1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - - - - - - -
FORM 10-Q
- - - - - - - - - - - - - -
(Mark One)
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1998.
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number: 0-23536
------------
SUPERTEL HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0774097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
309 NORTH 5TH STREET
NORFOLK, NEBRASKA 68701
(Address of principal executive offices)
Telephone number: (402) 371-2520
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 twelve months, and (2) has been subject to such filing
requirements for the past ninety days:
Yes ( X ) No ( )
As of September 30, 1998, there were 4,843,400 common shares of the registrant
outstanding.
2
PART I: FINANCIAL INFORMATION
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
---------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 285,611 9,532,430
Accounts receivable 1,481,435 1,157,372
Prepaid expenses and other 1,051,852 492,998
Recoverable income taxes -- 148,925
-------------- -------------
Total current assets 2,818,898 11,331,725
-------------- -------------
Property and equipment, at cost 112,548,431 108,740,409
Less accumulated depreciation (21,215,672) (18,365,073)
-------------- -------------
Net property and equipment 91,332,759 90,375,336
-------------- -------------
Other assets:
Intangible assets 1,373,745 1,515,858
Other assets 185,601 182,725
-------------- -------------
Total other assets 1,559,346 1,698,583
-------------- -------------
$ 95,711,003 103,405,644
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,349,197 771,569
-------------- -------------
Accrued expenses:
Real estate taxes 1,765,396 1,702,126
Income taxes payable 1,265,386 --
Other 2,375,358 1,631,142
-------------- -------------
Total accrued expenses 5,406,140 3,333,268
-------------- -------------
Current installments of long-term debt 2,250,139 1,942,380
-------------- -------------
Total current liabilities 9,005,476 6,047,217
-------------- -------------
Deferred income taxes 733,600 514,900
Long-term debt, excluding current installments 48,388,600 63,534,321
Other long-term liabilities 431,945 448,611
Stockholders' equity:
Preferred stock, $1.00 par value. Authorized 1,000,000 shares; none issued -- --
Common stock, $0.01 par value. Authorized 10,000,000 shares; issued
and outstanding 4,843,400 shares in 1998 and 4,840,000 shares in 1997 48,434 48,400
Additional paid-in capital 18,387,933 18,346,529
Retained earnings 18,715,015 14,465,666
Total stockholders' equity 37,151,382 32,860,595
-------------- -------------
Commitments and contingency $ 95,711,003 103,405,644
============== =============
See accompanying notes to condensed consolidated financial statements.
2
3
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Motel revenues:
Lodging revenues $ 14,231,204 13,050,616 37,903,952 33,714,249
Other lodging activities 425,741 412,984 1,194,653 1,132,282
------------ ------------ ------------ ------------
Total motel revenues 14,656,945 13,463,600 39,098,605 34,846,531
------------ ------------ ------------ ------------
Direct operating expenses:
Payroll and payroll taxes 3,413,176 3,040,142 9,325,077 8,212,179
Royalties and advertising fund 897,296 875,714 2,355,088 2,245,010
Other lodging 3,649,909 3,491,529 9,930,906 9,535,604
------------ ------------ ------------ ------------
Total lodging expense 7,960,381 7,407,385 21,611,071 19,992,793
Other lodging activities 300,832 281,652 856,957 778,010
Depreciation and amortization 1,110,089 1,045,867 3,299,683 2,957,038
General and administrative 992,443 720,684 3,151,969 2,312,485
------------ ------------ ------------ ------------
Total direct operating expenses 10,363,745 9,455,588 28,919,680 26,040,326
------------ ------------ ------------ ------------
Operating income 4,293,200 4,008,012 10,178,925 8,806,205
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (977,580) (1,147,081) (3,128,775) (3,382,923)
Miscellaneous income 9,625 24,473 32,087 65,381
------------ ------------ ------------ ------------
(967,955) (1,122,608) (3,096,688) (3,317,542)
------------ ------------ ------------ ------------
Income before income taxes 3,325,245 2,885,404 7,082,237 5,488,663
Income tax expense 1,330,103 1,154,162 2,832,898 2,195,460
------------ ------------ ------------ ------------
Net income $ 1,995,142 1,731,242 4,249,339 3,293,203
============ ============ ============ ============
Net income per share $ .41 .36 .88 .68
============ ============ ============ ============
Weighted average shares outstanding 4,842,140 4,840,000 4,840,730 4,840,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
3
4
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
------------- ------------
Cash flows from operating activities:
Net income $ 4,249,339 3,293,203
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,118,163 2,708,647
Amortization 181,520 248,391
Loss on sale of property and equipment 54,831 38,675
Deferred income taxes 218,700 329,000
Changes in assets and liabilities:
Accounts receivable (324,063) (64,565)
Prepaid expenses (558,854) (204,428)
Recoverable income taxes 148,925 204,803
Accounts payable 577,628 249,020
Accrued expenses 2,072,872 2,365,740
------------- ------------
Net cash provided by operating activities 9,739,061 9,168,486
------------- ------------
Cash flows from investing activities:
Additions to property and equipment (4,154,450) (11,120,157)
Decrease in intangibles and other assets (42,283) (218,583)
Proceeds from sale of property and equipment 24,032 20,239
------------- ------------
Net cash used in investing activities (4,172,701) (11,318,501)
------------- ------------
Cash flows from financing activities:
Repayments of long-term debt (41,907,873) (23,055,006)
Proceeds from long-term debt 27,053,256 19,635,719
Proceeds from issuance of common stock 41,438 --
------------- ------------
Net cash used in financing activities (14,813,179) (3,419,287)
------------- ------------
Net decrease in cash and cash equivalents (9,246,819) (5,569,302)
Cash and cash equivalents at beginning of period 9,532,430 6,487,764
------------- ------------
Cash and cash equivalents at end of period $ 285,611 918,462
============= ============
See accompanying notes to condensed consolidated financial statements.
4
5
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1998 and the
condensed consolidated statements of income and cash flows for the three
months and nine months ended September 30, 1998 and 1997 have been prepared
by Supertel Hospitality, Inc. (the "Company"), without audit. In the
opinion of management, all necessary adjustments (which include normal
recurring adjustments) have been made to present fairly the financial
position at September 30, 1998 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K Annual
Report for the year ended December 31, 1997. The results of operations for
the three months and nine months ended September 30, 1998 are not
necessarily indicative of the operating results for the full year.
(2) NET INCOME PER SHARE
For the three months and nine months ended September 30, 1998 and 1997, the
net income per share was calculated based on the weighted average number of
common shares outstanding.
(3) INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The Company does not expect the effective tax rate or the components of
income tax expense to cause variation from the expected statutory federal
and state income tax rates totaling 40%. A valuation allowance for deferred
tax assets has not been provided since all tax benefits are expected to be
used to offset future taxable income.
5
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain forward-looking statements and information
relating to Supertel Hospitality, Inc. (the "Company") that are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions, including the business
factors described in the Company's 1997 Form 10-K. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
believed, estimated, or expected.
RECENT DEVELOPMENT
On October 15, 1998, the Company announced that the June 3, 1998 Agreement
and Plan of Merger between the Company and PMC Commercial Trust had been
terminated by mutual agreement. In conjunction with the Agreement and Plan of
Merger, Supertel Hospitality, Inc. has incurred legal, accounting, investment
banking, environmental and title expenses of approximately $700,000 to $800,000
which will be reflected as a charge to income in the fourth quarter of 1998.
RESULTS OF OPERATIONS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total motel revenues for the third quarter were $14,656,945, an increase of
$1,193,345, or 8.86%, over total revenues of $13,463,600 for the third quarter
of 1997. Total motel revenues for the first nine months were $39,098,605, an
increase of $4,252,074, or 12.20%, over total revenues of $34,846,531 for the
first nine months of 1997. The increase for the third quarter was primarily due
to an increase of $1,180,588 in revenue from lodging operations with the
remaining $12,757 from other lodging activities (which consist of telephone,
vending, and movie revenue). The increase for the first nine months was
primarily due to an increase of $4,189,703 in revenue from lodging operations
with the remaining $62,371 from other lodging activities.
6
7
The increase in revenues from lodging operations for the third quarter
resulted primarily from renting 304,927 rooms in 1998 compared to 294,569 rooms
rented in the same period of 1997, an increase of 10,358, or 3.5%. Rooms
available in the third quarter of 1998 were 410,402, an increase of 5,496, or
1.4%, over rooms available of 404,906 in the third quarter of 1997. The increase
in revenues from lodging operations for the first nine months resulted primarily
from renting 832,542 rooms in 1998 compared to 787,900 rooms rented in the same
period of 1997, an increase of 44,642, or 5.7%. Rooms available for the first
nine months of 1998 were 1,218,478, an increase of 43,919, or 3.7%, over rooms
available of 1,174,559 for the first nine months of 1997.
The Company's room count was 4,526 at the end of the third quarter 1998, a
net increase of 67 rooms, or 1.5%, over the room count of 4,459 rooms at
December 31, 1997.
Revenues were impacted by an increase in the average daily room rate in the
third quarter of 1998. An average daily room rate of $48.07 was achieved
compared to $45.71 for the third quarter of 1997, an increase of $2.36, or 5.2%.
For the first nine months, the average daily room rate was $46.96 in 1998
compared to $44.23 for the first nine months of 1997, an increase of $2.73, or
6.2%.
Revenues per available room for the third quarter 1998 increased from
$33.25 for the third quarter 1997 to $35.54, an increase of $2.29, or 6.9%.
Revenue per available room for the first nine months of 1998 increased to $32.09
from $29.67, an increase of $2.42, or 8.2%.
Motel revenue was also impacted by changes in occupancy. Occupancy as a
percentage of rooms available increased from 72.7% in the third quarter of 1997
to 73.9% in the third quarter 1998. The increase in the occupancy percentage
resulted primarily from the continued seasoning of the Texas properties. The
occupancy percentage in seasoned properties (those owned/opened over one year)
increased from 73.8% in the third quarter of 1997 to 74.2% in the third quarter
of 1998. Total occupancy increased from 67.1% for the first nine months of 1997
to 68.3% for the first nine months of 1998. The occupancy percentage in seasoned
properties increased from 68.5% for the first nine months of 1997 to 68.7% for
the first nine months of 1998. Occupancy is seasonal and is lowest in the first
quarter, increases in the second, peaks in the third and then drops down again
in the fourth quarter. The increases in revenue from other lodging activities
resulted from the increase in the number of rooms rented.
7
8
RESULTS OF OPERATIONS, CONTINUED
Lodging expenses for the third quarter 1998 were $7,960,381 compared to
$7,407,385 for the third quarter of 1997, an increase of $552,996, or 7.5%.
Lodging expenses for the first nine months of 1998 were $21,611,071 compared to
$19,992,793 for the first nine months of 1997, an increase of $1,618,278, or
8.1%. The increase in lodging expenses was due primarily to the increase in the
number of rooms available to rent and rooms rented. Lodging expenses as a
percentage of lodging revenues decreased from 56.8% for the third quarter of
1997 to 55.9% in the third quarter of 1998. Lodging expenses as a percentage of
lodging revenues decreased from 59.3% for the first nine months of 1997 to 57.0%
in the first nine months of 1998. The percentage decrease for the third quarter
and the first nine months resulted from better cost controls implemented from
the open book management program and a larger base of revenue to cover fixed
costs.
Depreciation and amortization expenses for the third quarter of 1998 were
$1,110,089 compared to $1,045,867 for the third quarter of 1997, an increase of
$64,222, or 6.1%. Depreciation and amortization expenses for the first nine
months of 1998 were $3,299,683 compared to $2,957,038, an increase of $342,645,
or 11.6%. This increase was primarily due to an increase in the number of motel
properties. General and administrative expenses for the third quarter of 1998
were $992,443 compared to $720,684 (which includes the write-off of $49,415 of
costs associated with a land acquisition for a motel site in Dallas, Texas which
was not completed) in the third quarter of 1997, an increase of $271,759, or
37.7%. General and administrative expenses as a percent of motel revenue
increased in the third quarter of 1998 to 6.7% from 5.4% of motel revenue in the
third quarter of 1997. General and administrative expenses for the first nine
months of 1998 were $3,151,969 compared to $2,312,485 for the first nine months
of 1997, an increase of $839,484, or 36.3%. General and administrative expenses
as a percent of motel revenue increased in the first nine months of 1998 to 8.1%
from 6.6% of motel revenue in the first nine months of 1997. The increase in
general and administrative expenses was due primarily to experiencing increased
revenues without adding incremental overhead to support the revenue growth.
8
9
RESULTS OF OPERATIONS, CONTINUED
Interest expense decreased by $169,501 for the third quarter of 1998 from
$1,147,081 for the third quarter of 1997 to $977,580 in 1998, or 14.7%. Interest
expense decreased by $254,148 for the first nine months of 1998 from $3,382,923
in 1997 to $3,128,775 in 1998, or 7.5%. The decrease was primarily due to
reduced development and acquisition activity resulting from fewer acceptable
development opportunities and acquisition candidates. Average bank borrowings
for the third quarter of 1998 decreased to $51,667,802 from $56,424,950 for the
comparable period in 1997, a decrease of $4,757,148, or 8.4%. Bank borrowings at
September 30, 1998 were $51,070,684.
As a result of the aforementioned operating factors and general business
conditions, net income for the third quarter of 1998 from continuing operations
was $1,995,142, or $.41 per share, versus net income of $1,731,242, or $.36 per
share, for the corresponding period in 1997, a 15.2% increase.
Net income for the nine months of 1998 from continuing operations was
$4,249,339, or $.88 per share, versus net income of $3,293,203, or $.68 per
share, for the corresponding period of 1997, a 29.0% increase. Earnings before
interest, taxes, depreciation, and amortization (EBITDA) for the third quarter
of 1997 were $5,412,914, an increase of $334,562, or 6.6%, over EBITDA of
$5,078,352 for the third quarter of 1997. EBITDA for the first nine months of
1998 were $13,510,695, an increase of $1,682,071, or 14.2%, over EBITDA of
$11,828,624 for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been financed through a combination of cash
provided from operations and long-term debt financing. Cash provided from
operations was approximately $9,739,061 for the first nine months of 1998 and
$9,168,000 for the first nine months of 1997. The Company required capital
principally for the construction, acquisition, and improvement of lodging
facilities. Capital expenditures for such purposes were approximately $4,155,000
in the first nine months of 1998 and approximately $11,120,000 in the first nine
months of 1997.
9
10
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Long-term debt (excluding current installments of long-term debt) was
$48,820,545 at September 30, 1998 and $63,982,932 at December 31, 1997. The
Company's current installments of long-term debt were $2,250,139 at September
30, 1998 and $1,942,380 at December 31, 1997. The Company's loan agreements
contain certain restrictions and covenants related to, among other things,
minimum debt service, maximum debt per motel room, and maximum debt-to-tangible
net worth. At September 30, 1998, the Company was in compliance with these
covenants.
The Company's ratio of long-term debt (including current installments) to
long-term debt and stockholders' equity was 57.9% at September 30, 1998,
compared to 66.6% at December 31, 1997.
The Company plans to construct/acquire approximately 100-200 motel rooms in
1998 with approximately $3,000,000 to $3,750,000 of capital funds necessary to
finance such development. The Company believes that a combination of cash flow
from operations, borrowings available under its line of credit, securing new
short- and long-term facilities and the ability to leverage unencumbered
properties will be sufficient to fund scheduled development and debt repayment.
The Company had 4,526 rooms in operation as of September 30, 1998 compared
to 4,460 rooms in operation as of September 30, 1997, a net increase of 66 rooms
or 1.5%.
YEAR 2000 ISSUES
In 1998, the Company began preparing its computer-based systems for Year
2000 ("Y2K") computer software compliance issues. Historically, certain computer
programs were written using two digits rather than four to define the applicable
year. As a result, software may recognize a date using the two digits "00" as
1900 rather than the year 2000. Computer programs that do not recognize the
proper date could generate erroneous data or cause systems to fail. The
Company's Y2K project covers both traditional computer systems and
infrastructure ("IT Systems") and computer based hardware and software,
facilities, and equipment ("Non-IT Systems").
The Company has completed an assessment of its IT and Non-IT Systems and
is in the process of replacing non-compliant systems. Approximately 60% of the
systems are compliant. The Company expects to replace any non-compliant systems
by the end of the second quarter of 1999. The Company does not have any material
suppliers or customers and the Y2K noncompliance of any particular supplier
should not materially affect the Company.
The Company has incurred approximately $255,000 of Y2K project expense to
date. Future expenses are estimated to include approximately $375,000 of
additional costs. Such cost estimates are based upon presently available
information and may change as the Company continues with its Y2K project.
10
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
None.
B. Reports on Form 8-K.
The Company filed a Form 8-K dated September 21, 1998 reporting that
the Company and PMC Commercial Trust ("PMC") amended the Agreement and
Plan of Merger Dated June 3, 1998 to extend certain time periods
therein by thirty days. The Company subsequently filed a Form 8-K dated
October 15, 1998 reporting that the Company and PMC mutually terminated
the Agreement and plan of Merger dated June 3, 1998. A copy of the
Termination and Release Agreement dated October 15, 1998, and a copy of
the related press release, were filed as Exhibits to the October 15,
1998 Form 8-K.
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 hereunto duly authorized.
SUPERTEL HOSPITALITY, INC.
By: /s/ Troy Beatty
------------------------------
Mr. Troy Beatty
Senior Vice President and
Chief Financial Officer
DATED this 13th day of November, 1998.