<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - - - - - - -
FORM 10-Q
- - - - - - - - - - - - - -
(Mark One)
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 1999.
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number: 0-23536
----------------
SUPERTEL HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0774097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
309 North 5th Street
Norfolk, Nebraska 68701
(Address of principal executive offices)
Telephone number: (402) 371-2520
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past ninety days:
Yes ( X ) No ( )
As of June 30, 1999, there were 4,843,400 common shares of the registrant
outstanding.
<PAGE> 2
PART I: FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
----------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 363,386 11,520,593
Accounts receivable 1,518,144 1,428,531
Prepaid expenses and other current assets 1,225,139 388,409
----------------- --------------
Total current assets 3,106,669 13,337,533
----------------- --------------
Property and equipment, at cost 116,044,088 113,530,994
Less accumulated depreciation (23,835,297) (22,122,750)
----------------- --------------
Net property and equipment 92,208,791 91,408,244
----------------- --------------
Other assets:
Intangible assets 1,209,755 1,312,828
Other assets 189,301 180,174
----------------- --------------
Total other assets 1,399,056 1,493,002
----------------- --------------
$ 96,714,516 106,238,779
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,595,761 1,370,408
----------------- --------------
Accrued expenses:
Real estate taxes 1,706,294 1,838,088
Income taxes payable 880,000 207,900
Sales and lodging taxes 620,352 437,786
Payroll and payroll taxes 1,055,412 910,704
Royalties 372,655 256,906
Interest 265,812 294,825
----------------- --------------
Total accrued expenses 4,900,525 3,946,209
----------------- --------------
Current installments of long-term debt 2,104,497 2,437,936
----------------- --------------
Total current liabilities 8,600,783 7,754,553
----------------- --------------
Deferred income taxes 1,111,507 926,075
Long-term debt, excluding current installments 46,463,367 59,223,649
Other long-term liabilities 398,611 415,278
Stockholders' equity:
Preferred stock, $1.00 par value. Authorized 1,000,000 shares; none issued -- --
Common stock, $0.01 par value. Authorized 10,000,000 shares; issued
and outstanding 4,843,400 shares 48,434 48,434
Additional paid-in capital 18,387,933 18,387,933
Retained earnings 21,703,881 19,482,857
Total stockholders' equity 40,140,248 37,919,224
----------------- --------------
$ 96,714,516 106,238,779
================= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Motel revenues:
Lodging revenues $ 13,378,736 13,139,131 24,274,797 23,672,748
Other lodging activities 445,387 398,237 813,085 768,912
-------------- ------------ ------------ ------------
Total motel revenues 13,824,123 13,537,368 25,087,882 24,441,660
-------------- ------------ ------------ ------------
Direct operating expenses:
Payroll and payroll taxes 3,501,940 3,132,034 6,670,017 5,911,901
Royalties and advertising fund 847,748 812,157 1,542,330 1,457,792
Other lodging 3,421,926 3,236,930 6,629,866 6,280,997
-------------- ------------ ------------ ------------
Total lodging expense 7,771,614 7,181,121 14,842,213 13,650,690
Other lodging activities 277,202 286,595 545,898 556,125
Depreciation and amortization 1,171,943 1,076,322 2,307,103 2,189,594
General and administrative 1,049,279 1,159,663 1,920,117 2,159,526
-------------- ------------ ------------ ------------
Total direct operating expenses 10,270,038 9,703,701 19,615,331 18,555,935
-------------- ------------ ------------ ------------
Operating income 3,554,085 3,833,667 5,472,551 5,885,725
-------------- ------------ ------------ ------------
Other income (expense):
Interest expense (879,131) (1,050,186) (1,768,900) (2,151,195)
Miscellaneous income (expense) (9,894) 4,411 (1,944) 22,462
-------------- ------------ ------------ ------------
(889,025) (1,045,775) (1,770,844) (2,128,733)
-------------- ------------ ------------ ------------
Income before income taxes 2,665,060 2,787,892 3,701,707 3,756,992
Income tax expense 1,066,024 1,115,160 1,480,683 1,502,795
-------------- ------------ ------------ ------------
Net income $ 1,599,036 1,672,732 2,221,024 2,254,197
============== ============ ============ ============
Net income per share $ 0.33 0.35 0.46 0.47
============== ============ ============ ============
Weighted average shares outstanding 4,843,400 4,840,026 4,843,400 4,840,013
============== ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,221,024 2,254,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,204,781 2,068,589
Amortization 103,073 121,005
Loss on sale of property and equipment 54,023 42,291
Deferred income taxes 185,432 137,700
Changes in assets and liabilities:
Accounts receivable (89,613) (162,743)
Prepaid expenses and other assets (845,857) (556,757)
Recoverable income taxes -- 148,925
Accounts payable 225,353 626,839
Accrued expenses and other liabilities 265,549 601,331
Income taxes payable 672,100 864,727
---------------- -------------
Net cash provided by operating activities 4,995,865 6,146,104
---------------- -------------
Cash flows from investing activities:
Additions to property and equipment (3,059,351) (1,395,126)
Proceeds from sale of property and equipment -- 4,844
---------------- -------------
Net cash used in investing activities (3,059,351) (1,390,282)
---------------- -------------
Cash flows from financing activities:
Repayments of long-term debt (13,093,721) (28,245,052)
Proceeds from long-term debt -- 15,016,606
Proceeds from issuance of common stock -- 5,000
---------------- -------------
Net cash used in financing activities (13,093,721) (13,223,446)
---------------- -------------
Net decrease in cash and cash equivalents (11,157,207) (8,467,624)
Cash and cash equivalents at beginning of period 11,520,593 9,532,430
---------------- -------------
Cash and cash equivalents at end of period $ 363,386 1,064,806
================ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999 and the
condensed consolidated statements of income and cash flows for the
three-month and six-month periods ended June 30, 1999 and 1998 have been
prepared by Supertel Hospitality, Inc. (the "Company"), without audit.
In the opinion of management, all necessary adjustments (which include
normal recurring adjustments) have been made to present fairly the
financial position at June 30, 1999 and for all periods presented.
Balance sheet data as of December 31, 1998 has been derived from the
audited consolidated financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-K Annual Report for the year ended December 31, 1998. The results of
operations for the three-month and six-month periods ended June 30, 1999
are not necessarily indicative of the operating results for the full
year.
(2) BUSINESS COMBINATION
On June 11, 1999 Humphrey Hospitality Trust, Inc. (Humphrey) and the
Company announced that they had entered into an Agreement and Plan of
Merger pursuant to which Humphrey will exchange 1.30 shares of its
common stock for each share of the Company's common stock. The
Agreement provides for the stockholders of the Company to receive a
pre-closing dividend of the Company's earnings and profits. The
earnings and profits dividend would be payable only if the merger
occurs. The merger is subject to a number of conditions, including
approval by the stockholders of Humphrey and the Company. The merger
has been approved by the boards of both companies. Stockholders
meetings to vote on the merger are scheduled for late September 1999.
<PAGE> 6
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain forward-looking statements and information
relating to Supertel that are based on the beliefs of Supertel's management as
well as assumptions made by and information currently available to Supertel's
management. Such statements reflect the current views of Supertel with respect
to future events and are subject to certain risks, uncertainties and
assumptions, including the business factors described in Supertel's 1998 Form
10-K. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as believed, estimated or expected.
RECENT DEVELOPMENTS
On June 11, 1999, Humphrey Hospitality Trust, Inc. (Nasdaq: HUMP) and
Supertel announced that they had entered in an Agreement and Plan of Merger
pursuant to which Humphrey Hospitality would exchange 1.30 shares of Humphrey
Hospitality common stock for each share of Supertel common stock. The agreement
provides for the stockholders of Supertel to receive a pre-closing dividend of
Supertel's earnings and profits, which is expected to be between $4.50 and $4.80
per share. The earnings and profits dividend would be payable only if the merger
occurs. The merger has been approved by the boards of both companies, and is
subject to a number of conditions, including approval by the shareholders of
Humphrey Hospitality and the stockholders of Supertel.
Supertel has executed an application letter for a commercial loan of (a) up to
$27 million to fund the pre-merger earnings and profits dividend distribution,
and (b) up to $18 million exclusively for replacement financing of certain
Supertel motel properties. The application letter provides the loan must close
on or before October 4, 1999, or the bank will have no further obligation to
consider the loan request. Supertel and the bank continue to review and prepare
documentation for the loan and there can be no assurance that a loan will be
granted or granted on the terms contemplated in the application letter.
RESULTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Total motel revenues for the second quarter were $13,824,123, an increase
of $286,755 or 2.1%, over total revenues of $13,537,368 for the second quarter
of 1998. Total motel revenues for the first six months were $25,087,882, an
increase of $646,222 or 2.6% over the total revenues of $24,441,660 for the
first six months of 1998. The increase for the second quarter was primarily due
to an increase of $239,605 in revenues from lodging operations and $47,150 from
other lodging activities (which consist of telephone, vending, movie revenue and
other purchased services). The increase for the first six months was primarily
due to an increase of $602,049 in revenue from lodging operations and $44,173
from other lodging activities.
The increase in revenues from lodging operations for the second quarter
resulted primarily from renting 284,992 rooms at increased rates in 1999
compared to 286,555 rooms at lower rates in the second quarter of 1998. The
increase in revenues from lodging operations for the first six months resulted
primarily from renting 529,122 rooms in 1999 compared to 527,615 rooms rented in
the first six months of 1998, an increase of 1,507 or .3%.
<PAGE> 7
The increase in rooms rented for the first six months is due to the
purchase of a 58 unit motel in the third quarter of 1998 in Neosho, Missouri and
the construction of a 40 unit motel in the first quarter of 1999 in Creston,
Iowa. Revenues were also impacted by an increase in the average daily room rate
in the second quarter of 1999. An average daily room rate of $48.51 was achieved
compared to $47.24 for the second quarter of 1998, an increase of $1.27 or 2.7%.
For the first six months, the average daily room rate was $47.41 in 1999
compared to $46.32 for the first six months of 1998, an increase of $1.09 or
2.4%.
Revenue per available room for the second quarter of 1999 decreased to
$33.33 from $33.41, a decrease of $0.08 or .2%. Revenue per available room for
the first six months of 1999 increased to $30.50 from $30.32, an increase of
$0.18 or .6%.
Occupancy as a percentage of rooms available for the second quarter of
1999 was 68.7% versus 70.7% for the same period in 1998. Occupancy as a
percentage of rooms available for the first six months of 1999 was 64.3% versus
65.5% for the same period in 1998. There was only one unseasoned property at the
end of the second quarter of 1999.
Lodging expenses for the second quarter of 1999 were $7,771,614 compared to
$7,181,121 for the second quarter of 1998, an increase of $590,493 or 8.2%.
Lodging expenses for the first six months of 1999 were $14,842,213 compared to
$13,650,690 for the first six months of 1998, an increase of $1,191,523 or 8.7%.
The increase in lodging expense for the first six months of 1999 was due in part
to the increase in the number of rooms rented and an increase in payroll and
payroll tax expenses. Lodging expenses as a percentage of motel revenues
increased to 56.2% for the second quarter of 1999 from 53.0% in the second
quarter of 1998. Lodging expenses as a percentage of motel revenues increased to
59.2% for the first six months of 1999 from 55.9% for the first six months of
1998. The increase in payroll and payroll tax expenses resulted from wage rate
pressure and an increase in hours worked attributed to employee turnover.
Depreciation and amortization expenses for the second quarter of 1999 were
$1,171,943 compared to $1,076,322 for the second quarter of 1998, a decrease of
$95,621 or 8.9%. Depreciation and amortization expenses for the first six months
of 1999 were $2,307,103 compared to $2,189,594 for the first six months of 1998,
an increase of $117,509 or 5.4%. The increase in depreciation expense for the
second quarter and six months ended June 30, 1999 as compared to the
corresponding periods in 1998 is due to the opening of the Creston, Iowa
addition.
General and administrative expenses for the second quarter of 1999 were
$1,049,279 compared to $1,159,663 in the second quarter of 1998, a decrease of
$110,384 or 9.5%. General and administrative expenses as a percent of sales
decreased in the second quarter of 1999 to 7.6% from 8.6% of sales in the second
quarter of 1998. General and administrative expenses for the first six months of
1999 were $1,920,117 compared to $2,159,526 for the first six months of 1998, a
decrease of $239,409 or 11.1%. General and administrative expenses as a percent
of sales decreased in the first six months of 1999 to 7.7% from 8.8% of sales in
the first six months of 1998. The percentage decrease is due to a reduced bonus
accrual in the second quarter and first six months of 1999.
Interest expense decreased by $171,055 or 16.3% for the second quarter of
1999 from $1,050,186 for the second quarter of 1998 to $879,131 in 1999.
Interest expense decreased by $382,295 for the first six months of 1999 from
$2,151,195 in 1998 to $1,768,900 in 1999 or 17.8%. The decrease was primarily
due to using cash flow from operations to pay down debt. Average bank borrowings
for the second quarter of 1999 decreased to $49,548,839 from $53,235,391 for the
comparable period in 1998, a decrease of $3,686,552 or 6.9%. Bank borrowings at
June 30, 1999 were $48,567,864.
<PAGE> 8
As a result of the aforementioned operating factors and general business
conditions, net income for the second quarter of 1999 was $1,599,036 or $.33 per
share versus net income of $1,672,732 or $.35 per share for the corresponding
period in 1998. Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the second quarter of 1999, were $4,716,134, a decrease of $198,266
or 4.0% over EBITDA of $4,914,400 for the second quarter of 1998.
Net income for the six months of 1999 was $2,221,024 or $.46 per share
versus net income of $2,254,197 or $.47 per share, for the corresponding period
in 1998. EBITDA for the first six months of 1999 were $7,777,710, a decrease of
$320,071 or 4.0% over EBITDA of $8,097,781 for the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Supertel's growth has been financed through a combination of cash provided
from operations and long-term debt financing. Cash provided from operations was
approximately $4,996,000 for the first six months of 1999 and $6,146,000 for the
first six months of 1998. Supertel requires capital principally for the
construction, acquisition and improvement of lodging facilities. Capital
expenditures for such purposes were approximately $3,059,000 in the first six
months of 1999 and approximately $1,395,000 in the first six months of 1998.
Long-term debt (excluding current installments of long-term debt) was
$46,463,367 at June 30, 1999 and $59,223,649 at December 31, 1998. Supertel's
current installments of long-term debt were $2,104,497 at June 30, 1999 and
$2,437,936 at December 31, 1998. Supertel's loan agreements contain certain
restrictions and covenants related to, among other things, minimum debt service,
maximum debt per motel room, and maximum debt to tangible net worth. At June 30,
1999, 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 54.8% at June 30, 1999, compared to
61.9% at December 31, 1998.
Supertel plans to construct/acquire approximately 100-125 motel rooms in 1999
with approximately $3,000,000-$3,750,000 of capital funds necessary to finance
such development. Supertel believes that a combination of cash flow from
operations, borrowing available under its line of credit, securing new short and
long-term facilities and the ability to leverage unencumbered properties will be
sufficient to fund scheduled development and debt repayment.
YEAR 2000
In 1998, Supertel began preparing its computer-based systems for Year
2000 ("Y2K") computer software compliance issues. Historically, certain computer
programs were written using two digits rather than four to define the applicable
year. As a result, software may recognize a date using the two digits "00" as
1900 rather than the year 2000. Computer programs that do not recognize the
proper date could generate erroneous data or cause systems to fail. Supertel's
Y2K project covers both traditional computer systems and infrastructure ("IT
Systems") and computer based hardware and software, facilities, and equipment
("Non-IT Systems").
Supertel has completed an assessment of its IT and Non-IT Systems and is
in the process of replacing noncompliant systems. Approximately 90% of the
systems are believed to be compliant. Supertel expects to have its Y2K
compliance plan completed before the end of the third quarter of 1999. Supertel
does not have any material suppliers or customers and the Y2K noncompliance of
any particular supplier should not materially affect Supertel.
<PAGE> 9
Supertel has incurred approximately $225,000 of Y2K project expense to
date. Future expenses are estimated to include approximately $50,000. Such cost
estimates are based upon presently available information and may change as
Supertel continues with its Y2K project.
Recent Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective January 1, 2001.
Management does not believe adoption of this Statement will have a material
impact on Supertel's financial position, results of operations or cash flows.
Item 3 (a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no material change in Supertel's interest rate exposure
subsequent to December 31, 1998.
Part II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Financial Data Schedule
B. Reports on Form 8-K.
Supertel filed a Form 8-K dated June 11, 1999 reporting that Humphrey
Hospitality and Supertel had entered into an Agreement and Plan of Merger
whereby Supertel would merge with and into Humphrey Hospitality. A press release
and the Agreement and Plan of Merger were filed as exhibits to the Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUPERTEL HOSPITALITY, INC.
By: /s/ Troy Beatty
---------------------------
Troy Beatty
Chief Financial Officer
DATED this 4th day of August 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 363,386
<SECURITIES> 0
<RECEIVABLES> 1,518,144
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,106,669
<PP&E> 116,044,088
<DEPRECIATION> 23,835,297
<TOTAL-ASSETS> 96,714,516
<CURRENT-LIABILITIES> 8,600,783
<BONDS> 48,567,864
0
0
<COMMON> 48,434
<OTHER-SE> 40,091,814
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<SALES> 25,087,882
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<OTHER-EXPENSES> 4,227,220
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<INTEREST-EXPENSE> 1,768,900
<INCOME-PRETAX> 3,701,707
<INCOME-TAX> 1,480,683
<INCOME-CONTINUING> 2,221,024
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