Suburban-Franchise Systems,
Inc. and E.E.B. Lodging Systems LLC
II
10.20 Development and Design/Build 000-28108 10-K March 28, 1997 10.20
Agreement for Suburban Lodge of
Arlington South
10.21 Development and Design/Build 000-28108 10-K March 28, 1997 10.21
Agreement for Suburban Lodge of
Lewisville, Texas
10.22 Registration Rights Agreement among 000-28108 8-K March 17, 1997 10.19
the Registrant and Certain
Shareholders
10.23 Office Lease between the Registrant 333-35871 Amendment October 9, 1997 10.20
and Massachusetts Mutual Life No. 2 to S-
Insurance Company 3
10.24 Deed to Secure Debt and Security *
Agreement with Finova Realty
Capital Inc. and schedule of
omitted documents
10.25 Promissory Note to Finova Realty *
Capital Inc. and schedule of
omitted documents
10.26 Security Agreement in favor of *
Finova Realty Capital Inc. and
schedule of omitted documents
10.27 Assignment of Financial Agreements *
and Franchisor's Consent and
Subordination of Franchise
Agreements in favor of Finova
Realty Capital Inc. and schedule of
omitted documents
10.28 Change of Control Agreement *
21.1 Subsidiaries of the Registrant *
23.1 Consent of Deloitte & Touche, *
L.L.P.
27. Financial Data Schedule *
* Filed herewith.
** Originally filed on the date set forth above and
refiled pursuant to Regulation S-T on May 7, 1996.