<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------------------------------
For the Second Quarter Ended July 12, 1998 Commission File No. 0-19840
----------------------------------------------
SHOLODGE, INC.
(Exact name of registrant as specified in its charter)
----------------------------------------------
TENNESSEE 62-1015641
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
130 MAPLE DRIVE NORTH, HENDERSONVILLE, TENNESSEE 37075
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 264-8000
----------------------------------------------
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 as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
As of August 24, 1998, there were 8,255,810 shares of ShoLodge, Inc. common
stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997(1)
-------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,384,819 $ 59,105,505
Accounts receivable-net 3,642,844 3,053,422
Construction contracts 0 125,001
Income taxes receivable 4,472,362 6,132,154
Prepaid expenses 689,147 532,698
Other current assets 210,662 205,891
-------------------------------
Total current assets 30,399,834 69,154,671
DIRECT FINANCING LEASES, less current portion 287,377 297,037
PROPERTY AND EQUIPMENT 238,722,088 197,129,415
Less accumulated depreciation and amortization -42,321,921 -39,790,321
-------------------------------
196,400,167 157,339,094
LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,040,383 9,404,966
DEFERRED CHARGES 10,342,759 10,787,233
SECURITIES HELD TO MATURITY - RESTRICTED 9,350,314 8,946,985
SECURITIES AVAILABLE FOR SALE 271,365 264,581
DEPOSITS ON SALE/LEASEBACK 28,000,000 28,000,000
DEFERRED TAX ASSET 4,416,887 4,416,887
INTANGILE ASSETS 3,344,747 3,435,725
OTHER ASSETS 7,733,639 7,829,813
-------------------------------
TOTAL ASSETS $299,587,472 $299,876,992
===============================
</TABLE>
(1) Derived from fiscal year ended December 28, 1997 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997(1)
-------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,148,266 $ 10,919,712
Taxes other than on income 1,423,465 1,040,956
Income taxes payable 282,580 473,962
Current portion of long-term debt
and capitalized lease obligations 2,659,069 2,599,739
-------------------------------
Total current liabilities 17,513,380 15,034,369
LONG-TERM DEBT ASSOCIATED WITH LODGING FACILITIES 30,643,978 31,710,579
OTHER LONG-TERM DEBT 122,141,132 122,166,745
CAPITALIZED LEASE OBLIGATIONS 406,986 760,606
DEFERRED GAIN ON SALE/LEASEBACK 32,404,577 34,377,131
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 439,718 475,590
-------------------------------
TOTAL LIABILITIES 203,549,771 204,525,020
-------------------------------
SHAREHOLDERS' EQUITY:
Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares outstanding) -- --
Common stock (no par value; 20,000,000 shares
authorized, 8,255,810 shares issued and outstanding
as of July 12, 1998 and 8,255,810 shares issued
and outstanding as of December 28, 1997) 1,000 1,000
Additional paid-in capital 42,431,520 42,431,520
Retained earnings 53,508,532 52,827,145
Unrealized gain on securities available for sale (net of tax) 96,649 92,307
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 96,037,701 95,351,972
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $299,587,472 $299,876,992
===============================
</TABLE>
(1) Derived from fiscal year ended December 28, 1997 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 4
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE TWENTY-EIGHT WEEKS ENDED JULY 12, 1998 AND JULY 13, 1997
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
JULY 12, JULY 13, JULY 12, JULY 13,
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 19,344,570 $17,950,886 $41,960,081 $38,645,034
Franchising 526,998 707,661 1,489,497 1,889,545
Management 35,119 35,183 70,965 72,538
-------------------------------------------------------
Total operating revenues 19,906,687 18,693,730 43,520,543 40,607,117
COSTS AND EXPENSES:
Operating expenses:
Hotel 11,574,319 9,408,311 25,081,320 20,841,536
Franchising 528,448 504,422 1,276,704 1,216,001
-------------------------------------------------------
Total operating expenses 12,102,767 9,912,733 26,358,024 22,057,537
-------------------------------------------------------
Gross operating profit 7,803,920 8,780,997 17,162,519 18,549,580
General and administrative 1,609,711 639,738 3,090,321 1,568,252
Rent expense 2,281,620 217,563 5,349,400 460,435
Depreciation and amortization 2,089,053 2,572,106 4,661,531 5,501,163
-------------------------------------------------------
Operating profit 1,823,536 5,351,590 4,061,267 11,019,730
OTHER INCOME AND EXPENSES:
Interest expense 2,463,630 2,579,932 5,661,361 5,446,157
Interest income 786,843 311,435 2,133,114 665,291
-------------------------------------------------------
Net interest expense 1,676,787 2,268,497 3,528,247 4,780,866
Other income 360,180 1,465,753 604,075 1,688,955
-------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 506,929 4,548,846 1,137,095 7,927,819
INCOME TAXES 162,000 1,551,000 382,000 2,761,000
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS 54,487 156,443 73,708 286,273
-------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN 290,442 2,841,403 681,387 4,880,546
ACCOUNTING POLICY
-------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY
(net of tax effect of 691,000) -1,164,114
-------------------------------------------------------
NET EARNINGS $ 290,442 $ 2,841,403 $ 681,387 $ 3,716,432
=======================================================
EARNINGS PER COMMON SHARE
Basic:
Earnings before cumulative effect of change
of accounting policy $ 0.04 $ 0.34 $ 0.08 $ 0.59
Cumulative effect of change of accounting policy $ (0.14)
Net earnings $ 0.04 $ 0.34 $ 0.08 $ 0.45
=======================================================
Diluted:
Earnings before cumulative effect of change
of accounting policy $ 0.04 $ 0.32 $ 0.08 $ 0.58
Cumulative effect of change of accounting policy $ (0.14)
Net earnings $ 0.04 $ 0.32 $ 0.08 $ 0.44
=======================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,255,810 8,239,269 8,255,810 8,236,130
Diluted 8,268,921 10,685,454 8,323,251 8,356,121
-------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEKS ENDED JULY 12, 1998 AND JULY 13, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
28 WEEKS ENDED
JULY 12, JULY 13,
1998 1997
--------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 681,387 $ 4,880,546
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 4,661,531 5,403,040
DECREASE IN DEFERRED INCOME TAXES -274,000
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 73,708 286,273
GAIN ON SALE OF PROPERTY & EQUIPMENT -108,357 -1,190,687
ACCRETION OF DISCOUNT ON SECURITIES
HELD TO MATURITY -403,329 -425,338
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE 1,195,371 -697,253
(INCREASE) IN PREPAID EXPENSES -156,449 -748,173
DECREASE IN OTHER ASSETS 75,148 239,172
INCREASE (DECREASE) IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 2,228,554 -4,197,296
INCREASE IN INCOME AND OTHER TAXES 188,684 127,601
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,436,248 3,403,885
CASH FLOWS FROM INVESTING ACTIVITIES:
RECOGNITION OF PREVIOUSLY DEFERRED PROFIT -1,972,554
CAPITAL EXPENDITURES -44,014,125 -27,884,061
PROCEEDS FROM SALE OF PROPERTY & EQUIPMENT 1,059,205 1,743,364
- -----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES -44,927,474 -26,140,697
CASH FLOWS FROM FINANCING ACTIVITIES:
DECREASE (INCREASE) IN DEFERRED CHARGES 256,964 -263,228
PROCEEDS FROM DIRECT FINANCING LEASES 9,660 153,871
PROCEEDS FROM LONG-TERM DEBT 61,200,000
PAYMENTS ON LONG-TERM DEBT -1,032,884 -38,558,313
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS -353,620 -279,505
DISTRIBUTIONS TO MINORITY INTERESTS -109,580 -100,000
EXERCISE OF STOCK OPTIONS 181,606
- -----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES -1,229,460 22,334,431
- -----------------------------------------------------------------------------------------------------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS $(37,720,686) $ (402,381)
===========================================================================================================
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD $ 59,105,505 $ 4,259,768
===========================================================================================================
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,384,819 $ 3,857,387
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. The consolidated financial statements have been prepared by the
Company without audit.
In Management's opinion, the information and amounts furnished
in this report reflect all adjustments which are necessary for
the fair presentation of the financial position and results of
operations for the periods presented. All adjustments are of a
normal and recurring nature. It is suggested that these
financial statements be read in conjunction with the Company's
Annual Report or Form 10-K for the fiscal year ended December
28, 1997 and the Company's Quarterly Report on Form 10-Q for the
twenty-eight weeks ended July 12, 1998.
There have been no changes in accounting policies nor has the
composition of accounts substantially changed since the year
ended December 28, 1997.
The fiscal year consists of a 52/53 week year ending the last
Sunday of the year.
The Company has historically reported lower earnings in the
first and fourth quarters of the year due to the seasonality of
the Company's business. The results of operations for the
quarters ended July 12, 1998 and July 13, 1997 are not
necessarily indicative of the operating results for the entire
year.
B. On December 29, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". Comprehensive income includes net income and other
comprehensive income which is defined as non-owner transactions
in equity. The following table sets forth (in thousands) the
amounts of other comprehensive income included in equity for the
two quarters ended July 12, 1998 and July 13, 1997.
<TABLE>
<CAPTION>
7/12/98 7/13/97
------- -------
<S> <C> <C>
Net unrealized gain on securities
available for sale for the quarter $4 None
</TABLE>
C. On December 29, 1997, the Company adopted the practice of
capitalizing only directly identifiable internal costs of
identifying and acquiring commercial properties in accordance
with Emerging Issues Task Force ("EITF") Issue No. 97-11. The
implementation of this EITF resulted in increased operating
costs of approximately $330,000 and $560,000 in the second
quarter of 1998 and in the first two quarters of 1998,
respectively.
D. The net earnings per share is computed by dividing net earnings
by the weighted average number of common shares outstanding.
<PAGE> 7
ShoLodge, Inc. and Subsidiaries Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
For the Fiscal Quarters and Fiscal Year-to-date Periods Ended July 12, 1998
Total revenues for the fiscal quarter ended July 12, 1998, increased
6.5% to $19.9 million from $18.7 million for the same period in 1997. For the
two fiscal quarters ended July 12, 1998, total revenues increased 7.2% to $43.5
million from $40.6 million for the same period in 1997.
Revenues from hotel operations in the second fiscal quarter of 1998
increased by 7.8% to $19.3 million from $18.0 million for the same period in
1997. For the 45 same hotels opened for all of both quarterly periods (same
hotels), average daily room rates in the second fiscal quarter of 1998 increased
2.4% to $60.93 from $59.50 in the second quarter of 1997, while average
occupancy rates decreased to 63.5% from 64.1%, resulting in a net increase in
same hotel revenues per available room (RevPAR) of 1.4%, from $38.17 in the
second quarter of 1997 to $38.72 in the second quarter of 1998. The remaining
(non-same) hotels contributed $1.9 million to hotel revenues in the second
quarter of 1998 compared with $755,000 for the same period in 1997. The $755,000
from these hotels in second quarter of 1997 included $366,000 from one new hotel
and $389,000 from a hotel which was sold in the fourth quarter of 1997.
Revenues from hotel operations in the first two quarters of 1998
increased 8.6% to $42.0 million from $38.6 million for the same period in 1997.
For the 44 same hotels, average daily room rates in the first two quarters of
1998 increased 1.7% to $59.72 from $58.70 in the first two quarters of 1997 and
average occupancy rates increased to 59.6% from 59.1%, resulting in a net
increase in same hotel RevPAR of 2.6%, from $34.71 in the first two quarters of
1997 to $35.62 in the first two quarters of 1998. The five hotels opened during
1997 and the first two quarters of 1998 contributed $4.3 million to hotel
revenues in the first two quarters of 1998 compared to $554,000 for the same
period in 1997. The hotel which was sold in the fourth quarter of 1997
contributed $984,000 to hotel revenues in the first two quarters of 1997.
The Company owns and operates two hotel brands - Shoney's Inns and
Sumner Suites hotels. RevPAR for the 31 Company-owned Shoney's Inns declined
slightly, from $34.62 in the second quarter of 1997 to $34.43 in the second
quarter of 1998. This decrease in RevPAR on the Shoney's Inns was from $31.37 in
the first two quarters of 1997 to $30.80 in the first two quarters of 1998. The
18 Sumner Suites hotels' RevPAR declined slightly in the second quarter from the
same period last year, from $45.30 to $45.22, but increased for the two quarters
by 9.8%, from $41.56 to $45.65. The 14 Sumner Suites same hotels' RevPAR
increased from $45.30 in the second quarter of 1997 to $48.71 in the second
quarter of 1998. The 13 Sumner Suites same hotels on a year-to-date basis
increased RevPAR by 13.1%, from $42.07 in the first two quarters of
<PAGE> 8
1997 to $47.59 in the first two quarters of 1998. All future Company-owned
hotels currently planned are the Sumner Suites brand. After the end of the
second quarter the Company entered into a definitive agreement to sell 16 of its
Company-owned Shoney's Inns, which is scheduled to close in the third quarter.
The Company plans to exploit additional opportunities to sell its other 15
Shoney's Inns.
Franchising revenues declined by $181,000, or 25.5%, in the second
quarter of 1998 from second quarter 1997. The primary causes of the decrease
were (1) a decrease in royalty fees earned due primarily to the termination of
14 Shoney's Inns owned by one franchisee effective June 1, 1998, and (2) the
loss of reservation fee income due primarily to the cancellation of reservation
services from two hotel chains in early 1997 and the 14 Shoney's Inns mentioned
above in the second quarter of 1998. Approximately $100,000 of the $181,000
decrease was in royalty fee income with the balance in reservation fees.
Franchising revenues declined by $400,000, or 21.2%, in the first two quarters
of 1998 from the first two quarters of 1997. The primary causes of the decrease
were as discussed above for the second quarter, but for a year-to-date effect of
approximately $560,000, offset with an increase in year-to-date initial
franchise fees of approximately $160,000 over the first two quarters of 1997.
Initial franchise fees can vary materially from quarter to quarter. The 16
Company-owned Shoney's Inns, for which a sale is pending, will be franchised to
the prospective purchaser and is expected to produce additional franchise
revenues of approximately $1 million annually. Management revenues were not
material in either comparative quarter or year-to-date period, but declined
slightly for the first two quarters, from $73,000 in 1997 to $71,000 in 1998.
Operating expenses from hotel operations for the second quarter of 1998
increased by $2.2 million, or 23.0%, from $9.4 million in the second quarter of
1997 to $11.6 million in the second quarter of 1998, due partially to the $1.4
million increase in hotel operating revenues. Operating expenses as a percentage
of operating revenues for this activity, however, increased from 52.4% in second
quarter 1997 to 59.8% in second quarter 1998. Operating expenses from hotel
operations for the first two quarters of 1998 increased by $4.2 million, or
20.3%, from $20.8 million in the first two quarters of 1997 to $25.1 million in
the first two quarters of 1998, due partially to the $3.3 million increase in
hotel operating revenues. Operating expenses as a percentage of operating
revenues for this activity, however, increased from 53.9% in the first two
quarters of 1997 to 59.8% in the first two quarters of 1998. The negative impact
on hotel profit margin for both the second quarter and the first two quarters of
1998 was due primarily to increases in expenses in the areas of payroll related
costs, real estate taxes, repairs and maintenance, travel agents commissions,
and various supplies costs.
Franchise operating expenses increased by $24,000, or 4.8%, from second
quarter 1997 due primarily to increased payroll related expenses. This increase
for the first two quarters of 1998 over the first two quarters of 1997 was
$61,000, or 5.0%, due to the same factor. General and administrative expenses
increased by $970,000 in the second quarter of 1998 over the second quarter of
1997. The increase for the first two quarters of 1998 over the comparable period
of 1997 was $1.5 million. These substantial increases
<PAGE> 9
in general and administrative expenses were due primarily to increased
professional fees, increased expenses related to the occupancy of the new
corporate headquarters building, increased land acquisition costs as a result of
implementing Emerging Issues Task Force ("EITF") No. 97-11, provisions to a
workers' compensation self insurance reserve, and increased franchise taxes.
Rent expense increased by $2.1 million in the second quarter over last
year's second quarter, and by $4.9 million in the first two quarters of 1998
over the first two quarters of 1997. These increases were due to the
sale-leaseback of 14 hotels in fourth quarter 1997, for which net rent expense
incurred in the second quarter of 1998 was $2.1 million and in the first two
quarters of 1998 was $4.8 million.
Depreciation and amortization expense decreased by $483,000, or 18.8%,
from second quarter 1997, and for the first two quarters of 1998 decreased by
$840,000, or 15.3%, from the first two quarters of 1997. The sale-leaseback of
14 hotels in November of 1997 caused depreciation expense to be eliminated on
those hotels subsequent to the fourth quarter of 1997. Depreciation expense on
those 14 hotels in the second quarter of 1997 was $669,000, and for the first
two quarters of 1997 was $1.5 million. These reductions were partially offset,
however, with increases in depreciation and amortization on additions to
depreciable and amortizable assets beginning with first quarter 1997, which
increased depreciation and amortization expense, net of the effect of any
dispositions, by $186,000 for the second quarter of 1998, and by $615,000 for
the first two quarters of 1998.
Interest expense for the second quarter of 1998 decreased by $116,000,
while interest income increased by $476,000 from the second quarter of 1997, for
a decrease of $592,000 in net interest expense. For the first two quarters of
1998, interest expense increased by $215,000 over the first two quarters of
1997, while interest income increased during this period by $1.5 million, for a
net decrease of $1.3 million in net interest expense. These reductions in net
interest expense in 1998 from 1997 are primarily the result of the
sale-leaseback of 14 hotels in fourth quarter of 1997 which was used to reduce
indebtedness and invested in interest-earning funds until needed for capital
expenditures for new hotels.
Other income in the second quarter of 1998 decreased by $1.1 million
from the second quarter of 1997. This was due primarily to a gain of $1.3
million on the sale of excess land in the second quarter of 1997, whereas no
comparable transaction occurred in the second quarter of 1998. Other income for
the first two quarters of 1998 also decreased by $1.1 million from the same
period last year due to the land sale transaction in the second quarter of 1997.
Minority interests in earnings and losses of subsidiaries and partnerships
decreased by $102,000 in the second quarter of 1998 from second quarter 1997,
and decreased by $213,000 for the first two quarters of 1998 as compared with
the first two quarters of 1997, due to less profitable consolidated entities
which include minority ownership. The year-to-date decrease also included an
adjustment of $72,000 in minority interest receivable in the first quarter of
1997.
<PAGE> 10
The Company elected to make a change in accounting for pre-opening
costs effective with the beginning of its 1997 fiscal year to reflect the
preferable method of expensing pre-opening costs as incurred, rather than
capitalizing those expenditures and amortizing them over a three year period.
The cumulative effect of this accounting change for periods prior to fiscal 1997
recognized in the first quarter of 1997, net of income tax effect, was a
reduction in net earnings of $1,164,000. This is a one-time non-recurring
charge.
Liquidity and Capital Resources
The Company's cash flows provided by operating activities were $8.4
million in the first two quarters of 1998, compared with $3.4 million used in
operating activities in the first two quarters of 1997. The increase in accounts
payable and accrued expenses in first two quarters of 1998 of $2.2 million
contrasted to a decrease in first two quarters 1997 of $4.2 million, accounted
for an increase in operating cash flows of $6.4 million from this source from
first two quarters 1997 to first two quarters 1998. A reduction of $1.2 million
in accounts receivable in the first two quarters of 1998 versus an increase in
accounts receivable of $697,000 during the comparable period in 1997, resulted
in an increase in operating cash flows of $1.9 million. In first two quarters
1997 the Company recognized $1.3 million of profit on the sale of excess land.
The Company's cash flows used in investing activities were $44.9
million in first two quarters 1998 compared with $26.1 million for the
comparable period in 1997. The Company requires capital principally for the
construction and acquisition of new lodging facilities and the purchase of
equipment and leasehold improvements. Capital expenditures for such purposes
were $44.0 million in first two quarters 1998 and $27.9 in first two quarters
1997. In the first two quarters of 1998 the Company recognized $2.0 million of
deferred profit from a sale-leaseback transaction which occurred in fourth
quarter 1997.
Net cash used in financing activities was $1.2 million in first two
quarters 1998 compared with net cash provided by financing activities of $22.3
million in first two quarters 1997. The primary reason for this $23.6 million
difference was the proceeds from net borrowings on unsecured bank credit
facilities in the amount of $20.2 in first two quarters 1997 versus none in
first two quarters 1998. The sale-leaseback of 14 hotels in November 1997
provided funds to repay all unsecured bank credit facilities with excess funds
which are temporarily invested in high-grade short-term securities until needed
for construction and acquisition of new lodging facilities. As of the end of
second quarter 1998, the balance of these invested funds totaled $16.7 million.
Effective January 16, 1998, the company amended its $75.0 million
unsecured three-year revolving credit facility with a group of five banks. The
interest rate on this amended credit facility is at the lender's base rate or
one hundred seventy-five basis
<PAGE> 11
points over the 30, 60, 90, or 180 day LIBOR rate, at the Company's option.
Thereafter, the interest rate is based on the ratio of senior debt to EBITDAR,
as defined in the credit facility (the "Senior Leverage Ratio") and ranges from
base rate minus .25% to base rate plus .50% or 150 to 250 basis points over the
30, 60, 90, or 180 day LIBOR rate, at the Company's option. The Company pays
commitment fees on the unused portion of the facility raging from .15% to .40%
based on the Senior Leverage Ratio and certain other fees under the credit
facility. The credit facility contains covenants which, inter alia, limit or
prohibit incurrences of certain additional indebtedness, liens on assets,
investments, asset sales, mergers, dividends and amendments to indebtedness
subordinated to the credit facility. It also contains financial covenants by the
Company, including covenants with respect to net worth, indebtedness to total
capitalization, fixed charge coverage and the Senior Leverage Ratio. In
connection with the Company's anticipated sale of 16 hotels, the group of five
banks has consented to the sale transaction with the provision that a review of
the financial covenants in the credit agreement be performed and an amendment to
the credit agreement, if appropriate, be executed. Until such time as the
amendment is executed, or determined not to be required, the Company is
precluded from borrowing on the revolving credit facility. The Company currently
has no borrowings outstanding under this credit facility and anticipates no need
to borrow on it prior to any amendment being executed.
The Company also has a $1.0 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
1999. As of July 12, 1998, the Company had no borrowings outstanding under this
credit facility.
The Company opened four Sumner Suites hotels in 1997 and one in first
quarter 1998. Additionally, renovations of several existing properties were
completed in 1997, and several others are scheduled for completion in fiscal
1998. Furthermore, the Company's new corporate headquarters building was
completed in 1997. The Company currently has eight Sumner Suites hotels under
construction. In addition, the Company has properties for another seven Sumner
Suites hotels under contract which are scheduled to open by the end of second
quarter 1999. The Company expects that approximately $100 million in additional
capital funds will be necessary through second quarter 1999 to fulfill these
plans.
The Company has principal payments totaling approximately $2.6 million
due under existing debt instruments through second quarter 1999. The Company
believes that a combination of the balance of net proceeds from the
sale/leaseback transaction, additional sale-leaseback transactions, net cash
provided from operations, borrowings under existing or new credit facilities,
proceeds from sale of excess land and hotels, and available furniture, fixtures,
and equipment financing packages will be sufficient to fund its scheduled
development and debt repayments for the next twelve months.
<PAGE> 12
YEAR 2000 COMPLIANCE
The Company has commenced a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issues
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
two-digit time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations. The Company has designated its Information Systems Director to
coordinate its Year 2000 compliance program. Preliminary analysis has been
conducted and areas have been identified where the Company might be most
vulnerable. A sample of hardware and software has been tested and has operated
satisfactorily. Vendors of all the major third party applications have been
contacted and the Company is obtaining assurances of Year 2000 compliance from
those vendors. The Company currently believes that it will be Year 2000
compliant on a timely basis to avoid any material operations disruptions. To
date the Company has not identified any material expenditures which will be
required to become Year 2000 compliant. However, there can be no assurance that
such operations difficulties or expenditures will not be identified or
experienced in the future.
The statements appearing in this report which are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements, including delays in concluding or the inability to
conclude transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks.
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Lorraine Donergue v. ShoLodge, Inc., Leon Moore, Michael A.
Corbett and Bob Marlowe, Case No. 3-98-0295, United States
District Court for the Middle District of Tennessee, filed
March 31, 1998. This case was dismissed with respect to all
named defendants in August 1998.
Paul Senior v. ShoLodge, Inc., Leon Moore, and Bob Marlowe,
Case No. 98C-136, Chancery Court for Sumner County,
Tennessee at Gallatin, filed April 29, 1998 ("Senior Case").
This case names the Company and two of its officers, Leon
Moore and Bob Marlowe, as defendants in a purported class
action lawsuit by plaintiffs who claim to be shareholders of
the Company. The case originally named Michael A. Corbett,
former chief financial officer of the Company, as a
defendant, but Mr. Corbett was recently deleted as a named
defendant. The Senior Case alleges that the Company violated
certain anti-fraud provisions of the Tennessee Securities
Act of 1980, as amended, by issuing allegedly false and
misleading statements and financial information to the
investing public during 1997. The Senior Case was stayed by
the court in deference to the Donergue Case then pending in
Federal court. The Company has not yet filed an answer to
the Senior Case.
Stanley Gale v. ShoLodge, Inc., Leon Moore and Bob Marlowe,
Case No. 98C-208, Chancery Court for Sumner County,
Tennessee at Gallatin, filed July 2, 1998 ("Gale Case").
This case names the Company and two of its officers, Leon
Moore and Bob Marlowe, as defendants in a purported class
action lawsuit by plaintiffs who claim to be holders of the
Company's debt securities. The Gale Case alleges that the
Company violated certain anti-fraud provisions of the
Tennessee Securities Act of 1980, as amended, based on
essentially the same factual allegations as the Senior Case.
The Company has filed a motion to dismiss the case for
failure to state a cause of action under the applicable
state statute.
Michael A. Corbett v. ShoLodge, Inc., and Leon Moore, Case
No. 98C-184, Chancery Court for Sumner County, Tennessee at
Gallatin, filed June 12, 1998. This case was filed by
Michael A. Corbett, the former chief financial officer, of
the Company and alleges that his employment by the Company
was wrongfully terminated. The plaintiff alleges breach of
contract, fraud, retaliatory discharge and related claims.
The plaintiff seeks $3 million in compensatory damages and
punitive and treble damages. The defendants filed an answer
to the complaint on July 8, 1998, denying the allegations.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
29, 1998, 8,255,810 shares were outstanding and eligible to
vote. The Shareholders considered and voted to reelect the
following directors:
<TABLE>
<CAPTION>
Name of Nominee Vote Cast
--------------- ---------
For Withheld
--- --------
<S> <C> <C>
Earl H. Sadler 7,129,708 332,570
Bob Marlowe 7,136,990 325,288
</TABLE>
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
6 (a) Exhibits -
11 Statement Re: Computation of per share earnings
27 Financial Data Schedule (for SEC use only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, The Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ShoLodge, Inc.
Date: August 25, 1998 /s/ Leon Moore
---------------------------------
Leon Moore
President, Chief Executive
Officer, Principal Executive
Officer, Director
Date: August 25, 1998 /s/ Bob Marlowe
---------------------------------
Bob Marlowe
Secretary, Treasurer, Chief
Accounting Officer, Principal
Accounting Officer, Chief
Financial Officer, Director
<PAGE> 1
EXHIBIT 11
SHOLODGE, INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
BASIC AND ASSUMING DILUTION
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
-----------------------------------------------------------
JULY 12, JULY 13, JULY 12, JULY 13,
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC:
EARNINGS APPLICABLE TO COMMON STOCK (BASIC):
FROM CONTINUING OPERATIONS $ 290,442 $ 2,841,403 $ 681,387 $ 4,880,546
FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE $(1,164,114)
-----------------------------------------------------------
NET EARNINGS $ 290,442 $ 2,841,403 $ 681,387 $3,716,432
===========================================================
SHARES:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,255,810 8,239,269 8,255,810 8,236,130
===========================================================
BASIC EARNINGS PER SHARE:
FROM CONTINUING OPERATIONS $ 0.04 $ 0.34 $ 0.08 $ 0.59
FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE $ (0.14)
-----------------------------------------------------------
NET EARNINGS $ 0.04 $ 0.34 $ 0.08 $ 0.45
===========================================================
DILUTED:
EARNINGS APPLICABLE TO COMMON STOCK (BASIC):
FROM CONTINUING OPERATIONS $ 290,442 $ 2,841,403 $ 681,387 $ 4,880,546
FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE $(1,164,114)
-----------------------------------------------------------
NET EARNINGS $ 290,442 $ 2,841,403 $ 681,387 $ 3,716,432
INTEREST (LESS TAX) ON CONVERTIBLE
SUBORDINATED DEBENTURES $ 604,696
ADJUSTED EARNINGS APPLICABLE TO COMMON STOCK:
FROM CONTINUING OPERATIONS $ 290,442 $ 3,446,099 $ 681,387 $ 4,880,546
FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE $(1,164,114)
-----------------------------------------------------------
NET EARNINGS $ 290,442 $ 3,446,099 $ 681,387 $ 3,716,432
===========================================================
SHARES:
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 8,268,921 8,368,852 8,323,251 8,356,121
SHARES ISSUABLE UPON CONVERSION OF CONVERTIBLE
SUBORDINATED DEBENTURES 2,316,602
-----------------------------------------------------------
8,268,921 10,685,454 8,323,251 8,356,121
===========================================================
DILUTED EARNINGS PER SHARE:
FROM CONTINUING OPERATIONS $ 0.04 $ 0.32 $ 0.08 $ 0.58
FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE $ (0.14)
===========================================================
NET EARNINGS $ 0.04 $ 0.32 $ 0.08 $ 0.44
===========================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
FINANCIAL STATEMENTS FOR THE QUARTER ENDED JULY 12, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> JUL-12-1998
<CASH> 21,384,819
<SECURITIES> 9,621,679
<RECEIVABLES> 3,859,629
<ALLOWANCES> 216,785
<INVENTORY> 0
<CURRENT-ASSETS> 30,399,834
<PP&E> 238,722,088
<DEPRECIATION> 42,321,921
<TOTAL-ASSETS> 299,587,472
<CURRENT-LIABILITIES> 17,513,380
<BONDS> 153,192,096
0
0
<COMMON> 1,000
<OTHER-SE> 96,036,701
<TOTAL-LIABILITY-AND-EQUITY> 299,587,472
<SALES> 41,960,081
<TOTAL-REVENUES> 43,520,543
<CGS> 0
<TOTAL-COSTS> 39,459,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,661,361
<INCOME-PRETAX> 1,063,387
<INCOME-TAX> 382,000
<INCOME-CONTINUING> 681,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 681,387
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
