<PAGE> 1
FORM 10-Q/A
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 Third Quarter Ended October 5, 1997 Commission File No. 0-19840
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SHOLODGE, INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------
Tennessee 62-1015641
(State or other jurisdiction of (I.R.S. Employer
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 November 14, 1997, there were 8,255,293 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 5, DECEMBER 29,
1997 1996 (1)
(AS RESTATED)
(SEE NOTE C)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,726,457 $ 4,259,768
Accounts receivable - net 3,317,987 2,676,083
Construction contracts 125,001 259,785
Prepaid expenses 1,383,079 471,823
Other current assets 767,054 559,982
-------------- --------------
Total current assets 10,319,578 8,227,441
DIRECT FINANCING LEASES, less current portion 446,872 611,492
PROPERTY AND EQUIPMENT 301,032,066 262,264,264
Less accumulated depreciation and amortization (41,654,528) (33,888,495)
-------------- --------------
259,377,538 228,375,769
DEFERRED CHARGES 11,083,461 9,899,544
SECURITIES HELD TO MATURITY - RESTRICTED 8,814,067 8,255,810
SECURITIES AVAILABLE FOR SALE 228,399 212,062
EXCESS OF COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED 3,021,601 3,136,965
OTHER 3,176,827 4,990,095
-------------- --------------
TOTAL ASSETS $ 296,468,343 $ 263,709,178
============== ==============
</TABLE>
(1) Derived from fiscal year ended December 29, 1996 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
OCTOBER 5, DECEMBER 29,
1997 1996 (1)
(AS RESTATED)
(SEE NOTE C)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,618,222 $ 12,045,715
Taxes other than on income 1,580,558 984,855
Income taxes payable 1,303,143 1,116,972
Current portion of long-term debt
and capitalized lease obligations 4,179,541 15,824,914
-------------- --------------
Total current liabilities 15,681,464 29,972,456
LONG-TERM DEBT ASSOCIATED WITH LODGING FACILITIES 41,136,280 40,104,802
OTHER LONG-TERM DEBT 139,674,636 97,227,576
CAPITALIZED LEASE OBLIGATIONS 1,069,065 1,462,044
DEFERRED INCOME TAXES 3,335,144 4,702,144
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 481,165 504,028
-------------- --------------
TOTAL LIABILITIES 201,377,754 173,973,050
-------------- --------------
SHAREHOLDERS' EQUITY:
Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized,
no shares issued and outstanding) -- --
Common stock (no par value; 20,000,000 shares
authorized, 8,253,626 shares issued and outstanding
as of October 5, 1997 and 8,233,318 shares issued
and outstanding as of December 29, 1996) 1,000 1,000
Additional paid-in capital 42,413,175 42,212,042
Retained earnings 52,606,539 47,463,347
Unrealized gain on securities available for sale (net of tax) 69,875 59,739
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 95,090,589 89,736,128
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 296,468,343 $ 263,709,178
============== ==============
</TABLE>
(1) Derived from fiscal year ended December 29, 1996 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 4
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE FORTY WEEKS ENDED OCTOBER 5, 1997 AND OCTOBER 6, 1996
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
1997 1996 1997 1996
(AS RESTATED) (AS RESTATED)
(SEE NOTE C) (SEE NOTE C)
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 17,695,080 $16,171,522 $56,340,114 $44,392,537
Construction and development 0 14,684 0 529,157
Construction and development - other 0 575,000 0 775,000
Franchising 691,306 1,060,099 2,580,851 3,166,037
Management 26,165 39,319 98,703 154,855
------------------------------------------------------
Total operating revenues 18,412,551 17,860,624 59,019,668 49,017,586
COSTS AND EXPENSES:
Operating expenses:
Hotel 10,245,045 8,342,687 31,547,016 23,867,466
Construction and development 12,000 409,374 188,869 1,100,105
Franchising 436,379 872,974 1,652,380 2,648,621
------------------------------------------------------
Total operating expenses 10,693,424 9,625,035 33,388,265 27,616,192
------------------------------------------------------
Gross operating profit 7,719,127 8,235,589 25,631,403 21,401,394
General and administrative 833,175 492,053 2,224,558 1,983,557
Depreciation and amortization 2,615,558 2,099,047 8,018,598 5,919,472
------------------------------------------------------
Net operating profit (before interest and taxes) 4,270,394 5,644,489 15,388,247 13,498,365
OTHER INCOME AND EXPENSES:
Interest expense 2,569,796 1,306,555 8,114,076 2,211,629
Interest income 241,404 337,806 906,695 1,180,352
------------------------------------------------------
Net interest expense 2,328,392 968,749 7,207,381 1,031,277
Other income 154,773 316,348 1,843,728 750,189
------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 2,096,775 4,992,088 10,024,594 13,217,277
INCOME TAXES 778,000 1,807,000 3,539,000 4,769,000
MINORITY INTEREST IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS -107,983 143,761 178,288 373,027
------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ 1,426,758 $ 3,041,327 $ 6,307,306 $ 8,075,250
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
- net of $691,000 related tax effect -1,164,114
------------------------------------------------------
NET EARNINGS $ 1,426,758 $ 3,041,327 $ 5,143,192 $ 8,075,250
======================================================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary
Earnings before cumulative effect of accounting change $ 0.17 $ 0.36 $ 0.75 $ 0.96
Cumulative effect of a change in accounting principle - net of tax $ (0.14)
Net earnings $ 0.17 $ 0.36 $ 0.61 $ 0.96
Fully Diluted
Earnings before cumulative effect of accounting change $ 0.17 $ 0.34 $ 0.74 $ 0.93
Cumulative effect of a change in accounting principle - net of tax $ (0.14)
Net earnings $ 0.17 $ 0.34 $ 0.60 $ 0.93
Pro forma
Net earnings assuming accounting change is
applied retroactively $ 1,426,758 $ 2,945,210 $ 6,307,306 $ 7,531,478
Earnings per share:
Primary $ 0.17 $ 0.35 $ 0.75 $ 0.89
Fully diluted $ 0.17 $ 0.33 $ 0.74 $ 0.88
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 8,476,605 8,470,358 8,389,769 8,451,077
Fully Diluted 8,553,284 10,786,960 8,524,148 10,767,679
------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 5, 1997 AND OCTOBER 6, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS ENDED
OCTOBER 5, OCTOBER 6,
1997 1996
(AS RESTATED) (SEE NOTE C)
(SEE NOTE C)
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 6,307,306 $ 8,075,250
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 8,018,598 5,919,472
DECREASE IN DEFERRED INCOME TAXES -676,000 0
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 178,288 373,027
GAIN ON SALE OF SECURITIES AVAILABLE FOR SALE 0 -294,839
GAIN ON SALE OF PROPERTY & EQUIPMENT -1,190,687 0
ACCRETION OF DISCOUNT ON SECURITIES
HELD TO MATURITY -558,257 -490,599
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE -507,120 356,680
(INCREASE) IN PREPAID EXPENSES -911,256 -618,854
DECREASE (INCREASE) IN OTHER ASSETS 153,685 -1,260,471
(DECREASE) INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES -3,427,493 5,618,073
INCREASE IN INCOME AND OTHER TAXES 781,874 2,438,444
- ------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,168,938 20,116,183
CASH FLOWS FROM INVESTING ACTIVITIES:
REPAYMENT FROM RELATED PARTIES--NET 0 42,418,759
CAPITAL EXPENDITURES -39,320,479 -67,926,532
SALE OF SECURITIES AVAILABLE FOR SALE 0 847,120
PROCEEDS FROM SALE OF PROPERTY & EQUIPMENT 1,743,364 0
- ------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES -37,577,115 -24,660,653
CASH FLOWS FROM FINANCING ACTIVITIES:
(INCREASE) DECREASE IN DEFERRED CHARGES -1,729,922 33,682
PROCEEDS FROM DIRECT FINANCING LEASES 164,620 45,172
PROCEEDS FROM LONG-TERM DEBT 73,577,000 63,552,371
PAYMENTS ON LONG-TERM DEBT -41,743,835 -57,446,166
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS -392,979 -439,871
DISTRIBUTIONS TO MINORITY INTERESTS -201,151 -452,471
EXERCISE OF STOCK OPTIONS 201,133 40,455
- ------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,874,866 5,333,172
- ------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 466,689 $ 788,702
====================================================================================
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD $ 4,259,768 $ 2,444,990
====================================================================================
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,726,457 $ 3,233,692
====================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
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 29, 1996.
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 October 5, 1997
and October 6, 1996 are not necessarily indicative of the operating results
for the entire year.
B. ACCOUNTING CHANGE
In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for pre-opening costs, effective December 30, 1996, whereby
pre-opening costs are expensed as incurred rather than the previous method
of capitalizing such costs and amortizing them over a three-year period.
The Company believes the new method is preferable in the circumstances and
conforms to the predominant practice in the industry.
The cumulative effect of the change for periods prior to fiscal 1997, net
of income tax effect, is a reduction in net earnings of $1,164,000 or $0.14
per share and was recognized in the first quarter of 1997. The pro forma
effect on the third quarter of 1996, as if the change in accounting for
pre-opening costs had been adopted prior to fiscal 1996, would be to
increase hotel operating expenses by $329,000 and to reduce depreciation
and amortization expense by $175,000, resulting in a reduction of earnings
before income taxes of $153,000 ($96,000 after income taxes) to $2,945,000,
or $0.33 per share for the third quarter of 1996, from $3,041,000 or $0.34
per share as previously reported. The pro forma effect on the first three
quarters of 1996, as if the change in accounting for pre-opening costs had
been adopted prior to fiscal 1996, would be to increase hotel operating
expenses by $1,329,000 and to reduce depreciation and amortization expenses
by $464,000, resulting in a reduction of earnings before income taxes of
$865,000 ($544,000 after income taxes) to $7,531,000, or $0.88 per share
for the first three quarters of 1996, from $8,075,000 or $0.93 per share as
previously reported.
C. RESTATEMENT
Subsequent to the issuance of the consolidated financial statements for the
first three quarters of fiscal 1997, the Company's management determined
that certain transactions, primarily relating to the capitalization of
various expenses, the timing of recognition of profits on the sales of real
estate, and the recording of depreciation and amortization, bad debts and
income tax expense, were improperly recorded in the consolidated financial
statements. As a result, the consolidated financial statements for the
first three quarters of fiscal 1997 have been restated from the amounts
previously reported.
A summary of the effects of the restatement, and the effect of the
accounting change discussed in Note B above, on the consolidated financial
statements as of and for the sixteen weeks ended April 20, 1997 (amounts in
thousands, except per share data) is as follows:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
------------------------------ ---------------------------
OCTOBER 5, 1997 OCTOBER 5, 1997
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Hotel revenues $ 18,060 $17,695 $57,209 $56,340
Operating expenses:
Hotel 9,554 10,245 30,373 31,547
Construction and development -- 12 -- 189
Franchising 377 436 1,480 1,652
Operating profit 8,847 7,719 28,035 25,631
General and administrative expense 521 833 1,589 2,225
Depreciation and amortization 2,524 2,616 8,433 8,019
Interest expense 2,367 2,570 7,585 8,114
Other income 526 155 2,186 1,844
Income taxes 1,180 778 4,215 3,539
Minority interests 131 (108) 345 178
Cumulative effect of accounting change -- -- -- (1,164)
Net earnings 2,891 1,427 8,960 5,143
Earnings per common share (Fully Diluted):
Earnings before cumulative effect of
accounting change .33 .17 1.02 .74
Cumulative effect of accounting change -- -- -- (.14)
Net earnings .33 .17 1.02 .60
As of October 5, 1997:
Accounts receivable-net 4,292 3,318
Construction contracts 180 125
Other current assets 1,062 767
Property and equipment 302,278 301,032
Accumulated depreciation & amortization (41,464) (41,655)
Deferred charges 11,138 11,083
Other assets 5,538 3,177
Accounts payable & accrued expenses 8,442 8,618
Deferred income taxes 4,702 3,335
Minority interests in subsidiaries 648 481
Retained earnings 56,424 52,607
</TABLE>
D. EARNINGS PER SHARE
The net earnings per share is computed by dividing net earnings by the
weighted average number of common and common equivalent shares outstanding.
The Company will adopt Statement of Financial Accounting Standards No. 128
"Earnings Per Share" for the year ended December 28, 1997. This accounting
pronouncement requires the disclosure of basic and dilute earnings per
share. The Company believes that, upon adoption, diluted earnings per share
will approximate earnings per share as previously reported. Because the
concept of basic earnings per share does not include the impact of common
stock equivalents, such as stock warrants and stock options, basic earnings
per share will be generally higher than diluted earnings per share.
<PAGE> 7
ShoLodge, Inc. and Subsidiaries Management's Discussion and Analysis of
Financial Condition and Results of Operations
Restatement and Accounting Change
The Company has restated previously issued financial results, for the first
three quarters of fiscal 1997. After the consolidated financial statements were
originally issued, the Company became aware of additional information indicating
that certain transactions had been improperly reported. The restatements involve
all non-cash items and relate primarily to capitalization of various expenses;
the timing of recognition of profits on the sales of real estate; depreciation
and amortization expense; increases of reserves for doubtful accounts; and
adjustment of income tax provisions.
Additionally, the Company has, effective December 30, 1996, changed its
accounting for pre-opening costs to expense such costs as incurred, rather than
capitalizing those expenditures and amortizing them over a three year period.
See Notes B and C of the Notes to the consolidated financial statements for a
discussion of the effects of the restatement and accounting change on the
Company's previously reported results of operations and financial position.
The comments included in this Management's Discussion and Analysis
have been revised to give effect to the restatement and accounting change.
<PAGE> 8
Results of Operations
For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 5, 1997
and October 6, 1996.
Total revenues for the fiscal quarter ended October 5, 1997 increased 3.1%
to $18.4 million from $17.9 million for the same period in 1996. For the three
fiscal quarters ended October 5, 1997, total revenues increased 20.4% to $59.0
million from $49.0 million for the same period in 1996.
Revenues from hotel operations in third fiscal quarter 1997 increased 9.4%
to $17.7 million from $16.2 million for the same period in 1996. For the 40
hotels opened for all of both quarterly periods (same hotels), average daily
room rates in the third fiscal quarter of 1997 decreased 1.4% to $56.13 from
$56.93 in the third quarter of 1996 and average occupancy rates decreased to
62.5% from 63.7%, resulting in a decrease in same hotel revenue per available
room (RevPAR) of 3.1% from $36.25 to $35.11. The eight hotels opened after the
second quarter of 1996 contributed $3.1 million to room revenues in the third
quarter of 1997 compared to $855,000 for the same period in fiscal 1996.
Revenues from hotel operations in the first three quarters of 1997 increased
26.9% to $56.3 million from $44.4 million for the same period in 1996. For the
33 same hotels, average daily room rates in the first three quarters of 1997
increased 1.9% to $53.95 from $52.97 in the first three quarters of 1996 and
average occupancy rates decreased to 61.0% from 63.5%, resulting in a net
decrease in same hotel RevPAR of 2.2%. The 15 hotels opened during 1996 and the
first three quarters of 1997 contributed $18.3 million to hotel revenues in the
first three quarters of 1997 compared to $5.1 million for the same period in
fiscal 1996.
There were no revenues from regular construction and development activities
for the third fiscal quarter of 1997 compared with a negligible amount for the
same period in 1996. There were no revenues from regular construction and
development activities for
<PAGE> 9
the first three quarters of 1997 compared to $529,000 in the same period last
year. Revenues from construction and development can vary widely from quarter to
quarter depending upon the volume of outside contract work and the timing of
those projects. No outside construction projects were in progress during the
first three quarters of 1997 compared with the final portion of only one project
during the comparable period in 1996. No outside construction contracts are
currently in progress.
There were no revenues from "Construction and development - other" in the
first three quarters of 1997 compared with $775,000 in the first three quarters
of 1996, which represents a portion of profits not previously recognized on
installment sales. No revenues from this source are expected to be generated in
the future.
Franchise revenues in the third quarter of 1997 decreased 34.8% to $691,000
from $1.1 million for the comparable period last year. This decrease was due
primarily to the cancellation of reservation services by two hotel chains in the
first quarter of 1997. Franchise revenues in the first three quarters of 1997
decreased 18.5% to $2.6 million from $3.2 million for the comparable period last
year. This decrease was due primarily to the cancellation of reservation service
contracts by two hotel chains in the first quarter of 1997 and to a decrease of
$110,000 in initial franchise fee revenues. Initial franchise fees may vary
widely from quarter to quarter.
Management contract revenues for the third fiscal quarter of 1997 decreased
33.5% to $26,000 from $39,000 for the same period of 1996. Management contract
revenues for the first three quarters of 1997 decreased 36.3% to $99,000 from
$155,000 for the same period last year. These decreases were due to the
cancellation of one management contract on one hotel in the third quarter of
1996.
Operating expenses from hotel operations for the third fiscal quarter of
1997 increased 22.8% to $10.2 million from $8.3 million in the third quarter of
1996, due partially to the 9.4% increase in hotel operating revenues.
Approximately $430,000 of the increase was due to the expensing of supplies and
other operating expenses which had previously been capitalized. The change in
accounting for pre-opening expenses as incurred beginning with fiscal 1997
accounted for an additional $236,000 of the increase over third quarter 1996.
Hotel operating expenses, expressed as a percentage of hotel operating revenues,
increased to 57.9% in the third quarter of 1997 from 51.6% in the third quarter
of 1996, thus decreasing the gross profit margin on all hotels to 42.1% in the
third quarter of 1997 from 48.4% in the same period of 1996. This decrease was
due primarily to (i) a decrease in operating profit margins on the 33 hotels
opened prior to 1996 to 44.2% in the third quarter of 1997 from 46.6% in the
third quarter of 1996, and by (ii) a decrease in operating profit margins for
the 15 hotels opened since 1995 to 38.0% in the third quarter of 1997 from 55.2%
in the third quarter of 1996. Operating expenses from hotel operations for the
first three quarters of 1997 increased 32.2% to $31.5 million in the first three
quarters of 1997 from $23.9 million in the first three quarters of 1996, due
partially to the 26.9% increase in hotel operating revenues. Other causes of the
increase were (1) the expensing of previously capitalized supplies and other
previously capitalized operating expenses, (2) provisions for doubtful accounts,
and (3) the expensing of pre-opening costs as incurred. Operating expenses from
hotel
<PAGE> 10
operations, expressed as a percentage of hotel operating revenues, increased to
56.0% in the first three quarters of 1997 from 53.8% in the same period of 1996,
thus reducing the gross profit margin on all hotels to 44.0% in the first three
quarters of 1997 from 46.2% in the same period of 1996. The gross profit margin
on same hotels for the first three quarters of 1997 decreased to 44.6% from
45.7% for the same three quarters in 1996. The new hotels (primarily Sumner
Suites) have generally experienced higher profit margins than the same hotels
but incurred $551,000 in pre-opening expenses during the first three quarters of
1997 due to the adoption of the accounting principle to expense these costs as
incurred beginning with 1997.
There were only $189,000 of costs and expenses of construction and
development in the first three quarters of 1997 compared with $409,000 in the
third quarter of 1996 and $1.1 million in the first three quarters of 1996.
There were no outside construction contracts in the first three fiscal quarters
of 1997 compared with one during the comparable period in 1996.
Franchising operating expenses for the third quarter of 1997 decreased by
50.0% to $436,000 from $873,000 for the third quarter of 1996. Franchising
operating expenses for the first three quarters of 1997 decreased to $1.7
million from $2.6 million in the same period last year. The primary reason for
these decreases was the cancellation in the fourth quarter of 1996 of the
Company's obligation to pay a portion of franchise fees collected to Shoney's,
Inc. The reduction in this royalty fee expense was $273,000 in the third quarter
of 1997 and $858,000 in the first three quarters of 1997.
General and administrative expense for the third quarter of 1997 increased
by 69.3% to $833,000 from $492,000 in the third quarter of 1996. General and
administrative expense for the first three quarters of 1997 increased 12.1% to
$2.2 million from $2.0 million in the same period of 1996. These increases were
due primarily to an increase in professional fees incurred.
Depreciation and amortization expense in the third quarter of 1997
increased by 24.6% to $2.6 million from $2.1 million in the third quarter of
1996. For the first three quarters of 1997, depreciation and amortization
expense increased 35.5% to $8.0 million from $5.9 million for the same period
last year. These increases were due primarily to the 15 hotels opened during
fiscal 1996 and first three quarters of 1997, partially offset by the benefit in
1997 of reduced amortization due to the change in accounting principle; this
amortization in the first three quarters of 1996 was $464,000 versus none in
1997.
Interest expense for the third quarter of 1997 increased $1.3 million and
interest income decreased $96,000, as compared with the third quarter of 1996,
resulting in an increase in net interest expense of $1.4 million. For the first
three quarters of 1997, interest expense increased $5.9 million and interest
income decreased $274,000, resulting in an increase in net interest expense of
$6.2 million. The increase in interest expense resulted primarily from the
additional borrowings incurred for the 12 hotels opened in 1996 and the three
hotels opened in the first three quarters of 1997.
<PAGE> 11
Other income for the third quarter of 1997 decreased to $155,000 from
$316,000 in the third quarter of 1996. Other income for the first three quarters
of 1997 increased to $1.8 million compared with $750,000 in the first three
quarters of 1996. These increases were due to a gain of $1.3 million on the sale
of excess land in the first three quarters of 1997. Minority interest in
earnings and losses of consolidated subsidiaries and partnerships decreased
$252,000 for the third quarter of 1997 compared with the same period in 1996,
and $195,000 for the first three quarters of 1997, compared with the same period
in 1996, due to less profitable consolidated entities which include minority
ownership, the write-off of a $72,000 minority interest receivable in the first
quarter, and to the recovery of fees and expenses from a subsidiary partnership
in the third quarter.
The lower effective income tax rate (35.9% for the first three quarters of
1997 versus 37.1% for the comparable period last year) is due to a reduction in
applicable state tax rates.
Liquidity and Capital Resources
The Company's primary sources of cash in the first three quarters of 1997
were (1) net cash flows from operating activities of $8.2 million, (2) net
proceeds of approximately $33.6 million from the issuance of 9.55% Senior
Subordinated Notes due 2007, (3) proceeds of approximately $4.0 million from the
financing of furniture, fixtures and equipment, and (4) net proceeds of
approximately $1.7 million from the sale of excess land. The primary sources of
cash in the first three quarters of 1996 were (1) net cash flows from operating
activities of $20.1 million, (2) the collection of a note receivable of $44.1
million from Suites of America, Inc. (see discussion of AmeriSuites Transaction
in 1996 Form 10-K), and (3) proceeds of approximately $5.6 million from the
financing of furniture, fixtures and equipment.
The Company currently has a $75.0 million unsecured three-year revolving
credit facility with a group of five banks, which became effective April 30,
1997. The interest rate on this credit facility through the third fiscal quarter
of 1997 is at the lenders' prime rate plus 0.25%, or two hundred basis 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 EBITDA, as defined in
the credit facility (the "Senior Leverage Ratio") and ranges from prime rate
plus 0.50% over 175 to 250 basis points over the 30, 60, 90 or 180 day LIBOR
rate, at the Company's option. The weighted average rate on this facility at
October 5, 1997 was 8.00%. The Company pays commitment fees on the unused
portion of the facility ranging from 0.20% to 0.50% 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, interest coverage
and the Senior Leverage Ratio. As of October 5, 1997, the Company had $14.5
million outstanding under this credit facility. In November of 1996 the Company
issued $33.2 million in 9.75% Senior Subordinated Notes, due 2006, Series A in
the first series of notes issued under a $125 million shelf registration. In
September of 1997 the
<PAGE> 12
Company issued $35.0 million of 9.55% Senior Subordinated Notes, due 2007,
Series B ("Series B Notes") under the Company's shelf registration. 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, 1998. As of October 5,
1997, the Company had $977,000 outstanding under this credit facility.
The Company has announced its intention to sell and leaseback 14 Sumner
Suites hotels for a total price of $140.0 million. The transaction is expected
to close in November 1997. The Company expects to use the net proceeds to pay
off its bank credit facilities and approximately $10.5 million of furniture,
fixtures, and equipment loans on the hotels being sold and leased back. The
balance of net proceeds will be invested in short-term securities until needed
to fund capital expenditures. The holders of the Company's Credit Facility have
consented to the sale/leaseback transaction provided that any outstanding
balance under the Credit Facility is paid off and no new balance is drawn under
the Credit Facility prior to amendment of the terms of the Credit Facility which
must occur by December 15, 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 $39.3
million in the first three fiscal quarters of 1997, and $67.9 million in the
first three fiscal quarters of 1996.
The Company opened two Shoney's Inns and ten Sumner Suites hotels in 1996
and three Sumner Suites hotels thus far in 1997. Additionally, renovations of
several existing properties were completed in 1996 and in first three quarters
of 1997, and several others are scheduled for completion in fiscal 1997 and
first half of fiscal 1998. Furthermore, the Company's new corporate headquarters
building is substantially complete. The Company has six Sumner Suites hotels
scheduled to open by the end of the first fiscal quarter of 1998, all of which
are under construction. In addition, the Company has another ten Sumner Suites
hotels in various stages of development also scheduled to open in 1998. The
Company expects that approximately $90.0 million in additional capital funds
will be necessary through third quarter 1998 to fulfill these plans.
The Company has principal payments totaling approximately $4.2 million due
under existing debt instruments through third fiscal quarter 1998. The Company
believes that a combination of net proceeds from the sale/leaseback transaction,
net cash provided from operations, borrowings under existing or new credit
facilities, proceeds from sale of excess land 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> 13
PART II - OTHER INFORMATION
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.
<TABLE>
<S> <C>
Date: March 25, 1998 /s/ Leon Moore
----------------------------------------
Leon Moore
President, Chairman of the Board
and Director (Chief Executive Officer)
Date: March 25, 1998 /s/ Bob Marlowe
----------------------------------------
Bob Marlowe
Secretary, Treasurer and Director
(Chief Accounting Officer)
Date: March 25, 1998 /s/ Michael A. Corbett
----------------------------------------
Michael A. Corbett
Chief Financial Officer
</TABLE>
<PAGE> 1
EXHIBIT 11
SHOLODGE, INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
PRIMARY AND ASSUMING FULL DILUTION
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
-------------------------------------------------------------------
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
1997 1996 1997 1996
(AS RESTATED) (AS RESTATED)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
EARNINGS APPLICABLE TO COMMON STOCK (PRIMARY):
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 1,426,758 $ 3,041,327 $ 6,307,306 $ 8,075,250
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,164,114)
---------------------------------------------------------------
NET EARNINGS $ 1,426,758 $ 3,041,327 $ 5,143,192 $ 8,075,250
===============================================================
SHARES:
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 8,476,605 8,470,358 8,389,769 8,451,077
===============================================================
PRIMARY EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.17 $ 0.36 $ 0.75 $ 0.96
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (0.14)
---------------------------------------------------------------
NET EARNINGS $ 0.17 $ 0.36 $ 0.61 $ 0.96
===============================================================
FULLY DILUTED:
EARNINGS APPLICABLE TO COMMON STOCK (PRIMARY):
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 1,426,758 $ 3,041,327 $ 6,307,306 $ 8,075,250
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,164,114)
---------------------------------------------------------------
NET EARNINGS 1,426,758 3,041,327 5,143,192 8,075,250
INTEREST (LESS TAX) ON CONVERTIBLE
SUBORDINATED DEBENTURES 604,696 586,284 1,996,962 1,958,642
---------------------------------------------------------------
ADJUSTED EARNINGS APPLICABLE TO COMMON STOCK:
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 2,031,454 3,627,611 8,304,268 10,033,892
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,164,114)
---------------------------------------------------------------
NET EARNINGS $ 2,031,454 $ 3,627,611 $ 7,140,154 $10,033,892
===============================================================
SHARES:
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 8,553,284 8,470,358 8,524,148 8,451,077
SHARES ISSUABLE UPON CONVERSION OF CONVERTIBLE
SUBORDINATED DEBENTURES 2,316,602 2,316,602 2,316,602 2,316,602
---------------------------------------------------------------
10,869,886 10,786,960 10,840,750 10,767,679
===============================================================
FULLY DILUTED EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 0.17 $ 0.34 $ 0.74 $ 0.93
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (0.14)
---------------------------------------------------------------
NET EARNINGS $ 0.17 $ 0.34 $ 0.60 $ 0.93
===============================================================
PRO FORMA:
NET EARNINGS ASSUMING ACCOUNTING
CHANGE IS APPLIED RETROACTIVELY $ 1,426,758 $ 2,945,210 $ 6,307,306 $ 7,531,478
EARNINGS PER SHARE:
PRIMARY $ 0.17 $ 0.35 $ 0.75 $ 0.89
FULLY DILUTED $ 0.17 $ 0.33 $ 0.74 $ 0.88
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
FINANCIAL STATEMENTS FOR THE QUARTER ENDED OCTOBER 5, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> OCT-05-1997
<CASH> 4,726,457
<SECURITIES> 228,399
<RECEIVABLES> 3,670,488
<ALLOWANCES> 227,500
<INVENTORY> 0
<CURRENT-ASSETS> 10,319,578
<PP&E> 301,032,066
<DEPRECIATION> 41,654,528
<TOTAL-ASSETS> 296,468,343
<CURRENT-LIABILITIES> 15,681,464
<BONDS> 181,879,981
0
0
<COMMON> 1,000
<OTHER-SE> 95,089,589
<TOTAL-LIABILITY-AND-EQUITY> 296,468,343
<SALES> 56,340,114
<TOTAL-REVENUES> 59,019,668
<CGS> 0
<TOTAL-COSTS> 43,631,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,114,076
<INCOME-PRETAX> 9,846,306
<INCOME-TAX> 3,539,000
<INCOME-CONTINUING> 6,307,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,164,114)
<NET-INCOME> 5,143,192
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
</TABLE>
