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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-23536
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SUPERTEL HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0774097
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
309 NORTH 5TH STREET
NORFOLK, NEBRASKA 68701
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 371-2520
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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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 12 months (or for such shorter period that
the registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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The number of shares of common stock outstanding as of March 13, 1998
was 4,840,000 shares. The aggregate market value of the common stock held
by non-affiliates of the registrant as of March 13, 1998 was $32,508,000.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Documents incorporated by reference include portions of the Company's
Annual Report to Stockholders for the year ended December 31, 1997 ("1997
Annual Report") incorporated by reference into Parts I and II, and portions of
the Company's Proxy Statement for the May 1, 1998 Annual Stockholders' Meeting
("1998 Proxy Statement") incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Supertel is one of the largest franchisees of Super 8 motels based on
the number of motels owned and total rooms rented. The Company develops,
acquires, constructs and operates economy-class motels as a franchisee of
Super 8 Motels, Inc. and at February 1, 1998 owned 57 Super 8 motels located
primarily in Nebraska, Kansas, Iowa, Missouri, Arkansas, Wisconsin and Texas.
Supertel is one of the few multiple-location franchisees of Super 8 motels
that both owns and operates motels. Supertel also owned two Comfort Inn
motels, one River Valley Suites motel, and two Wingate Inns at February 1, 1998.
On March 18, 1998, Supertel announced that it was engaged in discussions
regarding a possible business combination with a publicly-traded
company pursuant to which Supertel stockholders would receive cash and common
stock of the other company. Supertel stated that completion of a definitive
agreement and consummation of a transaction are subject to a number of
uncertainties, including results of due diligence by both companies, and would
be subject to approval by Supertel's board of directors and stockholders.
Supertel further stated that there can be no assurance an agreement can be
reached, or that if an agreement is entered into, that any transaction will be
consummated.
CURRENT OPERATIONS. Supertel is a vertically-integrated motel
construction, development and operations company that (i) identifies
potential sites for the construction of new motels and analyzes existing
motels that are available for acquisition, (ii) develops and constructs new
motel properties and renovates existing motels it acquires and (iii)
manages its own motel properties. Certain historical information concerning
Supertel's operations is set forth in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR-END INFORMATION 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Motels 36 41 48 59 62
- ---------------------------------------------------------------------------------------------
Total Rooms Rented 603,367 667,545 793,151 903,643 1,041,904
- ---------------------------------------------------------------------------------------------
Motel Revenues $21,603,000 $25,161,000 $31,362,000 $37,832,388 46,344,815
- ---------------------------------------------------------------------------------------------
ProForma Net Income
After Taxes $ 2,142,000 $ 3,077,000 $ 3,624,000 $ 3,371,247 4,101,665
- ---------------------------------------------------------------------------------------------
Average Occupancy Rate 70.5% 69.4% 69.6% 65.7% 65.7%
- ---------------------------------------------------------------------------------------------
Average Room Rate (1) $ 35.80 $ 37.69 $ 39.54 $ 41.87 $ 44.48
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes telephone, vending and movie revenues.
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HISTORY. Paul J. Schulte and Steve H. Borgmann developed their first
Super 8 motel as a franchisee of Super 8 Motels, Inc. in 1978. From 1978
through October 1990, Messrs. Schulte and Borgmann developed by
acquisition or construction an additional 26 motels in the states of Nebraska,
Iowa, Missouri, Kansas and Arizona through a series of limited partnerships
and corporations. These various entities were combined into Spartan "8"
Limited Partnership ("Spartan") in October 1990. Messrs. Schulte and
Borgmann continued as the general partners of Spartan which acquired or
developed nine additional motel properties in Nebraska, Kansas, Missouri and
Arkansas between October 1990 and February 1994.
Simplex, Inc. ("Simplex") has been involved in the motel management
business for Spartan and its predecessors since 1980. Motel Developers,
Inc. ("MDI") or its predecessors have acted as a general contractor for
motel properties developed by Messrs. Schulte and Borgmann since 1977.
Supertel was organized in December 1993 to act as the successor to businesses
operated by Spartan, MDI and Simplex, at which time Simplex and MDI became
wholly-owned subsidiaries of Supertel. Supertel completed an initial public
offering in April 1994. Spartan, MDI and Simplex are sometimes referred to as
the "Predecessor Companies". The narrative description and financial information
herein have been prepared as if Supertel owned and operated the properties
throughout the periods described herein.
LODGING INDUSTRY OVERVIEW
The lodging industry can be divided into four broad segments based on
price and chain affiliation. These segments are: upscale, midscale, economy,
and small chains or independent motels. Each of the first three categories
are further divided into two subcategories based on price: upper and lower.
Super 8 motels are in the lower economy segment, together with Motel 6,
Budgetel, Ramada Limited, EconoLodge, Roadway Inn, Sleep Inn and others.
Wingate Inns are in the upper midscale segment, together with Hampton Inns
and Courtyard by Marriott.
Lower economy-class motels appeal to family, senior citizen and business
travelers seeking comfortable lodging at low cost. Supertel believes the
geographic location and cost structure of its economy motels results in
higher margins than are obtained in other segments of the lodging industry.
Upper mid-scale hotels appeal to the business traveler looking for extended
benefits.
Motel Operations
Supertel's Super 8 motels are economy lodging facilities containing
between 40 and 135 guest rooms. The guest rooms contain between 220 and
290 square feet of space and are furnished with either king or queen size or
two double beds, dresser, table and chairs or recliner and a remote controlled
color television (frequently with cable or satellite hook ups). The motels
provide continental breakfasts, wake up calls and 24-hour desk service.
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The typical motel is of an English-tudor style design and is located near
restaurants operated by third parties.
Supertel's personnel have extensive experience in conducting site
selection. Site selection typically consists of reviewing area
demographics, conducting market research and comparing the proposed site to
other potential expansion locations. The Company acts as its own general
contractor in constructing Super 8 motels. In the conduct of general
contractor duties, Supertel's personnel purchase building materials and
award contracts for plumbing, concrete, concrete finishing, electrical,
heating and air conditioning, carpentry, finish carpentry and specialized
equipment such as computer equipment and telephone equipment.
Each of Supertel's 62 motels has an on-site manager. The manager is
generally a resident of the local community. Supertel management is in
daily contact with each motel manager. Supertel's motels with 80 or fewer rooms
employ an average of 12 housekeeping and maintenance employees and its motels
with more than 80 rooms employ an average of 16 housekeeping and maintenance
employees.
Supertel's training personnel conducts training of all motel staff
members including motel managers, motel desk clerks and motel housekeepers.
Supertel's employee training emphasizes its guest safety programs which
include room key control, outside lighting and security cameras for monitoring
motel premises.
CUSTOMERS AND MARKETING
During 1997, the Company rented 1,041,904 rooms. Over 67% of its guests
were members of the VIP Club, a popular guest program developed by Super 8
Motels, Inc. The members of the VIP Club receive room discounts upon
presentation of their club card at check-in and check cashing privileges in
addition to other benefits. Supertel's marketing efforts include VIP Club
enrollment drives and VIP enrollment contests among desk clerks.
Supertel's marketing efforts also include negotiating and renewing
billboards and developing and renewing yellow page advertising. Specific
on-site marketing sales programs for individual motels are implemented and
planned by Company personnel. In addition, Supertel participates in various
community campaigns in support of the local area at each motel location.
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SERVICE AND QUALITY ASSURANCE
Supertel believes it ranks among the best Super 8 motels for quality
and service. Super 8 Motels, Inc. conducts surveys of guests of Super 8 motels
through the use of in-room guest comment cards. Guests are requested to
complete and mail the self-addressed cards to Super 8 Motels, Inc. following a
stay in a Super 8 motel. The comment card covers nine areas: appearance, room
cleanliness, room comfort, room furnishings, bathroom, price value
perception, employee friendliness, employee efficiency and employee response.
The following chart reflects the average guest responses on the Super 8
surveys, which use a scale of 1.00 to 4.00 with the best score being 1.00.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
All Super 8 motels 1.43 1.41 1.38
.................
Supertel-owned motels 1.17 1.15 1.14
.................
</TABLE>
Super 8 Motels, Inc. also conducts four unannounced inspections of each
motel per year, one each quarter. The inspection scores shown below are
the average for the year. A score of 0 to 50 is graded as excellent, 51 to
300 is graded good, 301 to 500 is graded average and above 500 is graded
unacceptable.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
All Super 8 motels ................. 173 187 180
Supertel-owned motels (all motels).. 52 61 65
Supertel-owned motels (properties
owned/opened more than one year).. 38 61 65
</TABLE>
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MOTEL PROPERTIES
Certain information for the 62 motels owned by Supertel at February 1,
1998 is set forth below. All motels are Super 8 motels except as noted.
<TABLE>
<CAPTION>
LOCATION DATE OPENED ROOMS IN MOTEL
- -------- ----------- --------------
<S> <C> <C>
NEBRASKA
- --------
Columbus 12/31/81 63
O'Neill 7/30/82 53
Omaha 2/18/83 116
Lincoln purchased 8/1/83 83
Lincoln 10/29/83 135
Omaha 5/23/86 74
Wayne 6/8/92 41
Omaha 12/29/93 101
Norfolk purchased 11/2/94 66
IOWA
- ----
Creston 9/19/78 84
Keokuk 2/2/85 62
Iowa City 12/21/85 87
Oskaloosa 12/31/85 51
Burlington 12/30/86 63
Clinton 1/25/88 63
Mt. Pleasant 8/29/88 55
Pella 3/15/90 41
Storm Lake 10/11/90 59
Muscatine purchased 1/4/95 63
Ft. Madison purchased 1/4/95 42
KANSAS
- ------
Hays 5/31/87 78
Pittsburg 8/14/87 64
Manhattan 11/23/87 87
Wichita 2/17/89 120
Lenexa 12/22/89 101
Garden City purchased 6/1/91 61
El Dorado 1/16/92 49
Wichita purchased 11/7/94 60
Parsons purchased 3/15/96 48
</TABLE>
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<TABLE>
<CAPTION>
LOCATION DATE OPENED ROOMS IN MOTEL
- -------- ----------- --------------
<S> <C> <C>
MISSOURI
- --------
Kirksville 8/28/86 64
Sedalia 3/6/87 87
Moberly purchased 8/1/87 60
Marshall 5/6/88 54
Kingdom City 6/6/89 62
West Plains 11/5/90 49
Jefferson City 7/2/91 80
TEXAS
- -----
College Station 6/21/94 90
Waco 6/21/94 78
Irving 2/10/95 104
Plano 10/3/95 102
McKinney 12/21/95 80
Denton 4/11/96 80
Wichita Falls 6/4/96 104
Grapevine 6/4/96 102
Bedford 8/15/96 114
Los Colinas (Wingate Inn) 4/1/97 101
Houston (Wingate Inn) 8/22/97 101
SOUTH DAKOTA
- ------------
Watertown purchased 7/15/94 58
ILLINOIS
- --------
Macomb purchased 1/17/95 41
Jacksonville purchased 3/22/95 43
ARKANSAS
- --------
Russellville 3/21/91 63
Mountain Home 4/13/92 41
Batesville 10/6/92 49
Fayetteville 5/17/93 83
</TABLE>
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<TABLE>
<CAPTION>
LOCATION DATE OPENED ROOMS IN MOTEL
- -------- ----------- --------------
<S> <C> <C>
ARIZONA
- -------
Bullhead City (Independent) 4/28/84 76
WISCONSIN
- ---------
Portage purchased 6/13/96 61
Antigo purchased 7/2/96 52
Shawano purchased 7/2/96 55
Minocqua (Comfort Inn) purchased 7/2/96 51
Sheboygan (Comfort Inn) purchased 7/30/96 59
Tomah purchased 8/14/96 64
Menomonie purchased 4/1/97 81
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4,459
</TABLE>
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RELATIONSHIP WITH SUPER 8 MOTELS, INC.
Supertel's motel properties are each operated pursuant to a franchise
agreement with Super 8 Motels, Inc. Super 8 Motels, Inc., with corporate
offices located in Aberdeen, South Dakota, is a subsidiary of Cendant
Corp., a publicly-owned franchisor of hotels and motels, including Days
Inn, Howard Johnson, Knights Inn, Ramada, Travelodge, Villager Lodge, Wingate
Inn and Super 8. There were 1,617 Super 8 motels operating as of December 31,
1997.
BENEFITS TO SUPERTEL. Supertel's franchisee relationship
allows the use of the nationally recognized service mark "Super 8"
in its motel operations. Super 8 Motels, Inc. conducts national
print and media advertising promoting the service mark and Super
8 motels. Quality and consistency among Super 8 motels is
monitored by Super 8 Motels, Inc. through four unannounced annual
inspections of each Super 8 motel for compliance with facility and
service standards. Super 8 Motels, Inc. also assists franchisees
in advertising, design and development, market research and trade
show participation.
Super 8 Motels, Inc. operates a 24-hour reservation system. Travelers
can use an 800 telephone number through the reservation system to reserve
rooms nationwide at Super 8 motels. In addition to the reservation
service, an international directory of Super 8 motels is published twice
annually and Super 8 Motels, Inc. prepares and delivers a special directory
for tour groups to travel agencies.
Members of Super 8 Motels, Inc.'s VIP Club program rented over 67% of
Supertel's motel rooms during 1997. The 5,035,265 members of the VIP
Club receive room rate discounts upon presentation of their club card at
check-in and check cashing privileges in addition to other benefits. Super 8
guarantees any losses that Supertel may incur from checks written by VIP Club
cardholders.
Super 8 Motels, Inc. provides Supertel with a central source for
purchasing of items used in the motel operations. The Company believes
that volume purchasing from a central source results in overall lower purchase
costs. As a franchisee of Super 8 Motels, Inc., Supertel also receives rebates
on long distance telephone charges and premium television charges through its
relationship with the franchisor.
FRANCHISE AGREEMENTS. Supertel pays a monthly franchise fee ranging
from 4% to 7% of each motel's gross receipts from room revenues of which 1%
to 3% is contributed to an advertising fund administered by Super 8 Motels, Inc.
to finance its
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national advertising program. An initial franchise fee of $20,000 is required
upon the execution of a franchise agreement for a new location.
Super 8 Motels, Inc. has agreed not to franchise additional Super 8 motels
within a specific radius (which varies from five to thirty miles depending
upon the location) of each motel. Each franchise agreement has a twenty
year term. Super 8 Motels, Inc. has the right to terminate a franchise
agreement, subject to the Supertel's right to correct the condition giving rise
to the right to terminate, if Supertel violates the agreement, becomes
insolvent, or permits an attachment or execution to be levied on the subject
motel.
Supertel may own and operate motels not subject to a franchise agreement
with Super 8 Motels, Inc. In addition, in the event a franchise agreement
with respect to a motel is not renewed or is terminated, Supertel may
operate such motel independently or pursuant to an agreement with another
franchisor while continuing to operate its other motels under franchise
agreements with Super 8 Motels, Inc.
AREA DEVELOPMENT RIGHTS. Super 8 Motels, Inc. has granted Supertel
exclusive rights to develop motels within the city limits of Omaha, Nebraska
and in a portion of the Kansas City metropolitan area located in Kansas.
RELATIONSHIP WITH WINGATE INNS, L.P.
Supertel signed an agreement with Wingate Inns, L.P. in December 1995
which provides rights for Supertel to develop five Wingate Inns in
the Dallas/Ft.Worth and Houston metropolitan areas through June 30, 1998.
Wingate Inns, L.P. is an affiliate of Cendant Corp., a publicly-held
corporation. Super 8 Motels, Inc. is also an affiliate of Cendant Corp.
Wingate Inns is a limited service hotel chain which features comfortable
suite-like rooms focused on business travelers. Wingate Inns hotels are in
the upper mid-scale segment of the lodging industry. See "Business - Lodging
Industry Overview". Supertel will pay a monthly franchise fee of 8.5% of
each Wingate Inns gross receipts from room revenues, of which 4% will be
contributed to an advertising fund administered by Wingate Inns, L.P. A minimum
initial franchise fee of $35,000 is required upon the execution of a franchise
agreement for a new location, with an additional initial fee of $350 for each
room in excess of 100 rooms at the location. Subject to certain conditions,
Wingate Inns, L.P. will advance $250,000 to Supertel for each new Wingate Inn;
one-fifteenth of the advance will be forgiven without payment annually following
the motel opening if Supertel complies with the terms of the franchise
agreement.
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COMPETITION
There is significant competition in the lodging industry. There are
numerous lodging chains that operate on a national or regional basis, as well
as other motels, motor inns and independent lodging establishments throughout
the United States. Many of the Company's competitors have recognized trade
names, greater resources and longer operating histories than the Company.
Supertel's motels also compete directly with other economy motel chains
that employ concepts similar to Super 8 motels and compete for the same type
of cost-conscious traveler. The number of available rooms in these
economy motels has grown rapidly.
GOVERNMENT REGULATION
Supertel is subject to various federal, state and local laws, regulations
and administrative practices affecting its business. Supertel's motel
facilities must comply with regulations related to health, sanitation and
safety standards, equal employment, minimum wages, building codes and zoning
ordinances and licenses to operate motel facilities. Supertel believes it is in
substantial compliance with all such regulations.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on such property.
Such laws often impose such liability without regard to whether the owner
knew of, or was responsible for, the presence of hazardous or toxic
substances. The cost of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral.
Supertel believes that the motel properties are in compliance in all
material respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances and other environmental matters.
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INSURANCE
Supertel has insurance for risks such as fire, personal injury and
property damage claims in connection with the operation of the motels as
its management deems appropriate and in accordance with prudent risk
management, taking into consideration the availability and cost thereof. The
motels are insured for other risks, such as business interruption insurance
covering six months of each motel's revenues, in amounts deemed adequate by
Supertel.
EMPLOYEES
As of December 31, 1997 Supertel had 1,129 employees. The corporate staff
consisted of 59 employees involved in development/construction,
operations/training, and purchasing and accounting. The motel-level employees
included 71 managers and assistant managers/relief managers, 405 desk clerks,
533 housekeepers and shuttle drivers and 61 maintenance employees. Approximately
46% of the desk clerks and housekeepers are part-time employees. The number of
Supertel employees varied during 1997 from a low of 1,113 employees to a high of
1,446 employees due to the seasonal nature of the motel business and the
addition of motels during the year. None of the employees is covered by a
collective bargaining agreement. Supertel considers its relations with employees
to be good.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS AND EXPORT SALES
Supertel has no foreign locations or export sales.
EXECUTIVE OFFICERS OF SUPERTEL
The executive officers of Supertel at February 28, 1998 are listed
below, together with their ages and all Company positions and offices held
by them.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul J. Schulte 64 Director, President and Treasurer
Steve H. Borgmann 52 Director, Executive Vice President
and Chief Operating Officer
Richard L. Herink 44 Director, Executive Vice President
Troy Beatty 33 Senior Vice President and Chief
Financial Officer
</TABLE>
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<PAGE> 13
Paul Schulte founded a predecessor of Supertel and was a controlling
shareholder, director and president of the predecessor's operations since
1974. Mr. Schulte has extensive experience in acquiring, developing, owning,
managing and operating economy motels for Supertel or its predecessors since
1978.
Steve Borgmann was a controlling shareholder, director and officer of
the predecessor's operations since 1983. Mr. Borgmann has extensive
experience in acquiring, developing, owning, managing and operating economy
motels for Supertel or its predecessors since 1978.
Richard Herink became executive vice president of Supertel in August
1995. From April 1993 to August 1995, he was executive vice president
of FirsTier Bank, N.A., Norfolk. Prior to April 1993, he was a division
president with Farm Credit Services of the Midlands.
Troy Beatty became chief financial officer of Supertel in December 1996.
From March 1994 to December 1996, Mr. Beatty was division controller with
Raytheon Corp. in Amana, Iowa; from March 1990 to March 1994 was assistant
controller with Cooper Industries; and from August 1987 to March 1990 was senior
associate with Coopers & Lybrand.
CERTAIN BUSINESS FACTORS
THIS 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO SUPERTEL THAT ARE BASED ON THE BELIEFS OF SUPERTEL MANAGEMENT AS
WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO SUPERTEL
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 THIS 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.
LODGING INDUSTRY RISKS. The lodging industry in general, including
Super 8, Comfort Inns and Wingate Inns, may be adversely affected by
such factors as changes in national and regional economic conditions
(particularly in geographic areas in which the Company has a high
concentration of motels), changes in local market conditions, oversupply of
motel space or a reduction in local demand for rooms and related services,
changes in interest rates and the availability of financing.
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<PAGE> 14
Operating factors affecting the lodging industry generally, including
the Company, include (i) competition from other motels and hotels, (ii)
demographic changes, (iii) the recurring need for renovations, refurbishment
and improvements of motels and increased expenses related to motel security,
(iv) restricted changes in zoning and similar land use laws, and regulations
relating to health, safety, disability and employment laws, (v) changes in
government regulations that influence or determine wages, prices or
construction costs, (vi) changes in the characteristics of motel locations,
(vii) the inability to secure property and liability insurance to fully
protect against all losses or to obtain such insurance at reasonable costs,
(viii) changes in real estate tax rates and other operating costs, (ix) changes
in travel patterns which may be affected by increases in transportation costs
or gasoline prices, weather patterns or construction of highways, and
(x) changes in brand identity and reputation.
Unexpected or adverse changes in any of the foregoing factors could have
a material adverse effect on Supertel's financial condition or results of
operations.
EXPANSION RISKS. Supertel has adopted a strategy to increase the number
of lodging facilities through the development of new motels and hotels and
the acquisition of existing motels. The Company's ability to expand depends
on a number of factors, including the selection and availability of suitable
locations at acceptable prices, the hiring and training of sufficiently
skilled management and personnel, and the availability of financing. There
can be no assurance that financing, or desirable locations for acquisitions or
new development will be available, or if available, will be on terms
acceptable to Supertel. There can be no assurance that the Company's expansion
plans will be completed successfully or that the nature of such expansion will
not be modified to reflect future events or economic conditions.
New motel development is subject to a number of additional risks including
construction delay or cost overruns, risks that properties will not achieve
anticipated occupancy levels or sustain expected room rate levels, and
commencement risks such as receipt of zoning, occupancy and other required
governmental permits and authorizations, which in each case could adversely
affect Supertel's financial performance. Supertel has historically incurred
significant costs relating to pre-opening activities and operating expenses
prior to reaching stabilized levels of occupancy and average daily room rates.
Consequently, as the Company develops new motel properties, the costs associated
therewith may negatively impact Supertel's results of operations.
Acquisitions entail risks that the new properties will fail to perform
in accordance with expectations and that the anticipated costs of renovation
or conversion will prove inaccurate, as well as general investment risks
associated with any new real estate investment. Certain of the properties
acquired by Supertel may not operate as Super 8
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<PAGE> 15
franchisees, and the Company may incur financial and guest acceptance risks in
converting such properties to Super 8 motels or operating such properties
under a franchise agreement with a different motel franchisor.
RISKS OF LEVERAGE. Supertel's business is capital intensive and the
Company will have significant capital requirements in the future. In the
event Supertel's cash flow and working capital are not sufficient to fund its
expenditures or to service its indebtedness, the Company would be required to
raise additional funds through the sale of additional equity securities, the
refinancing of all or part of its indebtedness, the incurrence of additional
indebtedness, or the sale of assets. There can be no assurance that any of
these sources of funds would be available in amounts sufficient for Supertel
to meet its obligations. Furthermore, Supertel's leveraged capital structure
could limit its ability to finance its acquisition strategy and other capital
expenditures, or to compete effectively or to operate successfully under
adverse economic conditions. In addition, adverse economic conditions
could result in higher interest rates which could increase debt service
requirements on Supertel's floating rate debt and thereby reduce the amounts
available for acquisition and development of lodging facilities.
MANAGEMENT OF GROWTH. Supertel has experienced rapid growth in the
number of motel rooms owned and operated. Such growth has resulted in, and
is expected to continue to create, increased responsibilities for
management personnel, as well as added demands on the Company's operating
and financial systems. In addition, as the Company continues to pursue its
growth strategy, new motels and hotels will be opened in geographic markets in
which Supertel has limited or no previous operating or franchise experience.
If the Company is unable to manage its growth effectively, the Company's
financial condition and results of operations could be materially and adversely
affected.
LODGING INDUSTRY COMPETITION. The economy segment of the lodging industry
is highly competitive. The success of an economy motel in its market, in large
part, will be dependent upon its ability to compete in such areas as
reasonableness of room rates, quality of accommodations, service level and
convenience of location. Supertel's motels compete with existing motel and hotel
facilities in their geographic markets, as well as future motel and hotel
facilities in proximity to Supertel's properties. The Company's motels generally
operate in areas that contain numerous competitors. Demographic, geographic or
other changes in one or more of the Company's markets could impact the
convenience or desirability of the sites of certain motels, which would
adversely affect the operations of those motels. There can be no assurance that
new or existing competitors will not significantly lower rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in a market in which the Company's motels compete. In addition, competition
generally reduces the number of suitable motel acquisition opportunities offered
to the Company and increases the
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<PAGE> 16
bargaining power of property owners seeking to sell, which could adversely
affect the availability of or price paid for existing properties acquired by
Supertel.
SEASONALITY. The motel industry is seasonal in nature. Generally, motel
revenues are greater in the second and third quarters than in the first
and fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the Company's revenues. Quarterly earnings also may be adversely
affected by factors beyond the Company's control, including weather conditions
and economic factors.
LOSS OF FRANCHISES OR CERTAIN FRANCHISOR SERVICES. Each Super 8 motel
owned by Supertel will be subject to a franchise agreement in the form provided
by Super 8 Motels, Inc. Similarly, each Wingate Inn hotel owned by Supertel will
be subject to a franchise agreement with Wingate Inns, L.P. The continuation of
each franchise agreement will be subject to specified operating standards and
other terms and conditions. The failure of Supertel to maintain such standards
or adhere to such other terms and conditions with respect to a motel or hotel
could result in the loss or cancellation of the franchise agreement covering
that property and may have an adverse effect upon the profitability of a covered
property. In addition, the failure of the franchisor to perform its obligations
under each Franchise Agreement may have an adverse effect on Supertel. See
"Business - Relationship With Super 8 Motels, Inc." and "Business - Relationship
with Wingate Inns, L.P."
DEPENDENCE ON SENIOR MANAGEMENT. Supertel's continued success will depend
to a significant extent upon the efforts and abilities of its senior management
team, including Paul J. Schulte, Steve H. Borgmann and Richard L. Herink. The
loss of their services could have a material adverse affect upon Supertel's
business. Supertel has employment agreements with each of these individuals.
ENVIRONMENTAL MATTERS. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may
become liable for the cost of removal or remediation of certain hazardous
substances released on or in its property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of such hazardous substances. The presence of such substances, or
the failure to properly remediate any contamination from such substances, may
adversely affect the owner's ability to sell the real estate or to borrow
using the real estate as collateral. In addition to clean-up actions
brought by the federal, state and local agencies, the presence of hazardous
waste or materials on a property could result in personal injury or similar
claims by private plaintiffs. Neither Supertel nor its predecessors have been
notified by any governmental authority of any liability or other claim in
connection with any of its motels and Supertel is not aware of any other
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<PAGE> 17
environmental condition with respect to any of its motels that could be
material to its results of operations. See "Business - Environmental Matters."
ITEM 2. PROPERTIES.
Supertel's executive, training and administrative operations are located
in an owned building containing approximately 18,000 square feet of space in
Norfolk, Nebraska.
The Company's motel properties are all owned. See "Business - Motel
Properties" and "Business - Motel Operations".
ITEM 3. LEGAL PROCEEDINGS.
Supertel from time to time is involved in litigation relating to claims
arising out of its operations in the normal course of business. In the
opinion of management, the ultimate disposition of all litigation involving
Supertel will not have a material impact on Supertel's consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of stockholders of Supertel during the
fourth quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The sections entitled "Quarterly Financial Information (Unaudited)" on
page 20 and "Common Stock" on page 21 of the 1997 Annual Report are incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The section entitled "Selected Financial Statement Data" on page 5 of the
1997 Annual Report is incorporated herein by reference.
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 6 through 8 of the 1997 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Supertel Hospitality, Inc. and
subsidiaries, and the independent auditors' report thereon, are incorporated
herein by reference to pages 9 through 19 of the 1997 Annual Report. Certain
supplementary data is incorporated herein by reference to the section entitled
"Quarterly Financial Information (Unaudited)" on page 20 of the 1997 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in Supertel's independent accountants during the
two most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The sections entitled "Director Meetings and Compensation", "Summary
Compensation Table", "Option Grants in 1997", and "Option Exercises in Fiscal
1997 and Year-End Values" in the 1998 Proxy Statement are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section entitled "Certain Stockholders" in the 1998 Proxy Statement
is incorporated herein by reference.
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<PAGE> 19
ITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS.
The section entitled "Certain Agreements and Transactions" in the 1998
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. The consolidated financial statements of
Supertel, and the independent auditors' report thereon, have been
incorporated by reference as set forth in Item 8 above.
(a) (2) FINANCIAL STATEMENT SCHEDULES. No financial statement
schedules are required pursuant to this item.
(a) (3) EXHIBITS. The Exhibit Index, set forth below, is incorporated
herein by reference.
(b) REPORTS ON FORM 8-K. Supertel did not file any reports on Form 8-K
during the last quarter of its fiscal year ended December 31, 1997.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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, in the City of
Norfolk, State of Nebraska, on the 23rd day of March, 1998.
Supertel Hospitality, Inc.
By: /s/ Paul J. Schulte
----------------------------------------
Paul J. Schulte, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Supertel
Hospitality, Inc. and in the capacities indicated on the 23rd day of March,
1998.
/s/ Paul J. Schulte Director and Chief Executive Officer
- ---------------------------
Paul J. Schulte
/s/ Steve H. Borgmann Director, Executive Vice President and
- --------------------------- Chief Operating Officer
Steve H. Borgmann
/s/ Richard Herink Director and Executive Vice President
- ---------------------------
Richard Herink
/s/ Troy Beatty Senior Vice President (Chief Financial
- --------------------------- Officer and Principal Accounting Officer)
Troy Beatty
/s/ Joseph Caggiano Director
- ---------------------------
Joseph Caggiano
/s/ Loren Steele Director
- ---------------------------
Loren Steele
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<PAGE> 21
SHAREHOLDER INFORMATION
DIRECTORS/OFFICERS
CORPORATE OFFICE
Supertel Hospitality, Inc.
309 North 5th Street
P.O. Box 1448
Norfolk, NE 68702-1448
Telephone 402-371-2520
Fax 402-371-4229
ANNUAL MEETING
The 1998 annual meeting of stockholders will be held on
May 1, 1998 at 2 p.m. central time at the Doubletree Inn,
1616 Dodge Street, Omaha, NE 68102.
AVAILABILITY OF 10-K REPORT
Stockholders may obtain a copy of Supertel's Form 10-K
Annual Report for 1997 by writing the investor relations
contact at the corporate office.
INVESTOR RELATIONS CONTACT
Troy M. Beatty
Chief Financial Officer
Telephone 402-371-2520
Fax 402-371-4229
COMMON STOCK
The common stock is traded on the NASDAQ National
Market System under the symbol SPPR. On March 13,
1998, there were approximately 1,225 beneficial owners
of the company's common stock.
STOCK TRANSFER AGENT
First National Bank of Omaha, Omaha, NE
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Omaha, NE
LEGAL COUNSEL
McGarth, North, Mullin & Kratz, PC
Omaha, NE
Directors
Joseph Caggiano
Vice Chairman Emeritus
Bozell, Jacobs, Kenyon & Eckhardt, Inc.
Loren Steele
Director, Super 8 Motels, Inc.
Chairman, International Franchise Association
Paul Schulte
President and Chief Executive Officer
Supertel Hospitality, Inc.
Steve Borgmann
Executive Vice President and Chief Operating Officer
Supertel Hospitality, Inc.
Richard Herink
Executive Vice President
Supertel Hospitality, Inc.
OFFICERS
Paul Schulte
President and Chief Executive Officer
Steve Borgmann
Executive Vice President and Chief Operating Officer
Richard Herink
Executive Vice President
Troy M. Beatty
Senior Vice President and Chief Financial Officer
Steve Gilbert
Senior Vice President of Purchasing
Karen Schulte
Senior Vice President of Administration
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C>
3.1 Certificate of Incorporation of Supertel, incorporated
herein by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-75796) filed with
the Securities and Exchange Commission on March 1,
1994 (the "Registration Statement").
3.2 Bylaws of Supertel, incorporated herein by reference to the
Registration Statement.
4.1 Revolving Term Promissory Note and Loan Agreement
(Modified and Extended) dated December 30, 1996 between
Supertel and First Bank National Association, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
4.2 Modification to Revolving Term Promissory Note and Loan
Agreement dated June 24, 1997 between Supertel and First
Bank National Association......................................
4.3 Term Loan Agreement dated May 9, 1997 between Supertel and
First Bank National Association, incorporated herein by
reference to the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1997.
4.4 Loan Agreement dated October 13, 1994 between Supertel and
Iowa State Savings Bank, incorporated herein by reference
to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1994.
10.1 Form of Super 8 Franchise Agreement, incorporated herein
by reference to the Registration Statement.
10.2 Amendment dated March 4, 1996 to Super 8 Franchise Agreements
incorporated herein by reference to the Company's annual
report on Form 10-K for the year ended December 31, 1995.
10.3 Form of Wingate Inn Franchise Agreement incorporated herein
by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1995.
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C>
10.4 Amended and Restated Territorial Development Agreement
dated June 30, 1994 between Supertel and Super 8 Motels,
Inc., incorporated herein by reference to the Company's
quarterly report on Form 10-Q for the quarter
ended June 30, 1994.
10.5 Amendment dated May 31, 1995 to Amended and Restated
Territorial Development Agreement between Supertel and
Super 8 Motels, Inc., incorporated herein by reference
to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1995.
10.6 Supertel's 1994 Stock Option Plan, incorporated herein
by reference to the Registration Statement.
10.7 Supertel's 1997 Stock Plan..................................
10.8 Employment Agreements dated May 1, 1995 between Supertel and
each of Paul J. Schulte and Steve H. Borgmann, incorporated
herein by reference to the Company's quarterly report on
Form 10-Q for the quarter ended June 30, 1995.
10.9 Employment Agreement dated November 6, 1995 between Supertel
and Richard L. Herink, incorporated herein by reference
to the Company's annual report on Form 10-K for the
year ended December 31, 1995.
13.1 Supertel's Annual Report to Stockholders for the fiscal
year ended December 31, 1997................................
21.1 List of Subsidiaries........................................
23.1 Consent of KPMG Peat Marwick LLP............................
</TABLE>
Pursuant to Item 601(b)(4) of Regulation S-K, certain instruments with
respect to long-term debt are not filed with this annual report on Form
10-K. Supertel will furnish a copy of any such long-term debt agreement
to the Securities and Exchange Commission upon request.
Management contracts and compensatory plans are set forth as exhibits
10.6 through 10.9.
<PAGE> 1
EXHIBIT 4.2
MODIFICATION TO $40,000,000 REVOLVING TERM
PROMISSORY NOTE AND LOAN AGREEMENT
Lincoln, Nebraska
THIS AGREEMENT is entered into by and between Supertel Hospitality, Inc.,
a Delaware corporation (hereinafter referred to as "Borrower"), and First Bank,
National Association, Lincoln, Nebraska (hereinafter referred to as "Bank").
WHEREAS, the Borrower has previously made, executed and delivered to
the Bank a Revolving Term Promissory Note and Loan Agreement (Modified and
Extended) in the principal amount of Forty Million Dollars ($40,000,000.00),
dated December 30, 1996 (herein "Revolving Note"), and
WHEREAS, the Revolving Note has been modified by the parties by the
execution of various modifications since the December 30, 1996 date of the
Revolving Note, and
WHEREAS, the parties, by this document, intend to fully set forth all
current modifications to the Revolving Note.
NOW, THEREFORE, in consideration of the foregoing and the covenants
contained herein, the parties agree as follows:
1. The maximum principal amount of the Revolving Note has been and is
reduced from Forty Million Dollars ($40,000,000.00) to Twenty-Five
Million Dollars ($25,000,000.00).
2. The maturity date of the Revolving Note shall be June 1, 1999.
3. Effective May 1, 1997, and on the first day of each month thereafter,
the interest rate shall be based on the Reuter's 30 Day LIBOR rate
(the "Index") plus a margin of 1.75 percentage points (1.75%). As
applied to said date, the Index was 5.7% per annum resulting in an
interest rate effective May 1, 1997 of 7.45%. In the event
publication of the foregoing Index is discontinued, the interest
rate shall be based upon an alternative comparable rate index
selected by Bank, in its sole discretion.
4. The Revolving Note as so modified may be referred to as the Modified
Revolving Note.
5. This modification supersedes any and all prior modifications to the
Revolving Note. All of the covenants and provisions of the Revolving
Note not expressly modified herein remain in full force and effect.
DATED this 24th day of June, 1997.
FIRST BANK, NATIONAL ASSOCIATION SUPERTEL HOSPITALITY, INC.
A Delaware Corporation
BY: /s/ Gerald L. Holscher BY: /s/ Paul J. Schulte
TITLE: Senior Vice President TITLE: President
<PAGE> 1
EXHIBIT 10.7
SUPERTEL 1997 STOCK PLAN
SECTION 1
NAME AND PURPOSE
1.1 NAME. The name of the plan shall be the Supertel 1997 Stock
Plan (the "Plan").
1.2. PURPOSE OF PLAN. The purpose of the Plan is to foster and
promote the long-term financial success of the Company and increase
stockholder value by (a) motivating superior performance by means of stock
incentives, (b) encouraging and providing for the acquisition of an ownership
interest in the Company by Employees and (c) enabling the Company to
attract and retain the services of a management team responsible for the
long-term financial success of the Company.
SECTION 2
DEFINITIONS
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have the respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Award" means any Option, Stock Appreciation Right, Restricted
Stock, Stock Bonus, or any combination thereof, including Awards
combining two or more types of Awards in a single grant.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Compensation Committee of the Board, which
shall consist of two or more members, each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3 as
promulgated under the Act.
(f) "Company" means Supertel Hospitality, Inc., a Delaware
corporation (and any successor thereto) and its Subsidiaries.
(g) "Director Award" means a grant of stock options granted to each
Eligible Director pursuant to Section 7.1 without any action by
the Board or the Committee.
<PAGE> 2
(h) "Eligible Director" means a person who is serving as a member
of the Board and who is not an Employee.
(i) "Employee" means any employee of the Company or any of its
Subsidiaries.
(j) "Fair Market Value" means, on any date, the average of the high
and low sales prices of the Stock as reported on the National
Association of Securities Dealers Automated Quotation system (or
on such other recognized market or quotation system on which the
trading prices of the Stock are traded or quoted at the relevant
time) on such date. In the event that there are no Stock
transactions reported on such system (or such other system) on
such date, Fair Market Value shall mean the average of the high
and low sale prices on the immediately preceding date on which
Stock transactions were so reported.
(k) "Option" means the right to purchase Stock at a stated price for
a specified period of time. For purposes of the Plan, an
Option may be either (i) an Incentive Stock Option within the
meaning of Section 422 of the Code or (ii) a Nonstatutory
Stock Option.
(l) "Participant" means any Employee designated by the Committee
to participate in the Plan.
(m) "Plan" means the Supertel 1997 Stock Plan, as in effect from
time to time.
(n) "Restricted Stock" shall mean a share of Stock granted to a
Participant subject to such restrictions as the Committee may
determine.
(o) "Stock" means the Common Stock of the Company, par value $.01
per share.
(p) "Stock Appreciation Right" means the right, subject to such terms
and conditions as the Committee may determine, to receive an
amount in cash or Stock, as determined by the Committee, equal
to the excess of (i) the Fair Market Value, as of the date such
Stock Appreciation Right is exercised, of the number shares of
Stock covered by the Stock Appreciation Right being exercised
over (ii) the aggregate exercise price of such Stock
Appreciation Right.
(q) "Stock Bonus" means the grant of Stock as compensation from the
Company, which may be in lieu of cash compensation otherwise
receivable by the Participant or in addition to such cash
compensation.
(r) "Subsidiary" means any corporation or partnership in which the
Company owns, directly or indirectly, 50% or more of the total
combined voting power of all classes of
-2-
<PAGE> 3
stock of such corporation or of the capital interest or profits
interest of such partnership.
2.2 GENDER AND NUMBER. Except when otherwise indicated by the context,
words in the masculine gender used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include
the singular.
SECTION 3
ELIGIBILITY AND PARTICIPATION
Except as otherwise provided in Section 7.1, the only persons eligible
to participate in the Plan shall be those Employees selected by the Committee
as Participants.
SECTION 4
POWERS OF THE COMMITTEE
4.1 POWER TO GRANT. The Committee shall determine the Participants to
whom Awards shall be granted, the type or types of Awards to be granted, and
the terms and conditions of any and all such Awards. The Committee may
establish different terms and conditions for different types of Awards, for
different Participants receiving the same type of Awards, and for the same
Participant for each Award such Participant may receive, whether or not
granted at different times.
4.2 ADMINISTRATION. The Committee shall be responsible for the
administration of the Plan. The Committee, by majority action thereof,
is authorized to prescribe, amend, and rescind rules and regulations relating
to the Plan, to provide for conditions deemed necessary or advisable to protect
the interests of the Company, and to make all other determinations
necessary or advisable for the administration and interpretation of the
Plan in order to carry out its provisions and purposes. Determinations,
interpretations, or other actions made or taken by the Committee pursuant to
the provisions of the Plan shall be final, binding, and conclusive for all
purposes and upon all persons.
SECTION 5
STOCK SUBJECT TO PLAN
5.1 NUMBER. Subject to the provisions of Section 5.3, the number
of shares of Stock subject to Awards (including Director Awards) under the
Plan may not exceed 250,000 shares of Stock. The shares to be delivered under
the Plan may consist, in whole or in part, of treasury Stock or authorized
but unissued Stock, not reserved for any other purpose. The maximum number of
shares of Stock with respect to which Awards may be granted to any one
-3-
<PAGE> 4
Employee under the Plan is 20% of the aggregate number of shares of Stock
available for Awards under Section 5.1.
5.2 CANCELLED, TERMINATED OR FORFEITED AWARDS. Any shares of Stock
subject to an Award which for any reason are cancelled, terminated or
otherwise settled without the issuance of any Stock shall again be available
for Awards under the Plan.
5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any Stock dividend or
Stock split, recapitalization (including, without limitation, the payment of
an extraordinary dividend), merger, consolidation, combination,
spin-off, distribution of assets to stockholders, exchange of shares, or
other similar corporate change, (i) the aggregate number of shares of Stock
available for Awards under Section 5.1 and (ii) the number of shares and
exercise price with respect to Options and the number, prices and dollar value
of other Awards, may be appropriately adjusted by the Committee, whose
determination shall be conclusive. If, pursuant to the preceding sentence, an
adjustment is made to the number of shares of Stock authorized for
issuance under the Plan, a corresponding adjustment shall be made with
respect to Director Awards granted pursuant to Section 7.1.
SECTION 6
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Options may be granted to Participants at such
time or times as shall be determined by the Committee. Options granted under
the Plan may be of two types: (i) Incentive Stock Options and (ii)
Nonstatutory Stock Options. The Committee shall have complete discretion in
determining the number of Options, if any, to be granted to a Participant. Each
Option shall be evidenced by an Option agreement that shall specify the type of
Option granted, the exercise price, the duration of the Option, the number of
shares of Stock to which the Option pertains, the exercisability (if any)
of the Option in the event of death, retirement, disability or termination of
employment, and such other terms and conditions not inconsistent with the Plan
as the Committee shall determine.
6.2 OPTION PRICE. Nonstatutory Stock Options and Incentive Stock
Options granted pursuant to the Plan shall have an exercise price which is not
less than the Fair Market Value on the date the Option is granted.
6.3 EXERCISE OF OPTIONS. Options awarded to a Participant under the Plan
shall be exercisable at such times and shall be subject to such restrictions
and conditions as the Committee may impose, subject to the Committee's right
to accelerate the exercisability of such Option in its discretion.
Notwithstanding the foregoing, no Option shall be exercisable for more than
ten years after the date on which it is granted.
-4-
<PAGE> 5
6.4 PAYMENT. The Committee shall establish procedures governing the
exercise of Options, which shall require that written notice of exercise
be given and that the Option price be paid in full in cash or cash equivalents,
including by personal check, at the time of exercise or pursuant to any
arrangement that the Committee shall approve. The Committee may, in its
discretion, permit a Participant to make payment (i) in Stock already owned by
the Participant valued at its Fair Market Value on the date of exercise (if
such Stock has been owned by the Participant for at least six months) or (ii)
by electing to have the Company retain Stock which would otherwise be issued
on exercise of the Option, valued at its Fair Market Value on the date of
exercise. As soon as practicable after receipt of a written exercise notice
and full payment of the exercise price, the Company shall deliver to the
Participant a certificate or certificates representing the acquired shares of
Stock.
6.5 INCENTIVE STOCK OPTIONS. Notwithstanding anything in the Plan to the
contrary, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of any Participant affected
thereby, to cause any Incentive Stock Option previously granted to fail to
qualify for the Federal income tax treatment afforded under Section 421 of
the Code.
SECTION 7
DIRECTOR AWARDS
7.1 AMOUNT OF AWARD. Each Eligible Director shall receive an annual
grant of a Nonstatutory Stock Option to acquire 1,500 shares of Stock
exercisable at the Fair Market Value of the Company's common stock on
the date of grant; such grant shall be made on the date of and immediately
following the annual meeting of stockholders (beginning with the 1998 Annual
Stockholders' Meeting). The Nonstatutory Stock Options awarded to a director
hereunder shall be appropriately adjusted in the event of any stock changes
as described in Section 5.3.
-5-
<PAGE> 6
SECTION 8
STOCK APPRECIATION RIGHTS
8.1 SAR'S IN TANDEM WITH OPTIONS. Stock Appreciation Rights may be
granted to Participants in tandem with any Option granted under the Plan,
either at or after the time of the grant of such Option, subject to such
terms and conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine. Each Stock Appreciation Right shall only be
exercisable to the extent that the corresponding Option is exercisable, and
shall terminate upon termination or exercise of the corresponding Option.
Upon the exercise of any Stock Appreciation Right, the corresponding Option
shall terminate.
8.2 OTHER STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may also
be granted to Participants separately from any Option, subject to such terms
and conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine.
SECTION 9
RESTRICTED STOCK
9.1 GRANT OF RESTRICTED STOCK. The Committee may grant Restricted Stock
to Participants at such times and in such amounts, and subject to such
other terms and conditions not inconsistent with the Plan as it shall determine.
Each grant of Restricted Stock shall be subject to such restrictions, which may
relate to continued employment with the Company, performance of the Company, or
other restrictions, as the Committee may determine. Each grant of Restricted
Stock shall be evidenced by a written agreement setting forth the terms of
such Award.
9.2 REMOVAL OF RESTRICTIONS. The Committee may accelerate or waive
such restrictions in whole or in part at any time in its discretion.
SECTION 10
STOCK BONUSES
10.1 GRANT OF STOCK BONUSES. The Committee may grant a Stock Bonus to a
Participant at such times and in such amounts, and subject to such other terms
and conditions not inconsistent with the Plan, as it shall determine.
10.2 EFFECT ON COMPENSATION. The Committee may from time to time
determine to grant a Stock Bonus in lieu of salary or cash bonuses otherwise
payable to a Participant.
-6-
<PAGE> 7
SECTION 11
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
11.1 GENERAL. The Board may from time to time amend, modify or
terminate any or all of the provisions of the Plan, subject to the provisions
of this Section 11.1. The Board may not change the Plan in a manner which
would prevent outstanding Incentive Stock Options granted under the Plan from
being Incentive Stock Options without the consent of the optionees
concerned. Furthermore, the Board may not make any amendment which would (i)
materially modify the requirements for participation in the Plan or (ii)
increase the number of shares of Stock subject to Awards under the Plan
pursuant to Section 5.1, in each case without the consent and approval of the
holders of a majority of the outstanding shares of Stock entitled to vote
thereon. No amendment or modification shall affect the rights of any
Employee with respect to a previously granted Award, nor shall any
amendment or modification affect the rights of any Eligible Director pursuant
to a previously granted Director Award.
11.2 TERMINATION OF PLAN. No further Options shall be granted under the
Plan subsequent to December 31, 2006, or such earlier date as may be
determined by the Board.
SECTION 12
MISCELLANEOUS PROVISIONS
12.1 BENEFICIARY DESIGNATION. Each Participant under the Plan may
from time to time name any beneficiary or beneficiaries (who may be
named contingent or successively) to whom any benefit under the Plan is to be
paid or by whom any right under the Plan is to be exercised in case of his
death. Each designation will revoke all prior designations by the same
Participant shall be in a form prescribed by the Committee, and will be
effective only when filed in writing with the Committee. In the absence of
any such designation, Awards outstanding at death may be exercised by the
Participant's surviving spouse, if any, or otherwise by his estate, subject
to the terms and conditions of the Award.
12.2 NO GUARANTEE OF EMPLOYMENT OR PARTICIPATION. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary. No Employee shall have a right to be selected as a Participant, or,
having been so selected, to receive any future Awards.
12.3 TAX WITHHOLDING. The Company shall have the power to withhold,
or require a Participant or Eligible Director to remit to the Company, an
amount sufficient to satisfy federal, state, and local withholding tax
requirements on any Award under the Plan, and
-7-
<PAGE> 8
the Company may defer issuance of Stock until such requirements are
satisfied. The Committee may, in its discretion, permit a Participant to
elect, subject to such conditions as the Committee shall impose, (i) to have
shares of Stock otherwise issuable under the Plan withheld by the Company
or (ii) to deliver to the Company previously acquired shares of Stock, in
each case having a Fair Market Value sufficient to satisfy all or part of the
Participant's estimated total federal, state and local tax obligation
associated with the transaction.
12.4 CHANGE OF CONTROL. On the date of a Change of Control, all
outstanding options and stock appreciation rights shall become immediately
exercisable and all restrictions with respect to Restricted Stock shall lapse.
"Change of Control" shall mean:
(i) The acquisition (other than from the Company) by any person,
entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Act (excluding any acquisition or holding by (i) the
Company or its subsidiaries or (ii) any employee benefit plan of
the Company or its subsidiaries which acquires beneficial ownership
of voting securities of the Company) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Act) of
50% or more of either the then outstanding shares of common stock
or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally in the election of
directors; or
(ii) Individuals who, as of the date hereof, constitute the Board
(as of the date hereof the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the date
hereof whose election, or nomination for the election by the
Company's stockholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be,
for purposes of this Plan, considered as though such person were
a member of the Incumbent Board; or
(iii) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, with respect to
which persons who were the stockholders of the Company
immediately prior to such reorganization, merger or consolidation
do not, immediately thereafter, own more than 50% of the combined
voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's
then outstanding voting securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially
all of the assets of the Company.
12.5 COMPANY INTENT. The Company intends that the Plan comply in
all respects with Rule 16b-3 under the Act, and any ambiguities
-8-
<PAGE> 9
or inconsistencies in the construction of the Plan shall be interpreted to
give effect to such intention.
12.6 REQUIREMENTS OF LAW. The granting of Awards and the issuance
of shares of Stock shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or securities
exchanges as may be required.
12.7 EFFECTIVE DATE. The Plan shall be effective upon its adoption
by the Board subject to approval by the affirmative vote of the holders of a
majority of the shares of Stock present in person or by proxy at a stockholders'
meeting.
12.8 GOVERNING LAW. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware.
-9-
<PAGE> 1
FINANCIAL
HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Net revenues $ 46,345 $ 37,832 $ 31,362
Operating income 11,121 9,104 8,386
Net income 4,102 3,371 3,624
Net income per share - basic and diluted $ 0.85 $ 0.70 $ 0.75
Weighted average common shares outstanding 4,840,000 4,840,000 4,840,000
Number of motels (at year end) 62 59 48
Number of motel rooms (at year end) 4,459 4,156 3,295
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ROOMS RENTED 93 94 95 96 97
603,367 667,545 793,151 903,643 1,041,904
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
AVERAGE DAILY ROOM RATE 93 94 95 96 97
$35.80 $37.69 $39.54 $41.87 $44.48
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OCCUPANCY RATE 93 94 95 96 97
70.5% 69.4% 69.6% 65.7% 65.7%
</TABLE>
[1]
<PAGE> 2
FELLOW STOCKHOLDERS
[ A PHOTO ]
1997 was an excellent year for Supertel Hospitality. Following a decline in
net income for 1996 - the first ever in the company's 20-year history - we once
again showed substantial gains in sales, operating profit and net income for
1997. Moreover, initiatives introduced during 1997 to improve operations not
only yielded measurable benefits but, we believe, will continue to help us in
the years to come.
FINANCIAL RESULTS
For the year ended December 31, 1997, total revenues increased 23 percent to
$46.3 million from $37.8 million for 1996. Operating income was ahead 22
percent to $11.1 million for 1997 from $9.1 million for 1996. Net income of
$4.1 million, or 85 cents per share, for 1997 represented a gain of 22 percent
from 1996's net income of $3.4 million, or 70 cents per share.
SUCCESS STORIES
We are beginning to realize the potential of our sizable investment in Texas.
With nine Super 8s and two Wingate Inns, we are building critical mass in the
state. From a marketing standpoint, we are expanding customer awareness. We
are also starting to generate economies of scale in managing our cluster of 11
properties in the state.
For 1997, our presence in Texas was a major contributor to Supertel's
year-over-year earnings improvement. The Super 8 motels in the state
contributed to net income in 1997, in contrast to 1996, when properties in that
state were unprofitable. Yet, we see substantial upside from here. Returns in
Texas have yet to match the Supertel average and, as they continue to expand,
we expect Texas to have a positive influence on our earnings comparisons and
overall profitability.
The most significant step we took in 1997 was the introduction of a new
management system - open-book management. The simple idea behind open-book
management is to create an environment in which everyone at the company works
toward the same goals and has a stake in the outcome. Much as it sounds,
open-book means that employees have access to more financial information - in
our case, the property-level profit and loss statements - and extensive
training in how to use this information. Whereas in the past, the role of
managers and property employees was to maintain "clean and friendly" rooms and
service, under open-book management their role has been expanded, so that they
are now engaged in the process of improving financial performance.
Introduced in mid-1997, open-book quickly had a very favorable impact.
We've seen broad benefits in terms of overall performance. Also, we have seen
many small changes, such as new and creative practices at the properties that
help control expenses. On a personally rewarding note, employees tell us that
they are finding their jobs more fun and challenging.
As part of our open-book system, we introduced a new employee incentive
system as of January 1, 1998. The program measures each property's net motel
operating income, as a percentage of sales, on a quarterly basis. When that
income exceeds a fixed percentage, all employees of that property will receive
a percentage share of that property's net operating income.
In 1997, we also made significant progress in our program to computerize
all properties. At year-end 1997, we had completed installation and training
at 45 of our 62 properties. We expect to finish computerization of all
properties by the end of the third quarter of 1998.
Several benefits have been derived from the new system. We can now
generate more detailed information on, and as a result, better target our
customers. Also, with instant access to occupancy
[2]
<PAGE> 3
and room rate information, we can improve our use of yield management. In
addition, we gain significant efficiencies because manual reporting of daily
activity is now automated.
OVERCOMING A COMPETITIVE ENVIRONMENT
According to Smith Travel Research, year-over-year occupancy rates were down for
the economy segment of the lodging industry in 1997. Increased building levels
in the segment brought new competition. In light of this challenging
environment, we were particularly satisfied with our progress and performance
in 1997. Supertel was able to hold occupancy flat at 65.7 percent for both 1997
and 1996. For seasoned properties [those owned/operated for over one year],
occupancy was 67.2 percent for 1997 and 67.9 percent for 1996.
We posted a 6.2 percent increase in the average daily room rate [ADR]
to $44.48 in 1997, resulting in a 6.4 percent gain in revenue per available
room [REVPAR]. This healthy room rate increase was another major contributor to
our strong earnings progress in 1997.
1997 DEVELOPMENTS
In 1997, we acquired one property, an 81-room Super 8 in Menomonie, Wisconsin.
We also added 23 rooms through an addition at our Lincoln, Nebraska [West O
Street] Super 8. Finally, we opened our first two Wingate Inns, one in the Las
Colinas area of Irving, Texas, and the other near Houston's Intercontinental
Airport.
While only open a short time, initial results from the two Wingates are
very promising. Occupancy trends are strong. Moreover, the usage patterns are
sending a very positive sign. Wingate - a new limited-service, mid-market hotel
chain developed by Cendant, Corp. - was designed for the business traveler. The
fact that our guests are actively using the hotel's business features - such as
meeting rooms and business centers - speaks well to the overall design of the
properties and the prospects for the present two and possibly other Wingates
that may be developed by Supertel in the future.
OUTLOOK FOR 1998
We are looking forward to another good year in 1998. Supertel has planned a
room addition at one property and a new motel in an existing market. Together,
they will add 60 rooms. We are also evaluating sites for at least one more
Wingate Inn. In addition, the company will continue to focus on acquisitions as
a source of growth, but we will not over pay to acquire properties that dilute
earnings and fail to add value.
Because our development plans for 1998 are fairly modest at this time,
revenue growth is likely to slow somewhat. However, we expect to generate
further benefits from our open-book management system, additional contributions
from our properties in Texas and, in the absence of acquisitions, use our
excess cash flow to reduce debt levels. The latter will also have a positive
effect on earnings.
The pieces are moving into place. That is the message illustrated by
the cover of this year's annual report. And hopefully, that message is clear
from the steps we have taken and the results we have produced in 1997. Once
again, we want to thank you, our fellow shareholders, for your continued
interest in and support of Supertel.
/s/ Paul J. Schulte
Paul J. Schulte
PRESIDENT AND CEO
/s/ Steve H. Borgmann
Steve H. Borgmann
EXECUTIVE VICE PRESIDENT AND CEO
[ 3 ]
<PAGE> 4
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
Consolidated
FINANCIAL
Financial
Statements
<TABLE>
<S> <C>
Selected Financial Statement Data 5
Management's Discussion and Analysis 6
Independent Auditors' Report 9
Financial Statements 10
Notes to Consolidated Financial
Statements 14
Quarterly Financial Information 20
</TABLE>
Supertel Hospitality, Inc.
and Subsidiaries
[4]
<PAGE> 5
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
SIX-YEAR SUMMARY OF SELECTED FINANCIAL STATEMENT DATA
Six-Year Summary of Selected Financial
Statement Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994(1) 1993(1) 1992(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 46,345 $ 37,832 $ 31,362 $ 25,161 $ 21,603 $ 19,337
Operating income 11,121 9,104 8,386 6,576 5,864 4,789
Net income 4,102 3,371 3,624 2,925(2) 2,142 1,386
Net income per
share - basic
and diluted 0.85 0.70 0.75 0.70(2) 0.71 0.46
- -------------------------------------------------------------------------------
OTHER DATA:
Occupancy 65.7% 65.7% 69.6% 69.4% 70.5% 70.0%
Average daily
room rate (ADR) $ 44.48 $ 41.87 $ 39.54 $ 37.69 $ 35.80 $ 34.32
Revenue per
available room
(REVPAR) $ 29.24 $ 27.49 $ 27.52 $ 26.16 $ 25.25 $ 24.02
Rooms owned
(at year end) 4,459 4,156 3,295 2,846 2,495 2,282
- -------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital
(deficit) $ 5,285 $ 3,463 $ 3,468 $ 454 $(13,967)$ (5,526)
Total assets 103,406 92,276 67,928 48,846 37,781 33,603
Long-term debt
(excluding
current portion) 63,534 58,895 38,188 24,045 19,207 25,220
Stockholders' equity 32,861 28,759 25,388 21,763 2,337 918
</TABLE>
(1) Supertel's predecessors were taxed as either Subchapter S corporations or
as partnerships prior to the initial public offering in May 1994.
Accordingly, their historical financial statements contain no provision
for federal and state income taxes. Pro forma net income and per share
data reflect a combined federal and state tax rate of 40% prior to the
date of the IPO.
(2) Excludes pro forma after-tax nonrecurring gain on involuntary conversion
of $151,333, or $0.03 per share, and an $860,706 benefit, or $0.21 per
share, resulting from the change in accounting for income taxes.
The company has not paid any cash dividends on its common stock and does not
expect to pay any dividends in the near future. The company anticipates that
any cash flow generated from operations will be used to expand the company's
business.
[5]
<PAGE> 6
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MD&A of Financial Condition and
Results of Operations
OVERVIEW
Supertel revenues are derived primarily from motel operations. The following
table sets forth, for the periods indicated, certain data as percentages of
motel revenues:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Motel revenues:
Lodging revenues 96.7% 96.8% 96.5%
Other lodging activities 3.3 3.2 3.5
-----------------------------
Total motel revenues 100.0 100.0 100.0
=============================
Operating expenses:
Payroll and payroll taxes 23.9 23.9 23.7
Royalties and advertising fund 6.4 6.4 6.3
Other lodging 27.9 27.9 26.4
-----------------------------
Total lodging expenses 58.2 58.2 56.4
Other lodging activities 2.3 2.4 2.5
Depreciation and amortization 8.7 8.3 7.2
General and administrative 6.8 7.0 7.2
-----------------------------
Total operating expenses 76.0 75.9 73.3
-----------------------------
Operating income 24.0 24.1 26.7
-----------------------------
Interest expense (9.6) (9.3) (7.6)
-----------------------------
Net income before taxes 14.4% 14.8% 19.1%
=============================
</TABLE>
RESULTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1996
Total motel revenues for 1997 were $46,344,815, an increase of $8,512,427 or
22.5% over the total revenues of $37,832,388 for 1996. The increase was
primarily due to an increase of $8,212,728 in revenue from lodging operations.
Revenues from other lodging activities, which consisted of telephone, vending
and movie revenues, increased $299,699.
The increase in revenue from lodging operations resulted primarily from renting
1,041,904 rooms in 1997 compared to 903,643 rooms rented in 1996, an increase
of 138,261 rooms or 15.3%. The increase in revenue from other lodging
activities resulted from the increase in the number of rooms rented. The
increase in rooms rented resulted primarily from the number of rooms added
during the year. The company opened two new Wingate Inn hotels in Texas and
purchased one existing Super 8 motel in Wisconsin. In addition, new rooms were
added at one Nebraska property.
Revenues from lodging operations were favorably impacted by an increase in the
average daily room rate. The average daily room rate was $44.48 for 1997,
compared to $41.87 for 1996, an increase of $2.61 or 6.2%.
Occupancy as a percentage of rooms available was 65.7% in 1997 and 1996. New
motels generally have lower occupancy rates than those experienced by seasoned
properties. The occupancy rate for seasoned properties (properties owned more
than one year) in 1997 was 67.2% versus 67.9% for 1996. Revenue per available
room (REVPAR) for 1997 increased to $29.24 from $27.49 in the prior year.
Lodging expenses for 1997 were $26,952,031 compared to $22,023,380 for 1996, an
increase of $4,928,651 or 22.4%. The increase in lodging expenses was due
primarily to the increase in number of rooms available to rent and rooms
rented. Lodging expenses as a percentage of motel revenues for 1997 and 1996
was 58.2%.
Depreciation and amortization expenses for 1997 were $4,060,778 compared to
$3,132,866 for 1996, an increase of $927,912 or 29.6%. The increase was
primarily due to an increase in the number of motel properties owned for a full
year.
[6]
<PAGE> 7
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MD&A of Financial Condition and
Results of Operations
General and administrative expenses for 1997 were $3,154,737 compared to
$2,665,794 for 1996, an increase of $488,943 or 18.3%. The increase in general
and administrative expenses was due primarily to expansion of staff to handle
current and anticipated motel growth.
Interest expense increased by 27.8% or $984,404 to $4,529,700 for 1997, from
$3,545,296 in 1996. The increase was primarily due to the additional
borrowings for acquisitions and construction. Average bank borrowings for 1997
increased to $56,943,962 from $45,320,603 for 1996, an increase of $11,623,359
or 25.6%.
For the reasons described above, net income increased 21.7% to $4,101,665 for
1997 from $3,371,247 for 1996. Basic and diluted net income per share from
continuing operations for 1997 was $0.85 compared to $0.70 for 1996. Weighted
average shares outstanding stayed constant at 4,840,000.
For the Years Ended December 31, 1996 and 1995
Total motel revenues for 1996 were $37,832,388, an increase of $6,470,875 or
20.6% over total revenues of $31,361,513 for 1995. The increase was primarily
due to an increase of $6,344,901 in revenue from lodging operations. Revenues
from other lodging activities, which consisted of telephone and vending
revenues, increased $125,974.
The increase in revenue from lodging operations resulted primarily from renting
903,643 rooms in 1996 compared to 793,151 rooms rented in 1995, an increase of
110,492 or 13.9%. The increase in revenue from other lodging activities
resulted from the increase in the number of rooms rented. The increase in
rooms rented resulted primarily from the number of rooms added during the year.
The company opened four new Super 8 motels in Texas, purchased four existing
Super 8 motels in Wisconsin and purchased one Super 8 motel in Kansas. In
addition, two Comfort Inn motels were purchased in Wisconsin.
Revenues from lodging operations were favorably impacted by an increase in the
average daily room rate. The average daily room rate was $41.87 for 1996
compared to $39.54 for 1995, an increase of $2.33 or 5.9%.
Motel revenues were also impacted by a decrease in occupancy. Occupancy as a
percentage of rooms available decreased to 65.7% in 1996 from 69.6% in 1995.
New motels generally have lower occupancy rates than those experienced by
seasoned properties. The occupancy rate for seasoned properties (properties
owned more than one year) in 1996 was 68.3% versus 70.7% for 1995. Revenue per
available room for 1996 decreased to $27.49 from $27.52 in the prior year.
Lodging expenses for 1996 were $22,023,380 compared to $17,693,355 for 1995, an
increase of $4,330,025 or 24.5%. The increase in lodging expenses was due
primarily to the increase in number of rooms available to rent and rooms
rented. Lodging expenses as a percentage of motel revenues for 1996 increased
to 58.2% from 56.4% for 1995. The increase in expenses resulted from expenses
incurred in connection with the properties acquired/opened in the fourth
quarter of 1995 and with those opened in 1996. The increase in lodging expense
as a percentage of lodging revenue was impacted by the decrease in occupancy,
which resulted in lower total revenue to cover fixed costs.
Depreciation and amortization expenses for 1996 were $3,132,866 compared to
$2,269,604 for 1995, an increase of $863,262 or 38.0%. The increase was
primarily due to an increase in the number of motel properties.
General and administrative expenses for 1996 were $2,665,794 compared to
$2,243,505 for 1995, an increase of $422,289 or 18.8%. The increase in general
and administrative expenses was due primarily to the expansion of staff to
handle current and anticipated motel growth.
Interest expense increased by 48.5% or $1,158,266 to $3,545,296 for 1996 from
$2,387,030 in 1995. The increase was primarily due to the additional
borrowings for acquisitions and construction. Average bank borrowings for 1996
increased to $45,320,603 from $29,217,517 for 1995, an increase of $16,103,086
or 55.1%.
For the reasons described above, net income decreased 7.0% to $3,371,247 for
1996 from $3,624,307 for 1995. Basic and diluted net income per share for
1996 was $0.70 compared to $0.75 for 1995. Weighted average shares outstanding
stayed constant at 4,840,000.
[7]
<PAGE> 8
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MD&A of Financial Condition and
Results of Operations
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
$9,037,668 for 1997 and $6,769,441 for 1996. Supertel requires capital
principally for the construction, acquisition and improvement of lodging
facilities plus expenditures for future site development. Capital expenditures
for such purposes were approximately $11,800,000 in 1997 and $27,000,000 in
1996. Long-term debt (excluding current installments of long-term debt) was
$63,534,321 at December 31, 1997 and $58,894,525 at December 31, 1996.
Long-term debt increased in 1997 to finance Supertel's construction,
acquisition and site development activities. Supertel's current installments of
long-term debt were $1,942,380 at December 31, 1997 and $1,067,023 at December
31, 1996.
Supertel's financing for construction, acquisition and site development
activities is provided by a long-term revolving line of credit for $25,000,000
and long-term debt with five banks aggregating $39,000,000 and maturing in 2002
through 2004. Approximately $1,430,000 remained available on this line of
credit 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 December 31, 1997, 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 66.6% at December 31, 1997 compared
to 67.6% at December 31, 1996.
The company's current ratio during the past three years and its working capital
are as shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Working capital $5,284,508 $3,463,122 $3,468,667
=========================================
Current ratio 1.87 1.76 1.80
==========================================
</TABLE>
During 1997, Supertel constructed a net 222 motel rooms and acquired 81 rooms,
for a total of 303 rooms. Capital and other expenditures for such development
totaled $11,765,451. Supertel plans to construct or acquire a total of
approximately 400 - 600 motel rooms in 1998 assuming acceptable acquisitions
can be completed. Approximately $14 million to $19 million of capital funds
will be necessary to finance such activity. Supertel also has principal
payments totaling $1,942,380 due under existing long-term debt obligations
during 1998. Supertel believes that a combination of cash flow from
operations, the use of funds from its line of credit, securing new short- and
long-term credit facilities, and the ability to leverage four unencumbered
properties will be sufficient to fund scheduled development and debt
repayments.
YEAR 2000
The company has addressed the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The company is utilizing primarily internal resources to identify and test the
systems for the Year 2000 compliance. It is anticipated that all reprogramming
efforts, if any, will be completed by December 31, 1998, allowing adequate time
for testing. This effort is not expected to have a material effect on the
company's financial position or results of operations. To date, verbal
confirmations have been received from the company's primary processing vendors
that their software is "Year 2000" compliant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, Reporting Comprehensive Income, which establishes standards for the
reporting and display of comprehensive income and its components in a financial
statement with the same prominence as in other financial statements.
Comprehensive income is defined as net income adjusted for changes in
shareholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. Supertel is required
to adopt Statement No. 130 effective January 1, 1998, with reclassification of
financial statements for earlier years required.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information, which establishes standards for
reporting information about operating segments. Generally, Statement 131
requires that financial information be reported on the basis that is used
internally for evaluating performance. Supertel is required to adopt Statement
No. 131 effective January 1, 1998, and comparative information for earlier
years must be restated. Supertel believes the impact on its disclosure will be
insignificant.
[8]
<PAGE> 9
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
INDEPENDENT AUDITORS' REPORT
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SUPERTEL HOSPITALITY, INC.:
We have audited the accompanying consolidated balance sheets of Supertel
Hospitality, Inc. and Subsidiaries (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Supertel
Hospitality, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
/s/ KPMG PEAT MARWICK LLP
-------------------------
Omaha, Nebraska
January 30, 1998
[9]
<PAGE> 10
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
CONSOLIDATED BALANCE SHEETS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash, including cash equivalents of
$8,594,991 in 1997 and $5,566,573
in 1996 $ 9,532,430 $ 6,487,764
Accounts receivable 1,157,372 1,018,045
Prepaid expenses 492,998 319,862
Recoverable income taxes 148,925 204,803
---------------------------
Total current assets 11,331,725 8,030,474
---------------------------
Property and equipment, at cost (notes 2 and 3) 108,740,409 97,574,480
Less accumulated depreciation 18,365,073 15,131,485
---------------------------
Net property and equipment 90,375,336 82,442,995
---------------------------
Other assets:
Intangible assets, less amortization
of $1,058,133 in 1997 and $811,677 in 1996 1,515,858 1,644,939
Other assets 182,725 157,299
---------------------------
Total other assets 1,698,583 1,802,238
---------------------------
$103,405,644 $ 92,275,707
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt (note 3) $ 1,942,380 $ 1,067,023
Accounts payable 771,569 786,456
Accrued expenses:
Real estate taxes 1,702,126 1,295,240
Sales and lodging taxes 419,676 326,749
Payroll and payroll taxes 565,934 470,990
Royalty fees 283,220 258,185
Interest 362,312 362,709
---------------------------
Total accrued expenses 3,333,268 2,713,873
---------------------------
Total current liabilities 6,047,217 4,567,352
---------------------------
Deferred income taxes (note 4) 514,900 54,900
Long-term debt, excluding current
installments (note 3) 63,534,321 58,894,525
Other long-term liabilities 448,611 -
Stockholders' equity:
Preferred stock, $1.00 par value. Authorized
1,000,000 shares; none issued - -
Common stock, $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
4,840,000 shares (note 1) 48,400 48,400
Additional paid-in capital (notes 1 and 11) 18,346,529 18,346,529
Retained earnings (note 11) 14,465,666 10,364,001
---------------------------
Total stockholders' equity 32,860,595 28,758,930
---------------------------
Commitments and contingency (notes 5 and 6) $103,405,644 $ 92,275,707
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
[10]
<PAGE> 11
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Motel revenues:
Lodging revenues $44,821,763 $36,609,035 $30,264,134
Other lodging activities 1,523,052 1,223,353 1,097,379
-----------------------------------------
Total motel revenues 46,344,815 37,832,388 31,361,513
-----------------------------------------
Direct operating expenses:
Payroll and payroll taxes 11,067,550 9,030,390 7,437,509
Royalties and advertising fund 2,978,371 2,415,065 1,970,521
Other lodging 12,906,110 10,577,925 8,285,325
-----------------------------------------
Total lodging expenses 26,952,031 22,023,380 17,693,355
Other lodging activities 1,056,455 906,058 769,335
Depreciation and amortization 4,060,778 3,132,866 2,269,604
General and administrative 3,154,737 2,665,794 2,243,505
-----------------------------------------
Total direct operating
expenses 35,224,001 28,728,098 22,975,799
-----------------------------------------
Operating income 11,120,814 9,104,290 8,385,714
-----------------------------------------
Other income (expenses):
Interest expense (4,529,700) (3,545,296) (2,387,030)
Miscellaneous income and
other expenses 105,383 27,753 (377)
-----------------------------------------
(4,424,317) (3,517,543) (2,387,407)
-----------------------------------------
Income before
income taxes 6,696,497 5,586,747 5,998,307
Income tax expense (note 4) 2,594,832 2,215,500 2,374,000
-----------------------------------------
Net income $ 4,101,665 $ 3,371,247 $ 3,624,307
=========================================
Basic and diluted net
income per share $ 0.85 $ 0.70 $ 0.75
=========================================
Weighted average shares outstanding 4,840,000 4,840,000 4,840,000
=========================================
</TABLE>
See accompanying notes to consolidated financial statements.
[11]
<PAGE> 12
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Consolidated Statements of
Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Total
Preferred Common paid-in Retained stockholders'
stock stock capital earnings equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $48,400 $18,346,529 $ 3,368,447 $21,763,376
Net income - - - 3,624,307 3,624,307
---------------------------------------------------------------
Balance, December 31, 1995 - 48,400 18,346,529 6,992,754 25,387,683
Net income - - - 3,371,247 3,371,247
---------------------------------------------------------------
Balance, December 31, 1996 - 48,400 18,346,529 10,364,001 28,758,930
Net income - - - 4,101,665 4,101,665
---------------------------------------------------------------
Balance at December 31, 1997 $ - $48,400 $ 18,346,529 $14,465,666 $32,860,595
===============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
[12]
<PAGE> 13
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,101,665 $ 3,371,247 $ 3,624,307
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,738,474 2,862,390 2,112,265
Amortization 322,304 270,476 157,339
Loss on sale of property and
equipment 67,302 104,244 120,394
Deferred income taxes 460,000 388,600 349,000
(Increase) decrease in current assets:
Accounts receivable (139,327) (395,547) (169,019)
Prepaid expenses (173,136) (88,298) 30,995
Recoverable income taxes 55,878 37,166 (69,625)
Increase (decrease) in current liabilities:
Accounts payable (14,887) (646,730) 743,508
Accrued expenses 619,395 865,893 434,090
------------------------------------------
Net cash provided by operating activities 9,037,668 6,769,441 7,333,254
------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (11,765,451) (27,015,120) (17,316,104)
Increase in intangibles and other assets (218,649) (720,335) (344,051)
Proceeds from sale of property and equipment 27,334 26,730 169,512
------------------------------------------
Net cash used in investing activities (11,956,766) (27,708,725) (17,490,643)
------------------------------------------
Cash flows from financing activities:
Repayments of long-term debt (67,077,199) (48,262,058) (27,467,597)
Proceeds from long-term debt 72,592,352 68,964,934 41,817,611
Repayments of notes payable to banks - - (70,200)
Other financing sources 448,611 - -
------------------------------------------
Net cash provided by financing activities 5,963,764 20,702,876 14,279,814
------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,044,666 (236,408) 4,122,425
Cash and cash equivalents at beginning of year 6,487,764 6,724,172 2,601,747
------------------------------------------
Cash and cash equivalents at end of year $ 9,532,430 $ 6,487,764 $ 6,724,172
==========================================
Supplemental Cash Flow Information
Cash paid during the year for:
Interest (including amounts capitalized of $156,101
in 1997, $214,577 in 1996 and $137,681 in 1995) $ 4,686,198 $ 3,615,125 $ 2,390,365
Income taxes 2,078,594 1,789,734 2,094,625
==========================================
Noncash Financing Activities
Long-term debt totaling $750,000 was refinanced in 1997.
</TABLE>
See accompanying notes to consolidated financial statements.
[13]
<PAGE> 14
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
December 31, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Supertel Hospitality, Inc. ("Supertel" or the "company") owns, operates
and constructs limited-service lodging facilities under the Super 8,
Comfort Inn and Wingate Inn brand names. The company has 62 properties
throughout the Midwest and Texas. Supertel is a vertically integrated
motel construction, development and operations company that (i) identifies
potential sites for the construction of new motels and analyzes existing
motels that are available for acquisition, (ii) develops and constructs
new motel properties and renovates existing motels it acquires, and (iii)
manages its own motel properties.
(b) BASIS OF PRESENTATION
The consolidated financial statements include Supertel Hospitality, Inc.
and its wholly-owned subsidiaries, which are Simplex, Inc.
("Simplex") and Motel Developers, Inc. ("MDI"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) PROPERTY AND EQUIPMENT
The company records its property and equipment at cost. Major
improvements and betterments to existing property and equipment are
capitalized. Expenditures for repairs and maintenance that do not extend
the life of the applicable asset are charged to expense as incurred. The
company computes depreciation on a straight-line and declining balance
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings 40 years
Furniture, fixtures and equipment 5 to 7 years
Vehicles 5 years
</TABLE>
(d) INTANGIBLE ASSETS
The company has 20-year franchise agreements with Cendant Corp. and
Choice Hotels International expiring from 1998 to 2017. All
franchise agreements contain renewal provisions. Connected with these
agreements is the requirement that the company pay to the franchisor
royalties, advertising fees and reservation service fees amounting to 5%
to 8.5% of motel revenues.
The company amortizes its intangible assets on the straight-line method
over the following years:
<TABLE>
<S> <C>
Franchise fees 20 years
Organization costs 5 years
Loan origination fees Period of loan
Noncompetitive agreements 5 years
</TABLE>
(e) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
(f) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the company
considers all highly liquid investments with maturities of less than 90
days to be cash equivalents.
(g) INCOME PER SHARE
During 1997, the company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 128, Earnings per Share. This statement requires the
reporting of both basic net income per share and diluted net income per
share. Basic net income per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
per share is computed using the weighted average number of common shares
outstanding during the period and dilutive potential common shares
outstanding during the period.
[14]
<PAGE> 15
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
(h) USE OF ESTIMATES
Management of the company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(i) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of
the short maturity of these instruments. The carrying amounts of each of
the company's long-term debt instruments also approximate fair value
because the interest rate is variable as it is tied to various market
rates.
(j) STOCK OPTION PLAN
Prior to January 1, 1996, the company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense was recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the company adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123 (see note 7). For the years ended 1997, 1996 and 1995,
the effect of the stock options were not significant.
(k) RECLASSIFICATIONS
Certain consolidated balance sheet and statement of income amounts have
been reclassified to conform with the 1997 presentation.
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the company's
financial position, results of operations, or liquidity.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Land $ 15,986,770 $ 15,458,137
Buildings 74,911,403 63,709,733
Furniture, fixtures
and equipment 17,427,363 14,304,883
Vehicles 269,025 264,809
Construction in progress 145,848 3,836,918
------------------------------
108,740,409 97,574,480
Less accumulated
depreciation 18,365,073 15,131,485
Net property and
equipment $ 90,375,336 $ 82,442,995
==============================
</TABLE>
[15]
<PAGE> 16
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
(3) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Iowa and Nebraska
Finance Authority
Bonds,currently
ranging from 7.74%
to 9.79%, due in
monthly installments
of $12,927 including
interest, with
maturities through
December 2006.
Secured by real estate. $ 914,426 $ 980,203
Notes payable at 7.75%
to 9.50% (with blended
rate of 8.15% at
December 31, 1997),
due in variable install-
ments with maturities
through November 2009.
Secured principally by
motel properties and
assignment of rents. 64,562,275 58,981,345
-------------------------
Total long-term debt 65,476,701 59,961,548
Less current installments
of long-term debt 1,942,380 1,067,023
-------------------------
Long-term debt, excluding
current installments $63,534,321 $58,894,525
=========================
</TABLE>
The company has a line of credit with a bank to fund future acquisitions and
construction of motel facilities. During 1997, the company refinanced its
line of credit. The line was reduced from $40,000,000 to $25,000,000. The
line bears interest at the LIBOR rate plus 1.75% (7.98% at December 31,1997) on
funds advanced and matures on June 1, 1999. Approximately $1,430,040 remained
available on this line of credit at December 31, 1997. The company must pay an
annual commitment fee of 1/4 of 1% on the unused portion of the commitment. The
company paid commitment fees of approximately $28,393 in 1997 and $13,250 in
1996.
Borrowings under this line of credit are classified as long-term debt since the
maturity is longer than one year and the company has the intent to maintain
borrowings of at least the same amount for the next year.
As part of the refinancing of the line of credit, the company entered into a
term loan with the same bank for the amount of $14,745,500. The rate of
interest on the loan is fixed at 8.65% until June 1, 2002, at which time the
rate of interest will be adjusted and fixed until maturity based on the weekly
average of the five-year United States Treasury Security Index for the week
immediately preceding April 15, 2002, plus 1.9%.
In May 1997, the company also entered into a promissory note with a bank for
the amount of $4,500,000. The rate of interest on the note is 8.25% per annum
until the date of maturity, May 19, 2002. No other significant changes
occurred in long-term debt in 1997.
The company's loan agreements contain certain restrictions and covenants
related to, among others, minimum debt service, maximum debt per motel room and
maximum debt to tangible net worth. At December 31, 1997, the company was in
compliance with these covenants. At December 31, 1997, all of the company's
retained earnings were unrestricted and available for the payment of dividends
under the most restrictive terms of the agreements.
The aggregate maturities of long-term debt for the five years following
1997 are as follows:
<TABLE>
<S> <C>
1998 $ 1,942,387
1999 25,886,590
2000 2,245,468
2001 2,427,543
2002 17,970,451
Thereafter 15,004,262
------------
$ 65,476,701
============
</TABLE>
[16]
<PAGE> 17
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
(4) INCOME TAXES
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- --------------------------------- ----------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
-------------------------------- --------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $1,707,866 367,000 2,074,866 $1,480,000 305,000 1,785,000 $1,635,000 278,000 1,913,000
State 426,966 93,000 519,966 346,900 83,600 430,500 390,000 71,000 461,000
-------------------------------- --------------------------------- ----------------------------------
$2,134,832 460,000 2,594,832 $1,826,900 388,600 2,215,500 $2,025,000 349,000 2,374,000
================================ ================================= ==================================
</TABLE>
Income tax expense is reconciled with income taxes computed at the federal
statutory rate of 34% for the years ended December 31, 1997, 1996 and
1995 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Tax expense computed at
federal statutory rate $ 2,276,809 $ 1,899,494 $ 2,039,424
State income tax, net of
federal tax effect 343,178 284,130 304,260
Other (25,155) 31,876 30,316
-----------------------------------------
$ 2,594,832 $ 2,215,500 $ 2,374,000
=========================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997,
1996 and 1995 are presented below:
<TABLE>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Tax basis over book basis on property
and equipment $ - $ - $ 337,001
Other 10,400 34,400 -
--------------------------------------
Total deferred tax assets 10,400 34,400 337,001
Deferred tax liabilities:
Book basis over tax basis on property
and equipment 497,722 76,157 -
Book basis over tax basis on other assets 27,578 13,143 3,301
--------------------------------------
Total deferred tax liabilities 525,300 89,300 3,301
Net deferred tax assets (liabilities) $ (514,900) $ (54,900) $ 333,700
======================================
</TABLE>
There was no valuation allowance provided for deferred tax assets at December
31, 1997, 1996 or 1995.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods that the deferred tax assets are deductible, management believes it is
more likely than not the company will realize the benefits of these deductible
differences.
[17]
<PAGE> 18
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
(5) LEASES
The company has leases for outdoor advertising signs and various other items
under noncancelable one- to 10-year agreements. Rental payments are expensed
when incurred and charged to advertising expense. Future minimum lease
payments required under noncancelable operating lease agreements at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 435,678
1999 198,479
2000 63,684
2001 24,733
2002 18,695
Thereafter 32,670
---------
$ 773,939
=========
</TABLE>
Rent expense incurred was $643,570 in 1997, $529,311 in 1996 and $391,082 in
1995.
(6) LITIGATION
The company is involved in various litigation incurred in the normal course of
business. In the opinion of management, the ultimate disposition of this
litigation will not have a material impact on the company's consolidated
financial statements.
(7) STOCK OPTION PLAN
The company adopted stock option plans in 1997 and 1994 whereby stock options,
stock appreciation rights, restricted stock and stock bonuses may be offered at
the discretion of the compensation committee of the Board of Directors to key
employees to acquire shares of common stock of the company. Also, each
nonemployee director will annually receive an option to acquire 1,500 shares of
common stock. An aggregate of 400,000 common shares may be issued and all
shares subject to options may be purchased at a price not less than its fair
market value at the date the options are granted. At December 31, 1997, there
were 287,300 additional shares available for grant under the plan.
The per share weighted-average fair value of stock options granted during 1997,
1996 and 1995 was $3.99, $7.32 and $6.66, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield - 0%, risk-free
interest rate of 6.0%, and an expected life of 5 years; 1996 - expected
dividend yield - 0%, risk-free interest rate of 6.5%, and an expected life of
10 years; and 1995 - expected dividend yield - 0%, risk-free interest rate of
6.0%, and an expected life of 10 years.
The company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 4,101,665 $ 3,371,247 $ 3,624,307
Pro forma 3,958,794 3,210,566 3,493,314
========================================
Net income
per share -
basic and
diluted:
As reported $ 0.85 $ 0.70 $ 0.75
Pro forma 0.82 0.66 0.72
========================================
</TABLE>
[18]
<PAGE> 19
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial
Statements
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of 12 months and compensation cost for options granted prior to
January 1, 1995 is not considered.
The changes in the outstanding stock options during the three years ended
December 31, 1997 are summarized below:
<TABLE>
<CAPTION>
Number Option price
of options per share range
--------------------------------------
<S> <C> <C>
Options outstanding
at December 31, 1994 4,500 $ 10.00 to 13.50
Granted 33,200 10.00 to 13.75
Exercised - -
Canceled (400) 13.50
--------------------------------------
Options outstanding
at December 31, 1995 37,300 10.00 to 11.125
Granted 36,600 10.00 to 11.125
Exercised - -
Canceled (1,000) 13.50
--------------------------------------
Options outstanding
at December 31, 1996 72,900 10.00 to 13.75
Granted 59,700 8.50 to 10.00
Exercised - -
Canceled (19,900) 10.00 to 13.50
--------------------------------------
Options outstanding
at December 31, 1997 112,700 $ 8.50 to 13.75
======================================
Options exercisable
at December 31, 1997 56,000 $ 10.00 to 13.75
=======================================
</TABLE>
(8) RELATED PARTY TRANSACTION
The company leased an airplane from a company owned by certain officers
of the company. The company paid approximately $14,000 in 1995 related to this
lease. The lease was terminated in 1995.
(9) PROFIT-SHARING PLAN
Beginning in July 1996, the company began sponsoring a nonstandardized 401(k)
profit-sharing plan and trust covering certain eligible full-time employees.
The company contributions provided for by the plan equal 50% of the
participants' contributions not to exceed 4% of the participant's compensation.
The company contributed and expensed approximately $41,000 and $18,000 in
1997 and 1996, respectively.
(10) ACQUISITION OF OPERATING PROPERTIES
During 1996, the company acquired for cash seven motel operating properties.
For consolidated financial statement purposes, the acquisitions were accounted
for as purchases. The following unaudited pro forma consolidated results of
operations have been prepared as if the acquisitions had occurred at the
beginning of fiscal 1996:
<TABLE>
<CAPTION>
1996 1995
(Unaudited)
---------------------------
<S> <C> <C>
Pro forma:
Net revenue $39,610,881 $35,427,266
Net income 3,504,152 3,985,713
Net income per share -
basic and diluted 0.72 0.82
===========================
</TABLE>
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future. There were no significant acquisitions in 1997.
[19]
<PAGE> 20
Supertel Hospitality, Inc. and Subsidiaries 1997 Annual Report
QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly Financial Information
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Net income per
Motel Operating Net share - basic Shares Stock market prices
revenues income income and diluted (000) High Low
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
First $ 9,066 $ 1,356 $ 217 $ 0.05 4,840 $ 11.00 $ 8.88
Second 12,317 3,442 1,345 0.28 4,840 9.25 8.00
Third 13,464 4,008 1,731 0.36 4,840 12.00 8.25
Fourth 11,498 2,315 809 0.17 4,840 11.63 10.00
- ---------------------------------------------------------------------------------------------
Year 46,345 11,121 4,102 0.85 4,840 12.00 8.00
=============================================================================================
1996
First $ 7,257 $ 1,364 $ 426 $ 0.09 4,840 $ 11.25 $ 9.75
Second 9,469 2,540 1,050 0.22 4,840 11.75 8.77
Third 11,442 3,155 1,281 0.26 4,840 11.00 9.00
Fourth 9,664 2,045 614 0.13 4,840 9.63 8.88
- ---------------------------------------------------------------------------------------------
Year 37,832 9,104 3,371 0.70 4,840 11.75 8.77
=============================================================================================
</TABLE>
Net income per share is computed independently for each of the quarters.
Therefore, the sum of the quarterly income per share may not equal the total
for the year.
[20]
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Supertel Hospitality, Inc. owns 100% of the voting securities
of the corporations listed below.
SUBSIDIARY JURISDICTION OF INCORPORATION
---------- -----------------------------
Simplex, Inc. Nebraska
Motel Developers, Inc. Nebraska
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Shareholders and Board of Directors
of Supertel Hospitality, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
333-26501 and 33-80462 on Form S-8 of Supertel Hospitality, Inc. of our report,
dated January 30, 1998, relating to the consolidated balance sheets of Supertel
Hospitality, Inc. and subsidiaries (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three year period ended December
31, 1997, which report appears in the December 31, 1997, annual report on Form
10-K of Supertel Hospitality, Inc.
KPMG Peat Marwick LLP
Omaha, Nebraska
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000919640
<NAME> SUPERTEL HOSPITALITY, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 9,532,430
<SECURITIES> 0
<RECEIVABLES> 1,157,372
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,331,725
<PP&E> 108,740,409
<DEPRECIATION> 18,365,073
<TOTAL-ASSETS> 103,405,644
<CURRENT-LIABILITIES> 6,047,217
<BONDS> 63,534,321
0
0
<COMMON> 48,400
<OTHER-SE> 32,812,195
<TOTAL-LIABILITY-AND-EQUITY> 103,405,644
<SALES> 46,344,815
<TOTAL-REVENUES> 46,344,815
<CGS> 0
<TOTAL-COSTS> 28,008,486
<OTHER-EXPENSES> 7,215,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,529,700
<INCOME-PRETAX> 6,696,497
<INCOME-TAX> 2,594,832
<INCOME-CONTINUING> 4,101,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,101,655
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
