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 March 31, 2000
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
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(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
May 5, 2000:
13,608,374
PART I, ITEM I. FINANCIAL STATEMENTS
SUBURBAN LODGES OF AMERICA, INC.
Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, December 31,
2000 1999
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,073 $ 9,862
Accounts receivable, net of reserves of
$235 (2000) and $191 (1999) 2,994 2,196
Hotel inventory and supplies 2,279 2,290
Prepaid and refundable income taxes 874 1,163
Deferred income taxes 461 448
Prepaid expenses and other current assets 1,782 1,511
-------- --------
Total current assets 14,463 17,470
Property and equipment, net of accumulated depreciation and
amortization of $20,911 (2000) and $18,600 (1999) 296,010 291,269
Notes receivable 4,992 4,992
Acquired intangible assets - net 3,719 3,617
Deferred loan costs 2,186 1,721
Other assets 1,608 2,013
-------- --------
TOTAL ASSETS $322,978 $321,082
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt $ 1,308 $ 1,228
Construction accounts payable 1,995 1,752
Trade accounts payable 1,542 3,207
Accrued property taxes 708 1,113
Accrued wages and benefits 938 507
Other accrued liabilities 1,296 615
Other current liabilities 797 591
-------- --------
Total current liabilities 8,584 9,013
Long-term debt, excluding current portion 101,040 97,891
Deferred income taxes 2,290 2,333
Other liabilities 84 84
-------- --------
Total liabilities 111,998 109,321
-------- --------
Shareholders' equity:
Common stock 157 157
Additional paid-in capital 202,250 202,250
Retained earnings 19,900 19,345
-------- --------
222,307 221,752
Less treasury stock, at cost 11,327 9,991
-------- --------
Shareholders' equity, net 210,980 211,761
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $322,978 $321,082
======== ========
See accompanying notes to unaudited consolidated financial statements.
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SUBURBAN LODGES OF AMERICA, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
Revenue:
Hotel revenues $ 15,959 $ 13,333
Franchise and other revenue 1,136 606
-------- --------
Total revenue 17,095 13,939
-------- --------
Operating costs and expenses:
Hotel operating expenses 9,159 7,325
Corporate operating expenses 2,859 1,667
Depreciation and amortization 2,398 1,809
-------- --------
14,416 10,801
Gain on sale of hotel (1,145)
-------- --------
Operating costs and expenses - net 14,416 9,656
-------- --------
Income from operations 2,679 4,283
Other income (expense):
Interest income 245 305
Interest expense (2,046) (1,265)
Other 10
-------- --------
Income before income taxes 888 3,323
Provision for income taxes 333 1,226
-------- --------
Net income $ 555 $ 2,097
======== ========
Earnings per common share:
Basic and diluted $ 0.04 $ 0.14
======== ========
Weighted average number of common shares outstanding:
Basic and diluted 13,870 15,429
======== ========
See accompanying notes to unaudited consolidated financial statements.
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SUBURBAN LODGES OF AMERICA, INC.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
OPERATING ACTIVITIES:
Net income $ 555 $ 2,097
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,398 1,809
Gain on sale of hotel (1,145)
Changes in operating assets and liabilities:
Accounts receivable (751) (117)
Other current assets 92 2,974
Other assets (176) (225)
Trade accounts payable (1,726) (175)
Other current liabilities 891 427
Income taxes payable 403
Other liabilities (3)
-------- --------
Net cash provided by operating activities 1,283 6,045
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (3,502) (12,183)
Acquisition, net of cash acquired (641)
Increase (decrease) in construction accounts payable 243 (5,647)
Proceeds from sale of hotel property 4,405
-------- --------
Net cash used by investing activities (3,900) (13,425)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,560 10,250
Principal payments on long term debt (2,931) (6,803)
Amounts borrowed under line of credit 5,000
Repayment of line of credit borrowings (5,000)
Purchase of treasury stock (1,336) (59)
Net decrease (increase) in deferred loan costs (465) 87
-------- --------
Net cash provided by (used by) financing activities (1,172) 3,475
-------- --------
Net decrease in cash and cash equivalents (3,789) (3,905)
Cash and cash equivalents at beginning of period 9,862 19,178
-------- --------
Cash and cash equivalents at end of period $ 6,073 $ 15,273
======== ========
Supplemental cash flow disclosures:
Income taxes paid or (net refund received) $ 362 $ (1,932)
======== ========
Interest paid, net of amounts capitalized $ 2,106 $ 1,216
======== ========
See accompanying notes to unaudited consolidated financial statements.
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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 years
ended December 31, 1999.
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
consisted 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. Three Company-owned hotels are pledged as
collateral on these loans.
On February 18, 2000, the Company executed a bank line of credit with
SouthTrust Bank. The line of credit provides a revolving credit
facility for amounts up to $15 million. Borrowings under the facility
will bear interest, at the Company's option, at (i) the bank's prime
rate or (ii) the Euro-Rate plus 275 basis points. Borrowings under the
credit facility are secured by a pool of nine hotels. At March 31,
2000, there were no borrowings outstanding under the line of credit.
On March 28, 2000, the Company completed a $2,660,000 mortgage loan
agreement with Empire Financial Services, Inc. with an initial interest
rate of 9.25%. The interest rate is adjustable at the end of each
twelve-month period to rates based on prime plus 50 basis points.
During the initial twelve-month period, the loan requires monthly
payments of principal and interest totaling $24,362 based on a
principal amortization period of 20 years with a final maturity of
March 1, 2007. One Company-owned hotel is pledged as collateral on this
loan.
3. ACQUISITION
On January 1, 2000, the Company acquired the remaining 50% interest in
a Suburban Lodge hotel in Atlanta, Georgia owned by a joint venture in
which the Company held a 50% equity position. The total purchase price
of $3,260,000, including transaction related expenses, consisted of
cash of $660,000 and the assumption of a $2,600,000 mortgage note. The
note was repaid on February 18, 2000.
Page 5
The acquisition was treated as a purchase; accordingly, operations of
the acquired company are included in the unaudited consolidated
statement of operations commencing on the acquisition date. The
Company's allocation of purchase price to assets acquired and
liabilities assumed was as follows (in thousands):
Property and equipment $ 3,550
Acquired intangible assets 189
Other assets 185
-------
Total assets 3,924
Notes payable (2,600)
Other liabilities (83)
-------
Net assets acquired 1,241
Less:
Prior equity investment (581)
Cash received (19)
-------
Purchase price, net of cash $ 641
=======
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.
Page 6
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 and
Hotel Franshising Support
Operations Operations Services Total
-----------------------------------------------------
Quarter ended March 31, 2000
Revenues from external customers $ 15,959 $ 786 $ 350 $ 17,095
Intersegment revenues 635 926 1,561
Depreciation and amortization 2,147 85 166 2,398
Net operating income (loss) 3,220 (1) (540) 2,679
Quarter ended March 31, 1999
Revenues from external customers $ 13,333 $ 383 $ 223 $ 13,939
Intersegment revenues 536 668 1,204
Depreciation and amortization 1,702 3 104 1,809
Net operating income (loss) 3,103 432 (397) 3,138
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 March 31, 2000 1999
---- ----
Total segment net operating income $ 2,679 $ 3,138
Interest income 245 305
Gain on sale of hotel 1,145
Interest expense (2,046) (1,265)
Other 10
------- -------
Income before income taxes $ 888 $ 3,323
======= =======
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 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. In December 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
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venture opened in May 1999. In January 2000, the Company purchased the
remaining 50% interest in this hotel from the unaffiliated owners. See
Note 3 for more information regarding this purchase.
8. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Page 8
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED MARCH 31, 2000 TO THE QUARTER ENDED MARCH 31,
1999
Hotel revenues increased by $2.7 million, or 20%, from $13.3 million in 1999 to
$16.0 million in 2000. The largest portion ($1.7 million) of the increase was
attributed to the nine hotels opened by the Company during 1999 and operated for
the full quarter ended March 31, 2000. The Company opened one hotel and acquired
one hotel during the quarter ended March 31, 2000. These two hotels accounted
for $0.5 million of the increase. Fifty-two hotels that operated for the full
quarter in both 1999 and 2000 accounted for $0.6 million of the increase in
hotel revenues. These fifty-two hotels increased their combined Average Weekly
Rate (AWR) by 4%, from $186.85 in 1999 to $194.06 in 2000. Occupancies at these
hotels declined from 75.3% in 1999 to 74.0% in 2000, while Weekly Revenue per
Available Room (RevPAR) increased 2%, from $139.48 in 1999 to $142.72 in 2000.
For all Company-owned hotels, AWR increased to $196.80 in 2000 from $188.32 in
1999, occupancy was approximately flat at 73.8% in 2000 compared to 74.0% in
1999, and weekly RevPAR increased to $144.44 in 2000 from $138.10 in 1999.
The increases contributed by these three groups of hotels were offset by a $0.2
million decrease in hotel revenues in a hotel that was owned and operated by the
Company until sold to a franchisee in February 1999.
Franchise and other revenues increased by $0.5 million, or 87%, to $1.1 million
in 2000. The largest portion ($0.3 million) of the increase was attributable to
franchise fees and royalties for the GuestHouse International brand, which was
acquired on June 1, 1999. Franchise fees for the Suburban Lodge hotel brand
increased $0.1 million due to the larger number of franchised locations open
during the first quarter of 2000. At March 31, 2000, 49 franchised Suburban
Lodge hotels were operating as compared with 37 at March 31, 1999. Another $0.1
million of the increase was the result of increased management fees. At March
31, 2000, the Company managed 20 hotels for its franchisees, including one hotel
that was in the process of conversion to a Suburban Lodge hotel. At March 31,
1999, the Company managed 15 hotels for its franchisees.
Hotel operating expenses increased approximately $1.8 million, or 25%, from $7.3
million in 1999 to $9.2 million in 2000. The fifty-two hotels that operated the
full quarter in both 1999 and 2000 accounted for $0.9 million of the increase.
The nine hotels opened by the Company during 1999 and operated for the full
quarter ended March 31, 2000 accounted for $0.7 million of the increases, while
the two hotels that opened or were acquired by the Company during the quarter
ended March 31, 2000 accounted for $0.2 million of the increase in hotel
operating expense.
Corporate operating expenses increased $1.2 million or 72% from $1.7 million in
1999 to $2.9 million in 2000. Of this increase, approximately $0.5 million was
attributable to operating expenses incurred by GuestHouse International.
Additionally, the amount of corporate overhead that was project-related, and is
therefore capitalized as land-acquisition or hotel-construction cost, was $0.3
million less in 2000 than in 1999. Excluding the incremental impact on reported
operating expenses of GuestHouse International and lower capitalization of
project-related expenses, corporate operating expenses in the quarter ended
March 31, 2000 increased by $0.4 million, or 19%, over such amounts for the 1999
quarter. The primary reasons for such increase were $0.2 million for additional
staffing needed to support the growth of the business and $0.1 million for
increased rent for the Corporate headquarters.
Depreciation and amortization increased by $0.6 million, or 33%, from $1.8
million in 1999 to $2.4 million in 2000. Of this increase, $0.1 million was
attributable to leasehold improvements and equipment at the corporate
headquarters. Hotel properties accounted for $0.4 million of the increase. In
addition, $0.1 million was attributable to amortization of certain intangible
assets (franchise contract rights and goodwill) recognized in connection with
the GuestHouse International acquisition.
Page 9
The nine hotels opened by the Company during 1999 accounted for $0.3 million of
the increase in depreciation and amortization for hotel properties while the
fifty-two hotels that operated for the full quarter in both 1999 and 2000
accounted for $0.1 million of the increase.
Interest expense, net of interest capitalized of $0.2 million and $0.8 million
in 2000 and 1999 respectively, was $2.0 million in 2000 and $1.3 million in
1999. The increase in total interest charges incurred was due to higher levels
of debt outstanding.
Seasonality
- -----------
Following their initial ramp-up, the Company's hotels typically experience lower
average occupancy rates and total revenues in the first and fourth calendar
quarters of each year.
Liquidity and Capital Resources
- -------------------------------
From May 29, 1996, the date of the Company's initial public offering (the
"IPO"), through December 31, 1998, the Company pursued a strategy of growing
principally through hotel development. Accordingly, the number of Company-owned
hotels grew from eight at May 29, 1996 to 53 at December 31, 1998. Capital
spending during this period exceeded $200 million and the principal sources of
capital included the proceeds from the 1996 IPO and two subsequent public equity
offerings during 1997, borrowings under a bank credit facility and operating
cash flow.
During the latter portion of 1998, the Company revised its debt strategy to
emphasize more traditional longer-term mortgages to fund the construction of
hotels rather than relying on bank lines of credit with shorter final
maturities. The Company plans to use its shorter term bank revolving credit
facility to fund special projects, repurchase shares of its outstanding common
stock and meet operating cash needs as necessary.
On February 18, 2000, the Company executed a bank line of credit with SouthTrust
Bank. The line of credit provides a revolving credit facility for amounts up to
$15 million. Borrowings under the facility will bear interest, at the Company's
option, at (i) the bank's prime rate or (ii) the Euro-Rate plus 275 basis
points. Borrowings under the credit facility are secured by a pool of nine
hotels. At March 31, 2000, there were no borrowings outstanding under the line
of credit.
On March 28, 2000, the Company completed a $2,660,000 mortgage loan agreement
with Empire Financial Services, Inc. with an initial interest rate of 9.25%. The
interest rate is adjustable at the end of each twelve-month period to rates
based on prime plus 50 basis points. During the initial twelve-month period, the
loan requires monthly payments of principal and interest totaling $24,362 based
on a principal amortization period of 20 years with a final maturity of March 1,
2007. One Company-owned hotel is pledged as collateral on this loan.
At March 31, 2000, the Company had approximately $102.3 million outstanding
under long-term mortgage loan arrangements, including amounts classified as
current maturities of long-term debt at that date. In the aggregate, these loans
require monthly principal and interest payments of $821,000. The final
maturities on these loans range from March 1, 2005 to July 1, 2009.
The Company has been authorized by its Board of Directors to repurchase up to
3,000,000 shares of its outstanding common stock. As of March 31, 2000, the
Company had purchased a total of 2,018,100 shares at a cost of $11,327,000.
At March 31, 2000, the Company had three hotels under construction which are
expected to open during 2000. The cash to fund the construction of these hotels
will be provided from construction loans. The Company had also begun development
of a fourth hotel that it presently expects to fund with a combination of line
of credit borrowings and cash generated by operations.
Page 10
In the future, the Company expects its cash requirements to be met by funds
generated from operations, occasional sales of its hotel properties,
construction loans made to build out certain of its unimproved sites and
borrowings under its bank line of credit.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), 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
beginning in the first quarter of 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 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 and interest
rates, consumer demand for extended stay and other forms of lodging, the level
of competition in the extended stay and other lodging markets, financial
markets, development efficiencies, weather delays, zoning delays, the Company's
financial condition, and its ability to maintain operational and financial
systems to manage the rapid growth it has experienced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities.
At December 31, 1999, the Company had debt outstanding totaling $99.1 million.
Approximately $74.7 million of this amount was represented by mortgage loans
with an interest rate of 8.25% that is fixed until the debt matures on January
1, 2009. Another $13.6 million was represented by mortgage loans with an
interest rate of 8.8% that is fixed until the debt matures on July 1, 2009. An
additional $10.1 million was represented by three mortgage loans with an initial
weighted average interest rate of 8.38%. The rates on all three loans
automatically adjust to an average rate of 0.625% over the prime rate on April
1, 2002. The rates will remain fixed at this newly-adjusted rate until April 1,
2005, at which time one of the loans will mature and the other two will
re-adjust based on the then-current prime interest rate. These remaining two
loans will mature on April 1, 2008.
During the quarter ended March 31, 2000, the Company issued additional debt of
$3.6 million. Of this amount, $2.7 million was represented by a mortgage loan
with an initial interest rate of 9.25%. The rate on this loan automatically
adjusts to a rate of 0.5% over the prime rate on April 1, 2001 and on April 1 of
each subsequent year until the debt matures on March 1, 2007. An additional $0.9
million represents borrowings made on a construction loan with an interest rate
of 8.75%.
Except for reductions in the loan balances resulting from scheduled amortizing
payments, the Company presently intends to hold all of the loans described above
until their scheduled maturities. Accordingly, a change in market interest rates
is not expected to impact the cost of these obligations until April 1, 2001.
On February 18, 2000, the Company executed a bank line of credit with SouthTrust
Bank. The line of credit provides a revolving credit facility for amounts up to
$15 million. Borrowings under the facility will bear interest, at the Company's
option, at (i) the bank's prime rate or (ii) the Euro-Rate plus 275 basis
Page 11
points. At March 31, 2000, there were no borrowings outstanding under the line
of credit. Fluctuations in short term interest rates will have an immediate
impact on the cost of funds borrowed under this arrangement.
The Company's cash and cash equivalents are short-term and highly-liquid
investments with original maturities of three months or less. Accordingly, a
change in market interest rates has a nearly immediate effect on interest earned
by the Company on its invested cash. For the foreseeable future, the Company
reasonably expects that its average invested cash balance will approximate $4.0
million. Accordingly, each one percent change in market interest rates will
change interest income by approximately $40,000 on an annual basis.
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
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Suburban Lodges of America, Inc.
Date: May 15, 2000 By: /s/ Paul A. Criscillis, Jr.
------------ ---------------------------
Paul A. Criscillis, Jr.
Vice President and Chief
Financial Officer
Date: May 15, 2000 By: /s/ Robert E. Schnelle
------------- ----------------------
Robert E. Schnelle
Vice President and Treasurer
(Chief Accounting Officer)
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