<PAGE> 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 June 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 June 30, 1998, there were 4,840,400 common shares of the registrant
outstanding.
<PAGE> 2
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
=========================================================================================================
June 30,
1998 December 31,
ASSETS (Unaudited) 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,064,806 9,532,430
Accounts receivable 1,320,115 1,157,372
Prepaid expenses 1,018,050 492,998
Recoverable income taxes - 148,925
- ---------------------------------------------------------------------------------------------------------
Total current assets 3,402,971 11,331,725
- ---------------------------------------------------------------------------------------------------------
Property and equipment, at cost 109,908,072 108,740,409
Less accumulated depreciation 20,253,334 18,365,073
- ---------------------------------------------------------------------------------------------------------
Net property and equipment 89,654,738 90,375,336
- ---------------------------------------------------------------------------------------------------------
Other assets:
Intangible assets 1,434,111 1,515,858
Other assets 175,172 182,725
- ---------------------------------------------------------------------------------------------------------
Total other assets 1,609,283 1,698,583
- ---------------------------------------------------------------------------------------------------------
$ 94,666,992 103,405,644
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,398,408 771,569
Accrued expenses:
Real estate taxes 1,631,757 1,702,126
Income taxes payable 864,727 -
Other 2,302,842 1,631,142
- ---------------------------------------------------------------------------------------------------------
Total accrued expenses 4,799,326 3,333,268
- ---------------------------------------------------------------------------------------------------------
Current installments of long-term debt 2,293,469 1,942,380
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 8,491,203 6,047,217
- ---------------------------------------------------------------------------------------------------------
Deferred income taxes 652,600 514,900
Long-term debt, excluding current installments 49,971,452 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 per value. Authorized 10,000,000 shares; issued
and outstanding 4,840,400 shares in 1998 and 4,840,000 shares in 1997 48,404 48,400
Additional paid-in capital 18,351,525 18,346,529
Retained earnings 16,719,863 14,465,666
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 35,119,792 32,860,595
Commitments and contingency
- ---------------------------------------------------------------------------------------------------------
$ 94,666,992 103,405,644
=========================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
==================================================================================================
Three-month period Six-month period
ended June 30, ended June 30,
------------------ ------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Motel revenues:
Lodging revenues $13,139,131 11,926,389 23,672,748 20,663,633
Other lodging activities 398,237 390,862 768,912 719,298
- --------------------------------------------------------------------------------------------------
Total motel revenues 13,537,368 12,317,251 24,441,660 21,382,931
- --------------------------------------------------------------------------------------------------
Direct operating expenses:
Payroll and payroll taxes 3,132,034 2,797,275 5,911,901 5,172,037
Royalties and advertising fund 812,157 794,540 1,457,792 1,369,296
Other lodging 3,236,930 3,141,102 6,280,997 6,044,075
- --------------------------------------------------------------------------------------------------
Total lodging expenses 7,181,121 6,732,917 13,650,690 12,585,408
Other lodging activities 286,595 261,237 556,125 496,358
Depreciation and amortization 1,076,322 1,009,835 2,189,594 1,911,171
General and administrative 1,159,663 871,167 2,159,526 1,591,801
- --------------------------------------------------------------------------------------------------
Total direct operating expenses 9,703,701 8,875,156 18,555,935 16,584,738
- --------------------------------------------------------------------------------------------------
Operating income 3,833,667 3,442,095 5,885,725 4,798,193
- --------------------------------------------------------------------------------------------------
Other income (expenses):
Interest expense (1,050,186) (1,184,905) (2,151,195) (2,235,842)
Miscellaneous income and other expenses 4,411 (16,189) 22,462 40,908
- --------------------------------------------------------------------------------------------------
(1,045,775) (1,201,094) (2,128,733) (2,194,934)
- --------------------------------------------------------------------------------------------------
Income before income taxes 2,787,892 2,241,001 3,756,992 2,603,259
Income tax expense 1,115,160 896,400 1,502,795 1,041,298
- --------------------------------------------------------------------------------------------------
Net income $ 1,672,732 1,344,601 2,254,197 1,561,961
==================================================================================================
Net income per share - basic and diluted $ .35 .28 .47 .32
==================================================================================================
Weighted average shares outstanding 4,840,026 4,840,000 4,840,013 4,840,000
==================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
================================================================================================
Six-month period
ended June 30,
------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,254,197 1,561,961
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 2,068,589 1,746,626
Amortization 121,005 164,545
Loss on sale of property and equipment 42,291 21,463
Deferred income taxes 137,700 201,000
(Increase) decrease in current assets:
Accounts receivable (162,743) (428,110)
Prepaid expenses (525,052) (290,049)
Recoverable income taxes 148,925 204,803
Increase in current liabilities:
Accounts payable 626,839 488,320
Accrued expenses 601,331 1,373,692
Income taxes payable 864,727 458,252
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,177,809 5,502,503
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (1,395,126) (8,928,492)
Additions to intangibles and other assets (31,705) (181,907)
Proceeds from sale of property and equipment 4,844 16,731
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,421,987) (9,093,668)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of long-term debt (28,245,052) (21,628,415)
Proceeds from long-term debt 15,016,606 19,635,719
Proceeds from exercise of stock options 5,000 -
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (13,223,446) (1,992,696)
- ------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,467,624) (5,583,861)
Cash and cash equivalents at beginning of period 9,532,430 6,487,764
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,064,806 903,903
================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 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 June 30, 1998 and the
condensed consolidated statements of income and cash flows for the
three-month and six-month periods ended June 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 June 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 consolidated
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-month and six-month periods ended June 30, 1998
are not necessarily indicative of the operating results for the full year.
2. NET INCOME PER SHARE
For the three-month and six-month periods ended June 30, 1998 and 1997,
basic net income per share was calculated based on the weighted average
number of common shares outstanding during the period. Diluted net income
per share was computed using the weighted average number of common shares
outstanding during the period and dilutive potential common shares
outstanding during the period.
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 in effect for the year in
which the temporary 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 percent. 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
<PAGE> 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 that are based on the beliefs of Supertel's management as
well as assumptions made by and information currently available to Supertel's
management. Such statements reflect the current views of Supertel with respect
to future events and are subject to certain risks, uncertainties and
assumptions, including the business factors described in Supertel'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 DEVELOPMENTS
On June 4, 1998, PMC Commercial Trust (AMEX: PCC) and Supertel announced
that they had entered into an Agreement and Plan of Merger pursuant to which
Supertel will merge with and into PMC Commercial. The consideration to be paid
by PMC Commercial would be 0.6 common shares of PMC Commercial (the "Common
Shares") for each share of Supertel, subject to an adjustment in the event the
average trading price of the Common Shares for the ten trading days ending five
days before the respective shareholder meetings to approve the merger drops
below $17.50 or increases above $24.00. The merger has been approved by the
boards of both companies, and is subject to a number of conditions, including
approval by the shareholders of PMC Commercial and the stockholders of Supertel.
Additionally, the agreement provides that the stockholders of Supertel
will receive a preclosing dividend of certain of Supertel's earnings and
profits which, if less than $3.00 per share of Supertel Common Stock, allows
Supertel to terminate the agreement. The special dividend would be payable
only if the merger occurs. The merger is expected to be consummated in October
1998.
The 62 hotels (containing 4,453 rooms) acquired by PMC Commercial pursuant
to the merger will be leased to Norfolk Hospitality Management Co. (the
"Lessee"), an entity to be owned by certain officers and employees of Supertel.
The Lessee will pay an annual base rent of $15,000,000 (including certain
reserve requirements of $600,000) plus additional rent in the amount of 20% of
every dollar of annual gross revenues in the excess of $42,000,000 and 25% of
every dollar of gross revenues in excess of $50,000,000. The lease agreement
has a five year initial term with options for additional two year terms.
A complaint (the "Complaint") was filed against Supertel, the members of
its board of directors, and PMC Commercial in the Delaware Court of Chancery in
New Castle County on June 16, 1998. The Complaint was purportedly filed on
behalf of a stockholder of Supertel, and seeks certification as a class
action. The Complaint alleges, among other things, that by entering into a
merger agreement and related agreements with PMC Commercial, Supertel's board
of directors did not act in good faith and in compliance with their fiduciary
duties to Supertel's stockholders. The Complaint seeks to enjoin the proposed
merger of Supertel with PMC Commercial, rescission of the contemplated merger,
if consummated, and/or compensatory damages, attorneys fees, and other relief.
Supertel believes that there is no merit to the allegations of the Complaint
and intends to vigorously defend the action.
RESULTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total motel revenues for the second quarter were $13,537,368, an increase
of $1,220,117 or 9.9%, over total revenues of $12,317,251 for the second quarter
of 1997. Total motel revenues for the first six months were $24,441,660, an
increase of $3,058,729 or 14.3% over the total revenues of $21,382,931 for the
first six months of 1997. The increase for the second quarter was primarily due
to an increase of $1,212,742 in revenues from lodging operations and $7,375 from
other lodging activities (which consist of telephone, vending and movie
revenue). The increase for the first six months was primarily due to an
increase of $3,009,115 in revenue from lodging operations and $49,614 from other
lodging activities.
The increase in revenues from lodging operations for the second quarter
resulted primarily from renting 286,555 rooms in 1998 compared to 274,250 rooms
in the second quarter of 1997, an increase of 12,305 or 4.5%. The increase in
revenues from lodging operations for the first six months resulted primarily
from renting 527,615 rooms in 1998 compared to 493,331 rooms rented in the first
six months of 1997, an increase of 34,284 or 6.9%.
6
<PAGE> 7
The increase in rooms rented was due in part to the opening of a 101 unit
property in the third quarter of 1997 in Houston, Texas. Revenues were also
impacted by an increase in the average daily room rate in the second quarter of
1998. An average daily room rate of $47.24 was achieved compared to $44.91 for
the second quarter of 1997, an increase of $2.33 or 5.2%. For the first six
months, the average daily room rate was $46.32 in 1998 compared to $43.34 for
the first six months of 1997, an increase of $2.98 or 6.9%.
Revenue per available room for the second quarter of 1998 increased to
$33.41 from $31.13, an increase of $2.28 or 7.3%. Revenue per available room
for the first six months of 1998 increased to $30.32 from $27.78, an increase of
$2.54 or 9.1%.
Motel revenue was also impacted by changes in occupancy. Occupancy as a
percentage of rooms available for the second quarter of 1998 increased to 70.7%
from 69.3% in the second quarter of 1997. The occupancy percentage in seasoned
properties (those owned/opened over one year) increased from 70.4% in the second
quarter of 1997 to 71.0% in the second quarter of 1998. Occupancy increased
from 64.1% for the first six months of 1997 to 65.5% for the first six months of
1998. Occupancy is seasonal. Occupancy 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.
Lodging expenses for the second quarter of 1998 were $7,181,121 compared to
$6,732,917 for the second quarter of 1997, an increase of $448,204 or 6.7%.
Lodging expenses for the first six months of 1998 were $13,650,690 compared to
$12,585,408 for the first six months of 1997, an increase of $1,065,282 or 8.5%.
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 motel revenues decreased to 53.0% for the second quarter of 1998 from 54.7%
in the second quarter of 1997. Lodging expenses as a percentage of motel
revenues decreased to 55.9% for the first six months of 1998 from 58.9% for the
first six months of 1997. The percentage decrease was due to having a larger
revenue base to spread fixed costs over and by improved variable cost controls.
7
<PAGE> 8
Depreciation and amortization expenses for the second quarter of 1998 were
$1,076,322 compared to $1,009,835 for the second quarter of 1997, an increase of
$66,487 or 6.6%. Depreciation and amortization expenses for the first six
months of 1998 were $2,189,594 compared to $1,911,171 for the first six months
of 1997, an increase of $278,423 or 14.6%. The higher level of depreciation is
associated with newly constructed properties and acquisitions.
General and administrative expenses for the second quarter of 1998 were
$1,159,663 compared to $871,167 in the second quarter of 1997, an increase of
$288,496 or 33.1%. General and administrative expenses as a percent of sales
increased in the second quarter of 1998 to 8.6% from 7.1% of sales in the second
quarter of 1997. General and administrative expenses for the first six months
of 1998 were $2,159,526 compared to $1,591,801 for the first six months of 1997,
an increase of $567,725 or 35.7%. General and administrative expenses as a
percent of sales increased in the first six months of 1998 to 8.8% from 7.4% of
sales in the first six months of 1997. The percentage increase was due in part
to making additional accruals for projected year-end bonuses as part of our new
bonus program which ties bonuses to motel net operating income.
Interest expense decreased by $134,719 or 11.4% for the second quarter of
1998 from $1,184,905 for the second quarter of 1997 to $1,050,186 in 1998.
Interest expense decreased by $84,647 for the first six months of 1998 from
$2,235,842 in 1997 to $2,151,195 in 1998 or 3.8%. 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 second quarter of 1998 decreased to $53,235,391 from
$58,297,477 for the comparable period in 1997, a decrease of $5,062,086 or 8.7%.
Bank borrowings at June 30, 1998 were $52,264,921.
8
<PAGE> 9
As a result of the aforementioned operating factors and general business
conditions, net income for the second quarter of 1998 from continuing operations
was $1,672,732 or $.35 per share versus net income of $1,344,601 or $.28 per
share for the corresponding period in 1997. Earnings before interest, taxes,
depreciation and amortization (EBITDA) for the second quarter of 1998, were
$4,914,400, an increase of $478,659 or 10.8% over EBITDA of $4,435,741 for the
second quarter of 1997.
Net income for the six months of 1998 from continuing operations was
$2,254,197 or $.47 per share versus net income of $1,561,961 or $.32 per share,
for the corresponding period in 1997. EBITDA for the first six months of 1998
were $8,097,781, an increase of $1,347,509 or 20.0% over EBITDA of $6,750,272
for the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Supertel's growth has been financed through a combination of cash provided
from operations and long-term debt financing. Cash provided from operations was
approximately $6,178,000 for the first six months of 1998 and $5,503,000 for the
first six months of 1997. Supertel requires capital principally for the
construction, acquisition and improvement of lodging facilities. Capital
expenditures for such purposes were approximately $1,395,000 in the first six
months of 1998 and approximately $8,928,000 in the first six months of 1997.
Long-term debt (excluding current installments of long-term debt) was
$49,971,452 at June 30, 1998 and $63,534,321 at December 31, 1997. Supertel's
current installments of long-term debt were $2,293,469 at June 30, 1998 and
$1,942,380 at December 31, 1997. Supertel'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 June 30,
1998, Supertel was in compliance with these covenants.
Supertel's ratio of long-term debt (including current installments) to
long-term debt and stockholders' equity was 59.8% at June 30, 1998, compared to
66.6% at December 31, 1997.
9
<PAGE> 10
Supertel plans to construct/acquire approximately 100-125 motel rooms in
1998 with approximately $3,000,000 - $3,750,000 of capital funds necessary to
finance such development. Supertel 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.
Supertel had 4,448 rooms in operation as of June 30, 1998 compared to 4,359
rooms in operation as of June 30, 1997, a net increase of 89 rooms or 2.0%.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
None.
B. Reports on Form 8-K.
Supertel filed a Form 8-K dated June 3, 1998 reporting that (i) Supertel
and PMC Commercial Trust ("PMC") had executed an Agreement and Plan of Merger,
whereby Supertel will merge with and into PMC and (ii) Supertel entered into an
Agreement of Sale with Norfolk Hospitality Management Co. ("Norfolk
Hospitality") whereby Norfolk Hospitality will acquire certain assets of
Supertel immediately prior to the merger. A press release, Agreement and Plan
of Merger and Agreement of Sale were filed as exhibits to the Form 8-K.
Supertel filed a Form 8-K dated June 16, 1998 reporting that a Complaint
(the "Complaint") had been filed against Supertel, the members of the Board of
Directors, and PMC in the Delaware Court of Chancery in New Castle County. The
Compliant was purportedly filed on behalf of a stockholder of Supertel, and
seeks certification as a class action. The Compliant alleges, among other
things, that by entering into a merger agreement and related agreements with
PMC, Supertel's Board of Directors did not act in good faith and in compliance
with their fiduciary duties to the Supertel stockholders. The Complaint seeks
to enjoin the proposed merger of Supertel with PMC, rescission of the
contemplated merger, if consummated, and/or compensatory damages, attorneys fees
and other relief. A copy of the Complaint is attached as an exhibit to the Form
8-K. Supertel believes that there is no merit to the allegations of the
Complaint and intends to vigorously defend the action.
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:_____________________________
Troy Beatty
Chief Financial Officer
DATED this 13th day of August 1998.
11
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,064,806
<SECURITIES> 0
<RECEIVABLES> 1,320,115
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,402,971
<PP&E> 109,908,072
<DEPRECIATION> 20,253,334
<TOTAL-ASSETS> 94,666,992
<CURRENT-LIABILITIES> 8,491,203
<BONDS> 49,971,452
0
0
<COMMON> 48,404
<OTHER-SE> 35,071,388
<TOTAL-LIABILITY-AND-EQUITY> 94,666,992
<SALES> 13,537,368
<TOTAL-REVENUES> 13,537,368
<CGS> 0
<TOTAL-COSTS> 7,181,121
<OTHER-EXPENSES> 2,522,580
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<INTEREST-EXPENSE> 1,050,186
<INCOME-PRETAX> 2,787,892
<INCOME-TAX> 1,115,160
<INCOME-CONTINUING> 1,672,732
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