UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 specified in its charter)
GEORGIA 58-1781184
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
300 Galleria Parkway
Suite 1200
Atlanta, Georgia 30339
----------------------------------------------------------
(Address of principal executive office, including zip code)
770-799-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES / X / NO / /
Number of shares of Common Stock, $.01 par value, outstanding as of
November 9, 1999:
14,204.672
Suburban Lodges of America, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,015 $ 19,178
Accounts receivable, net of reserves of
$195 (1999) and $99 (1998) 2,031 1,796
Hotel inventory and supplies 2,193 1,684
Prepaid and refundable income taxes 2,754
Deferred income taxes 829 904
Prepaid expenses and other current assets 3,129 1,728
--------- --------
Total current assets 27,197 28,044
Property and equipment, net of accumulated depreciation and
amortization of $16,132 (1999) and $10,764 (1998) 288,198 272,030
Notes receivable 5,675 5,455
Deferred loan costs 1,610 1,552
Acquired intangible assets - net 3,615 --
Other assets 469 454
--------- --------
TOTAL ASSETS $ 326,764 $307,535
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,269 $ 7,465
Construction accounts payable 1,549 6,847
Trade accounts payable 1,126 2,448
Accrued wages and benefits 1,314 345
Accrued property taxes 2,130 337
Other accrued liabilities 2,223 1,270
Income taxes payable 449 316
Deferred revenue 789 988
--------- --------
Total current liabilities 10,849 20,016
Long-term debt, less current maturities 97,513 74,735
Deferred income taxes 1,538 1,026
Other liabilities 111 114
--------- --------
Total liabilities 110,011 95,891
--------- --------
Shareholders' equity:
Common stock 157 154
Additional paid-in capital 202,250 200,190
Retained earnings 18,251 11,300
Treasury stock (3,905) --
--------- --------
Total shareholders' equity 216,753 211,644
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 326,764 $307,535
========= ========
See accompanying notes to unaudited consolidated financial statements.
Page 2
Suburban Lodges of America, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
REVENUE:
Hotel revenue $ 17,717 $ 12,720 $ 46,954 $ 32,237
Franchise and other revenue 966 442 2,478 1,215
-------- -------- -------- --------
Total revenue 18,683 13,162 49,432 33,452
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 8,849 6,022 24,150 15,592
Corporate operating expenses 2,419 1,321 5,819 2,970
Site acquisition cancellation expense 2,480 2,480
Depreciation and amortization 2,156 1,439 5,957 3,674
-------- -------- -------- --------
Total costs and expenses 13,424 11,262 35,926 24,716
-------- -------- -------- --------
INCOME FROM OPERATIONS 5,259 1,900 13,506 8,736
OTHER INCOME (EXPENSE):
Interest income 358 406 1,000 1,998
Interest expense (1,874) (5) (4,632) (153)
Gain on sale of hotel 1,145
Public debt transaction
abandonment costs (10,714) (10,714)
Other 8 192 63
-------- -------- -------- --------
Income (loss) before income taxes 3,751 (8,413) 11,211 (70)
Provision (credit) for income taxes 1,462 (2,939) 4,260 (25)
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,289 $ (5,474) $ 6,951 $ (45)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted $ 0.15 $ (0.35) $ 0.45 $ --
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic and diluted 15,388 15,431 15,405 15,430
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3
Suburban Lodges of America, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Unaudited)
Nine Months Ended
Sept. 30, 1999 Sept. 30, 1998
----------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) $ 6,951 $ (45)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,957 3,674
Deferred income taxes 587 --
Equity in loss of joint venture 23 --
Stock compensation 19 30
Gain on sale of property (1,145) (63)
Site acquisition cancellation expense 2,480
Changes in operating assets and
liabilities -- net of the effects of
acquisitions:
Accounts receivable (235) (681)
Other current assets 881 (4,402)
Other assets (197) (202)
Trade accounts payable (1,322) (558)
Income taxes payable 133 --
Other current liabilities 3,414 1,267
Other liabilities (3) (26)
-------- --------
Net cash provided by operating activities 15,063 1,474
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (25,231) (82,823)
Proceeds from sale of property 4,405 356
Acquisitions - net of cash acquired (1,481) (2,279)
Increase (decrease) in construction accounts payable (5,298) 3,063
Investment in and advances to joint venture (240) (430)
-------- --------
Net cash used by investing activities (27,845) (82,113)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 23,950 15,000
Principal payments on long-term debt (7,368) (11)
Purchase of treasury stock (3,905) --
Notes issued to franchisees -- (2,660)
Reserve for abandonment of public debt transaction -- 10,714
Net increase in deferred loan costs (58)
Decrease in restricted cash -- 11,000
-------- --------
Net cash provided by financing activities 12,619 34,043
-------- --------
Net decrease in cash and cash equivalents (163) (46,596)
Cash and cash equivalents at beginning of period 19,178 62,650
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,015 $ 16,054
======== ========
Supplemental information:
Interest paid net of interest capitalized $ 4,506 $ 51
======== ========
Income taxes paid $ 899 $ 3,183
======== ========
See accompanying notes to unaudited 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, based on a 25-year
amortization schedule with a final maturity of June 30, 2009. Five
Company-owned hotels are pledged as collateral on this loan.
3. ACQUISITION
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 $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 accounted for as purchases and,
accordingly, the consolidated statements of earnings include the
revenues, expenses and operating results of the acquired companies from
the date of acquisition.
Page 5
The Company's allocation of purchase price to assets acquired and
liabilities assumed was as follows:
Property and equipment $ 9,971,000
Other assets 420,000
------------
10,391,000
Notes payable (6,597,000)
Other liabilities (1,289,000)
------------
Purchase price 2,505,000
Less cash acquired (226,000)
------------
Purchase price, net of cash $ 2,279,000
============
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
$3,525,000. The purchase price consisted of cash of $1,481,000 and
300,000 shares of the Company's common stock with a market value of
$2,044,000. The Company also assumed certain liabilities totaling
$102,000. 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 statements of earnings for the periods ended September 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 as follows:
Continuing franchise contracts $ 1,392,000
Goodwil 2,198,000
Other assets 37,000
------------
3,627,000
Liabilities assumed (102,000)
------------
Purchase price $ 3,525,000
============
The franchise contracts are being amortized over a period of four
years, and goodwill is being amortized over a period of twenty years.
4. PROJECT ABANDONMENT COSTS
On July 9, 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. As a result of these decisions, expenses of $8.7 million, net of
income taxes, were recognized during the quarter ended September 30,
1998 to cover costs associated with the abandoned debt transaction,
including the loss expected to be incurred upon settlement of the
interest rate lock, and the termination of negotiations with respect to
several potential hotel sites.
Page 6
5. 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.
6. 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.
7. 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):
Franchising Corporate
Hotel Franchising and Support
Operations Operations Services Total
---------- ---------- -------- -----
QUARTER ENDED SEPTEMBER 30, 1999
Revenues from external customers ... $ 17,717 $ 632 $ 334 $ 18,683
Intersegment revenues (see Note) ... 705 881 1,586
Depreciation and amortization ...... 1,903 117 136 2,156
Intersegment expenses .............. 1,586 1,586
Net operating income (loss) ........ 5,379 284 (429) 5,234
QUARTER ENDED SEPTEMBER 30, 1998
Revenues from external customers ... $ 12,720 $ 251 $ 191 13,162
Intersegment revenues .............. 635 635
Depreciation and amorization ....... 1,391 2 46 1,439
Intersegment expenses .............. 635 635
Net operating income (loss) ........ 4,676 26 (322) 4,380
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers ... $ 46,954 $ 1,563 $ 915 $ 49,432
Intersegment revenues (see Note) ... 1,875 2,343 4,218
Depreciation and amortization ...... 5,425 162 370 5,957
Intersegment expenses .............. 4,218 4,218
Net operating income (loss) ........ 13,161 1,476 (1,018) 13,619
Total assets ....................... 297,618 4,619 24,527 326,764
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers ... $ 32,237 $ 733 $ 482 $ 33,452
Intersegment revenues .............. 1,606 1,606
Depreciation and amortization ...... 3,502 7 165 3,674
Intersegment expenses .............. 1,606 1,606
Net operating income (loss) ........ 11,537 118 (439) 11,216
Total assets ....................... 276,966 685 2,513 280,164
Note: Effective January 1, 1999, Suburban Franchise Systems, Inc., a
wholly-owned subsidiary, instituted a franchise royalty charge to all
Company-owned hotels.
Page 7
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 September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Total segment net operating income $ 5,234 $ 4,380 $ 13,619 $ 11,216
Interest income 358 406 1,000 1,998
Gain on sale of hotel 1,145
Other nonoperating income 8 - 192 63
Interest expense (1,874) (5) (4,632) (153)
Site acquisition cancellation costs 25 (2,480) (113) (2,480)
Public debt transaction abandon-
ment costs -- (10,714) -- (10,714)
------- ------- -------- ---------
Income (loss) before income taxes $ 3,751 $ (8,413) $ 11,211 $ (70)
======= ======== ======== =========
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.
8. 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. As described in Note 3, the Company acquired both locations
on July 31, 1998. Franchise and other revenue recognized for such
locations for the three month and nine month periods ended September
30, 1998 was approximately $14,000 and $97,000, respectively.
During 1998, the Company entered into a joint 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. The hotel owned by the
venture opened in May 1999.
9. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Page 8
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 nine-month periods ended September 30,
1999 is discussed below.
The Company's acquisition of GuestHouse was an important step toward reaching
its strategic objective of expanding its franchising operations. With the
addition of this second brand, a traditional nightly stay hotel to complement
the Suburban Lodge extended stay hotel brand, the Company has increased the size
of its franchise sales force and is focusing its efforts in this area. As the
table below indicates, the Company's two brands had 209 hotels open or in
development at September 30, 1999.
BRAND STATUS REPORT AT SEPTEMBER 30, 1999
Suburban Guesthouse
Lodges International Total
------ ------------- -----
Hotels open 105 45 150
Hotels under construction
or conversion 10 5 15
Executed franchise agreements
(not under construction) 5 5 10
Approved applications 24 10 34
--- -- ---
Total hotels open or in
development 144 65 209
=== == ===
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
The following table sets forth certain information regarding the performance of
the Company's hotels by geographic region for the quarter ended September 30,
1999.
==============================================================================================================================
AWR Occupancy RevPAR Total Hotels Average Age
- ------------------------------------------------------------------------------------------------------------------------------
(in years)
Mid Atlantic Region $ 195.56 87.4% $ 171.03 10 2.77
Midwest Region 211.04 88.7 187.48 15 1.60
Southeast Region 184.27 84.4 155.34 19 4.31
West Region 186.36 80.7 150.01 16 1.03
------------------------------------------------------------------------------
All Company-Owned $ 193.42 84.9% $ 164.56 60 2.50
==============================================================================
All Mature Company-Owned <F1> $ 190.37 86.5% $ 164.71 46 3.05
==============================================================================================================================
<FN>
<F1> Hotels are considered to be mature for these statistics when
they have been open for twelve full calendar months.
</FN>
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1999 TO THE QUARTER ENDED
SEPTEMBER 30, 1998
Hotel revenues for the quarter ended September 30, 1999 were
$17,717,000 which was an increase of $4,997,000, or 39.3%, over the quarter
ended September 30, 1998. Fourteen hotels open less than twelve full calendar
months as of September 30, 1999 accounted for $3,996,000 of the increase, while
the Company's 46 mature hotels contributed $1,001,000 of the increase. The
average weekly rate ("AWR") for the Company's mature hotels increased from
$175.97 to $190.37; however, the occupancy for these hotels declined from 90.3%
to 86.5%. The AWR for all Company-owned hotels, which includes the 14 hotels
open less than twelve full calendar months, increased from $179.05 to $193.42.
This increase was accompanied by a decrease in occupancy from 87.6% to 84.9%.
Page 9
Franchise and other revenue from corporate operations for the quarter
ended September 30, 1999, which includes management, franchise and development
revenue, was $966,000, compared to $442,000 for the quarter ended September 30,
1998. Management fees increased $184,000 to $302,000 for the quarter ended
September 30, 1999 from $118,000 in the prior year quarter as a result of fees
earned for managing 20 hotels for franchisees during the current year quarter
compared to managing 10 hotels for franchisees during the prior year quarter.
Franchise revenue for the quarter increased approximately $381,000, from
$251,000 in 1998 to $632,000 in 1999. Initial franchise fees of $64,000 and
$52,000 were earned in the quarters ended September 30, 1999 and September 30,
1998, respectively. There were two hotel openings in each of these quarters.
Franchise royalties and other revenue on open hotels was approximately $568,000
for the quarter ended September 30, 1999 compared to $199,000 for the quarter
ended September 30, 1998. The current year quarter includes $215,000 of
franchise fees attributable to the GuestHouse acquisition. The Company earned
$73,000 in development and construction revenue during the prior year quarter.
No development and construction revenue was earned during the current year
quarter.
Hotel operating expenses increased $2,827,000, or 46.9%, to $8,849,000
for the quarter ended September 30, 1999, from $6,022,000 for the quarter ended
September 30, 1998. The majority of this increase, or approximately $1,897,000,
pertains to the opening and quarter-to-date expenses for the 14 hotels open less
than twelve full calendar months. In addition, approximately $930,000 of the
increase is attributable to the mature hotels. Hotel operating margins at the
mature properties declined from 53.5% in the prior year quarter to 50.1% for the
current year quarter. Operating margins at all Company-owned hotels, which
includes the 14 hotels open less than twelve full calendar months, declined from
52.7% for the quarter ended September 30, 1998 to 50.1% for the quarter ended
September 30, 1999.
Corporate operating expenses, net of amounts capitalized, increased
$1,098,000, or 83.1%, to $2,419,000 which includes $381,000 attributable to
GuestHouse. The primary reasons for the increase are $243,000 for additional
staffing needed to support the growth of the business and a reduction of
$701,000 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 15.6%
compared to the prior year quarter. The prior year amounts included $218,000 of
expense associated with the Company's early termination of a lease in connection
with its move to a new headquarters building. Depreciation and amortization
increased to $2,156,000 from $1,439,000, primarily as a result of the 14 hotels
open less than twelve full calendar months. The current year quarter includes
amortization of $114,000 related to intangible assets acquired in the GuestHouse
acquisition.
Interest expense, net of interest capitalized of $298,000 and $570,000
for the quarters ended September 30, 1999, and September 30, 1998, respectively,
increased from $5,000 for the quarter ended September 30, 1998 to $1,874,000 for
the quarter ended September 30, 1999. The increase in total interest charges
incurred is due to higher levels of debt outstanding.
Page 10
COMPANY-OWNED HOTEL STATISTICS BY REGION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
The following table sets forth certain information regarding the performance
of the Company's hotels by geographic region for the nine months ended
September 30, 1999.
================================================================================================================
AWR Occupancy RevPAR Total Hotels Average Age
- ----------------------------------------------------------------------------------------------------------------
(in years)
Mid Atlantic Region $ 188.11 83.7% $ 157.62 10 2.77
Midwest Region 208.41 80.0 166.29 15 1.60
Southeast Region 182.30 82.0 149.28 19 4.31
West Region 187.14 74.5 138.42 16 1.03
--------------------------------------------------------------------------
All Company-Owned $ 191.17 80.0% $ 152.44 60 2.50
==========================================================================
All Mature Company-Owned <F1> $ 186.28 83.4% $ 155.37 46 3.05
================================================================================================================
<FN>
<F1> Hotels are considered to be mature for these statistics when they
have been open for twelve full calendar months.
</FN>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Hotel revenues for the nine months ended September 30, 1999 were
$46,954,000, which was an increase of $14,717,000 or 45.7%, over the prior year
nine-month period. Fourteen hotels open less than twelve full calendar months as
of September 30, 1999 accounted for $8,884,000 of the increase, while the
Company's 46 mature hotels contributed $5,833,000 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 $1,224,000 of the revenue
increase from mature hotels. The average weekly rate ("AWR") for the Company's
mature hotels increased from $169.24 to $186.28; however, the occupancy for
these hotels declined from 90.3% to 83.4%. The AWR for all Company-owned hotels,
which includes the 14 hotels open less than twelve full calendar months,
increased from $171.79 to $191.17. This increase was accompanied by a decrease
in occupancy from 84.1% to 80.0%.
Franchise and other revenue from corporate operations for the nine
months ended September 30, 1999, which includes management, franchise and
development revenue, was $2,478,000, compared to $1,215,000 for the nine months
ended September 30, 1998. Management fees increased $527,000 to $746,000 for the
current year period from $219,000 in the prior year period, as a result of fees
earned for managing 20 hotels for franchisees during the current year compared
to managing 10 hotels for franchisees during the prior year. Franchise revenue
for the nine-month period increased approximately $832,000, from $731,000 in
1998 to $1,563,000 in 1999. The franchise revenue for the nine months ended
September 30, 1999 reflects $390,000 in initial franchise fees, representing 14
hotel openings and $30,000 for one contract cancellation fee, compared to
$262,000 and 10 hotel openings in the prior year nine month period. Franchise
royalties and other revenue on open hotels was approximately $1,143,000 for the
nine months ended September 30, 1999 compared to $469,000 for the nine months
ended September 30, 1998. The current year period includes $281,000 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
$256,000 earned in the prior year period.
Hotel operating expenses increased $8,558,000, or 54.9%, to $24,150,000
for the current year period from $15,592,000 for the prior year period. The
majority of this increase, or approximately $4,823,000, pertains to the opening
and period-to-date expenses for the 14 hotels open less than twelve full
calendar months. In addition, approximately $3,735,000 of the increase is
attributable to the mature hotels, which includes $715,000 for the two hotels
acquired in the third quarter of 1998. Hotel operating margins at the mature
properties declined from 52.1% in the prior year period to 49.6% for the current
year period. Operating margins at all Company-owned hotels, which includes the
14 hotels open less than twelve full calendar months, declined from 51.6% for
the nine months ended September 30, 1998 to 48.6% for the nine months ended
September 30, 1999.
Page 11
Corporate operating expenses, net of amounts capitalized, increased
$2,849,000, or 95.9%, to $5,819,000, which includes $445,000 attributable to
GuestHouse. The primary reasons for the increase are $739,000 for additional
staffing needed to support the growth of the business and a reduction of
$1,626,000 in the amount of project-related expenses capitalized to hotel
construction costs as compared to the prior year. The prior year amounts
included $218,000 of expense associated with the Company's early termination of
a lease in connection with its move to a new headquarters building. Total
corporate operating expenses prior to capitalization of project related expenses
increased 19.8% compared to the prior year nine-month period. Depreciation and
amortization increased to $5,957,000 from $3,674,000, primarily as a result of
the 14 hotels open less than twelve full calendar months. The current year
period includes amortization of $153,000 related to intangible assets acquired
in the GuestHouse acquisition.
Interest expense, net of interest capitalized of $1,522,000 and
$1,767,000 for the nine months ended September 30, 1999 and September 30, 1998,
respectively, increased $4,479,000 from $153,000 for the nine months ended
September 30, 1998 to $4,632,000 for the nine months ended September 30, 1999.
The increase in total interest charges incurred 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. See "Liquidity and Capital Resources."
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 fee income for the
Company
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
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 recognized expenses of $10.7 million
during the nine months ended September 30, 1998 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. Accordingly, costs of $2,480,000 were recorded in September 1998 to
recognize the losses incurred in connection with the abandonment of such sites.
SEASONALITY
The Company's mature hotels typically experience lower average
occupancy rates and total revenues during the first and fourth quarters of each
year.
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.
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On June 7, 1999, the Company completed a $13,700,000 mortgage loan
arrangement with Finova 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
September 30, 1999, the Company had purchased a total of 622,500 shares at a
cost of $3,905,000. On November 2, 1999, the Board of Directors authorized the
Company to purchase up to an additional 1,500,000 shares. Through November 9,
1999 the Company has purchased 1,529,400 shares at a cost of $8,580,000 using
available cash reserves.
As of September 30, 1999, the Company had approximately $19.0 million
in cash and cash equivalents, $57.7 million of borrowings from Finova Capital
Corporation, $30.8 million of borrowings from Amresco Services LP and $10.2
million of borrowings from Empire Financial Services, Inc.
At September 30, 1999, the Company had two hotels under construction,
which are scheduled to open in late 1999. The Company anticipates that the total
additional cost to complete these two hotels, as well as fund amounts to be
disbursed on recently opened hotels, is approximately $3.7 million, which
includes $2.8 million in construction draws accrued at September 30, 1999. The
Company intends to fund these expenditures from existing cash balances and cash
flow from operations. The Company has closed construction loans on two hotels
for which it expects to break ground during the fourth quarter of 1999 and has
received a loan commitment on a hotel for which it expects to begin construction
during the first half of 2000.
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).
The Company also owns 11other sites which it intends to use for future
hotel development. The Company's present focus is on expanding its franchising
operations; therefore, it is not seeking additional sites for the future
construction of hotels.
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. Some 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 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 Chief Executive Officer and consisting of representatives of
various Suburban departments. The task force has identified, inventoried and
assessed systems and components for potential Year 2000 risks; renovated and
replaced systems or components, as necessary; and tested the renovated and
replaced systems and components.
Suburban 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.
Page 13
The contract developer of the Property Management System has confirmed
to Suburban in writing that the software is Year 2000 compliant. The Company has
reviewed the system, tested it with live data, and it appears to function
accurately in a Year 2000 environment.
Suburban has implemented new accounting applications software. The
vendor of this new software has certified in writing that the software can
properly interpret dates subsequent to December 31, 1999. Suburban has completed
initial testing of the software and will continue to test the software to
confirm that it is Year 2000 compliant.
Suburban has received written certification from ADP that its payroll
software systems are Year 2000 compliant.
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 has substantially
implemented. 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 and testing of
such software will be complete by December 31, 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
compliant. Suburban is replacing vendors whose compliance is questionable.
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
adverse impact on occupancies, revenues and earnings. The likelihood and costs
of these interruptions are not known or presently quantifiable.
With respect to these "most likely worst case" scenarios, Suburban has
prepared contingency plans for each of the company owned and operated hotels,
and for each hotel managed by the Company on behalf of a franchisee. These
contingency plans are designed to protect the safety and convenience of guests
and employees, and maintain hotel facilities. Hotels are obtaining certain
emergency supplies along with additional inventories of housekeeping and other
consumable materials required for operation of each hotel. The plans further
establish redundant means of communication with Company management and specific
policies to deal with possible loss of telephone service and/or public
utilities. These contingency plans will be tested by drills performed during the
months prior to December 31, 1999. The cost of emergency supplies for each hotel
is estimated to be $1,000. Any excess inventory will be consumed during normal
hotel operations subsequent to January 1, 2000. 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.
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 impact on the Company, its
business and its financial condition. At present, Suburban does not anticipate
that material incremental costs will be incurred in connection with the Year
Page 14
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 material 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 to 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.
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.
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 September 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 $88.6 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 15
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
None
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/A on August 13, 1999 as
described in its Form 10Q filed August 16, 1999 for the
quarter ended June 30, 1999.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Suburban Lodges of America, Inc.
Date: November 15, 1999 By: /S/ Paul A. Criscillis, Jr.
----------------- ---------------------------
Paul A. Criscillis, Jr.
Vice President, Chief
Financial Officer
Date: November 15, 1999 By: /S/ Robert E. Schnelle
------------------ ----------------------
Robert E. Schnelle
Vice President, Treasurer
(Chief Accounting Officer)
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