FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| For the First Quarter Ended April 18, 2004 | Commission File No. 0-19840 |
SHOLODGE, INC.
| 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
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 28, 2004, there were 5,006,611 shares of ShoLodge, Inc. common stock outstanding.
ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets
| April 18, | ||||||||
| 2004 | December 28, | |||||||
| (unaudited) |
2003(1) |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 11,867,996 | $ | 12,491,736 | ||||
Accounts receivable: |
||||||||
Accounts receivable-trade, net |
2,510,335 | 2,188,312 | ||||||
Construction contracts |
661,284 | 837,714 | ||||||
Construction contracts due from related parties |
27,404,061 | 22,668,784 | ||||||
Costs and estimated earnings in excess of
billings on construction contracts |
28,990 | 39,832 | ||||||
Income taxes receivable |
3,807,246 | 3,908,041 | ||||||
Prepaid expenses |
512,351 | 314,967 | ||||||
Notes receivable, net |
4,264,737 | 6,641,598 | ||||||
Assets of hotels transferred under contractual
agreements (notes receivable) |
2,000,000 | 4,352,000 | ||||||
Assets of hotels held for sale |
16,139,477 | 16,139,477 | ||||||
Other current assets |
45,407 | 45,352 | ||||||
Total current assets |
69,241,884 | 69,627,813 | ||||||
Notes receivable, net |
2,604,583 | 4,702,058 | ||||||
Property and equipment |
40,253,476 | 40,369,304 | ||||||
Less accumulated depreciation and amortization |
(7,273,507 | ) | (6,922,065 | ) | ||||
| 32,979,969 | 33,447,239 | |||||||
Land under development or held for sale |
10,653,717 | 10,644,991 | ||||||
Deferred charges, net |
392,939 | 437,353 | ||||||
Goodwill, net |
765,711 | 765,711 | ||||||
Trademark and franchise rights, net |
396,442 | 473,366 | ||||||
Other assets |
2,410,599 | 1,921,596 | ||||||
| $ | 119,445,844 | $ | 122,020,127 | |||||
| (1) | Derived from fiscal year ended December 28, 2003 audited financial statements. See accompanying notes. |
ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
| April 18, | ||||||||
| 2004 | December 28, | |||||||
| (unaudited) |
2003(1) |
|||||||
Liabilities and shareholders’ equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 4,376,767 | $ | 5,450,275 | ||||
Taxes payable other than on income |
402,251 | 344,179 | ||||||
Current portion of long-term debt |
11,360,703 | 11,344,902 | ||||||
Total current liabilities |
16,139,721 | 17,139,356 | ||||||
Long-term debt, less current portion |
41,373,639 | 41,373,383 | ||||||
Deferred income taxes |
233,485 | 783,485 | ||||||
Deferred credits |
150,280 | 153,106 | ||||||
Minority interests in equity of consolidated subsidiaries and
partnerships |
391,560 | 388,699 | ||||||
Total liabilities |
58,288,685 | 59,838,029 | ||||||
Shareholders’ equity: |
||||||||
Preferred stock (no par value; 1,000,000 shares
authorized;
no shares issued) |
— | — | ||||||
Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares issued) |
— | — | ||||||
Common stock (no par value; 20,000,000 shares
authorized, 5,006,611 and 4,993,278 shares issued
and outstanding as of April 18, 2004
and December 28, 2003, respectively) |
1,000 | 1,000 | ||||||
Additional paid-in capital |
23,177,820 | 23,127,821 | ||||||
Retained earnings |
37,978,339 | 39,053,277 | ||||||
Total shareholders’ equity |
61,157,159 | 62,182,098 | ||||||
| $ | 119,445,844 | $ | 122,020,127 | |||||
| (1) | Derived from fiscal year ended December 28, 2003 audited financial statements. See accompanying notes. |
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
| 16 weeks ended |
||||||||
| April 18, | April 20, | |||||||
| 2004 |
2003 |
|||||||
Revenues: |
||||||||
Hotel |
$ | 1,356,050 | $ | 786,657 | ||||
Franchising, reservation and management |
2,177,855 | 2,080,301 | ||||||
Construction and development-related parties |
7,741,531 | 2,944,623 | ||||||
Construction and development-other |
145,156 | 9,151 | ||||||
Rent income |
9,728 | 327,178 | ||||||
Other income |
63,481 | 17,256 | ||||||
Total revenues |
11,493,801 | 6,165,166 | ||||||
Cost and expenses: |
||||||||
Hotel |
1,020,105 | 565,364 | ||||||
Franchising, reservation and management |
1,718,030 | 1,677,618 | ||||||
Construction and development |
6,647,624 | 3,417,198 | ||||||
Rent expense, net |
138,623 | 144,651 | ||||||
General and administrative |
1,427,882 | 2,027,972 | ||||||
Depreciation and amortization |
512,402 | 535,921 | ||||||
Write-off of pre-development costs |
— | 5,993 | ||||||
Write-off of construction contracts receivable |
— | 16,483 | ||||||
Write-off of trade receivables |
83,741 | 13,336 | ||||||
Write-down of notes receivable |
148,414 | — | ||||||
Total cost and expenses |
11,696,821 | 8,404,536 | ||||||
Operating loss |
(203,020 | ) | (2,239,370 | ) | ||||
Gain on sale of property and leasehold interests |
2,926 | 594,977 | ||||||
Gain on early extinguishments of debt |
— | 283,319 | ||||||
Interest expense |
(1,808,407 | ) | (2,889,694 | ) | ||||
Interest income |
57,874 | 939,767 | ||||||
Lease abandonment income |
— | 5,329,504 | ||||||
(Loss) earnings from continuing operations before income taxes and
minority interests |
(1,950,627 | ) | 2,018,503 | |||||
Income tax benefit |
661,707 | — | ||||||
Minority interests in earnings of consolidated
subsidiaries and partnerships |
(2,861 | ) | (11,976 | ) | ||||
(Loss) earnings from continuing operations |
(1,291,781 | ) | 2,006,527 | |||||
Discontinued operations: |
||||||||
Operations of hotels disposed of and transferred, net of income
tax effect of $111,707 in 2004 and $0 in 2003 |
216,843 | 221,032 | ||||||
Loss on disposal and transfer of discontinued operations, net of income
tax effect |
— | (1,768,559 | ) | |||||
Net (loss) earnings |
$ | (1,074,938 | ) | $ | 459,000 | |||
Net (loss) earnings per common share: |
||||||||
Basic: |
||||||||
Continuing operations |
$ | (0.26 | ) | $ | 0.39 | |||
Discontinued operations: |
||||||||
Operations of hotels disposed of and transferred |
$ | 0.04 | 0.04 | |||||
Loss on
disposal and transfer of discontinued operations |
$ | — | (0.34 | ) | ||||
Net (loss) earnings |
$ | (0.22 | ) | $ | 0.09 | |||
Diluted: |
||||||||
Continuing operations |
$ | (0.26 | ) | $ | 0.39 | |||
Discontinued operations: |
||||||||
Operations of hotels disposed of and transferred |
0.04 | 0.04 | ||||||
Loss on
disposal and transfer of discontinued operations |
— | (0.34 | ) | |||||
Net (loss) earnings |
$ | (0.22 | ) | $ | 0.09 | |||
Weighted average common shares outstanding: |
||||||||
Basic |
5,005,778 | 5,118,778 | ||||||
Diluted |
5,005,778 | 5,118,778 | ||||||
See accompanying notes.
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
| 16 weeks ended |
||||||||
| April 18, | April 20, | |||||||
| 2004 |
2003 |
|||||||
Cash flows from operating activities |
||||||||
Net (loss) earnings |
$ | (1,074,938 | ) | $ | 459,000 | |||
Adjustments to reconcile net (loss) earnings
to net cash used in operating activities: |
||||||||
Discontinued operations, net of tax |
(216,843 | ) | 1,547,527 | |||||
Depreciation and amortization |
512,402 | 535,921 | ||||||
Write-off of pre-development costs |
— | 5,993 | ||||||
Write-off of construction contracts receivable |
— | 16,483 | ||||||
Write-off of
accounts receivable – trade |
83,741 | 13,336 | ||||||
Write-off of notes receivable |
148,414 | — | ||||||
Amortization of deferred charges recorded as interest expense |
44,414 | 217,041 | ||||||
Accretion of debt recorded as interest expense |
201,852 | 201,852 | ||||||
Recognition of previously deferred gains |
(2,826 | ) | (57,513 | ) | ||||
Gain on sale of property and leasehold interests |
(100 | ) | (594,977 | ) | ||||
Gain on early extinguishments of debt |
— | (283,319 | ) | |||||
Lease abandonment income |
— | (5,329,504 | ) | |||||
Deferred income tax benefit |
(661,707 | ) | — | |||||
Minority interest in earnings of consolidated subsidiaries
and partnerships |
2,861 | 11,976 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts
receivable – trade |
(405,764 | ) | (504,096 | ) | ||||
Construction contracts receivable |
176,430 | 29,552 | ||||||
Construction contracts receivable due from related parties |
(4,735,277 | ) | 2,036,883 | |||||
Costs and estimated earnings in excess of billings on
construction contracts |
10,842 | — | ||||||
Income and other taxes receivable and payable |
487,417 | 2,051,914 | ||||||
Prepaid expenses |
(197,384 | ) | (173,870 | ) | ||||
Accounts payable and accrued expenses |
(1,073,508 | ) | (1,100,861 | ) | ||||
Other |
28,633 | (30,141 | ) | |||||
Net cash used in operating activities |
(6,671,341 | ) | (946,803 | ) | ||||
Cash flow from investing activities |
||||||||
Payments received on notes receivable |
6,677,922 | 17,267,885 | ||||||
Capital expenditures |
(96,207 | ) | (164,228 | ) | ||||
Purchase of other assets |
(490,000 | ) | (1,050,000 | ) | ||||
Proceeds from sale of properties |
91,682 | 7,466,297 | ||||||
Proceeds from lease abandonment |
— | 415,668 | ||||||
Acquistion |
— | (20,000 | ) | |||||
Net cash provided by investing activities |
6,183,397 | 23,915,622 | ||||||
Cash flow from financing activities |
||||||||
Repayments of notes receivable from officer |
— | 687,500 | ||||||
Deferred loan costs |
— | (18,763 | ) | |||||
Proceeds from long-term debt |
— | 6,726,904 | ||||||
Payments on long-term debt |
(185,795 | ) | (14,811,924 | ) | ||||
Exercise of stock options |
49,999 | — | ||||||
Net cash used in financing activities |
(135,796 | ) | (7,416,283 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(623,740 | ) | 15,552,536 | |||||
Cash and
cash equivalents – beginning of period |
12,491,736 | 1,534,942 | ||||||
Cash and
cash equivalents – end of period |
$ | 11,867,996 | $ | 17,087,478 | ||||
See accompanying notes.
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003.
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 the 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 18, 2004 and April 20, 2003 are not necessarily indicative of the operating results for the entire year.
Certain reclassifications have been made in the first quarter 2003 consolidated statement of earnings to conform to the classifications used in 2004. These reclassifications had no impact on net earnings (losses) as previously reported.
LEASE ABANDONMENT INCOME
The Company leased three hotels to Prime Hospitality Corp. (“Prime”) in July of 2000. In the first quarter of 2003, Prime abandoned the lease of the three hotels and the Company resumed operations of the hotels on April 5, 2003. Due to the terms of the lease agreement, the Company had recorded a liability and a deferred credit in July of 2000. Due to the lease abandonment by Prime in the first quarter of 2003, the remaining deferred amounts totaling $4,913,836 and $415,668 in cash received from Prime upon the abandonment, were recognized as lease abandonment income totaling $5,329,504 in the first quarter of 2003.
DISCONTINUED OPERATIONS
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Discontinued operations do not include amounts for operating losses that have not yet been incurred.
Under SFAS No. 144, the reporting of discontinued operations includes all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company reports as discontinued operations assets held for sale (as defined by SFAS 144) and assets sold in the current period. All results of these discontinued operations are included in a separate component of income on the consolidated statements of earnings under the heading, “operations of hotels disposed of and transferred, net of income taxes.”
The following table summarizes the results of operations for five properties transferred in the fourth quarter of 2002 and eleven properties sold or classified as held for sale, from the hotel operations segment for the quarters ended April 18, 2004 and April 20, 2003 (amounts in thousands):
| 16 Weeks Ended |
||||||||
| April 18, 2004 |
April 20, 2003 |
|||||||
Revenues: |
||||||||
Hotel |
$ | 1,982 | $ | 1,987 | ||||
Rent |
— | 490 | ||||||
Total revenues |
1,982 | 2,477 | ||||||
Cost and expenses: |
||||||||
Hotel |
1,653 | 1,889 | ||||||
General and administrative |
— | 29 | ||||||
Depreciation and amortization |
— | 312 | ||||||
Total expenses |
1,653 | 2,230 | ||||||
Interest expense |
— | (24 | ) | |||||
Interest income |
— | (2 | ) | |||||
Earnings before income taxes |
329 | 221 | ||||||
Income taxes |
(112 | ) | — | |||||
Operations of hotels included in
discontinued operations, net of
income tax effect |
$ | 217 | $ | 221 | ||||
The assets of the five properties transferred in the fourth quarter of 2002 and presented in the accompanying consolidated balance sheets as assets of hotels transferred under contractual agreements (notes receivable) are as follows at April 18, 2004 (one property) and December 28, 2003 (two properties) (amounts in thousands):
| April 18, | December 28, | |||||||
| 2004 |
2003 |
|||||||
Assets |
||||||||
Other current assets |
$ | 7 | $ | 16 | ||||
Property and equipment, net |
1,982 | 4,307 | ||||||
Other assets |
11 | 29 | ||||||
Total assets |
$ | 2,000 | $ | 4,352 | ||||
The assets and liabilities of the properties held for sale presented in the accompanying consolidated balance sheets are as follows (amounts in thousands):
| April 18, | December 28, | |||||||
| 2004 |
2003 |
|||||||
Assets |
||||||||
Other current assets |
$ | 17 | $ | 17 | ||||
Property and equipment, net |
16,080 | 16,080 | ||||||
Other assets |
42 | 42 | ||||||
Total assets |
$ | 16,139 | $ | 16,139 | ||||
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share was computed by dividing net earnings (loss) by the weighted average number of common shares outstanding. The following table reconciles earnings (loss) and weighted average shares used in the earnings (loss) per share calculations for the fiscal quarters ended April 18, 2004, and April 20, 2003:
| 16 Weeks Ended |
||||||||
| April 18, | April 20, | |||||||
| 2004 |
2003 |
|||||||
Basic: |
||||||||
Earnings (loss) from continuing operations |
$ | (1,291,781 | ) | $ | 2,006,527 | |||
Earnings (loss) from discontinued operations |
216,843 | (1,547,527 | ) | |||||
Net earnings (loss) applicable to common stock |
$ | (1,074,938 | ) | $ | 459,000 | |||
Shares: |
||||||||
Weighted average common shares outstanding |
5,005,778 | 5,118,778 | ||||||
Basic earnings (loss) per share: |
||||||||
Continuing operations |
$ | (0.26 | ) | $ | 0.39 | |||
Discontinued operations |
0.04 | (0.30 | ) | |||||
Net earnings (loss) |
$ | (0.22 | ) | $ | 0.09 | |||
Diluted: |
||||||||
Earnings (loss) from continuing operations |
$ | (1,291,781 | ) | $ | 2,006,527 | |||
Earnings (loss) from discontinued operations |
216,843 | (1,547,527 | ) | |||||
Net earnings (loss) applicable to common stock |
(1,074,938 | ) | 459,000 | |||||
Dilutive effect of 7.5% convertible debentures |
— | — | ||||||
Numerator for diluted earnings (loss) per share |
$ | (1,074,938 | ) | $ | 459,000 | |||
Shares: |
||||||||
Weighted average common shares outstanding |
5,005,778 | 5,118,778 | ||||||
Effect of dilutive securities (options) |
— | — | ||||||
Effect of dilutive securities (7.5% convertible
debentures)
|
— | — | ||||||
Weighted average common and common equivalent
shares outstanding |
5,005,778 | 5,118,778 | ||||||
Diluted earnings (loss) per share: |
||||||||
Continuing operations |
$ | (0.26 | ) | $ | 0.39 | |||
Discontinued operations |
0.04 | (0.30 | ) | |||||
Net earnings (loss) |
$ | (0.22 | ) | $ | 0.09 | |||
OPERATING SEGMENT INFORMATION
The Company’s significant operating segments are hotel operations, franchising, reservation and management services, 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):
| 16 Weeks Ended |
||||||||
| April 18, | April 20, | |||||||
| 2004 |
2003 |
|||||||
Revenues: |
||||||||
Hotel |
$ | 1,561 | $ | 1,351 | ||||
Franchising, reservation and management services |
2,339 | 2,294 | ||||||
Construction and development |
7,968 | 3,070 | ||||||
Elimination of intersegment revenue |
(374 | ) | (550 | ) | ||||
Total revenues |
$ | 11,494 | $ | 6,165 | ||||
Operating loss: |
||||||||
Hotel |
$ | 168 | $ | 400 | ||||
Franchising, reservation and management services |
(1,498 | ) | (2,144 | ) | ||||
Construction and development |
1,127 | (495 | ) | |||||
Total operating loss |
$ | (203 | ) | $ | (2,239 | ) | ||
Capital expenditures: |
||||||||
Hotel |
$ | — | $ | 4 | ||||
Franchising, reservation and management services |
96 | 160 | ||||||
Construction and development |
— | — | ||||||
Total capital expenditures |
$ | 96 | $ | 164 | ||||
Depreciation and amortization: |
||||||||
Hotel |
$ | 202 | $ | 198 | ||||
Franchising, reservation and management services |
302 | 320 | ||||||
Construction and development |
8 | 18 | ||||||
Total depreciation and amortization |
$ | 512 | $ | 536 | ||||
| As of April 18, |
As of December 28, |
|||||||
| 2004 |
2003 |
|||||||
Total assets: |
||||||||
Hotel |
$ | 41,281 | $ | 45,572 | ||||
Franchising, reservation and management services |
49,787 | 52,522 | ||||||
Construction and development |
28,378 | 23,926 | ||||||
Total assets |
$ | 119,446 | $ | 122,020 | ||||
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.
STOCK BASED COMPENSATION
The Company uses the intrinsic value method for valuing its awards of stock options and recording the related compensation expense, if any. This compensation expense is included in general and administrative expense. The Company has adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure. The Company’s pro forma net (loss) earnings would not be materially different than reported net (loss) earnings in the sixteen weeks ended April 18, 2004 and April 20, 2003 under the fair value method.
RELATED PARTY TRANSACTIONS
The chairman and chief executive officer is personally involved in various real estate development activities. The Company’s wholly-owned construction and development subsidiary has from time to time provided services in connection with these activities. Revenues earned by the Company from these projects were $7,741,531 and $2,944,623 in the sixteen weeks ended April 18, 2004 and April 20, 2003, respectively. Construction contracts due from related parties were $27,404,061 and $22,668,784 at April 18, 2004 and December 28, 2003, respectively.
ShoLodge, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company develops, owns, operates and is the exclusive franchisor of Shoney’s Inns and GuestHouse Inns & Suites. In the second quarter of 2002, the Company acquired the exclusive franchise rights of the GuestHouse Inns & Suites hotel brand and announced its plan to convert the name of the Shoney’s Inns and Shoney’s Inns & Suites hotel chain to GuestHouse International Inns & Suites as soon as practical. As of April 18, 2004, the Shoney’s Inn/GuestHouse lodging system consisted of 82 properties containing 6,486 rooms of which one containing 98 rooms is owned by the Company. Shoney’s Inns and GuestHouse Inns & Suites are currently located in 20 states. As of April 18, 2004, the Company also owned and operated two AmeriSuites hotels.
Except for three owned hotel properties which the Company intends to continue to operate at present, all of the Company’s remaining owned hotel properties are held for sale at April 18, 2004. The Company’s present strategy does not include the ownership of additional hotel properties.
The Company also franchises and manages Shoney’s Inns and GuestHouse Inns & Suites, earning revenues from royalties, reservation services, and manage