UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-28108
Suburban Lodges of America, Inc.
---------------------------------
(Exact Name of registrant as
Georgia specified in its charter) 58-1781184
- ----------------------- -------------------
(State of Incorporation) (IRS Employer
Identification No.)
300 Galleria Parkway
Suite 1200
Atlanta, Georgia 30339
----------------------------------------------------------
(Address of principal executive office, including zip code)
770-799-5000
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES / X / NO / /
Number of shares of Common Stock, $.01 par value, outstanding as of
August 11, 1999:
15,425,072
Suburban Lodges of America, Inc.
Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 30, December 31,
1999 1998
---------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 22,096 $ 19,178
Accounts receivable, net of reserves of
$203 (1999) and $99 (1998) 716 568
Hotel inventory and supplies 2,045 1,684
Prepaid and refundable income taxes 2,754
Deferred income taxes 829 904
Prepaid expenses and other current assets 4,204 2,956
--------- --------
Total current assets 29,890 28,044
Property and equipment, net of accumulated depreciation and
amortization of $14,284 (1999) and $10,764 (1998) 285,118 272,030
Notes receivable 5,743 5,455
Deferred loan costs 1,644 1,552
Acquired intangible assets - net 3,584
Other assets 473 454
========= ========
Total assets $ 326,452 $307,535
========= ========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 1,251 $ 7,465
Construction accounts payable 2,807 6,847
Trade accounts payable 490 2,448
Accrued liabilities 5,362 2,558
Income taxes payable 478 316
Other current liabilities 204 382
--------- --------
Total current liabilities 10,592 20,016
Long-term debt, excluding current portion 97,822 74,735
Deferred income taxes 1,538 1,026
Other liabilities 111 114
--------- --------
Total liabilities 110,063 95,891
--------- --------
Shareholders' equity:
Common stock 157 154
Additional paid-in capital 202,250 200,190
Retained earnings 15,962 11,300
Treasury stock (1,980)
--------- --------
Total shareholders' equity 216,389 211,644
--------- --------
Total liabilities and shareholders' equity: $ 326,452 $307,535
========= ========
See accompanying notes to consolidated financial statements.
Page 2
Suburban Lodges of America, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- --------------- --------------- ---------------
REVENUE:
Hotel revenue $ 15,904 $ 10,855 $ 29,237 $ 19,517
Franchise and other revenue 906 390 1,512 773
-------- -------- -------- --------
Total revenue 16,810 11,245 30,749 20,290
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 7,976 5,002 15,301 9,570
Corporate operating expenses 1,733 891 3,400 1,649
Depreciation and amortization 1,992 1,152 3,801 2,235
-------- -------- -------- --------
Total costs and expenses 11,701 7,045 22,502 13,454
-------- -------- -------- --------
INCOME FROM OPERATIONS 5,109 4,200 8,247 6,836
OTHER INCOME (EXPENSE):
Interest income 337 757 642 1,592
Interest expense (1,493) (85) (2,758) (147)
Gain on sale of hotel 1,145
Other 184 63 184 63
-------- -------- -------- --------
Income before income taxes 4,137 4,935 7,460 8,344
Provision for income taxes 1,572 1,762 2,798 2,915
-------- -------- -------- --------
NET INCOME $ 2,565 $ 3,173 $ 4,662 $ 5,429
======== ======== ======== ========
EARNINGS PER COMMON SHARE:
Basic and diluted $ 0.17 $ 0.21 $ 0.30 $ 0.35
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic and diluted 15,398 15,430 15,414 15,430
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
Page 3
Suburban Lodges of America, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
June 30, 1999 June 30, 1998
-------------- -------------
Operating activities:
Net income $ 4,662 $ 5,429
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,801 2,235
Deferred income taxes 587
Stock compensation 19 30
Gain on sale of hotel (1,145)
Changes in operating assets and liabilities
net of the effects of acquisitions:
Accounts receivable (148) (393)
Other current assets 1,181 (925)
Other assets (307) (67)
Trade accounts payable (1,958) (480)
Income taxes payable 162 1,667
Other current liabilities 2,459 1,103
Other liabilities (3) (145)
-------- --------
Net cash provided by operating activities 9,310 8,454
-------- --------
Investing activities:
Additions to property and equipment (20,110) (51,966)
Proceeds from sale of hotel property 4,405
Acquisitions (1,448)
Increase (decrease) in construction accounts payable (4,040) 1,635
Other (1,725)
-------- --------
Net cash used by investing activities (21,193) (52,056)
-------- --------
Financing activities:
Proceeds from issuance of long-term debt 23,950 10,000
Principal payments on long-term debt (7,077)
Purchase of treasury stock (1,980)
Net increase in deferred loan costs (92)
Increase in restricted cash 11,000
-------- --------
Net cash provided by financing activities 14,801 21,000
-------- --------
Net increase (decrease) in cash and cash equivalents 2,918 (22,602)
Cash and cash equivalents at beginning of period 19,178 62,650
-------- --------
Cash and cash equivalents at end of period $ 22,096 $ 40,048
======== ========
Supplemental information:
Interest paid net of interest capitalized $ 2,684 $ 46
======== ========
Income taxes paid (net refund received) $ (564) $ 1,255
======== ========
See accompanying notes to consolidated financial statements.
Page 4
Suburban Lodges of America, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting
principles for complete financial statements have been omitted. In the
opinion of management, all adjustments that are necessary for a fair
presentation of financial position and results of operations have been
made. These interim financial statements should be read in conjunction
with the consolidated historical financial statements and notes thereto
presented in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
All significant intercompany balances and transactions have been
eliminated.
2. LONG-TERM DEBT
On March 31, 1999, the Company completed a $10,250,000 financing
arrangement with Empire Financial Services, Inc. The financing consists
of three mortgage loans with an initial weighted average interest rate
of 8.38%. The interest rates are adjustable at the end of each
three-year period to rates based on prime plus an average margin of
62.5 basis points. The loan repayments aggregating $88,163 per month
are based on a principal amortization period of 20 years with a final
maturity of March 1, 2005 for one of the loans and March 1, 2008 for
the other two loans. A total of three Company-owned hotels are pledged
as collateral on these loans.
On June 7, 1999, the Company completed a $13,700,000 mortgage loan
arrangement with Finova Realty Capital Corporation at a fixed interest
rate of 8.8%. The loan requires monthly payments of principal and
interest totaling approximately $113,100 commencing August 1, 1999,
based on a 25-year amortization schedule with a final maturity of June
30, 2009. A total of five Company-owned hotels are pledged as
collateral on this loan.
3. ACQUISITION
On June 1, 1999, the Company, through a wholly-owned subsidiary,
GuestHouse International Franchise Systems, Inc. ("GuestHouse"),
completed the acquisition of assets from GuestHouse International LLC
for a total purchase price, including transaction-related expenses, of
$3,491,750. The purchase price consisted of cash of $1,448,000 and
300,000 shares of the Company's common stock with a market value of
$2,043,750. The Company also assumed certain liabilities totaling
$167,000. GuestHouse is a franchisor of midscale lodging facilities
under the names GuestHouse International Inns, Hotels and Suites.
The acquisition was accounted for as a purchase and, accordingly, the
consolidated statement of earnings for the periods ended June 30, 1999
include the revenues, expenses and operating results of GuestHouse from
the date of acquisition. The purchase price plus the value of
liabilities assumed was allocated to assets acquired based on their
estimated fair value. The Company allocated $3,623,000 to intangible
assets consisting of continuing franchise contracts of $1,392,000 and
goodwill of $2,231,000. The franchise contracts are being amortized
over a period of four years, and goodwill is being amortized over a
period of twenty years.
Page 5
4. EARNINGS PER COMMON SHARE
Earnings per common share were computed based on the weighted average
number of common shares outstanding. Stock options outstanding under
the Company's various stock option plans did not have a dilutive effect
in any of the periods presented.
5. CONTINGENCIES
The Company is a defendant in litigation in the ordinary course of
business. In the opinion of management, such litigation will not have a
material adverse effect on the financial position, results of
operations or cash flows of the Company.
6. SEGMENT AND RELATED INFORMATION
The Company operates in three reportable segments: hotel operations,
franchising operations and corporate and support services. 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 tables (in thousands):
Corporate
Hotel Franchising and Support
Operations Operations Services Total
QUARTER ENDED JUNE 30, 1999
Revenues from external customers $ 15,904 $ 549 $ 357 $ 16,810
Intersegment revenues 634 794 1,428
Depreciation and amortization 1,821 41 130 1,992
Intersegment expenses 1,428 1,428
Net operating income (loss) 4,679 675 (198) 5,156
QUARTER ENDED JUNE 30, 1998
Revenues from external customers $ 10,855 $ 281 $ 109 $ 11,245
Intersegment revenues 538 538
Depreciation and amortization 1,084 1 67 1,152
Intersegment expenses 538 538
Net operating income (loss) 4,253 65 (118) 4,200
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 29,237 $ 932 $ 580 $ 30,749
Intersegment revenues 1,170 1,462 2,632
Depreciation and amortization 3,522 44 235 3,801
Intersegment expenses 2,632 2,632
Net operating income (loss) 7,783 1,191 (589) 8,385
Total assets 300,714 4,722 21,016 326,452
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers $ 19,517 $ 481 $ 292 $ 20,290
Intersegment revenues 971 971
Depreciation and amortization 2,111 2 122 2,235
Intersegment expenses 971 971
Net operating income (loss) 6,887 92 (143) 6,836
Total assets 243,537 630 17,927 262,094
Page 6
The following table provides a reconciliation of total segment net
operating income to the Company's reported income before income taxes
(in thousands):
Quarter ended June 30 Six Months ended June 30
---------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Total segment net operating income $ 5,156 $ 4,200 $ 8,385 $ 6,836
Interest income 337 757 642 1,592
Gain on sale of hotel 1,145
Other nonoperating income 184 63 184 63
Interest expense (1,493 (85) (2,758) (147)
Site acquisition cancellation cost (47) (138)
------- ------- ------- -------
Income before income taxes $ 4,137 $ 4,935 $ 7,460 $ 8,344
------- ------- ------- -------
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.
7. RELATED PARTY TRANSACTIONS
During certain periods of 1998, 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 for the three
month and six month periods ended June 30, 1998 was approximately
$22,000 and $63,000, respectively.
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 owned 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). On August 1, 1999 the Company exercised its option
to purchase the director's interest for an additional payment of
$70,000. The hotel owned by the venture opened in May 1999.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITION
On June 1, 1999, the Company, through a wholly-owned subsidiary, acquired the
assets of GuestHouse International LLC ("GuestHouse"). GuestHouse is a
franchisor of midscale lodging facilities under the names GuestHouse
International Inns, Hotels and Suites. The effect of this acquisition on the
operating results for the three-month and six-month periods ended June 30, 1999
is discussed below.
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE QUARTER ENDED JUNE 30, 1999
The following table sets forth certain information regarding the performance of
the Company's hotels by geographic region for the quarter ended June 30, 1999.
AWR Occupancy RevPAR Total Hotels Average Age
--- --------- ------ ------------ -----------
(in years)
Mid Atlantic Region $ 186.66 85.6% $ 159.97 10 2.54
Midwest Region 208.10 82.8 171.75 15 1.35
Southeast Region 182.31 81.9 148.95 19 4.06
West Region 189.17 73.2 135.91 16 .93
---------- ---- ---------- -- ----
All Company-Owned $ 191.42 80.5% $ 153.36 60 2.25
========== ==== ========== == ====
All Mature Company-Owned <F1> $ 185.29 84.3% $ 156.16 42 2.97
========== ==== ========== == ====
<FN>
<F1> Mature hotels are those which have operated for at least
thirteen full months as of the end of the period for which data is
presented.
</FN>
COMPARISON OF THE QUARTER ENDED JUNE 30, 1999 TO THE QUARTER ENDED JUNE 30, 1998
Hotel revenues for the quarter ended June 30, 1999 were $15,904,000,
which was an increase of $5,049,000, or 46.5%, over the quarter ended June 30,
1998. Eighteen hotels open less than a full thirteen months as of June 30, 1999
accounted for $4,186,000 of the increase, while the Company's 42 mature hotels
contributed $863,000 of the increase. Included in the mature hotel category, are
two hotels acquired by the Company in the third quarter of 1998. These two
hotels accounted for $551,000 of the revenue increase from mature hotels. The
average weekly rate ("AWR") for the Company's mature hotels increased from
$170.13 to $185.29; however, the occupancy for these hotels declined from 90.9%
to 84.3%. The AWR for all Company-owned hotels, which includes the 18 hotels
open less than a full thirteen months, increased from $172.08 to $191.42. This
increase was accompanied by a decrease in occupancy from 87.9% to 80.5%.
Franchise and other revenue from corporate operations for the quarter
ended June 30, 1999, which includes management, franchise and development
revenue, was $906,000, compared to $390,000 for the quarter ended June 30, 1998.
Management fees increased $184,000 to $253,000 for the quarter ended June 30,
1999 from $69,000 in the prior year quarter as a result of fees earned for
managing 21 hotels for franchisees during the current year quarter compared to
managing eight hotels for franchisees during the prior year quarter. Franchise
revenue for the quarter increased approximately $267,000, from $281,000 in 1998
to $548,000 in 1999. The franchise revenue for the quarter ended June 30, 1999
reflects $167,000 in initial franchise fees, representing six hotel openings and
$30,000 for one contract cancellation fee, compared to $130,000 and five hotel
openings in the quarter ended June 30, 1998. Franchise royalties and other
revenue on open hotels was approximately $351,000 for the quarter ended June 30,
1999 compared to $151,000 for the quarter ended June 30, 1998. The current year
quarter includes $66,000 of franchise fees attributable to the GuestHouse
Page 8
acquisition. The Company earned $64,000 in development and construction revenue
during the current year quarter compared to $35,000 earned in the prior year
quarter.
Hotel operating expenses increased $2,974,000, or 59.5%, to $7,976,000
for the quarter ended June 30, 1999, from $5,002,000 for the quarter ended June
30, 1998. The majority of this increase, or approximately $2,198,000, pertains
to the opening and quarter-to-date expenses for the 18 hotels open less than a
full thirteen months. In addition, approximately $778,000 of the increase is
attributable to the mature hotels, which includes $303,000 for the two hotels
acquired in the third quarter of 1998. Hotel operating margins at the mature
properties declined from 54.2% in the prior year quarter to 50.9% for the
current year quarter. Operating margins at all Company-owned hotels, which
includes the 18 hotels open less than a full thirteen months, declined from
53.9% for the quarter ended June 30, 1998 to 49.8% for the quarter ended June
30, 1999.
Corporate operating expenses, net of amounts capitalized, increased
$842,000, or 94.5%, to $1,733,000, which includes $57,000 attributable to the
GuestHouse operation. The primary reasons for the increase are $161,000 for
additional staffing needed to support the growth of the business and a reduction
of $556,000 in the amount of project-related expenses capitalized to hotel
construction costs as compared to the prior year. Total corporate operating
expenses prior to capitalization of project related expenses increased 14.8%
compared to the prior year quarter. Depreciation and amortization increased to
$1,992,000 from $1,152,000, primarily as a result of the 18 hotels open less
than a full thirteen months. The current year quarter includes amortization of
$38,000 related to intangible assets acquired in the GuestHouse acquisition.
Interest expense, net of interest capitalized of $453,000 and $617,000
for the quarters ended June 30, 1999, and June 30, 1998, respectively, increased
$1,408,000 from $85,000 for the quarter ended June 30, 1998 to $1,493,000 for
the quarter ended June 30, 1999. The increase in interest expense, excluding
interest capitalized, is due to higher levels of debt outstanding. .
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE SIX MONTHS ENDED JUNE 30, 1999
The following table sets forth certain information regarding the performance of
the Company's hotels by geographic region for the six months ended June 30,
1999.
AWR Occupancy RevPAR Total Hotels Average Age
--- --------- ------ ------------ -----------
(in years)
Mid Atlantic Region $ 183.92 81.9% $ 150.80 10 2.54
Midwest Region 188.29 82.6 155.40 15 1.35
Southeast Region 181.15 81.0 146.49 19 4.06
West Region 188.35 70.8 131.35 16 .93
---------- ---- ---------- -- ----
All Company-Owned $ 190.02 77.4% $ 145.97 60 2.25
========== ==== ========== == ====
All Mature Company-Owned <F1> $ 183.26 81.7% $ 149.62 42 2.97
========== ==== ========== == ====
<FN>
<F1> Mature hotels are those which have operated for at least a full
thirteen months as of the end of the period for which data is
presented.
</FN>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED
JUNE 30, 1998
Hotel revenues for the six months ended June 30, 1999 were $29,237,000,
which was an increase of $9,720,000, or 49.8%, over the prior year six-month
period. Eighteen hotels open less than a full thirteen months as of June 30,
1999 accounted for $7,031,000 of the increase, while the Company's 42 mature
hotels contributed $2,689,000 of the increase. Included in the mature hotel
category, are two hotels acquired by the Company in the third quarter of 1998.
These two hotels accounted for $1,018,000 of the revenue increase from mature
hotels. The average weekly rate ("AWR") for the Company's mature hotels
Page 9
increased from $165.18 to $183.25; however, the occupancy for these hotels
declined from 90.4% to 81.7%. The AWR for all Company-owned hotels, which
includes the 18 hotels open less than a full thirteen months, increased from
$167.25 to $190.02. This increase was accompanied by a decrease in occupancy
from 82.1% to 77.4%.
Franchise and other revenue from corporate operations for the six
months ended June 30, 1999, which includes management, franchise and development
revenue, was $1,512,000, compared to $773,000 for the six months ended June 30,
1998. Management fees increased $343,000 to $444,000 for the current year period
from $101,000 in the prior year period, as a result of fees earned for managing
21 hotels for franchisees during the current year compared to managing eight
hotels for franchisees during the prior year. Franchise revenue for the
six-month period increased approximately $447,000, from $481,000 in 1998 to
$928,000 in 1999. The franchise revenue for the six months ended June 30, 1999
reflects $327,000 in initial franchise fees, representing 12 hotel openings and
$30,000 for one contract cancellation fee, compared to $209,000 and eight hotel
openings in the prior year six month period. Franchise royalties and other
revenue on open hotels was approximately $571,000 for the six months ended June
30, 1999 compared to $272,000 for the six months ended June 30, 1998. The
current year period includes $66,000 of franchise fees attributable to the
GuestHouse acquisition. The Company earned $64,000 in development and
construction revenue during the current year period compared to $183,000 earned
in the prior year period.
Hotel operating expenses increased $5,731,000, or 59.9%, to $15,301,000
for the current year period from $9,570,000 for the prior year period. The
majority of this increase, or approximately $4,015,000, pertains to the opening
and period-to-date expenses for the 18 hotels open less than a full 13 months.
In addition, approximately $1,716,000 of the increase is attributable to the
mature hotels, which includes $584,000 for the two hotels acquired in the third
quarter of 1998. Hotel operating margins at the mature properties declined from
51.1% in the prior year period to 49.3% for the current year period. Operating
margins at all Company-owned hotels, which includes the 18 hotels open less than
a full thirteen months, declined from 51.0% for the six months ended June 30,
1998 to 47.7% for the six months ended June 30, 1999.
Corporate operating expenses, net of amounts capitalized, increased
$1,751,000, or 106.2%, to $3,400,000, which includes $57,000 attributable to the
GuestHouse operation. The primary reasons for the increase are $496,000 for
additional staffing needed to support the growth of the business and a reduction
of $925,000 in the amount of project-related expenses capitalized to hotel
construction costs as compared to the prior year. Total corporate operating
expenses prior to capitalization of project related expenses increased 22.8%
compared to the prior year six-month period. Depreciation and amortization
increased to $3,801,000 from $2,235,000, primarily as a result of the 18 hotels
open less than a full thirteen months. The current year period includes
amortization of $38,000 related to intangible assets acquired in the GuestHouse
acquisition.
Interest expense, net of interest capitalized of $1,223,000 and
$1,197,000 for the six months ended June 30, 1999, and June 30, 1998,
respectively, increased $2,611,000 from $147,000 for the six months ended June
30, 1998 to $2,758,000 for the six months ended June 30, 1999. The increase in
interest expense, excluding interest capitalized, is due to higher levels of
debt outstanding and the write off of approximately $300,000 in unamortized loan
costs associated with the credit facility at PNC Bank, N.A. which was terminated
during the first quarter of 1999.
During the first quarter of 1999, the Company sold a hotel resulting in
a gain of approximately $1,145,000. The hotel continues to operate as a Suburban
Lodge under franchise and management agreements that generate franchise and
management fee income for the Company
SEASONALITY
The Company's mature hotels typically experience lower average
occupancy rates and total revenues during the first and fourth quarters of each
year.
Page 10
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1999, the Company completed a $10,250,000 financing
agreement with Empire Financial Services, Inc. The financing consists of three
mortgage loans with an initial weighted average interest rate of 8.38%. The
interest rates are adjustable at the end of each three-year period to rates
based on prime plus an average margin of 62.5 basis points. The loan repayments
aggregating $88,163 per month are based on a principal amortization period of 20
years with a final maturity of March 1, 2005 for one of the loans and March 1,
2008 for the other two loans. A total of three Company-owned hotels are pledged
as collateral on these loans. A portion of the proceeds from this financing was
used to repay the notes assumed by the Company in connection with the
acquisition of two franchised hotels on July 31, 1998.
On June 7, 1999, the Company completed a $13,700,000 mortgage loan
arrangement with Finova Realty Capital Corporation at a fixed interest rate of
8.8%. The loan requires monthly payments of principal and interest totaling
approximately $113,100 commencing August 1, 1999, based on a 25-year
amortization schedule with a final maturity of June 30, 2009. A total of five
Company-owned hotels are pledged as collateral on this loan.
On February 23, 1999, the Board of Directors authorized the Company to
repurchase up to 1,500,000 shares of its outstanding common stock. As of June
30, 1999, the Company had purchased a total of 300,000 shares at a cost of
$1,980,000.
As of June 30, 1999, the Company had approximately $22.1 million in
cash and cash equivalents, $88.7 million of borrowings with Finova Realty
Capital Corporation and $10.2 million of borrowings with Empire Financial
Services, Inc.
At June 30, 1999, the Company had two hotels under construction, which
are scheduled for completion during the third quarter of 1999, and the Company
plans to start construction on three new hotels during the last half of 1999.
The Company anticipates that the total additional cost to complete these hotels,
as well as fund amounts to be disbursed on recently opened hotels, is
approximately $18.7 million, which includes $2.8 million in construction draws
accrued at June 30, 1999. The Company intends to fund the construction of these
hotels with existing cash balances, cash flow from operations and additional
borrowings. The Company is not presently seeking additional sites for the future
construction of hotels. However, the Company owns 14 additional sites for future
development. The Company has no current plans to acquire additional sites.
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 $5.0 million (approximately $34,000 to
$37,000 per guest room).
In the future, the Company may seek to acquire new credit facilities or
issue debt or equity securities. Any debt incurred or issued by the Company may
be secured or unsecured, bear fixed or variable rate interest, and may be
subject to such terms and conditions as the Board of Directors of the Company
deems prudent.
YEAR 2000 PREPAREDNESS
The 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.
Page 11
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 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.
Suburban has received written documentation from the vendor of its
current accounting applications software certifying that the software can
properly interpret dates subsequent to December 31, 1999. Suburban is
implementing a new accounting applications software and expects to complete that
implementation by October 1, 1999. The vendor of this new software has certified
in writing that the software can properly interpret dates subsequent to December
31, 1999, and Suburban plans to test the software to confirm that it is Year
2000 compliant before start up.
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 third quarter of 1999
to verify Year 2000 compliance of these systems
The vendors of certain commercial software utilized by Suburban for
routine office applications have 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 software 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 has completed an inventory and assessment of
relevant Year 2000 issues for such systems and equipment. Suburban expects to
complete all necessary upgrades to such systems and equipment 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. Written requests
have been made of the vendors to provide letters regarding their Year 2000
status. The responses to these requests, received to date, indicate for the most
part that its vendors and suppliers are currently, or will timely be, Year 2000
Page 12
compliant. Suburban is replacing vendors whose compliance is questionable.
Company owned or operated hotels are acquiring additional stocks of operating
supplies and materials. The Company anticipates that during the 3rd quarter of
1999, each such hotel will have a specifically tailored contingency plan which
will address possible disruptions in supplies, utilities and governmental
services.
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 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 their potential adverse impact. It is
anticipated that each Company-owned or operated hotel, along with the corporate
headquarters in Atlanta, will have a written contingency plan describing
responses to the aforementioned scenarios. 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 businesses 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which was modified by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of FASB Statement No. 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 2001, and does not presently expect such adoption to have any effect on the
Company's financial statements at that time.
Page 13
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding the Company's activities pertaining to the approach of the
Year 2000, constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are generally identified by words such as "expects", "believes",
"anticipates," etc., and involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performances or achievements
of the Company to be materially different from the expectation expressed or
implied in such statements. Such factors include, among other things,
uncertainty as to economic conditions, consumer demand for extended stay
lodging, the level of competition in the extended stay market, financial
markets, the Company's ability to 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash and cash equivalents are short-term, and highly liquid
investments with original maturities of three months or less. 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 June 30, 1999, $10.2 million of the Company's long-term debt bears interest
at rates of approximately 8.4%. These rates are fixed until March 31, 2002. The
remaining $88.7 million of the Company's long-term debt bears interest at fixed
rates ranging from 8.25% to 8.8%. A change in market interest rates is not
expected to impact the Company's fixed rate obligations over the next three
years.
Page 14
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 11, 1999, the Company held its annual meeting of shareholders.
The purpose of the meeting was to re-elect two directors whose terms
expired in 1999, and to vote on a proposal to amend the Company's Stock
Option and Incentive Award Plan (the "Plan) to provide for an
additional 250,000 shares which may be issued thereunder. At the
meeting, Messrs. David E. Krischer and Dan J. Berman were both
re-elected for a three-year term, which expires in 2002. The number of
votes cast in favor of Mr. Krischer was 12,897,021, against or withheld
was 391,835. The number of votes cast in favor of Mr. Berman was
12,607,021, against or withheld was 681,835. The Company's other
directors are Mr. John W. Spiegel, whose term expires in 2000, and
Messrs. James R. Kuse and Michael McGovern, whose terms expire in 2001.
The proposal to amend the Plan received 9,438,048 votes in favor,
3,840,583 votes against and there were 10,225 absentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 15, 1999. The
report was for Item 2, Acquisition or Disposition of Assets,
covering the Company's purchase of assets from GuestHouse
International LLC. The report did not include financial
statements.
The Company filed a report on Form 8-K/A on August 13, 1999.
The report was for Item 2, Acquisition or Disposition of
Assets, covering the Company's purchase of assets from
GuestHouse International LLC. The report included the
financial statements listed below.
Financial statements of GuestHouse International LLC:
1. Report of Independent Certified Public Accountants as
of and for the year ended December 31, 1998.
2. Balance Sheet as of December 31, 1998.
3. Statement of Operations for the year ended December 31,
1998.
4. Statement of Changes in Unitholders' Equity for the year
ended December 31, 1998.
5. Statement of Cash Flows for the year ended December 31,
1998.
6. Notes to Financial Statements as of and for the year
ended December 31, 1998.
Page 15
7. Unaudited Balance Sheet as of March 31, 1999.
8. Unaudited Statement of Operations for the three months
ended March 31, 1999.
9. Unaudited Statement of Cash Flows for the three months
ended March 31, 1999.
10. Notes to Unaudited Financial Statements as of and for
the three months ended March 31, 1999.
Pro Forma Financial Information:
1. Introduction to Unaudited Pro Forma Financial Information.
2. Unaudited Pro Forma Balance Sheet as of March 31, 1999.
3. Unaudited Pro Forma Statement of Operations for the
three months ended March 31, 1999.
4. Unaudited Pro Forma Statement of Operations for the
year ended December 31, 1998.
5. Notes to Unaudited Pro Forma Financial Information.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Suburban Lodges of America, Inc.
Date: August 16, 1999 By: /s/ PAUL A. CRISCILLIS, JR.
--------------- ---------------------------
Paul A. Criscillis, Jr.
Vice President, Chief
Financial Officer
Date: August 16, 1999 By: /s/ ROBERT E. SCHNELLE
---------------- ----------------------
Robert E. Schnelle
Vice President, Treasurer
(Chief Accounting Officer)