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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998 Commission File No. 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 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
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
The number of shares of common stock outstanding as of March 12, 1999
was 4,843,400 shares. The aggregate market value of the common stock held by
non-affiliates of the registrant as of March 12, 1999 was $34,147,000.
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. /X/
Documents incorporated by reference include portions of Supertel's
Proxy Statement for the April 30, 1999 Annual Stockholders' Meeting ("1999 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. Supertel develops, acquires,
constructs and operates economy-class motels as a franchisee of Super 8 Motels,
Inc. and at February 1, 1999 owned 58 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, 1999.
Strategic Planning. Supertel announced on June 4, 1998 the execution of
a merger agreement pursuant to which Supertel would merge into PMC Commercial
Trust (AMEX:PCC) with each Supertel stockholder receiving 0.6 common shares of
PMC Commercial Trust, subject to certain adjustments. The merger was subject to
a number of conditions, including approval by the stockholders of Supertel and
PMC Commercial Trust. Supertel announced on October 15, 1998 that the merger
agreement had been terminated by mutual agreement due to unfavorable stock
market conditions. The board of directors of Supertel continues to consider
Supertel's strategic alternatives.
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>
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
Year-End Information 1994 1995 1996 1997 1998
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Number of Motels 41 48 59 62 63
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
Total Rooms Rented 667,545 793,151 903,643 1,041,904 1,094,009
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
Motel Revenues $25,161,000 $31,362,000 $37,832,000 $46,345,000 $51,339,000
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
ProForma Net Income After Taxes $3,077,000 $3,624,000 $3,371,000 $ 4,102,000 $5,017,000
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
Average Occupancy Rate 69.4% 69.6% 65.7% 65.7% 66.9%
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
Average Room Rate (1) $37.69 $39.54 $41.87 $44.48 $46.93
- ----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
</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 133 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
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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. 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. Supertel 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 63 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 1998, Supertel rented 1,094,009 rooms. Over 59% 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
Supertel 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>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
All Super 8 motels ........... 1.41 1.38 1.41
Supertel-owned motels......... 1.15 1.14 1.17
</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>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
All Super 8 motels ................. 187 180 175
Supertel-owned motels (all motels).. 61 65 65
Supertel-owned motels (properties
owned/opened more than one year).. 61 65 65
</TABLE>
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Motel Properties
Certain information for the 63 motels owned by Supertel at February 1,
1999 is set forth below. All motels are Super 8 motels except as noted.
<TABLE>
Location Date Opened Rooms in Motel
Nebraska
<S> <C> <C>
Columbus 12/31/81 63
O'Neill 7/30/82 72
Omaha 2/18/83 115
Lincoln purchased 8/1/83 83
Lincoln 10/29/83 133
Omaha 5/23/86 74
Wayne 6/8/92 40
Omaha 12/29/93 101
Norfolk purchased 11/2/94 66
Iowa
Creston 9/19/78 84
Keokuk 2/2/85 62
Iowa Ci 12/21/85 87
Oskaloosa 12/31/85 51
Burlingto 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 2/17/89 119
Lenexa 12/22/89 101
Garden City purchased 6/1/91 60
El Dorado 1/16/92 49
Wichita purchased 11/7/94 59
Parsons purchased 3/15/96 48
</TABLE>
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<TABLE>
Location Date Opened Rooms in Motel
Missouri
<S> <C> <C>
Kirksville 8/28/86 63
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 77
Neosho purchased 8/15/98 58
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 8/15/96 113
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 61
Mountain Home 4/13/92 41
Batesville 10/6/92 49
Fayetteville 5/17/93 83
</TABLE>
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<TABLE>
Location Date Opened Rooms in Motel
Arizona
<S> <C> <C>
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
-----
4,522
</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 1,757 Super 8 motels operating as of December 31, 1998.
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 59% of
Supertel's motel rooms during 1998. The 5,704,000 members (as of December 31,
1998) 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. Supertel 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 8% 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 national advertising program. An initial franchise fee of $20,000 is
required upon the execution of a franchise agreement for a new location.
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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.
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. 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.
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 Supertel's competitors have recognized trade names,
greater resources and longer operating histories than Supertel. Supertel's
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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. The Americans With
Disabilities Act became effective in 1992 and requires public accommodations to
meet certain federal requirements related to access and use by disabled persons.
Compliance with the ADA could require removal of structural barriers to handicap
access in certain public areas of properties owned by Supertel. Supertel
expended approximately $215,000 during 1998 in improvements to bring its
properties materially in compliance with the ADA and comparable state laws.
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's motels have been subjected to Phase I or similar
environmental audits (which involve inspection without soil sampling or ground
water analysis) by independent environmental consultants. Such audits have not
revealed any significant environmental liability. 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.
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
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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, 1998 Supertel had 1,180 employees. The corporate
staff consisted of 58 employees involved in development/construction,
operations/training, and purchasing and accounting. The motel-level employees
included 89 managers and assistant managers/relief managers, 381 desk clerks,
583 housekeepers and shuttle drivers and 69 maintenance employees. Approximately
46% of the desk clerks and housekeepers are part-time employees. The number of
Supertel employees varied during 1998 from a low of 1,121 employees to a high of
1,299 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 March 12, 1999 are listed below,
together with their ages and all Company positions and offices held by them.
Name Age Position
Paul J. Schulte 65 Director, President and Treasurer
Steve H. Borgmann 53 Director, Executive Vice
President and Chief Operating Officer
Richard L. Herink 45 Director, Executive Vice President
Troy Beatty 33 Senior Vice President and Chief
Financial Officer
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.
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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 Supertel 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.
Operating factors affecting the lodging industry generally, including
Supertel, 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,
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(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. Supertel'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 Supertel'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. During 1998, Supertel completed a 19-unit
addition in O'Neill, Nebraska, purchased a 58-unit motel in Neosho, Missouri and
started a 40-unit addition in Creston, Iowa. Supertel's development activities
were limited in 1998 since Supertel's management believed there were fewer
acceptably-priced development opportunities and acquisition candidates during
1998.
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 Supertel 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 franchisees, and Supertel 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.
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Risks of Leverage. Supertel's business is capital intensive and
Supertel 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, Supertel 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 increased annually 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 Supertel's operating and financial systems. In addition, as
Supertel 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 Supertel is unable to manage its growth
effectively, Supertel'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. Supertel's motels generally
operate in areas that contain numerous competitors. Demographic, geographic or
other changes in one or more of Supertel'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 Supertel's motels compete. In addition, competition generally reduces
the number of suitable motel acquisition opportunities offered to Supertel and
increases the 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 lodging 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
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fluctuations in Supertel's revenues. Quarterly earnings also may be adversely
affected by factors beyond Supertel'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. and the two Comfort
Inns owned by Supertel are subject to a franchise agreement with Choice Hotels
International, Inc. 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. Supertel has not 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 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.
-16-
<PAGE>
Supertel's motel properties are all owned. See "Business - Motel
Properties" and "Business - Motel Operations".
Item 3. Legal Proceedings.
A complaint was filed against Supertel, the members of its board of
directors, and PMC Commercial Trust in the Delaware Court of Chancery on June
16, 1998. The complaint was purportedly filed on behalf of a stockholder of
Supertel, and seeks certification as a class action. The complaint alleges,
among other things, that by entering into the merger agreement and related
agreements with PMC Commercial Trust, Supertel's board of directors did not act
in good faith and in compliance with their fiduciary duties to Supertel's
stockholders. Supertel believes there is no merit to the allegations of the
complaint. The merger agreement was terminated by mutual consent in October 1998
due to unfavorable market conditions.
In addition, 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, 1998.
-17-
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Security Holder
Matters.
Information required for Item 5 is included with the information set
forth under Item 8 below.
Item 6. Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
1998 1997 1996 1995 1994((1))
- --------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Motel revenues $51,339 $46,345 $37,832 $31,362 $25,161
Operating income 12,393 11,121 9,104 8,386 6,576
Net Income 5,017 4,102 3,371 3,624 2,925(2)
Net income per share - basic and diluted 1.04 0.85 0.70 0.75 0.70(2)
Cash dividends per share (3) N/A N/A N/A N/A N/A
- --------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Other Data:
Occupancy 66.9% 65.7% 65.7% 69.6% 69.4%
Average daily room rate (ADR) $46.93 $44.48 $41.87 $39.54 $37.69
Revenue per available room (REVPAR) $31.41 $29.24 $27.49 $27.52 $26.16
Rooms owned (at year end) 4,522 4,459 4,156 3,295 2,846
- --------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital $5,583 $5,285 $3,463 $3,468 $454
Total Assets 106,239 103,406 92,276 67,928 48,846
Long-term debt (excluding current portion) 59,224 63,534 58,895 38,188 24,045
Stockholders' equity 37,919 32,861 28,759 25,388 21,763
</TABLE>
(1) Supertel's initial public offering was in May 1994. Information prior
to that time is drawn from historical financial information of
Supertel's predecessors.
(2) Excludes pro forma after-tax nonrecurring gain on involuntary
conversion of $151,333, or $.03 per share, and an $860,706 benefit, or
$0.21 per share, resulting from a change in accounting for income
taxes.
(3) Supertel has not declared or paid any cash dividends on its common
stock.
-18-
<PAGE>>
Item 7. Management's Discussion and Analysis 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>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Motel revenues:
Lodging revenues 96.9% 96.7% 96.8%
Other lodging activities 3.1 3.3 3.2
------ ------ -----
Total motel revenues 100.0% 100.0% 100.0%
Operating expenses:
Payroll and payroll taxes 24.4 23.9 23.9
Royalties and advertising fund 6.1 6.4 6.4
Other lodging 25.4 27.9 27.9
---- ---- ----
Total lodging expenses 55.9 58.2 58.2
Other lodging activities 2.2 2.3 2.4
Depreciation and amortization 8.7 8.7 8.3
General and administration 7.7 6.8 7.0
Transaction Expense 1.4 - -
--- --- ---
Total operating expenses 75.9 76.0 75.9
Operating income 24.1 24.0 24.1
Other income (expenses):
Interest and miscellaneous expense (7.9) (9.6) (9.3)
Net income before taxes 16.2% 14.4% 14.8%
===== ===== =====
</TABLE>
Results of Operations
For the Years Ended December 31, 1998 and 1997.
Total motel revenues for 1998 were $51,338,529, an increase of
$4,993,714 or 10.8% over the total revenues of $46,344,815 for 1997. The
increase was primarily due to an increase of $4,910,813 in revenue from lodging
operations. Revenues from other lodging activities, which consisted of
telephone, vending and movie revenues, increased $82,901.
The increase in revenues from lodging operations resulted from an
increase in the number of rooms rented and an increase in the average daily room
rate. Supertel rented 1,094,009 rooms in 1998 compared to 1,041,904 rooms in
1997, an increase of 52,105 rooms or 5.0%. The average daily room rate was
$46.93 for 1998, compared to $44.48 for 1997, an increase of $2.45 or 5.5%.
-19-
<PAGE>
Motel revenue was also favorably impacted by changes in occupancy.
Occupancy as a percentage of rooms available increased to 66.9% in 1998 compared
to 65.7% in 1997. For seasoned properties (those owned/opened over one year),
occupancy was 67.2% in both years. The increase in the occupancy percentage
resulted primarily from the continued seasoning of Supertel's properties in
Texas. Revenue per available room (REVPAR) for 1998 increased to $31.41 from
$29.24 in 1997.
Lodging expenses for 1998 were $28,697,945 compared to $26,952,031 for
1997, an increase of $1,745,914 or 6.5%. The increase in lodging expenses was
due primarily to the increase in the number of rooms rented. Lodging expenses as
a percentage of motel revenues decreased to 55.9% in 1998 from 58.2% in 1997.
The percentage decrease resulted from cost controls implemented under Supertel's
open book management program and a larger base of revenue to cover fixed costs.
Depreciation and amortization expenses for 1998 were $4,451,933
compared to $4,060,778 in 1997, an increase of $391,155 or 9.6%. The increase
was primarily due to an increase in the number of motel properties owned for a
full year.
General and administrative expenses for 1998 were $3,949,588 compared
to $3,154,737 for 1997, an increase of $794,851 or 25.2%. General and
administrative expenses as a percent of motel revenue increased to 7.7% in 1998
from 6.8% in 1997. The increase in general and administrative expenses was due
primarily to increased payroll expense attributable to employee salary increases
and employee incentive programs initiated in 1998.
Interest expense decreased to $4,056,558 in 1998 from $4,529,700 in
1997, a decrease of $473,142 or 10.4%. The decrease was due to the use of
operating income to pay down bank debt. Average bank borrowings were $53,285,701
in 1998 compared to $56,943,962 in 1997, a decrease of 6.4%.
Supertel also incurred a one-time charge of $708,143 in 1998 related to
the terminated merger agreement with PMC Commercial Trust. For the reasons
described above, and including the one-time charge, net income for 1998 was
$5,017,191 compared to $4,101,665 in 1997, an increase of $915,526 or 22.3%.
Basic and diluted net income per share from continuing operations for 1998,
including the one-time charge, was $1.04 compared to $0.85 for 1997, an increase
of 22.4%.
-20-
<PAGE>
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 revenues 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. Supertel opened two new Wingate Inn hotels in Texas and
purchased one existing super 8 motel in Wisconsin. In addition, new rooms were
added to 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 the number of 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.
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.
-21-
<PAGE>
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.
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 $11,167,344 for 1998 and $9,037,668 for 1997. 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 $5,349,000 in 1998 and $11,800,000 in 1997.
Long-term debt (excluding current installments of long-term debt was
$59,223,649 at December 31, 1998 and $63,534,321 at December 31, 1997.
Supertel's current installments of long-term debt were $2,437,936 at December
31, 1998 and $1,942,380 at December 31, 1997. The reduction in long-term debt
during 1998 resulted from the use of cash provided from operations to pay down
debt. Such cash was used to pay down debt, rather than for capital expenditures
for construction and acquisition of lodging facilities, since Supertel's
management believes there were fewer acceptably-priced development opportunities
and acquisition candidates during 1998.
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 $37,000,000 and maturing in 2002
through 2007. Approximately $3,300,000 remained available on this line of credit
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 December 31, 1998,
Supertel was in compliance with these covenants. Supertel's ratio of long-term
debt (including current installments) to long-term debt and stockholders' equity
was 61.9% at December 31, 1998 compared to 66.6% at December 31, 1997.
-22-
<PAGE>
Supertel's current ratio during the past three years and its working
capital are as shown in the following table:
<TABLE>
Year ended December 31,
----------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Working Capital $5,582,980 $5,284,508 $3,463,122
Current ratio 1.72 1.87 1.76
--------------------- --------------------- --------------------
</TABLE>
During 1998, Supertel constructed and acquired 77 motel rooms. Capital
and other expenditures for such development totaled $5,348,533. Supertel has
principal payments totaling $2,437,936 due under existing long-term debt
obligations during 1999. 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 potential unencumbered
properties will be sufficient to fund development and debt repayments.
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 60% of the
systems are compliant. Supertel expects to replace any noncompliant systems by
the end of the second 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.
Supertel has incurred approximately $225,000 of Y2K project expense to
date. Future expenses are estimated to include approximately $75,000 of
additional costs. 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
-23-
<PAGE>
Instruments and Hedging Activities", which is effective January 1, 2000.
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 7(A). Quantitative and Qualitative Disclosures about Market Risk.
Supertel is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of Supertel's property portfolio and
operations. Supertel's interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives, Supertel borrows primarily
at variable rates in order to mitigate its interest rate risk for changing
market conditions. Supertel does not enter into derivative or interest rate
transactions for speculative purposes.
Supertel's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts, weighted average
interest rates, fair values and other terms required by year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes. <TABLE>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt 210,600 228,769 248,507 4,255,897 - - 4,943,772 4,943,772
Average Interest Rate 8.31% 8.31% 8.31% 8.31% 8.31%
Variable Rate Libor Debt 620,871 22,400,718 721,026 777,009 837,339 10,321,968 35,678,931 35,678,931
Average Interest Rate 7.47% 7.47% 7.47% 7.47% 7.47% 7.47% 7.47%
Variable Rate Treasury Debt 1,523,799 1,384,423 1,489,176 1,598,141 1,715,218 12,425,680 20,136,438 20,136,438
Average Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Variable Rate Prime Debt 82,667 82,667 82,667 82,667 82,667 489,111 902,444 902,444
Average Interest Rate 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%
Total Debt 2,437,936 24,096,577 2,541,376 6,713,714 2,635,224 23,236,759 61,661,585 61,661,585
Average Interest Rate 7.43% 7.43% 7.43% 7.43% 7.43% 7.43% 7.43%
</TABLE>
As the table incorporates only those exposures that existed as of
December 31, 1998, it does not consider those exposures or positions which could
arise after that date. Moreover, because firm commitments are not presented in
the table above, the information presented therein has limited predictive value.
As a result, Supertel's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arrive during the period,
Supertel's financing strategies at that time, and interest rates.
-24-
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Supertel listed in the index
appearing under Items 14(a)(1) and (2) hereof are filed as a part of this Annual
Report on Form 10-K and are incorporated by reference in this Item 8. See also
"Index to Financial Statements" below. Certain unaudited quarterly financial
data is set forth below.
(Dollars in thousands, except per share data)
<TABLE>
Stock market prices
Net income per -------------------------
Motel Operating Net Income share - basic Shares
Revenues Income and diluted (000) High Low
<S> <C> <C> <C> <C> <C> <C> <C>
---------------- ----------- ------------- ------------- ------------------ ----------- ------------- -----------
1998
First 10,904 2,052 581 .12 4,840 14.00 8.50
Second 13,537 3,834 1,673 .35 4,840 14.25 12.25
Third 14,657 4,293 1,995 .41 4,842 13.13 9.00
Fourth 12,241 2,214 768 .16 4,843 10.50 8.00
---------------- ----------- ------------- ------------- ------------------ ----------- ------------- -----------
================ =========== ============= ============= ================== =========== ============= ===========
Year 51,339 12,393 5,017 1.04 4,841 14.25 8.00
================ =========== ============= ============= ================== =========== ============= ===========
================ =========== ============= ============= ================== =========== ============= ===========
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
================ =========== ============= ============= ================== =========== ============= ===========
</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.
-25-
<PAGE>
Supertel's common stock is traded in the over-the-counter market and is
quoted by the National Association of Securities Dealers Automated Quotations
National Market System under the symbol "SPPR". As of March 12, 1999, Supertel
estimates there were 1,200 beneficial holders of common stock.
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" in the 1999 Proxy
Statement is incorporated herein by reference. Information concerning Supertel's
executive officers is set forth in Item 1 above.
Item 11. Executive Compensation.
The sections entitled "Director Meetings and Compensation", "Summary
Compensation Table", "Option Grants in 1998", and "Option Exercises in 1998 and
Year-End Values" in the 1999 Proxy Statement are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The section entitled "Certain Stockholders" in the 1999 Proxy Statement
is incorporated herein by reference.
Item 13. Certain Transactions and Relationships.
The section entitled "Certain Agreements and Transactions" in the 1999
Proxy Statement is incorporated herein by reference.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1)(2) Financial Statements. See Table of Contents to Consolidated
Financial Statements.
(a) (3) Exhibits. See Exhibit Index, which index is incorporated
herein by reference.
(b) Reports on Form 8-K. Supertel filed a Form 8-K dated October 15, 1988
reporting that Supertel and PMC Commercial Trust mutually terminated
their June 3, 1998 Merger Agreement.
-27-
<PAGE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
-28-
<PAGE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report 30
Consolidated Balance Sheets as of December 31, 1998 and 1997 31
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996 32
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 34
Notes to Consolidated Financial Statements 35
-29-
<PAGE>
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, 1998
and 1997, 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, 1998. 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Omaha, Nebraska
January 20, 1999
-30-
<PAGE>
<TABLE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $11,553,210 in 1998 and $8,594,991 in 1997 $ 11,520,593 9,532,430
Accounts receivable 1,428,531 1,157,372
Prepaid expenses 388,409 492,998
Recoverable income taxes -- 148,925
----------- -----------
Total current assets 13,337,533 11,331,725
----------- -----------
Property and equipment, at cost 113,530,994 108,740,409
Less accumulated depreciation 22,122,750 18,365,073
----------- -----------
Net property and equipment 91,408,244 90,375,336
----------- -----------
Other assets:
Intangible assets, less amortization of $1,300,288 in 1998 and $1,058,133 in 1997 1,312,828 1,515,858
Other assets 180,174 182,725
----------- -----------
Total other assets 1,493,002 1,698,583
----------- -----------
$ 106,238,779 103,405,644
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 2,437,936 1,942,380
Accounts payable 1,370,408 771,569
Income taxes payable 207,900 --
Accrued expenses:
Real estate taxes 1,838,088 1,702,126
Sales and lodging taxes 437,786 419,676
Payroll and payroll taxes 910,704 565,934
Royalty fees 256,906 283,220
Interest 294,825 362,312
----------- -----------
Total accrued expenses 3,738,309 3,333,268
----------- -----------
Total current liabilities 7,754,553 6,047,217
----------- -----------
Deferred income taxes 926,075 514,900
Long-term debt, excluding current installments 59,223,649 63,534,321
Other long-term liabilities 415,278 448,611
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 4,843,400 shares in 1998 and 4,840,000 shares in 1997 48,434 48,400
Additional paid-in capital 18,387,933 18,346,529
Retained earnings 19,482,857 14,465,666
----------- -----------
Total stockholders' equity 37,919,224 32,860,595
Commitments and contingency
----------- -----------
$ 106,238,779 103,405,644
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
-31-
<PAGE>
<TABLE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Motel revenues:
Lodging revenues $ 49,732,576 44,821,763 36,609,035
Other lodging activities 1,605,953 1,523,052 1,223,353
-------------- -------------- --------------
Total motel revenues 51,338,529 46,344,815 37,832,388
-------------- -------------- --------------
Direct operating expenses:
Payroll and payroll taxes 12,545,648 11,067,550 9,030,390
Royalties and advertising fund 3,107,849 2,978,371 2,415,065
Other lodging 13,044,448 12,906,110 10,577,925
-------------- -------------- --------------
Total lodging expenses 28,697,945 26,952,031 22,023,380
Other lodging activities 1,137,494 1,056,455 906,058
Depreciation and amortization 4,451,933 4,060,778 3,132,866
General and administrative 3,949,588 3,154,737 2,665,794
Transaction expense 708,143 -- --
-------------- -------------- --------------
Total direct operating expenses 38,945,103 35,224,001 28,728,098
-------------- -------------- --------------
Operating income 12,393,426 11,120,814 9,104,290
-------------- -------------- --------------
Other income (expenses):
Interest expense (4,056,558) (4,529,700) (3,545,296)
Miscellaneous income and other expenses 25,110 105,383 27,753
-------------- -------------- --------------
(4,031,448) (4,424,317) (3,517,543)
-------------- -------------- --------------
Income before income taxes 8,361,978 6,696,497 5,586,747
Income tax expense 3,344,787 2,594,832 2,215,500
-------------- -------------- --------------
Net income $ 5,017,191 4,101,665 3,371,247
============== ============== ==============
Basic and diluted net income per share $ 1.04 .85 .70
============== ============== ==============
Weighted average shares outstanding 4,841,403 4,840,000 4,840,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
-32-
<PAGE>
<TABLE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
Additional Total
Preferred Common paid-in Retained stockholders'
stock stock capital earnings equity
------------ ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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, December 31, 1997 -- 48,400 18,346,529 14,465,666 32,860,595
Exercise of stock options -- 34 41,404 -- 41,438
Net income -- -- -- 5,017,191 5,017,191
------------ ---------- --------------- --------------- ---------------
Balance at December 31, 1998 $ -- 48,434 18,387,933 19,482,857 37,919,224
============ ========== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-33-
<PAGE>
<TABLE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,017,191 4,101,665 3,371,247
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 4,209,778 3,738,474 2,862,390
Amortization 242,155 322,304 270,476
Loss on sale of property and equipment 92,910 67,302 104,244
Deferred income taxes 411,175 460,000 388,600
(Increase) decrease in current assets:
Accounts receivable (271,159) (139,327) (395,547)
Prepaid expenses 104,589 (173,136) (88,298)
Recoverable income taxes 148,925 55,878 37,166
Increase (decrease) in current liabilities:
Accounts payable 598,839 (14,887) (646,730)
Accrued expenses 405,041 619,395 865,893
Income taxes payable 207,900 -- --
------------ ------------ ------------
Net cash provided by operating activities 11,167,344 9,037,668 6,769,441
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (5,348,533) (11,765,451) (27,015,120)
Increase in intangibles and other assets (36,574) (218,649) (720,335)
Proceeds from sale of property and equipment 12,937 27,334 26,730
------------ ------------ ------------
Net cash used in investing activities (5,372,170) (11,956,766) (27,708,725)
------------ ------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (51,077,263) (67,077,199) (48,262,058)
Proceeds from long-term debt 47,262,147 72,592,352 68,964,934
Proceeds from the exercise of stock options 41,438 -- --
Other financing sources (33,333) 448,611 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,807,011) 5,963,764 20,702,876
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,988,163 3,044,666 (236,408)
Cash and cash equivalents at beginning of year 9,532,430 6,487,764 6,724,172
------------ ------------ ------------
Cash and cash equivalents at end of year $ 11,520,593 9,532,430 6,487,764
============ ============ ============
Supplemental cash flow information: Cash paid during the year for:
Interest (including amounts capitalized of $12,090 in 1998,
$156,101 in 1997, and $214,577 in 1996) $ 4,136,135 4,686,198 3,615,125
Income taxes 2,817,472 2,078,594 1,789,734
============ ============ ============
Noncash financing activities:
Long-term debt of $750,000 was refinanced in 1997
See accompanying notes to consolidated financial statements.
</TABLE>
-34-
<PAGE>
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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 sixty-three 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 which 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:
Buildings 40 years
Furniture, fixtures, and equipment 5 to 7 years
Vehicles 5 years
===============
(d) Intangible Assets
The Company has twenty-year franchise agreements with Cendant
Corp. and Choice Hotels International expiring from 1999 to 2017.
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:
Franchise fees 20 years
Organization costs 5 years
Loan origination fees Period of loan
Noncompetitive agreements 5 years
====================
-35-
<PAGE>
(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 ninety days to be cash equivalents.
(g) 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.
(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 would be 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
-36-
<PAGE>
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
ending 1998, 1997, and 1996, the effect of the stock options was
not significant.
(k) Impairment of Long-lived Assets and Long-lived Assets to be
Disposed Of
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
exceed 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.
(l) Comprehensive Income
During 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. This statement requires that an
enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of
the consolidated balance sheet. At December 31, 1998, the Company
has no items of accumulated other comprehensive income and,
therefore, comprehensive income is equal to net income for the
year then ended.
(2) Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
1998 1997
---------------- ---------------
<S> <C> <C>
Land $ 16,319,837 15,986,770
Buildings 77,482,811 74,911,403
Furniture, fixtures, and equipment 18,611,306 17,427,363
Vehicles 305,682 269,025
Construction in progress 811,358 145,848
---------------- ---------------
113,530,994 108,740,409
---------------- ---------------
Less accumulated depreciation 22,122,750 18,365,073
---------------- ---------------
Net property and equipment $ 91,408,244 90,375,336
================ ===============
</TABLE>
-37-
<PAGE>
(3) Long-term Debt
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
1998 1997
--------------- ----------------
<S> <C> <C>
Iowa and Nebraska Finance Authority Bonds,
currently ranging from 7.74% to 9.79%, due in monthly installments of
$12,043, including interest, with maturities through January 2007.
Secured by real estate 841,877 914,426
Notes payable at 5.45 to 9.25% (with blended
rate of 7.41% at December 31, 1998), due in
variable installments with maturities through
November 2009. Secured principally by
motel properties and assignment of rents 60,819,708 64,562,275
--------------- ----------------
Total long-term debt 61,661,585 65,476,701
Less current installments of long-term debt 2,437,936 1,942,380
--------------- ----------------
Long-term debt, excluding current
installments $ 59,223,649 63,534,321
=============== ================
</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% (7.45% at December 31, 1998) on funds
advanced and matures on June 1, 2000. Approximately $3,300,000 remains available
on this line of credit at December 31, 1998. 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 $9,769 in 1998 and $28,393 in 1997.
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, of which $13,900,000
remains outstanding at December 31, 1998. 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 1997, the Company also entered into a promissory note with a bank for the
amount of $4,500,000, of which $4,200,000 remains outstanding at December 31,
1998. The rate of interest on the note is 8.25% per annum until the date of
maturity, May 19, 2002.
-38-
<PAGE>
No other significant changes occurred in long-term debt in 1998 or 1997. Other
remaining principal balances represent notes payable to banks in the aggregate
amount of $21,700,000, all at various rates and maturities.
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, 1998, the Company was in compliance
with these covenants. At December 31, 1998, 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 1998 are
as follows:
<TABLE>
<S> <C>
1999 $ 2,437,936
2000 24,096,576
2001 2,541,376
2002 6,713,714
2003 2,635,224
Thereafter 23,236,759
---------------
$ 61,661,585
===============
</TABLE>
(4) Income Taxes
Income tax expense for the years ended December 31, 1998, 1997, and 1996
consists of the following:
<TABLE>
1998 1997 1996
--------------------------------------- ------------------------------------ -------------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------------ -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 2,374,832 345,157 2,719,989 1,707,866 367,000 2,074,866 1,480,000 305,000 1,785,000
State 558,780 66,018 624,798 426,966 93,000 519,966 346,900 83,600 430,500
------------ -------- --------- --------- -------- --------- --------- -------- ---------
$ 2,933,612 411,175 3,344,787 2,134,832 460,000 2,594,832 1,826,900 388,600 2,215,500
============ ======== ========= ========= ======== ========= ========= ======= =========
</TABLE>
Income tax expense is reconciled with income taxes computed at the federal
statutory rate of 34% for the years ended December 31, 1998, 1997, and 1996 as
follows:
<TABLE>
1998 1997 1996
-------------- -------------- ------------
<S> <C> <C>
Tax expense computed at federal statutory rate $ 2,843,073 2,276,809 1,899,494
State income tax, net of federal tax effect 412,367 343,178 284,130
Other (89,347) (25,155) 31,876
-------------- -------------- ------------
$ 3,166,093 2,594,832 2,215,500
============== ============== ============
</TABLE>
-39-
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Other $ -- 10,400
------------ ------------
Deferred tax liabilities:
Book basis over tax basis on property
and equipment 835,565 497,722
Book basis over tax basis on other assets 90,510 27,578
------------ ------------
Total deferred tax liabilities 926,075 525,300
------------ ------------
Net deferred tax liabilities $ 926,075 514,900
============ ============
</TABLE>
There was no valuation allowance provided for deferred tax assets at
December 31, 1997.
(5) Leases
The Company has leases for outdoor advertising signs and various other
items under noncancelable one to ten-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, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 342,910
2000 198,574
2001 73,864
2002 18,220
2003 17,820
Thereafter 14,850
------------------
$ 666,238
==================
</TABLE>
Rent expense incurred was $615,357 in 1998, $643,570 in 1997, and
$529,311 in 1996.
(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 may be offered at the discretion of the compensation committee
of the Board of Directors to key employees to purchase shares of common
stock of the Company. Also, each nonemployee director will annually
receive an option to acquire 1,500 shares of common stock. Options for
an aggregate of 400,000 common shares may be granted 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, 1998,
there were 237,200 additional shares available for grant under the plan.
-40-
<PAGE>
The per share weighted average fair value of stock options granted
during 1998, 1997, and 1996 was $3.79, $3.99, and $7.32, respectively,
on the date of grant using the Black Scholes option-pricing model with
the following weighted average assumptions: 1998 - expected dividend
yield of 0%, risk-free interest rate of 5%, and an expected life of five
years; 1997 - expected dividend yield of 0%, risk-free interest rate of
6.0%, and an expected life of five years; and 1996 - expected dividend
yield of 0%, risk-free interest rate of 6.5%, and an expected life of
ten years.
The Company applies APB Opinion No. 25 in accounting for its plan 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>
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income:
As reported $ 5,017,191 4,101,665 3,371,247
Pro forma 4,886,291 3,958,794 3,210,566
================== ================== ==================
Net income per share - basic and diluted:
As reported $ 1.04 0.85 0.70
Pro forma 1.01 0.82 0.66
================== ================== ==================
</TABLE>
Pro forma net income reflects only options granted in 1998, 1997, and
1996. 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 twelve 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, 1998 are summarized below:
<TABLE>
Number Option price
of options per share range
------------ ----------------
<S> <C> <C>
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
Granted 57,600 10.75 to 13.03
Exercised (3,400) 10.00 to 11.125
Canceled (4,100) 10.00 to 13.50
------------ ----------------
Options outstanding at December 31, 1998 162,800 $ 8.50 to 13.75
============ ================
Options exercisable at December 31, 1998 108,200 $ 8.50 to 13.75
============ ================
</TABLE>
-41-
<PAGE>
(8) 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. In January 1998, the plan was expanded to include all
eligible full-time and part-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 $310,000 and $41,000 in 1998 and
1997, respectively.
(9) 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 for 1996 have been prepared
as if the acquisitions had occurred at the beginning of fiscal 1996:
<TABLE>
<S> <C>
Pro forma:
Net revenue $ 39,610,881
Net income 3,504,152
Net income per share - basic and diluted .72
==============
</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 1998 or 1997.
(10) Transaction Expense
In 1998, the Company incurred legal, accounting, investment banking,
environmental, and title expenses fees of $708,000 relating to a
terminated merger agreement, and all related expenses are included in
the accompanying consolidated financial statements as a separate
component of operating expenses.
-42-
<PAGE>
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 22nd day of March, 1999.
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 22nd day of March,
1999.
/s/ Paul J. Schulte Director and Chief Executive Officer
- --------------------------
Paul J. Schulte
/s/ Steve H. Borgmann Director, Executive Vice President and
- --------------------------
Steve H. Borgmann Chief Operating Officer
/s/ Richard Herink Director and Executive Vice President
- --------------------------
Richard Herink
/s/ Troy Beatty Senior Vice President (Chief Financial
- --------------------------
Troy Beatty Officer and Principal Accounting Officer)
/s/ Joseph Caggiano Director
- --------------------------
Joseph Caggiano
/s/ Paul J. Schulte* Director
- --------------------------
Loren Steele
* Pursuant to power of attorney -- Exhibit 24.1
-43-
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
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 Supertel'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,
incorporated herein by reference to Supertel's Annual Report on Form
10-K for the year ended December 31, 1997.
4.3 Term Loan Agreement dated May 9, 1997 between Supertel and First Bank
National Association, incorporated herein by reference to Supertel's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
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 Agreement,
incorporated herein by reference to Supertel'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 Supertel's annual report on Form 10-K for the year ended
December 31, 1995.
10.4 Amended and Restated Territorial Development Agreement dated June 30,
1994 between Supertel and Super 8 Motels, Inc., incorporated herein by
reference to Supertel'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 Supertel'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, incorporated herein by reference to
Supertel's annual report on Form 10-K for the year ended December 31,
1997.
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 Supertel'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 Supertel's
annual report on Form 10-K for the year ended December 31, 1995.
21.1 List of Subsidiaries.............................
23.1 Consent of KPMG Peat Marwick LLP.................
24.1 Power of Attorney................................
27 Financial Data Schedule..........................
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.
-45-
<PAGE>
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>
EXHIBIT 23.1
INDEPENDENT AUDITORS' 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 20, 1999, relating to the consolidated balance sheets of Supertel
Hospitality, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1997, 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,
1998, which report appears in the December 31, 1998 annual report on Form 10-K
of Supertel Hospitality, Inc.
KPMG Peat Marwick LLP
Omaha, Nebraska
March 19, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned Director of Supertel Hospitality, Inc., a Delaware
corporation, hereby constitutes and appoints Paul J. Schulte as Attorney-in-Fact
in his name, place and stead to execute Supertel's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, together with any and all
subsequent amendments thereof, in his capacity as a director and hereby ratifies
all that said Attorney-in-Fact may do by virtue thereof.
In witness whereof, the undersigned has hereunto signed this power of
attorney this 19th day of March, 1999.
/s/ Loren Steele
----------------------------------
Loren Steele
<PAGE>
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