<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 First Quarter Ended April 16, 2000 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 May 30, 2000, there were 5,293,645 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
APRIL 16, DECEMBER 26,
2000 1999(1)
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,421,677 $ 3,386,937
Restricted cash 802,608 1,605,513
Accounts receivable-trade, net 5,348,016 4,853,252
Construction contracts receivable 597,525 7,674,104
Costs and estimated earnings in excess of billings
on construction contracts 6,966,000 3,588,071
Income taxes receivable 1,035,543 3,335,543
Prepaid expenses 851,755 573,064
Notes receivable, net 468,762 468,762
Other current assets 442,971 441,023
------------------------------
Total current assets 22,934,857 25,926,269
NOTES RECEIVABLE, NET 60,843,512 60,887,262
PROPERTY AND EQUIPMENT 150,000,761 148,698,134
Less accumulated depreciation and amortization (25,742,149) (23,821,643)
------------------------------
124,258,612 124,876,491
LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,202,302 9,186,608
DEFERRED CHARGES,NET 8,079,433 8,407,623
DEPOSITS ON SALE/LEASEBACK 35,280,000 35,280,000
INTANGIBLE ASSETS 3,068,915 3,122,173
OTHER ASSETS 3,851,856 2,627,487
------------------------------
TOTAL ASSETS $267,519,487 $270,313,913
==============================
</TABLE>
(1) Derived from fiscal year ended December 26, 1999 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
APRIL 16, DECEMBER 26,
2000 1999(1)
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,821,080 $ 9,594,955
Taxes other than on income 1,581,360 1,448,602
Current portion of long-term debt
and capitalized lease obligations 2,082,834 2,227,929
--------------------------------
Total current liabilities 12,485,274 13,271,486
OTHER LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, LESS CURRENT PORTION 127,299,998 125,550,557
DEFERRED INCOME TAXES 2,089,297 2,089,297
DEFERRED GAIN ON SALE/LEASEBACK 35,585,418 36,307,820
DEFERRED CREDITS 750,001 1,283,605
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 749,910 932,809
--------------------------------
TOTAL LIABILITIES 178,959,898 179,435,574
--------------------------------
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 5,308,645 shares issued and outstanding
as of April 16, 2000 and 5,372,578 shares issued
and outstanding as of December 26, 1999) 1,000 1,000
Additional paid-in capital 42,488,276 42,484,275
Retained earnings 63,480,014 65,512,322
Unrealized gain on securities available for sale (net of tax) 74,711 80,321
Treasury stock (17,484,412) (17,199,579)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY 88,559,589 90,878,339
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $267,519,487 $270,313,913
================================
</TABLE>
(1) Derived from fiscal year ended December 26, 1999 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 4
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE SIXTEEN WEEKS ENDED APRIL 16, 2000 AND APRIL 18, 1999
<TABLE>
<CAPTION>
16 WEEKS ENDED
APRIL 16, APRIL 18,
2000 1999
----------------------------
<S> <C> <C>
REVENUES:
Hotel $ 22,201,806 $18,258,701
Franchising and management 897,311 922,422
Construction and development 4,132,771 291,265
----------------------------
Total revenues 27,231,888 19,472,388
COSTS AND EXPENSES:
Operating expenses:
Hotel 15,687,306 12,044,052
Franchising and management 818,183 637,158
Construction and development 4,023,122 245,938
----------------------------
Total operating expenses 20,528,611 12,927,148
General and administrative 1,402,263 1,714,529
Rent expense, net 5,365,745 3,013,532
Depreciation and amortization 2,106,775 2,464,030
----------------------------
Loss from operations (2,171,506) (646,851)
OTHER INCOME AND (EXPENSES):
Interest expense (3,618,585) (3,674,653)
Interest income 1,871,988 1,880,360
Gain on sale of property 299,024 4,609,256
Other income 157,693 320,366
----------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY GAIN (3,461,386) 2,488,478
INCOME TAX (BENEFIT) EXPENSE (1,197,000) 230,000
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS (18,929) (1,882,502)
----------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (2,283,315) 375,976
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
(net of related tax effect of 154,000) 251,007 0
============================
NET EARNINGS (LOSS) ($2,032,308) $ 375,976
============================
EARNINGS (LOSS) PER COMMON SHARE
Basic:
Earnings (loss) per share from continuing operations ($0.43) $ 0.05
Extraordinary gain, net of tax effect $0.05 $ 0.00
Net earnings (loss) ($0.38) $ 0.05
============================
Diluted:
Earnings (loss) per share from continuing operations ($0.43) $ 0.05
Extraordinary gain, net of tax effect $0.05 $ 0.00
Net earnings (loss) ($0.38) $ 0.05
============================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,330,737 7,304,456
Diluted 5,412,682 7,556,835
============================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 16, 2000 AND APRIL 18, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
16 WEEKS ENDED
APRIL 16, APRIL 18,
2000 1999
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEMS ($2,283,315) $ 375,976
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT 251,007 0
DEPRECIATION AND AMORTIZATION 2,106,775 2,464,030
RECOGNITION OF PREVIOUSLY DEFERRED PROFIT (956,982) (1,708,349)
GAIN ON SALE OF PROPERTY AND OTHER ASSETS (299,024) (4,609,256)
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 18,929 1,882,502
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN RESTRICTED CASH 802,905 (71,542)
INCREASE IN TRADE RECEIVABLES (494,764) (983,102)
DECREASE IN CONSTRUCTION CONTRACT RECEIVABLES 7,076,579 0
ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONSTRUCTION
CONTRACTS (3,377,929) 0
DECREASE IN INCOME TAXES RECEIVABLE 2,300,000 0
INCREASE IN PREPAID EXPENSES (278,691) (533,613)
INCREASE IN OTHER ASSETS (1,231,211) (381,470)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES (773,875) 2,288,328
(DECREASE) INCREASE IN INCOME AND OTHER TAXES (17,805) 214,477
---------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,842,599 (1,062,019)
CASH FLOWS FROM INVESTING ACTIVITIES:
PAYMENTS RECEIVED ON NOTES RECEIVABLE 43,850 12,230,168
CAPITAL EXPENDITURES (1,439,320) (7,912,180)
---------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,395,470) 4,317,988
CASH FLOWS FROM FINANCING ACTIVITIES:
DECREASE IN DEFERRED CHARGES 465,931 34,690
PROCEEDS FROM LONG-TERM DEBT 9,200,500 12,390,755
PAYMENTS ON LONG-TERM DEBT (7,467,091) (4,332,144)
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (129,063) (50,350)
DISTRIBUTIONS TO MINORITY INTERESTS (201,834) 0
EXERCISE OF STOCK OPTIONS 4,001 2,250
PURCHASE OF TREASURY STOCK (284,833) (1,369,263)
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,587,611 6,675,938
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,034,740 9,931,907
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,386,937 2,480,984
---------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,421,677 $12,412,891
=================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
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. The condensed consolidated balance sheet at December 26,
1999 has been derived from the audited consolidated financial
statements at that date. These financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 26, 1999.
The fiscal year consists of a 52/53 week year ending the last Sunday
of the year. The Company's fiscal quarters have 16, 12, 12, and 12
weeks in first, second, third and fourth quarters, respectively, in
each fiscal year. When the 53rd week occurs in a fiscal year, it is
added to the fourth fiscal quarter, making it 13 weeks in length.
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
April 16, 2000 and April 18, 1999 are not necessarily indicative of
the operating results for the entire year.
B. 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 quarters ended April
16, 2000 and April 18, 1999.
<TABLE>
<CAPTION>
4/16/00 4/18/99
------- -------
<S> <C> <C>
Net unrealized (loss) gain on securities
available for sale for the quarter ($6) $20
</TABLE>
<PAGE> 7
C. EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the
weighted average number of common shares outstanding. The following
table reconciles earnings and weighted average shares used in the
earnings per share calculations for the fiscal quarters ended April
16, 2000, and April 18, 1999:
<TABLE>
<CAPTION>
16 WEEKS ENDED
--------------
APRIL 16, APRIL 18,
2000 1999
<S> <C> <C>
BASIC:
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS ($2,283,315) $ 375,976
EXTRAORDINARY GAIN 251,007 --
----------- ----------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ($2,032,308) $ 375,976
=========== ==========
SHARES:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,330,737 7,304,456
=========== ==========
BASIC EARNINGS (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEMS ($0.43) $0.05
EXTRAORDINARY GAIN 0.05 --
----------- ----------
NET EARNINGS (LOSS) ($0.38) $ 0.05
=========== ==========
DILUTED:
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS ($2,283,315) $375,976
EXTRAORDINARY GAIN 251,007 --
----------- ----------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ($2,032,308) $ 375,976
=========== ==========
SHARES:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,330,737 7,304,456
EFFECT OF DILUTIVE SECURITIES (OPTIONS) 81,945 252,379
----------- ----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,412,682 7,556,835
=========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEMS ($0.43) $ 0.05
EXTRAORDINARY GAIN 0.05 --
----------- ----------
NET EARNINGS (LOSS) ($0.38) $ 0.05
=========== ==========
</TABLE>
<PAGE> 8
D. OPERATING SEGMENT INFORMATION
The Company's significant operating segments are hotel operations,
franchising and management, and construction and development. None
of the Company's segments conduct foreign operations. Operating
profit includes the operating revenues and expenses directly
identifiable with the operating segment. Identifiable assets are
those used directly in the operations of each segment. A summary of
the Company's operations by segment follows (in thousands of
dollars):
<TABLE>
<CAPTION>
16 Weeks Ended
---------------------------------
April 16, 2000 April 18, 1999
<S> <C> <C>
Revenues:
Hotel revenues from external customers $ 22,202 $ 18,259
Franchising and management 2,381 2,203
Construction and development 5,471 6,783
Elimination of intersegment revenue franchising,
management, construction and development (2,822) (7,773)
-------- --------
Total revenues $ 27,232 $ 19,472
======== ========
Operating profit (loss):
Hotel ($ 666) $ 1,042
Franchising and management (1,646) (1,659)
Construction and development 140 (30)
-------- --------
Total operating profit (loss) ($2,172) ($ 647)
======== ========
Capital expenditures:
Hotel $ 1,291 $ 7,576
Franchising and management 148 316
Construction and development -- 20
-------- --------
Total capital expenditures $ 1,439 $ 7,912
======== ========
Depreciation and amortization:
Hotel $ 1,736 $ 2,074
Franchising and management 363 378
Construction and development 8 12
-------- --------
Total depreciation and amortization $ 2,107 $ 2,464
======== ========
<CAPTION>
As of As of
April 16, December 26,
2000 1999
<S> <C> <C>
Total assets:
Hotel $201,759 $200,773
Franchising and management 57,708 57,986
Construction and development 8,052 11,555
-------- --------
Total assets $267,519 $270,314
======== ========
</TABLE>
<PAGE> 9
E. CONTINGENCIES
The Company is a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with
respect to these actions will not materially affect the consolidated
financial position or results of operations of the Company. The
following is a summary of certain legal actions pending against
the Company.
In 1998, a former chief financial officer of the Company, filed a
lawsuit against the Company and its chief executive officer alleging
that his employment by the Company was wrongfully terminated,
claiming breach of contract, fraud, retaliatory discharge and
related claims. The plaintiff seeks $3 million in compensatory
damages and punitive and treble damages. On December 31, 1998 the
Company filed a motion to dismiss this lawsuit on the basis that the
plaintiff has intentionally destroyed relevant evidence during the
pendency of the case. The court granted this motion on January 28,
1999 and dismissed the case with prejudice. On March 8, 1999 the
plaintiff filed a Motion to Alter or Amend the Judgment dismissing
the case. The court denied the motion on April 23, 1999. The
plaintiff has filed an appeal with the Tennessee Court of Appeals.
No date for argument has been set in the Court of Appeals. The
Company believes the suit is without merit and will defend itself
vigorously.
F. OTHER MATTERS
On March 16, 2000 the Company entered into a Sale and Purchase
Agreement with Prime Hospitality Corp. ("Prime") that contemplated a
series of transactions in which the Company will (i) sell to Prime
the Company's leasehold interest in 20 Sumner Suites hotels leased
from HPT Suite Properties Trust and operated by the Company, (ii)
sell to HPT Suite Properties Trust, which would then lease to Prime,
all of the Company's interest in four additional Sumner Suites
hotels currently owned and operated by ShoLodge, (iii) lease
directly to Prime the remaining three Sumner Suites hotels currently
owned and operated by the Company on terms similar to the existing
lease agreement between the Company and HPT Suite Properties Trust
and (iv) sell to Prime two undeveloped hotel sites. In addition, the
agreement contemplated that Prime would engage the Company to
construct a hotel on each of the two undeveloped sites being
purchased from the Company and to provide other services to Prime in
the future.
The Company expects to receive in its second fiscal quarter
approximately $50 million in cash and cash equivalents, future
minimum annual rental payments of approximately $3 million, and
additional future annual revenues for services to be provided to
Prime in the future amounting to approximately $4 million per year.
As a condition to the transfer of the assets to Prime, the Company
will receive a release and return of its $14 million in cash
currently securing its lease guaranty with HPT Suite Properties
Trust. The Company's $14 million lease security deposit will be
transferred to Prime as a part of the lease.
The closing of the sale/leaseback of the four Sumner Suites hotels
between the Company and HPT Suite Properties Trust occurred on May
11, 2000; therefore, the assumption by Prime of the Company's
leasehold interest at the closing of the second part of the
contemplated transaction will be in the 24 Sumner Suites hotels
currently leased from HPT Suite Properties Trust by the Company.
Additionally, the sale by the Company of the two undeveloped hotel
<PAGE> 10
sites is no longer likely to occur; instead, the Company will likely
retain ownership of the sites and develop an all-suites hotel on
each of those sites for its own account. HPT Suite Properties Trust
will have an option to exchange two of the hotels currently owned by
them and leased to the Company (specifically, the two located in
Albuquerque, New Mexico, and Alpharetta, Georgia) for these two new
hotels upon completion of each of the two new hotels.
The Company will grant Prime the right to continue operating the
hotels using the Sumner Suites brand name for up to nine months
after closing. As part of the transaction the Company agrees to
operate no other all-suites hotel in competition with Prime within a
defined geographic radius of each of the hotels being sold. The
radius is the same that exists with respect to the Sumner Suites
currently leased from HPT Suite Properties Trust and three miles for
each of the hotels in Texas. This restriction will not prevent the
Company from developing hotels for others in the restricted area or
operating or franchising any Shoney's Inn brand hotel in the
restricted area.
The closing of the pending transaction, which is expected to be in
June, 2000, is subject to a number of conditions. It is possible
that the parties will not be able to successfully complete the
transaction or that the terms of the final transaction will vary
from those presently contemplated.
<PAGE> 11
ShoLodge, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The following discussion should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report.
The Company develops, owns and operates all-suites hotels under the
Sumner Suites brand name and is an operator and the exclusive franchisor of
Shoney's Inns. The Company's 27 Sumner Suites owned and operated as of April 16,
2000 are mid-scale, all-suites hotels located in Arizona, Colorado, Florida,
Georgia, Indiana, Kansas, New Mexico, North Carolina, Ohio, Tennessee, Texas and
Virginia. As of April 16, 2000, the Shoney's Inn lodging system consists of 74
Shoney's Inns containing 7,148 rooms of which 17 containing 1,933 rooms are
owned or managed by the Company. Shoney's Inns are currently located in 21
states with a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and,
to a lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $75 and $100 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room,
and offers a deluxe continental breakfast.
The Sumner Suites concept was launched in 1995 with three hotels. From
1990 until 1995, the Company developed and managed 12 mid-scale, all-suites
hotels under another brand name before selling its interests in those hotels in
March 1995. The Company believes that its experience in developing, constructing
and managing mid-scale, all-suites hotels has enabled it to expand effectively
its development and ownership of the Sumner Suites system. In addition, as
Sumner Suites has a limited presence in the marketplace, the Company is
utilizing its proprietary reservation system, INNLINK, to further expand
awareness of Sumner Suites.
Shoney's Inns operate in the upper economy limited-service segment and
are designed to appeal to both business and leisure travelers, with rooms
usually priced between $40 and $65 per night. The typical Shoney's Inn includes
60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not
offer full food service, most offer continental breakfast and most of the
Shoney's Inns are located adjacent or in close proximity to Shoney's
restaurants. Management believes that its strategy of locating most of its
Shoney's Inns in close proximity to free-standing Shoney's restaurants has given
it a competitive advantage over many other limited-service lodging
<PAGE> 12
chains by offering guest services approximating those of full-service facilities
without the additional capital expenditures, operating costs or higher room
rates.
The Company's operations have been supplemented by contract revenues
from construction and development of hotels for third parties. Revenues from
these activities have varied widely from period to period, depending upon
whether the Company's construction and development activities were primarily
focused on its own facilities or on outside projects. Construction revenues are
recognized on the percentage of completion basis.
RESULTS OF OPERATIONS
For the Quarters Ended April 16, 2000 and April 18, 1999
Total operating revenues for the quarters ended April 16, 2000, were
$27.2 million, or 39.8% more than the total operating revenues of $19.5 million
reported for the first quarter of 1999.
Revenues from hotel operations increased by $3.9 million, or 21.6%,
from the $18.3 million reported for the same period last year. For the 38 same
hotels opened for all of both quarterly periods, a decrease of 0.3% in average
daily room rates, from $68.41 in first quarter 1999 to $68.21 in first quarter
2000, and an increase in average occupancy rates on these hotels from 50.9% to
54.8% this year, resulted in an increase in same hotel revenues of 7.3% from
$18.0 million in first quarter 1999 to $19.3 million in first quarter 2000. The
four hotels opened since the end of 1998 contributed $2.9 million to hotel
operating revenues in first quarter this year, compared to only $279,000 in
first quarter last year from three of the hotels which opened in the first
quarter of 1999.
The Company owns and operates two hotel brands - Shoney's Inns and
Sumner Suites hotels. RevPAR (revenue per available room) for the 15
Company-owned Shoney's Inns decreased from $23.13 in first quarter 1999 to
$22.20 in first quarter 2000. The 27 Sumner Suites hotels' RevPAR increased by
12.9%, from $41.45 in first quarter 1999 to $46.81 in first quarter 2000. The 23
Sumner Suites same-hotels' RevPAR increased by 11.2%, from $42.18 in first
quarter 1999 to $46.91 in first quarter this year.
Franchising and management revenues declined by $25,000, or 2.7%, in
first quarter 2000 from first quarter 1999. Initial franchise and franchise
termination fees increased by $104,000 from first quarter of last year, which
was offset by a $129,000 decrease in royalty and reservation fees, of which
$52,000 was from the cancellation of reservation services by one hotel chain in
March of 1999. Initial franchise fee revenue varies from quarter to quarter
depending on the level of franchise sales activities. As of April 16, 2000,
there were three franchised Shoney's Inns under construction, two of which are
expected to open in the second quarter of this year. Revenues from construction
and development activities were $4.1 million in first quarter 2000 on five
<PAGE> 13
third party construction contracts in progress versus $291,000 in first quarter
1999 on one third party construction contract in progress.
Operating expenses from hotel operations for the first quarter of 2000
increased by $3.6 million, or 30.2%, from $12.0 million in first quarter 1999,
due partially to the $3.9 million increase in hotel operating revenues. The four
Sumner Suites hotels opened in 1999 and first quarter 2000 caused hotel
operating expenses to increase by $1.3 million over first quarter last year.
Hotel operating expenses on the 38 same-hotels increased by 20.7%, or $2.3
million, in first quarter 2000 over first quarter 1999. The operating expenses
as a percentage of operating revenues for this activity increased from 66.1% in
first quarter 1999 to 70.7% in first quarter 2000; operating expenses as a
percentage of operating revenues on the 38 same-hotels increased from 63.2% in
first quarter 1999 to 71.0% in first quarter 2000. Increases in hotel operating
expenses on same-hotels were primarily in the areas of payroll related costs,
repairs and maintenance, uncollectible accounts receivable, operating supplies,
and security.
Franchising and management operating expenses increased by $181,000, or
28.4%, from first quarter 1999. The increases were primarily in the areas of (1)
reservation center equipment expenses and payroll and related benefits and (2)
franchise administrative expenses; particularly, advertising, postage and
freight, dues and subscriptions, and hotel inspection expenses. Construction and
development costs in first quarter 2000 were $4.0 million on the five third
party construction contracts in progress versus $246,000 in first quarter 1999
on the one third party construction contract in progress at that time. General
and administrative expenses decreased by $312,000, or 18.2%, from first quarter
1999. This decrease was due primarily to decreased professional fees, travel
expenses and telephone expenses.
Rent expense increased by $2.4 million in first quarter this year from
last year's first quarter, of which $2.2 million represents the base rent paid
in the first quarter of this year on the six Sumner Suites hotels sold and
leased back on June 29, 1999.
Depreciation and amortization expense decreased by $357,000, or 14.5%,
from first quarter 1999. The sale-leaseback of 6 Sumner Suites hotels in June,
1999 reduced depreciation expense in first quarter 2000 by $543,000 from first
quarter 1999. However, depreciation and amortization increased in first quarter
2000 over first quarter 1999 by $186,000 due to the two new hotels opened in
1999 and not sold and leased back and various other depreciable assets acquired
since first quarter 1999. Interest expense decreased by $56,000, or 1.5%, while
interest income decreased by $8,000, or 0.4%, from first quarter 1999, for a net
decrease of $48,000 in net interest expense.
<PAGE> 14
The gain recognized on sale of property in first quarter 2000 totaled
$299,000, and represents the adjustment of deferred credits due to the revision
of the estimated amounts needed to fund reserves related to the 16 hotels sold
in third quarter 1998, of which the recognition of the balance of the gain was
recognized in 1998 and 1999. The gain on sale of property in first quarter 1999
totaling $4.6 million relates to three of the 16 hotels sold in third quarter
1998, the recognition of which was originally deferred and recognized on the
installment method. Other income decreased by $163,000 from first quarter 1999
to first quarter 2000. Other income can vary widely from quarter to quarter due
to the nature of this income and its varied sources. Minority interests in
earnings of consolidated subsidiaries and partnerships decreased from $1.9
million in first quarter 1999 to $19,000 in first quarter 2000, due primarily to
the 40% minority interest in $4.6 million of the gain on sale of property
recognized in first quarter 1999, described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows provided by operating activities were $2.8
million in first quarter 2000, compared with $1.1 million used in operating
activities in the first quarter 1999. Construction contracts receivable
decreased by $7.1 million in first quarter 2000, compared with none in first
quarter 1999; however, estimated earnings in excess of billings on construction
contracts were $3.4 million in first quarter 2000 versus none in first quarter
1999. A federal income tax receivable of $2.3 million was collected in first
quarter 2000 versus none in first quarter 1999. The decrease in accounts payable
in first quarter 2000 of $774,000, compared with a $2.3 million increase in
first quarter 1999.
The Company's cash flows used in investing activities were $1.4 million
in first quarter 2000, compared with cash flows provided by investing activities
of $4.3 million for the comparable period in 1999. The Company collected $12.2
million from notes receivable in first quarter 1999, which related to two hotel
properties sold in 1997 and 1998. Only $44,000 was received in first quarter
2000 from the collection of notes receivable. 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 $1.4 million in first quarter 2000 and $7.9 million in first
quarter 1999.
Net cash provided by financing activities was $1.6 million in first
quarter 2000 compared with $6.7 million in first quarter 1999. Borrowings, net
of repayments, on long-term debt and capitalized lease obligations were $1.6
million in first quarter 2000 versus $8.0 million in first quarter 1999. The
repayments in first quarter 2000 include $1.3 million of long-term debt
repurchased in the open market. In the first quarter of 2000, the Company
repurchased 65,000 shares of its common stock for $285,000; in the first quarter
of 1999, the Company repurchased 210,000 shares of its common stock for
<PAGE> 15
$1.4 million pursuant to a plan to repurchase up to $20.0 million of the
Company's outstanding common stock.
The Company's $25.2 million revolving credit facility with a group of five banks
matured on June 30, 1999. It was repaid in full on June 29, 1999, from a portion
of the $65.0 million gross proceeds from a sale/leaseback transaction involving
six of the Company's Sumner Suites hotels. The Company established a new
three-year credit facility with a new bank group effective August 27, 1999. The
new credit facility is for an initial amount of $30.0 million (a $10.0 million
term loan and a $20.0 million revolving line of credit), secured by a pledge of
certain promissory notes payable to the Company received in connection with the
sale of 16 of the Company's lodging facilities in the third quarter of 1998. The
borrowing base is the lower of (a) 85% of the outstanding principal amount of
the pledged notes, (b) 65% of the appraised market value of the underlying real
property collateral securing the pledged notes, or (c) $30.0 million. The
interest rate is at the lender's base rate plus 50 basis points and the Company
is to pay commitment fees on the unused portion of the facility at .50% per
annum. The credit facility also contains covenants which, inter alia, limit or
prohibit the incurring of certain additional indebtedness in excess of a
specified debt to total capital ratio, prohibit additional liens on the
collateral, restrict mergers and the payment of dividends and restrict the
Company's ability to place liens on unencumbered assets. The credit facility
contains financial covenants as to the Company's minimum net worth. As of April
16, 2000, the Company had $15.4 million in borrowings outstanding under this
credit facility, including the three-year term loan of $10.0 million; the
remaining availability under this credit facility as of April 16, 2000, was
$14.6 million.
The Company also maintains a $1 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
2001. As of April 16, 2000, the Company had no borrowings outstanding under this
credit facility.
The Company opened four new Sumner Suites hotels in 1999 (including
three in first quarter 1999) and none in first quarter 2000. As of the end of
the first fiscal quarter of 2000, two Sumner Suites hotels were under
construction which are expected to open in fourth quarter 2000 or first quarter
2001. The Company estimates that approximately $13.0 million in capital funds
will be necessary to complete the construction of the two hotels under
construction. In late 1998, the Company decided to slow its aggressive
development schedule of new Sumner Suites hotels in the near term. This decision
was based on current market conditions, rooms supply in certain areas, and
capital availability.
The Company's Board of Directors has previously authorized the use of
up to $20.0 million for the repurchase of shares of the Company's common stock.
The purchases, including block purchases, are to be made from time to time in
the open market at prevailing market prices, or in privately negotiated
transactions at the Company's discretion. No time limit has been placed on the
duration of the stock repurchase plan, and the Company may discontinue the plan
at any time. As of the end of
<PAGE> 16
the first fiscal quarter of 2000, approximately 3.0 million shares had been
repurchased at a cost of $17.5 million.
On May 11, 2000, the Company sold and leased back four Sumner Suites
hotels, adding these four hotels to the existing lease of 20 other hotels. Net
proceeds from this transaction were $33.7 million, of which $7.5 million was
used to reduce long-term indebtedness of the Company. The balance of $26.2
million has been temporarily invested in money market funds until needed. This
transaction represented the first closing transaction as a part of the series of
contemplated transactions pursuant to an agreement entered into with Prime
Hospitality Corp. ("Prime") on March 16, 2000 (reference "Pending Prime
Transaction" discussion in Item 7 of the Company's 1999 Form 10-K and footnote F
of the Notes to Condensed Consolidated Financial Statements included with this
Form 10-Q). The assumption by Prime of the Company's leasehold interest in the
24 Sumner Suites hotels currently leased from HPT Suite Properties Trust and the
Company's lease of three Sumner Suites hotels to Prime is expected to occur in
June, 2000. The Company is expected to receive net proceeds of approximately $16
million in cash or cash equivalents at the time of closing and to begin
receiving minimum rental income from Prime in an amount of approximately $3.1
million per year.
The Company is investigating various alternatives to maximize
shareholder value. These alternatives could include, without limitation, a
continuation of the development and operation of Sumner Suites and the
franchising and operation of Shoney's Inns, a sale of the remaining Shoney's
Inns, negotiating new credit arrangements, developing hotels for other owners,
the repurchase of additional shares of the Company's common stock or outstanding
debt securities, or any combination of these or other strategies. The Company
believes that a combination of net proceeds from the above-discussed
sale-leaseback transaction, the pending Prime transaction, the collection of
notes receivable, net cash provided by operations, borrowings under existing and
new revolving credit facilities or mortgage debt, and available furniture,
fixture and equipment financing packages will be sufficient to fund its
scheduled hotel development, stock repurchase plan, debt repayments and
operations for the next twelve months.
MARKET RISK
There have been no material changes in the Company's exposure to market
risk in the first fiscal quarter ended April 16, 2000.
YEAR 2000 DISCLOSURE
The Company transitioned through January 1, 2000, and experienced no
significant date related processing issues. The Company does not anticipate
incurring any material direct costs related to the Year 2000 issue going
forward.
<PAGE> 17
FORWARD-LOOKING STATEMENT DISCLAIMER
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> 18
PART II - OTHER INFORMATION
Item 1. ShoLodge Franchise Systems, Inc. v. The Williams & Roxann Davis
Company, L.L.C., et al., U.S. District Court for the Middle District
of Tennessee, Case No. 3-99-0967. On October 12, 1999, the Company
filed an action against The William & Rosann Davis Company, L.L.C.
and other parties arising out of a breach of the License Agreement
concerning the Shoney's Inn in Texarkana, Arkansas. On January 11,
2000, the defendants filed a counterclaim against the Company
claiming that the Company should be precluded from enforcing the
License Agreement because of certain alleged misrepresentations made
prior to the execution of the License Agreement, because of certain
alleged breaches of the License Agreement by the Company and because
of the Company's alleged violation of the Arkansas Franchise
Practices Act. On March 14, 2000, the parties entered into a
settlement pursuant to which the defendants agreed to pay $90,000 to
the Company to resolve all claims raised in the case. The defendants
have now paid the proceeds of the settlement to the Company and the
case has been dismissed.
No material developments occurred during the first quarter ended
April 16, 2000 with respect to any other pending litigation.
Item 4. Submission of Matters to a vote of Security Holders
Not applicable
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits -
10.1 Purchase and Sale Agreement by and between ShoLodge,
Inc. and certain of its Affiliates, as Sellers, and
HPT Suite Properties Trust, as Purchaser, dated May
11, 2000, incorporated by reference to the Company's
Current Report on Form 8-K filed with the Commission
on May 26, 2000.
10.2 Agreement to Lease between HPT Suite Properties Trust
and Suite Tenant, Inc. dated May 11, 2000,
incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on May
26, 2000.
10.3 Fourth Amendment to Lease Agreement and Amendment to
Incidental Documents entered into between Hospitality
Properties Trust, HPT Suite Properties Trust,
ShoLodge, Inc., and Suite Tenant, Inc., dated May 11,
2000, incorporated by reference to the Company's
Current Report on Form 8-K filed with the Commission
on May 26, 2000.
27 Financial Data Schedule for Quarter Ended April 16,
2000
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended April 16, 2000.
<PAGE> 19
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: May 30, 2000 S/ Leon Moore
----------------------------------------
Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director
Date: May 30, 2000 S/ Bob Marlowe
----------------------------------------
Bob Marlowe
Secretary, Treasurer, Chief Accounting
Officer, Principal Accounting Officer,
Chief Financial Officer, Director
