UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
-----------------------------------------------------------
(Address of principal executive office, including zip code)
770-799-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES / X / NO / /
Number of shares of Common Stock, $.01 par value, outstanding as of
August 4, 2000:
12,513,070
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Suburban Lodges of America, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 5,015 $ 9,862
Accounts receivable, net of reserves of
$375 (2000) and $191 (1999) 1,674 1,852
Hotel inventory and supplies 2,537 2,290
Prepaid and refundable income taxes 29 1,163
Deferred income taxes 461 448
Prepaid expenses and other current assets 1,989 1,511
-------- --------
Total current assets 11,705 17,126
Property and equipment, net of accumulated depreciation and
amortization of $23,232 (2000) and $18,600 (1999) 295,383 291,269
Notes receivable HotelTools, Inc. 3,570 344
Other notes receivable 4,972 4,992
Acquired intangible assets 3,635 3,617
Deferred loan costs 2,161 1,721
Other assets 1,757 2,013
-------- --------
TOTAL ASSETS $323,183 $321,082
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 1,311 $ 1,228
Construction accounts payable 729 1,752
Trade accounts payable 1,264 3,207
Accrued property taxes 1,121 1,113
Accrued wages and benefits 1,495 507
Other accrued liabilities 1,438 615
Other current liabilities 731 591
-------- --------
Total current liabilities 8,089 9,013
Long-term debt, excluding current portion 104,032 97,891
Deferred income taxes 2,290 2,333
Other liabilities 163 84
-------- --------
Total liabilities 114,574 109,321
-------- --------
Shareholders' equity:
Common stock 157 157
Additional paid-in capital 202,280 202,250
Retained earnings 22,006 19,345
-------- --------
224,443 221,752
Less treasury stock, at cost 15,834 9,991
-------- --------
Shareholders' equity, net 208,609 211,761
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $323,183 $321,082
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE>
Suburban Lodges of America, Inc
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Hotel revenue $ 18,072 $ 15,904 $ 34,031 $ 29,237
Franchise and other revenue 1,202 906 2,338 1,512
-------- -------- -------- --------
Total revenue 19,274 16,810 36,369 30,749
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Hotel operating expenses 9,238 7,976 18,397 15,301
Corporate operating expenses 2,732 1,733 5,591 3,400
Depreciation and amortization 2,405 1,992 4,803 3,801
-------- -------- -------- --------
14,375 11,701 28,791 22,502
Reserve for loss on property sale 545 545
Gains realized on property sales (68) (68) (1,145)
-------- -------- -------- --------
Operating costs and expenses - net 14,852 11,701 29,268 21,357
-------- -------- -------- --------
INCOME FROM OPERATIONS 4,422 5,109 7,101 9,392
OTHER INCOME (EXPENSE):
Interest income 189 337 434 642
Interest expense (2,088) (1,493) (4,134) (2,758)
Proceeds from legal settlement 842 842
Other 5 184 15 184
-------- -------- -------- --------
Income before income taxes 3,370 4,137 4,258 7,460
Provision for income taxes 1,264 1,572 1,597 2,798
-------- -------- -------- --------
NET INCOME $ 2,106 $ 2,565 $ 2,661 $ 4,662
======== ======== ======== ========
EARNINGS PER COMMON SHARE:
Basic and diluted $ 0.16 $ 0.17 $ 0.20 $ 0.30
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic and diluted 13,335 15,398 13,603 15,414
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
<PAGE>
Suburban Lodges of America, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 2,661 $ 4,662
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,803 3,801
Deferred income taxes 1 587
Stock compensation 30 19
Gains realized on property sales (68) (1,145)
Reserve for loss on property sale 545
Changes in operating assets and liabilities - net of the effects
of acquisitions:
Accounts receivable 225 (148)
Other current assets 471 2,146
Other assets (3,531) (307)
Trade accounts payable (2,004) (1,958)
Income taxes payable 162
Other current liabilities 1,937 1,494
Other liabilities 79 (3)
-------- --------
Net cash provided by operating activities 5,149 9,310
-------- --------
Investing activities:
Additions to property and equipment (5,903) (20,110)
Proceeds from sale of hotel property 230 4,405
Acquisitions, net of cash acquired (641) (1,448)
Decrease in construction accounts payable (1,023) (4,040)
-------- --------
Net cash used by investing activities (7,337) (21,193)
-------- --------
Financing activities:
Proceeds from issuance of long-term debt 5,904 23,950
Principal payments on long-term debt (3,280) (7,077)
Amounts borrowed under line of credit 6,000
Repayment of line of credit borrowings (5,000)
Purchase of treasury stock (5,843) (1,980)
Net increase in deferred loan costs (440) (92)
-------- --------
Net cash provided by (used by) financing activities (2,659) 14,801
-------- --------
Net increase (decrease) in cash and cash equivalents (4,847) 2,918
Cash and cash equivalents at beginning of period 9,862 19,178
-------- --------
Cash and cash equivalents at end of period $ 5,015 $ 22,096
======== ========
Supplemental information:
Interest paid net of interest capitalized $ 4,219 $ 2,684
======== ========
Income taxes paid (net refund received) $ 472 $ (564)
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
<PAGE>
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, 1999.
All significant intercompany balances and transactions have been
eliminated.
2. LONG-TERM DEBT
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.
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 June 30, 2000,
there were borrowings of $1,000,000 outstanding under the line of
credit.
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 July 1, 2009. A total of
five Company-owned hotels are pledged as collateral on this loan.
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.
Page 5
<PAGE>
3. ACQUISITIONS
On January 1, 2000, the Company acquired the remaining 50% interest in
a Suburban Lodge hotel in Atlanta, Georgia (the "2000 Acquisition")
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.
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
(the "1999 Acquisition"). GuestHouse is a franchisor of mid-scale
lodging facilities under the names GuestHouse International Inns,
Hotels and Suites. The total purchase price of $3,525,000, including
transaction related expenses, 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 acquisitions described in the preceding two paragraphs were treated
as purchases; accordingly, operations of the acquired companies are
included in the unaudited consolidated statements of operations
commencing on the dates of acquisition. The Company's allocation of
purchase price to assets acquired and liabilities assumed was as
follows (in thousands):
The 2000 The 1999
Acquistion Acquisition
Property and equipment $ 3,550
Acquired intangible assets 189 $ 3,633
Other assets 185 90
------- -------
Total assets 3,924 3,723
Notes payable (2,600)
Other liabilities (83) (198)
------- -------
Net assets acquired 1,241 3,525
Less:
Prior equity investment (581)
Cash received (19)
------- -------
Purchase price, net of cash $ 641 $ 3,525
======= =======
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
<PAGE>
6. SEGMENT AND RELATED INFORMATION
The Company operates in three reportable business 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, gains on
sales of property and other nonoperating income.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands):
<TABLE>
<CAPTION>
Hotel Franchising Corporate Total
Operations Operations and Support
Services
------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended June 30, 2000
Revenues from external customers $18,072 $ 904 $ 298 $19,274
Intersegment revenues 725 903 1,628
Depreciation and amortization 2,154 85 166 2,405
Net operating income (loss) 5,051 4 (156) 4,899
Quarter ended June 30, 1999
Revenues from external customers $15,904 $ 549 $ 357 $16,810
Intersegment revenues 634 794 1,428
Depreciation and amortization 1,821 41 130 1,992
Net operating income (loss) 4,679 622 (145) 5,156
Six months ended June 30, 2000
Revenues from external customers $34,031 $ 1,690 $ 648 $36,369
Intersegment revenues 1,360 1,701 3,061
Depreciation and amortization 4,301 170 332 4,803
Net operating income (loss) 8,271 3 (696) 7,578
Six months ended June 30, 1999
Revenues from external customers $29,237 $ 932 $ 580 $30,749
Intersegment revenues 1,170 1,462 2,632
Depreciation and amortization 3,522 44 235 3,801
Net operating income (loss) 7,783 1,065 (463) 8,385
</TABLE>
Page 7
<PAGE>
The following table provides a reconciliation of total segment net
operating income to the Company's reported income before income taxes
(in thousands):
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total segment net operating income $ 4,899 $ 5,156 $ 7,578 $ 8,385
Interest income 189 337 434 642
Gains realized on property sales 68 68 1,145
Proceeds from legal settlement 842 842
Other nonoperating income 5 184 15 184
Interest expense (2,088) (1,493) (4,134) (2,758)
Reserve for loss on property sale (545) (545)
Site acquisition cancellation costs (47) (138)
------- ------- ------- -------
Income before income taxes $ 3,370 $ 4,137 $ 4,258 $ 7,460
======= ======= ======= =======
</TABLE>
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
In the fall of 1999, the Company licensed to HotelTools, Inc. the use
of its proprietary hotel management and reservation systems and
Hoteltools, Inc. assumed the costs of the continued maintenance and
development of these systems. As of June 30, 2000, the Company had
notes receivable of $3,570,000 from HotelTools, Inc. for loans made to
HotelTools to fund their operations. The loans are payable on demand
and bear interest at a rate of 7% per annum. In exchange for the loans
the Company received from HotelTools, Inc., a stock purchase warrant to
purchase up to 20 million shares of HotelTools, Inc. common stock at a
nominal price. David E. Krischer, the Company's Chief Executive
Officer, is a member of the Board of Directors of HotelTools, Inc.
During 1998, the Company entered into a venture to develop a Suburban
Lodge hotel in Atlanta, Georgia, investing $200,000 for a 25% equity
position. A non-employee director of the Company owned another 25%
equity position in this venture. In December 1998, the Company acquired
an option to purchase the director's interest for a total consideration
of $300,000. 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. 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
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED JUNE 30, 2000 TO THE QUARTER ENDED JUNE 30, 1999
Hotel revenues increased by $2.2 million, or 14%, from $15.9 million in 1999 to
$18.1 million in 2000. The largest portion ($1.3 million) of the increase was
attributed to the six hotels opened or acquired by the Company between April 1,
1999 and March 31, 2000 and operated for the full quarter ended June 30, 2000.
The Company opened one hotel during the quarter ended June 30, 2000. This hotel
accounted for $0.1 million of the increase. Fifty-seven hotels that operated for
the full quarter in both 1999 and 2000 accounted for $0.7 million of the
increase in hotel revenues. These fifty-seven hotels increased their combined
Average Weekly Rate (AWR) by 2%, from $190.33 in 1999 to $194.68 in 2000.
Occupancies at these hotels increased from 81.4% in 1999 to 82.2% in 2000, while
Weekly Revenue per Available Room (RevPAR) increased 4%, from $154.43 in 1999 to
$160.22 in 2000. For all Company-owned hotels, AWR increased to $196.62 in 2000
from $191.42 in 1999, occupancy increased to 81.7% in 2000 compared to 80.5% in
1999, and weekly RevPAR increased to $160.64 in 2000 from $153.36 in 1999.
Franchise and other revenues increased by $0.3 million, or 33%, to $1.2 million
in 2000. The largest portion ($0.3 million) of the increase was attributable to
incremental 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 second quarter of 2000. At June 30, 2000, 52 franchised Suburban
Lodge hotels were operating as compared with 43 at June 30, 1999. Other revenues
declined $0.1 million primarily because the Company earned no development or
construction revenue in the current year quarter compared to $64,000 earned in
the prior year quarter.
Hotel operating expenses increased approximately $1.3 million, or 16%, from $8.0
million in 1999 to $9.2 million in 2000. The fifty-seven hotels that operated
the full quarter in both 1999 and 2000 accounted for $0.6 million of the
increase. The six hotels opened or acquired by the Company between April 1, 1999
and March 31, 2000 and operated for the full quarter ended June 30, 2000
accounted for $0.6 million of the increases, while the one hotel that was opened
by the Company during the quarter ended June 30, 2000 accounted for $0.1 million
of the increase in hotel operating expense.
Corporate operating expenses increased $1.0 million or 58% from $1.7 million in
1999 to $2.7 million in 2000. Of this increase, approximately $0.6 million was
attributable to incremental 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 $0.1 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 June 30, 2000 increased by $0.3 million,
or 12%, 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 Company's franchising business and $0.1 million for increased rent for
the Corporate headquarters.
Depreciation and amortization increased by $0.4 million, or 21%, from $2.0
million in 1999 to $2.4 million in 2000. Hotel properties accounted for $0.3
million of the increase. In addition, $0.1 million was attributable to leasehold
improvement and equipment at the corporate headquarters and amortization of
certain intangible assets (franchise contract rights and goodwill) recognized in
connection with the GuestHouse International acquisition in June 1999 and the
hotel acquisition during the quarter ended March 31, 2000.
The six hotels opened or acquired by the Company between April 1, 1999 and March
31, 2000 accounted for $0.2 million of the increase in depreciation and
amortization for hotel properties while the fifty-seven hotels that operated for
the full quarter in both 1999 and 2000 accounted for $0.1 million of the
increase.
Page 9
<PAGE>
The reserve for loss on property sale recorded in the current year quarter
represents the write-down of an undeveloped site that the Company expects to
sell at a $545,000 pre-tax loss.
Interest expense, net of interest capitalized of $0.2 million and $0.5 million
in 2000 and 1999 respectively, was $2.1 million in 2000 and $1.5 million in
1999. The increase in total interest charges incurred was due primarily to
higher levels of debt outstanding.
The proceeds from legal settlement of $842,000 recorded in the current year
quarter represents amounts received in settlement of a claim for lost profits
associated with an abandoned development project.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED
JUNE 30, 1999
Hotel revenues increased by $4.8 million, or 16%, from $29.2 million in 1999 to
$34.0 million in 2000. The largest portion ($2.8 million) of the increase was
attributed to the nine hotels opened by the Company during 1999 and operated for
the full six-month period ended June 30, 2000. The Company opened two hotels and
acquired one hotel during the six-month period ended June 30, 2000. These three
hotels accounted for $1.1 million of the increase. Fifty-two hotels that
operated for the full six-month period in both 1999 and 2000 also accounted for
$1.1 million of the increase in hotel revenues. These fifty-two hotels increased
their combined Average Weekly Rate (AWR) by 3%, from $187.99 in 1999 to $193.82
in 2000. Occupancies at these hotels declined from 79.0% in 1999 to 78.1% in
2000, while Weekly Revenue per Available Room (RevPAR) increased 2%, from
$147.83 in 1999 to $151.08 in 2000. For all Company-owned hotels, AWR increased
to $196.62 in 2000 from $190.02 in 1999, occupancy increased to 77.8% in 2000
compared to 77.4% in 1999, and weekly RevPAR increased to $152.59 in 2000 from
$145.97 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 $0.8 million, or 55%, to $2.4 million
in 2000. The largest portion ($0.5 million) of the increase was attributable to
incremental 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 $0.2 million due to the larger number of franchised locations
open during the first six months of 2000. At June 30, 2000, 52 franchised
Suburban Lodge hotels were operating as compared with 43 at June 30, 1999.
Another $0.1 million of the increase was the result of increased management
fees. At June 30, 2000, the Company managed 13 hotels for its franchisees
compared to 20 hotels at June 30, 1999. The decline in the number of managed
hotels was due to decisions by one franchise group to start a management company
to manage its four Suburban Lodge hotels and other properties, and by another
franchise group to move the management of two of its Suburban Lodge hotels to an
independent management company. Also one of the hotels managed by the Company
during the prior year quarter was acquired by the Company during the first
quarter of 2000.
Hotel operating expenses increased approximately $3.1 million, or 20%, from
$15.3 million in 1999 to $18.4 million in 2000. The fifty-two hotels that
operated the full six-month period in both 1999 and 2000 accounted for $1.4
million of the increase. The nine hotels opened by the Company during 1999 and
operated for the full six-month period ended June 30, 2000 accounted for $1.1
million of the increase, while the three hotels that opened or were acquired by
the Company during the six-month period ended June 30, 2000 accounted for $0.6
million of the increase in hotel operating expense.
Corporate operating expenses increased $2.2 million or 64% from $3.4 million in
1999 to $5.6 million in 2000. Of this increase, approximately $1.1 million was
attributable to incremental 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 $0.4 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 for the six-month period ended June 30, 2000 increased by
Page 10
<PAGE>
$0.7 million, or 16%, over such amounts for the 1999 six-month period. The
primary reasons for such increase were $0.5 million for additional staffing
needed to support the growth of the business and $0.2 million for increased rent
for the Corporate headquarters.
Depreciation and amortization increased by $1.0 million, or 26%, from $3.8
million in 1999 to $4.8 million in 2000. Hotel properties accounted for $0.8
million of the increase. In addition, $0.2 million was attributable to leasehold
improvements and equipment at the corporate headquarters and amortization of
certain intangible assets (franchise contract rights and goodwill) recognized in
connection with the GuestHouse International acquisition in June 1999 and the
hotel acquisition during the current year six-month period.
The nine hotels opened by the Company during 1999 accounted for $0.4 million of
the increase in depreciation and amortization for hotel properties. The
fifty-two hotels that operated for the full six-month period in both 1999 and
2000 accounted for $0.3 million of the increase while the three hotels opened or
acquired by the Company during the current year six-month period accounted for
$0.1 million of the increase.
The reserve for loss on property sale recorded in the current year six-month
period represents the write-down of an undeveloped site that the Company expects
to sell at a $545,000 pre-tax loss.
During the first quarter of 1999, the Company sold a hotel resulting in a
pre-tax gain of approximately $1,145,000. The hotel continues to operate as a
Suburban Lodge under franchise and management agreements that generate franchise
and management fee income for the Company.
Interest expense, net of interest capitalized of $0.4 million and $1.2 million
in 2000 and 1999 respectively, was $4.1 million in 2000 and $2.8 million in
1999. The increase in total interest charges incurred was due primarily to
higher levels of debt outstanding.
The proceeds from legal settlement of $842,000 recorded in the current year
six-month period represents amounts received in settlement of a claim for lost
profits associated with an abandoned development project.
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 June 30, 2000, there were borrowings of $1,000,000 outstanding under
the line of credit.
Page 11
<PAGE>
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 June 30, 2000, the Company had approximately $105.3 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 $850,000. The final maturities on
these loans range from February 1, 2005 to July 1, 2009.
In the fall of 1999, the Company licensed to HotelTools, Inc. the use of its
proprietary hotel management and reservation systems, and at that time
HotelTools assumed the costs of the continued maintenance and development of
these systems. HotelTools intends to market the fully developed systems,
including an eCommerce procurement system, to hotel, owners and operators,
including Suburban Lodges. The Chief Executive Officer and sole shareholder of
HotelTools, Inc. is Seth Christian, the former Vice President of Operations of
Suburban Lodges of America, Inc. and President of Suburban Management, Inc.
Officers of the Company own options pursuant to which they are entitled to
acquire common stock of HotelTools, Inc.
As of the June 30, 2000, the Company had loaned HotelTools, Inc. $3,570,000,
and, if no additional funding is secured by HotelTools, the Company expects that
its loans will aggregate approximately $7.5 million by December 31, 2000. The
Company anticipates that, without other funding from third parties, it will make
advances to HotelTools through June 30, 2001. The loans are payable on demand,
and bear interest at an annual rate of 7.0%. In exchange for the loans, the
Company received from HotelTools, Inc. a stock purchase warrant to purchase up
to 20 million shares of the common stock of HotelTools at a nominal cost.
Although such shares would constitute in excess of 99% of the equity of
HotelTools based on its present capitalization, HotelTools is actively seeking
equity investors, and it is expected that the Company's potential ownership
through the exercise of its warrant will be reduced when such additional equity
funding is secured. In the event HotelTools is unable to repay the loans, the
Company would recognize a loss up to the full amount of its loans.
The Company has been authorized by its Board of Directors to repurchase up to
4,500,000 shares of its outstanding common stock. As of June 30, 2000, the
Company had purchased a total of 2,735,698 shares at a cost of $15,834,000.
At June 30, 2000, the Company had two hotels under construction one of which is
expected to open during 2000. The other one is expected to open during the first
half of 2001. The Company had also begun development of a third hotel. The
Company expects that the costs of constructing these hotels will be
substantially provided by construction loans.
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.
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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.
In 1999, the Securities and Exchange Commission's staff issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 provides guidance on revenue recognition. The Company believes that SAB No.
101 will have no impact on its current revenue recognition policies.
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 six months ended June 30, 2000, the Company issued additional debt of
$5.9 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 $3.2
million represents borrowings made on two construction loans. The initial
interest rate on one of the construction loans is 8.75%. This rate will
automatically adjust to 0.50% over the prime rate on October 1, 2002 and again
an October 1, 2005. This loan will mature on September 1, 2006. Interest on the
other construction loan is a variable daily rate equal to the prime rate plus
0.75%. On August 1, 2001 this loan will convert to a fixed rate loan at an
interest rate of 250 basis points in excess of the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity of three years as of August
1, 2001. This loan will mature on February 1, 2005.
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Except for reductions in the loan balances resulting from scheduled amortizing
payments, the Company presently expects to hold all of the loans described above
until their scheduled maturities. Accordingly, a change in market interest rates
is not expected to significantly 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
points. At June 30, 2000, there were borrowings of $1,000,000 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.
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PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
None
Item 4 Submission of Matters to a Vote of Security Holders
On May 11, 2000, the Company held its annual meeting of shareholders.
The purpose of the meeting was to re-elect one director whose term
expired in 2000. At the meeting, Mr. John W. Spiegel was re-elected for
a three-year term, which expires in 2003. The number of votes cast in
favor of Mr. Spiegel was 12,788,434, against or withheld was 13,588.
The Company's other directors are Messrs. James R. Kuse and Michael
McGovern, whose terms expire in 2001, and Messrs. David E. Krischer and
Dan J. Berman, whose terms expire in 2002.
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: August 14, 2000 By: /s/ Paul A. Criscillis, Jr.
--------------- ---------------------------
Paul A. Criscillis, Jr.
Vice President and Chief
Financial Officer
Date: August 14, 2000 By: /s/ Robert E. Schnelle
---------------- ----------------------
Robert E. Schnelle
Vice President and Treasurer
(Chief Accounting Officer)
