<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration No. 333-14463
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 12, 1996)
[SHONEY'S $30,000,000 [SUMNER
INN SHOLODGE, INC. SUITES
LOGO] LOGO]
9 3/4% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
------------------------
ShoLodge, Inc. (the "Company") is offering $30,000,000 in aggregate
principal amount of its 9 3/4% Senior Subordinated Notes due 2006, Series A (the
"Series A Notes"). The Series A Notes mature on November 1, 2006. Interest on
the Series A Notes will be payable quarterly on the first day of February, May,
August and November of each year commencing February 1, 1997. The Series A Notes
will be unsecured and subordinated in right of payment to the prior payment in
full of all existing and future Senior Indebtedness, as defined, of the Company
and will be senior in right of payment to, or pari passu with, all other
subordinated indebtedness of the Company. As of July 14, 1996, after giving pro
forma effect to the sale of the Series A Notes and to the application of the net
proceeds therefrom to reduce indebtedness under the Company's current credit
agreements, as described under "Use of Proceeds," the amount of Senior
Indebtedness of the Company would have been approximately $39.5 million. The
Company had incurred $7.2 million in additional Senior Indebtedness as of
October 6, 1996 and approximately $7.3 million of additional Senior Indebtedness
in connection with the Shoney's Transaction, as defined. The Company may incur
additional Senior Indebtedness subject to the "Restrictions on Additional
Indebtedness" covenant in the Indenture, as defined.
Upon the occurrence of a Change in Control, as defined, of the Company, the
Company will be obligated to purchase the Series A Notes at the holder's option
at par plus accrued interest to the date of purchase. The change in control
feature may have an anti-takeover effect. See "Description of the Notes --
Repurchase at Holder's Option Upon Change in Control." The Series A Notes also
will be redeemable at any time on or after December 1, 1999, at the option of
the Company, in whole or in part, at declining premiums, as set forth herein.
The Company will redeem Series A Notes tendered by the personal representative
or surviving joint tenant, tenant in common or tenant by the entirety of a
deceased holder within 60 days of presentation of the necessary documents, up to
an annual maximum of $50,000 per holder and up to an annual aggregate maximum
amount equal to 5% of the aggregate original principal amount of the Notes of
all series issued under the Indenture. The Company will redeem Series A Notes
tendered by other holders commencing December 1, 1999 and on each anniversary
thereof subject to the per holder and aggregate limitations. No sinking fund
will be established to redeem the Series A Notes. See "Description of the
Notes."
The Series A Notes will be issued in integral multiples of $1,000 and will
be in fully registered form. The Company does not intend to list the Series A
Notes on the Nasdaq National Market or any securities exchange. The Underwriters
have informed the Company that they intend to make a market in the Series A
Notes; however, no assurance can be given that an active trading market for the
Series A Notes will develop. See "Underwriting."
SEE "RISK FACTORS" APPEARING ON PAGES S-8 THROUGH S-11 OF THIS PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SERIES A NOTES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------------------------
Per Series A Note................................. 100% 3.5% 96.5%
- -------------------------------------------------------------------------------------------------------------------
Total(4).......................................... $30,000,000 $1,050,000 $28,950,000
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from date of initial issuance.
(2) The Company has agreed to indemnify the several Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Before deducting estimated expenses of $400,000 payable by the Company.
(4) The Company has granted the Underwriters an option to purchase up to an
additional $4,500,000 in principal amount of Series A Notes to cover
over-allotments on the same terms and conditions as set forth above. If all
such Series A Notes are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $34,500,000, $1,207,500 and
$33,292,500, respectively. See "Underwriting."
------------------------
The Series A Notes offered by this Prospectus Supplement and accompanying
Prospectus are offered by the Underwriters when, as and if issued by the
Company, subject to receipt and acceptance by the several Underwriters, prior
sale and the right of the Underwriters to reject any order in whole or in part
and to withdraw, cancel or modify the offer without notice. It is expected that
the Series A Notes will be available for delivery on or about November 15, 1996.
------------------------
J.C. BRADFORD & CO
DAIN BOSWORTH INCORPORATED
INTERSTATE/JOHNSON LANE CORPORATION
November 12, 1996
<PAGE> 2
This page contains spaces for the following graphic and image materials:
The inside front cover contains a map of a portion of the United
States showing the states where the Company's hotels are located or under
construction.
The map above depicts the approximate location of the Company's corporate
headquarters, Shoney's Inns and Sumner Suites in operation, and Sumner Suites
under construction as of October 18, 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A NOTES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus Supplement
and accompanying Prospectus or incorporated by reference herein. The term
"Company" as used herein includes the operations of ShoLodge, Inc. and its
subsidiaries. Unless otherwise noted, the information in this Prospectus
Supplement does not give effect to the exercise of the Underwriters'
over-allotment option.
THE COMPANY
ShoLodge, Inc. 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 and Shoney's Inn & Suites (collectively, "Shoney's Inns"). The
Company's 11 Sumner Suites are mid-scale, all-suites hotels located in Florida,
Georgia, Indiana, New Mexico, Ohio and Texas. The Shoney's Inns lodging system
consists of 88 Shoney's Inns containing 8,985 rooms of which 34 Shoney's Inns
containing 4,164 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. Usually located
in or near business or leisure travel destinations in mid-sized and larger
metropolitan markets, Sumner Suites offer mid-scale accommodations at rates
between $65 and $85 per night. A typical Sumner Suites hotel contains from 110
to 125 rooms, lounge facilities, meeting rooms and an exercise 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 will enable it to expand effectively its
development and ownership of the Sumner Suites system. As Sumner Suites has a
limited presence in the marketplace, the Company seeks to capitalize on 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 $39 and $58 per night. The typical Shoney's Inn includes 100 to
125 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not offer
full food service, many offer continental breakfast and 79 of the 88 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 other limited-service lodging chains by offering guest services
approximating those of full-service facilities without the additional capital
expenditures and operating costs or higher room rates.
In 1991, the Company became the exclusive franchisor of Shoney's Inns,
including the then existing Shoney's Inns. Management believes that Shoney's
Inns benefit from the association with the Shoney's national brand restaurant
system's reputation for consistency and value which provides an opportunity for
expansion in both existing and new markets. Shoney's Inns benefit directly from
cross-marketing efforts with Shoney's restaurants as well as indirectly from
Shoney's restaurant advertising.
The Company's strategy is to increase cash flow and earnings by (i)
increasing revenue per available room ("REVPAR") while maintaining the Company's
attractive suite and room price/value relationships and controlling operating
costs, (ii) developing additional Sumner Suites, and (iii) expanding the
Shoney's Inn system through the addition of new franchised units and selectively
developing Company-owned hotels. The Company has opened eight Sumner Suites in
fiscal 1996 and has three Sumner Suites under construction scheduled to open
during the remainder of fiscal 1996. The Company intends to open a total of
eight to ten Sumner Suites in fiscal 1997, of which two are currently under
construction. Based on the Company's experience to date, the capital investment
(including land and pre-opening expenses) for a typical 125 suite Sumner Suites
is approximately $6.5 million (approximately $52,000 per suite).
The principal executive offices of the Company are located at 217 West Main
Street, Gallatin, Tennessee 37066. The Company's telephone number is (615)
452-7200.
S-3
<PAGE> 4
RECENT DEVELOPMENTS
Recent Operating Results. On October 30, 1996, the Company announced the
following unaudited financial information for its fiscal quarter ended October
6, 1996, as compared with its fiscal quarter ended October 1, 1995, and the
three fiscal quarters ended October 6, 1996, as compared with the three fiscal
quarters ended October 1, 1995 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
THREE FISCAL
FISCAL QUARTER ENDED QUARTERS ENDED
------------------------- -------------------------
OCTOBER 1, OCTOBER 6, OCTOBER 1, OCTOBER 6,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Hotel operating revenues......................... $ 11,076 $ 16,172 $ 34,123 $ 44,393
Total operating revenues......................... 13,419 17,861 66,512 49,018
Earnings from continuing operations.............. 1,981 3,041 16,621 8,075
Earnings (loss) from discontinued operations*.... 24 -- (21) --
Extraordinary items**............................ 8 -- (700) --
------- ------- ------- -------
Net earnings..................................... $ 2,013 $ 3,041 $ 15,900 $ 8,075
Net earnings per share (primary):
From continuing operations..................... $ 0.23 $ 0.36 $ 1.94 $ 0.96
From discontinued operations................... 0.01 -- -- --
Extraordinary items............................ -- -- (0.08) --
------- ------- ------- -------
Net earnings................................... $ 0.24 $ 0.36 $ 1.86 $ 0.96
Net earnings per share (fully diluted):
From continuing operations..................... $ 0.24 $ 0.34 $ 1.71 $ 0.93
From discontinued operations................... -- -- (0.01) --
Extraordinary items............................ -- -- (0.06) --
------- ------- ------- -------
Net earnings................................... $ 0.24 $ 0.34 $ 1.64 $ 0.93
Average shares outstanding:
Primary........................................ 8,516 8,470 8,570 8,451
Fully diluted.................................. 10,832 10,787 10,886 10,768
</TABLE>
- ---------------
* During first quarter 1996, the Company sold its 60% ownership interest in its
restaurant operations.
** Extraordinary items represent primarily noncash charges net of income taxes
resulting from the early extinguishment of indebtedness in 1995.
Revenues from hotel operations for all hotels and same store hotels in the
third quarter of 1996 increased 46% and 2%, respectively, from the third quarter
of 1995. Operating profit margins from all hotels in the third quarter of 1996
increased to 48.4% from 44.1% in the third quarter of 1995. Operating profit
margins for same store hotels in the third quarter of 1996 increased to 47.3%
from 43.4% in the third quarter of 1995. REVPAR for all hotels increased 5.5%
and REVPAR for same store hotels increased 1.1% in the third quarter of 1996 as
compared with the third quarter of 1995.
S-4
<PAGE> 5
Shoney's Transaction. On October 25, 1996 the Company repurchased for $2.0
million in cash the warrant held by Shoney's Investments, Inc., an affiliate of
Shoney's, Inc. ("Shoney's"), to acquire 5% of the Company's common stock (the
"Common Stock") outstanding on the date of exercise of the warrant, exercisable
through February 20, 1997. As of October 25, 1996, the warrant entitled Shoney's
to acquire 559,589 shares of Common Stock, of which 437,703 warrants were in the
money at an average price of $9.49. In addition, the Company paid to Shoney's
$5.3 million in cash in exchange for (i) the cancellation of Shoney's right to
receive a portion of the franchise fees collected by the Company equal, in
substantially all cases, to 1.5% of 52 Shoney's Inns' gross revenues through
October 1999 and 0.5% of the remaining and all future Shoney's Inns' gross
revenues for the first ten years of their operations; (ii) the repurchase of all
of the Company's Series A Redeemable Nonparticipating Stock and all of the
Series A Redeemable Nonparticipating Stock of the Company's franchising
subsidiary; (iii) the termination of Shoney's right of first refusal with
respect to shares of Common Stock owned by Leon Moore, the Company's Chief
Executive Officer, if he received an offer which would result in his owning less
than 20% of the Company's outstanding Common Stock; and (iv) the amendment of
the Company's License Agreement with Shoney's (the "License Agreement")_to
terminate certain of Shoney's approval rights over various aspects of the
Company's franchise operations, including the selection of franchisees, the
location and design of franchised facilities, the termination of individual
franchisees, and the maximum fees which the Company may charge franchisees. The
Company will continue as the exclusive franchisor of Shoney's Inns and Shoney's
will retain certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed and the terms of the franchise agreements (other than the maximum
fees and other financial terms thereof). Further, Shoney's retains the right to
terminate the License Agreement under limited circumstances, including the
bankruptcy of the Company, the failure to comply with the terms of the License
Agreement and the failure to desist from conduct likely to impair Shoney's
goodwill and reputation. As a result of the repurchase of the Company's Series A
Redeemable Nonparticipating Stock, Shoney's no longer has the right to designate
two members of the Company's board of directors. Management expects that the
repurchase of the warrants will be treated as a reduction of shareholders'
equity and the cancellation of the warrants will reduce the number of common
equivalent shares outstanding. The $5.3 million price for the cancellation of
Shoney's right to receive a portion of the Company's franchise fees is expected
to be treated as a deferred asset and amortized over a fixed period of time.
Franchise operating expenses of the Company will no longer reflect an expense
for the royalty fees to Shoney's. The transactions described above are sometimes
collectively referred to herein as the "Shoney's Transaction."
THE OFFERING
Securities Offered............ $30,000,000 principal amount of 9 3/4% Senior
Subordinated Notes due 2006, Series A. See
"Description of the Series A Notes."
Maturity...................... November 1, 2006
Interest Payment Date......... Quarterly, commencing February 1, 1997 and on
each May 1, August 1, November 1 and February 1
thereafter. The first interest payment will
represent interest from the date of issuance
through February 1, 1997.
Denomination.................. $1,000 and any integral multiple thereof.
Redemption at Company's
Option........................ Not redeemable prior to December 1, 1999. The
redemption price for the 12 months beginning
December 1, 1999 will be 104% of par plus
accrued and unpaid interest, declining 1% each
year thereafter to 100% on December 1, 2003.
See "Description of the Series A
Notes -- Optional Redemption by the Company."
S-5
<PAGE> 6
Repurchase at Holder's Option
upon Change in Control...... The Company is required to repurchase the
Series A Notes at 100% of their principal
amount together with accrued interest, at the
option of the holder, if a Change in Control
occurs. See "Description of the Series A
Notes -- Certain Provisions Regarding
Redemption at Holder's Option" and "Description
of the Notes -- Repurchase at Holder's Option
Upon Change in Control."
Redemption at Holder's
Option........................ Upon the Death of a Noteholder: The Series A
Notes tendered by the personal representative
or surviving joint tenant, tenant by the
entirety or tenant in common of a deceased
beneficial owner shall be redeemed within 60
days of tender, at par plus accrued interest,
subject to the amount limitations set forth
below.
By other Noteholders: The Series A Notes
tendered by November 1 of each year shall be
redeemed at par plus accrued interest, subject
to the amount limitations set forth below, on
December 1 each year, commencing in 1999.
Amount Limitations: Of the Series A Notes
tendered, the Company is only required to
redeem, for any 12 month period ending November
1, an aggregate maximum of 5% of the original
aggregate principal amount of all Notes of all
series issued under the Indenture, subject to a
maximum of $50,000 per beneficial owner. Notes
tendered by representatives of deceased
beneficial owners will be redeemed prior to
Notes tendered by other Noteholders. See
"Description of the Notes -- Redemption at
Holder's Option."
Subordination................. The Notes of all series issued under the
Indenture will be unsecured obligations of the
Company subordinated in right of payment to the
prior payment in full of all Senior
Indebtedness of the Company, as defined in the
Indenture, and will be senior in right of
payment to or pari passu with all other
subordinated indebtedness of the Company. The
Notes will be effectively subordinated to all
indebtedness of the Company's subsidiaries. See
"Description of the Notes -- Subordination."
Certain Covenants of the
Company....................... In the Indenture, the Company agrees to certain
limitations on dividends and additional
indebtedness and to maintain a certain minimum
consolidated net worth.
Sinking Fund.................. None.
Use of Proceeds............... To reduce certain indebtedness of the Company
under its revolving credit facilities incurred
(i) to fund development and renovation of
lodging facilities and (ii) for general
corporate purposes including funding the
Shoney's Transaction. See "Use of Proceeds."
Risk Factors.................. See "Risk Factors" for a discussion of certain
factors that should be considered by
prospective purchasers of the Series A Notes.
Trustee....................... Bankers Trust Company, New York, New York.
S-6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
TWO FISCAL
QUARTERS ENDED
FISCAL YEAR ENDED ------------------
-------------------------------------------- JULY
DECEMBER 26, DECEMBER 25, DECEMBER 31, JULY 9, 14,
1993 1994 1995(1) 1995(1) 1996(1)
------------ ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total operating revenues........... $ 40,733 $ 60,776 $ 78,620 $53,094 $31,157
Total operating expenses........... 26,980 43,239 43,137 26,355 17,991
Earnings from continuing operations
before income taxes(2).......... 8,316 12,831 28,289 23,331 7,996
Net earnings(2).................... $ 5,198 $ 7,796 $ 16,977 $13,887 $ 5,034
Net earnings per common and common
equivalent share(2)............. $ 0.66 $ 0.90 $ 1.80 $ 1.40 $ 0.60
EBITDA(3).......................... $ 12,404 $ 16,159 $ 33,554 $25,836 $11,674
Ratio of earnings to fixed
charges(4)...................... 2.43x 2.58x 4.20x 5.86x 2.93x
OPERATING DATA:
Shoney's Inns system (end of period):
Number of units................. 58 73 80 77 88
Number of rooms................. 6,359 7,828 8,584 8,307 9,149
REVPAR(5)....................... $ 26.47 $ 26.43 $ 27.31 $ 27.22 $ 28.79
Company-owned Shoney's Inns (end of
period):
Number of units................. 20 28 30 29 32
Number of rooms................. 2,536 3,560 3,789 3,675 3,973
REVPAR(5)....................... $ 29.50 $ 30.20 $ 30.97 $ 30.72 $ 31.72
Sumner Suites (end of period)(6):
Number of units................. -- -- 3 1 8
Number of rooms................. -- -- 299 55 906
</TABLE>
<TABLE>
<CAPTION>
JULY 14, 1996
-------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(7)
-------- --------------
<S> <C> <C>
Working capital.................................................... $(35,569) $ (7,378)
Total assets....................................................... 227,921 228,755
Long-term debt and capitalized leases.............................. 90,067 120,067
Shareholders' equity............................................... 87,575 87,575
</TABLE>
- ---------------
(1) The financial results for the fiscal year ended December 31, 1995 and the
two fiscal quarters ended July 9, 1995 and July 14, 1996 include $17.7
million, $16.3 million and $200,000, respectively, of pre-tax profits
recognized in connection with the AmeriSuites Transaction which are
considered to be non-recurring. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
(2) After deducting minority interest in earnings of consolidated subsidiaries
and partnerships.
(3) EBITDA represents earnings from continuing operations before deducting
minority interest in earnings of consolidated subsidiaries and partnerships,
net interest expense, income taxes, and depreciation and amortization and
before adding other income. EBITDA is not intended to represent net income,
cash flow or any other measures of performance in accordance with generally
accepted accounting principles, but is included because management believes
certain parties find it to be a useful tool for measuring the Company's
performance.
(4) Earnings used in computing ratio of earnings to fixed charges consist of
earnings before minority interest in earnings of consolidated subsidiaries
and partnership and income taxes, plus fixed charges. Fixed charges means
total interest whether capitalized or expensed (including the portion of
rent expense representative of interest costs) on outstanding debt plus
debt-related fees and amortization of deferred financing costs. The ratio of
earnings to fixed charges on a pro forma basis, giving effect to the
offering and the application of the net proceeds therefrom, would have been
3.53x for fiscal 1995 and 2.42x for the two fiscal quarters ended July 14,
1996.
(5) REVPAR is defined as revenue per available room, which is equal to total
room revenue divided by the number of rooms available for sale.
(6) Seven of the eight Sumner Suites open at July 14, 1996 had been in operation
as Sumner Suites for less than eight months and had not yet reached
stabilized occupancy levels. Therefore, management does not believe that the
presentation of REVPAR for Sumner Suites is meaningful.
(7) As adjusted to give effect to the offering and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
S-7
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Series A Notes should carefully consider,
among other things, the following risk factors before purchasing the Series A
Notes offered hereby. This Prospectus Supplement, the accompanying Prospectus
and the information incorporated herein by reference contain 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,
including statements regarding the Company's growth strategies and development
plans and anticipated trends in the Company's business. These statements are
subject to a number of risks and uncertainties, including those described below.
Sumner Suites Expansion Risks. In pursuing its business strategy of
developing new Sumner Suites hotels, the Company will incur substantial costs
relating to pre-opening activities and operating expenses prior to reaching
stabilized levels of occupancy and average daily room rates. As the Company
opens additional Sumner Suites hotels, such start-up costs may negatively impact
the Company's results of operations. While the Company has owned and operated
Shoney's Inns and mid-scale, all-suites hotels under another brand name for a
number of years, the Company's current suites concept, Sumner Suites, was
launched in 1995 with three hotels. Currently, the Company owns and operates 11
Sumner Suites. Company-owned or managed hotels have historically attained
occupancy and average daily room rate stabilization within approximately 18
months of opening. However, the stabilization rates achieved by such hotels to
date may not be indicative of future stabilization rates for Sumner Suites or
Shoney's Inns.
The Company's ability to pursue its expansion plans will depend on a number
of factors, including the hiring and training of sufficiently skilled management
and other personnel, the availability of adequate financing and other factors,
some of which are beyond the control of the Company. Construction of hotels
involves certain risks, including the possibility of construction cost overruns
and delays, a lack of attractive sites at acceptable prices, uncertainties as to
market potential and market deterioration after commencement of the development.
There can be no assurance that the Company will be able to pursue its expansion
plans in accordance with its current expectations.
The opening of the new Sumner Suites hotels will be contingent upon, among
other things, receipt of all required licenses, permits and authorizations. The
scope of the approvals required for a new hotel is extensive, including, without
limitation, state and local land use and occupancy permits, building and zoning
permits and health and safety permits. In addition, unexpected changes or
concessions required by local and state regulatory authorities could involve
significant additional costs and could delay or prevent the completion of
construction or the opening of a new Sumner Suites hotel. There can be no
assurance that the necessary permits, licenses and approvals for the
construction and operation of the new Sumner Suites hotels will be obtained, or
that such permits, licenses and approvals will be obtained within the
anticipated time frame.
The Sumner Suites concept does not have a large presence in the marketplace
and does not have extensive brand awareness. The Company competes with other
companies in the all-suites segment, many of which have greater brand
recognition and financial and other resources than the Company. As a result,
there can be no assurance that the Company can successfully expand the Sumner
Suites hotel brand or compete effectively with these other hotel brands.
Expansion of the Sumner Suites brand may present operating and marketing
challenges that are different from those currently encountered by the Company in
its existing markets. There can be no assurance that the Company will anticipate
all of the changing demands that expanding operations will impose on its
financial resources, management and management information systems or its
reservation system. The failure to adapt its systems and procedures could have a
material adverse effect on the Company's business.
Leverage. As of July 14, 1996, the Company's total long-term debt was $90.1
million, and the Company's earnings exceeded fixed charges by $8.2 million for
the two fiscal quarters then ended. In addition, the Company had $30.0 million
outstanding as of July 14, 1996 under unsecured revolving credit facilities
which are set to mature in January, February and May 1997 and which the Company
intends to reduce with the net proceeds of this offering. The Company has
incurred $11.5 million in additional indebtedness under these facilities since
July 14, 1996. The Company is seeking a new $50.0 million to $75.0 million
multi-year senior revolving credit facility to replace the Company's existing
facilities. There can be no assurance,
S-8
<PAGE> 9
however, as to the availability or terms of any such financing. The failure to
obtain senior revolving credit facility financing on reasonable terms would have
a material adverse effect on the Company's results of operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Company may in
the future issue additional senior subordinated debt financing under the same
Indenture under which the Series A Notes are to be issued; however, there can be
no assurance as to the availability or terms of any such senior subordinated
note financing in the future. The debt service requirements of any additional
indebtedness could make it more difficult for the Company to make principal and
interest payments on the Series A Notes. The Company's ability to satisfy its
obligations will be dependent upon its future performance, which is subject to
prevailing economic conditions and financial, business and other factors,
including factors beyond the Company's control. There can be no assurance that
the Company's operating cash flow will be sufficient to meet its debt service
requirements or to repay the Series A Notes at maturity or that the Company will
be able to refinance the Series A Notes or other indebtedness at maturity.
Subordination; Series A Notes Are Unsecured Obligations. The Series A Notes
will be unsecured senior subordinated obligations of the Company and will be
subordinated in right of payment to all present and future Senior Indebtedness
of the Company. The Company operates directly and through subsidiaries which are
direct or indirect obligors or guarantors of $24.7 million of the long-term debt
of the Company and its consolidated subsidiaries outstanding at July 14, 1996.
The Series A Notes will be effectively subordinated in right of payment to all
present and future liabilities of the Company's subsidiaries, including
indebtedness of the Company for which one or more subsidiaries are co-obligors
or guarantors. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Series A Notes only after all Senior Indebtedness has been paid in full, and
there may not be sufficient assets remaining to pay amounts due on any or all of
the Series A Notes then outstanding. As of July 14, 1996, the Company had
approximately $68.1 million of outstanding Senior Indebtedness. The Company has
incurred $7.2 million in additional Senior Indebtedness as of October 6, 1996
and incurred approximately $7.3 million of additional Senior Indebtedness in
connection with the Shoney's Transaction. The Company anticipates using the net
proceeds of this offering to reduce Senior Indebtedness. See "Use of Proceeds."
In the event of a payment default with respect to the Senior Indebtedness, no
payments may be made on account of the Series A Notes until such default has
been cured or waived. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources" and
"Description of the Notes."
Dependence on Key Employees. The success of the Company is dependent in
part upon certain key personnel, including, in particular, Leon Moore, President
and Chief Executive Officer and the founder of the Company. The absence of Mr.
Moore would have a material adverse effect on the Company's business and future
operations. The Company has no employment or noncompetition agreement with Mr.
Moore, who is the Company's largest shareholder of record.
Relationship with Shoney's. The Company has the right to use the service
marks "Shoney's Inn" and "Shoney's Inn & Suites" in its development and
franchising operations pursuant to the License Agreement with Shoney's. The
License Agreement gives Shoney's certain rights, including the right to approve
the styles, shapes, colors and forms in which the service marks are displayed
and the terms of the franchise agreements (other than the maximum fees and other
financial terms thereof). Upon the occurrence of certain events, the License
Agreement may terminate and the Company may lose its right to continue
operations using the Shoney's Inn and Shoney's Inn & Suites marks. The Company
believes that the loss of its rights under the License Agreement would have a
material adverse effect upon its operations. See "Business -- License Agreement
with Shoney's."
Importance of Franchisee and Other Third Party Relationships. The Company's
business strategy calls for the expansion of Shoney's Inns primarily through the
opening of additional franchised units. Competition for new franchisees in the
lodging industry is intense. There can be no assurance that the Company can
successfully attract new franchisees on terms acceptable to the Company or that
such new or current franchisees will open new Shoney's Inns.
S-9
<PAGE> 10
The Company believes its relationships with its major franchisees are
satisfactory and the Company has no reason to believe that such relationships
will not continue. However, from time to time, the Company has terminated
relationships with franchisees for quality or for other reasons and in addition,
the Company's franchisees have in certain cases terminated their franchise
relationships with the Company. If any of the franchise agreements were
terminated by the franchisee, the Company could explore entering into a
franchise agreement with another franchisee. There can be no assurance, however,
that a desirable replacement relationship would be available.
Seven of the Shoney's Inns operated by the Company are held by partnerships
with minority interest holders. The Company has management authority over each
partnership in which there are minority interest holders and, in most cases, the
Company has a right of first refusal to purchase the interest of the other
parties in the event that they receive a bona fide offer for their interests in
the partnerships. The Company, as owner of majority interests in partnerships in
which there are minority interest holders, owes a fiduciary duty to such
minority interest holders and may encounter conflicts between the respective
interests of the Company and the minority holders. In such cases, the Company's
directors are obligated to exercise reasonable, good-faith judgment to resolve
the conflicts and may not be free to act solely in the best interest of the
Company.
Geographic Concentration of Hotels. Most of the Company's hotels are
located in the Southeastern United States, and such geographic concentration
exposes the Company's operating results to events or conditions which
specifically affect those areas, such as local and regional economic, weather
and other conditions. Adverse developments which specifically affect those areas
may have a material adverse effect on the results of operations of the Company.
While the Company's Sumner Suites expansion may reduce these risks over time,
the Company will remain subject to the risks associated with geographic
concentration for the foreseeable future.
Risks of the Lodging Industry; Competition. The Company's business is
subject to all of the risks inherent in the lodging industry. These risks
include, among other things, adverse effects of general and local economic
conditions, an oversupply of lodging facilities or a reduction in demand for
lodging facilities in a geographic area, dependence on tourism, susceptibility
to increases in gasoline prices, changes in travel patterns and routes of major
highways, adverse use of neighboring land, changes in governmental regulations
that influence or determine wages, prices or construction costs, changes in
interest rates, the availability of credit and changes in real estate taxes and
other operating expenses. The Company's ownership of real property, including
hotels, is substantial. Real estate values are sensitive to changes in local
market and economic conditions and to fluctuations in the economy as a whole.
Due in part to the strong correlation between the lodging industry's performance
and economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits.
The lodging industry is highly competitive. During the 1980s, construction
of lodging facilities in the United States resulted in an excess supply of
available rooms. This oversupply had an adverse effect on occupancy levels and
room rates in the industry. Competitive factors in the industry include room
rates, quality of accommodations, name recognition, supply and availability of
alternative lodging facilities, service levels, reputation, reservation systems
and convenience of location. There can be no assurance that demographic,
economic or other changes in markets will not adversely affect the convenience
or desirability of the sites in which the Company's hotels are located. Each of
the Company's hotels is located in a developed area that includes competing
lodging facilities, and the Company expects that future hotels which it
constructs will be located in similar areas. A high concentration of competitive
lodging facilities in a particular area could have a material adverse effect on
occupancy, average daily room rate and REVPAR of the Company's hotels. See
"Business -- Lodging Industry" and " -- Competition."
Employment and Other Government Regulation. The lodging industry is subject
to numerous federal, state and local government regulations, including those
relating to the preparation and sale of food and beverages (such as health and
liquor license laws) and building and zoning requirements. The Company's results
of operations may be adversely affected by increases in the minimum wage or by
the enactment in the future of legislation that would increase the cost of
employee benefits or increase other employment-related costs. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
are
S-10
<PAGE> 11
required to meet certain federal requirements related to access and use by
disabled persons. Although the Company believes that it is in substantial
compliance with the ADA, a failure to comply with the ADA could result in the
imposition of fines or an award of damages to private litigants.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may require
expenditures. In connection with the ownership or operation of hotels, the
Company may be potentially liable for any such costs. The cost of defending
against claims of liability or of remediating a contaminated property could have
a material adverse effect on the results of operations of the Company.
Absence of Public Market for the Series A Notes. The Series A Notes are a
new issue of securities for which there is currently no public market. There can
be no assurance as to the liquidity of the market for the Series A Notes that
may develop, the ability of the holders to sell their Series A Notes or the
prices at which holders of the Series A Notes would be able to sell their Series
A Notes. If a market for the Series A Notes does develop, the Series A Notes may
trade at a discount from their initial public offering price, depending upon
prevailing interest rates, the market for similar securities, performance of the
Company, performance of the lodging sector and other factors. The Underwriters
have informed the Company that they currently intend to make a market for the
Series A Notes. However, the Underwriters are not obligated to do so and any
such market-making may be discontinued at any time without notice. The Company
does not intend to apply for listing of the Series A Notes on the Nasdaq
National Market or any securities exchange. Therefore, no assurance can be given
as to whether an active trading market will develop or be maintained for the
Series A Notes. See "Underwriting."
S-11
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Notes offered
hereby are estimated to be approximately $28.6 million (approximately $32.9
million if the over-allotment option is exercised in full), after deducting the
estimated underwriting discount and offering expenses. The Company intends to
use the net proceeds of this offering to reduce borrowings under three unsecured
revolving credit facilities with an aggregate outstanding principal balance at
October 6, 1996 of $34.2 million. This indebtedness was originally incurred to
fund hotel development and other capital improvements. These facilities bear
interest at the lender's prime rate or two hundred basis points above the 30, 60
or 90 day LIBOR rates, at the Company's option. The blended rate on these
facilities at October 6, 1996 was 7.80%. Although amounts repaid on these
facilities would be available for reborrowing on a short-term basis, these
amounts would mature, and the facilities would cease to be available, in January
and February 1997. On October 25, 1996, the Company incurred additional
borrowings of $7.3 million under the revolving credit facilities to consummate
the Shoney's Transaction. See "Prospectus Summary -- Recent
Developments -- Shoney's Transaction." The Company is seeking a new $50.0
million to $75.0 million senior revolving credit facility to replace these
facilities following the offering. Borrowings under this new facility will be
used to fund development of new Sumner Suites hotels, renovate existing hotels,
fund construction of the Company's headquarters and for general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Pending the above uses of proceeds, net proceeds of the offering will be
invested in investment grade, short-term, interest-bearing securities, such as
Treasury bills, repurchase agreements, commercial paper and short-term
certificates of deposit.
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
capitalized leases and consolidated capitalization of the Company as of July 14,
1996 and as adjusted to reflect the sale of $30,000,000 in aggregate principal
amount of Series A Notes offered hereby and application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JULY 14, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and capitalized leases....... $ 32,052 $ 3,502
======== ========
Revenue participation bonds due April 2001(1).................. $ 11,355 $ 11,355
Other long-term debt and capitalized leases less current
portion...................................................... 24,712 24,712
9 3/4% Senior subordinated notes due 2006, Series A............ -- 30,000
7 1/2% Convertible subordinated debentures due 2004(2)......... 54,000 54,000
Total shareholders' equity..................................... 87,575 87,575
-------- --------
Total capitalization................................. $177,642 $ 207,642
======== ========
</TABLE>
- ---------------
(1) The revenue participation bonds are secured by U.S. Treasury securities that
upon maturity will fund the complete obligation under the revenue
participation bonds.
(2) The 7 1/2% convertible subordinated debentures due 2004 are subordinate to
the Series A Notes.
S-12
<PAGE> 13
SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five fiscal
years ended December 31, 1995 have been derived from the Company's audited
Consolidated Financial Statements. The financial statements for the three fiscal
years ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, and have been incorporated herein by reference. The
related financial data as of and for the two fiscal quarters ended July 9, 1995
and July 14, 1996 are derived from the Company's unaudited consolidated
financial statements and, in the opinion of management, include all adjustments
(consisting of only normal recurring entries) necessary for fair presentation of
the financial results of operations for these periods. Operating results for the
two fiscal quarters ended July 14, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 29, 1996. The
information set forth on the following page should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
S-13
<PAGE> 14
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TWO FISCAL QUARTERS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, JULY 9, JULY 14,
1991 1992 1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Hotel.......................... $ 24,022 $ 25,598 $29,890 $36,440 $44,144 $23,048 $28,221
Construction and development... 2,690 6,178 -- 6,213 9,214 7,696 514
Construction and development --
other........................ -- -- -- -- 14,827 13,438 200
Sale of hotels................. -- -- 9,080 17,366 6,174 6,174 --
Profits not recognized on
installment sales............ -- -- (1,295) (2,782) (1,956) (1,956) --
Franchising.................... 270 1,760 2,079 2,623 2,917 1,543 2,106
Management..................... 469 660 979 916 438 289 116
Management -- previously
deferred..................... -- -- -- -- 2,862 2,862 --
------------ ------------ ------------ ------------ ------------ -------- --------
Total operating
revenues............... 27,451 34,196 40,733 60,776 78,620 53,094 31,157
Costs and Expenses:
Operating expenses:
Hotel........................ 14,786 15,354 17,042 20,938 25,962 13,108 15,525
Construction and
development................ 1,330 4,549 -- 5,242 10,096 7,585 691
Cost of hotels sold.......... -- -- 7,785 14,584 4,218 4,218 --
Franchising.................. 304 1,841 2,153 2,475 2,861 1,444 1,775
------------ ------------ ------------ ------------ ------------ -------- --------
Total operating
expenses............... 16,420 21,744 26,980 43,239 43,137 26,355 17,991
------------ ------------ ------------ ------------ ------------ -------- --------
Gross operating profit......... 11,031 12,452 13,753 17,537 35,483 26,739 13,166
General and administrative..... 905 894 1,349 1,378 1,929 903 1,492
------------ ------------ ------------ ------------ ------------ -------- --------
Earnings before interest,
taxes, depreciation and
amortization................. 10,126 11,558 12,404 16,159 33,554 25,836 11,674
Depreciation and
amortization................. 2,876 2,944 3,290 4,083 5,638 2,779 3,820
------------ ------------ ------------ ------------ ------------ -------- --------
Net operating profit..... 7,250 8,614 9,114 12,076 27,916 23,057 7,854
Other Income and Expenses:
Interest expense............... 6,966 4,939 4,642 5,525 5,856 3,504 905
Interest income................ 1,935 2,425 3,345 5,311 5,815 3,551 842
------------ ------------ ------------ ------------ ------------ -------- --------
Net interest expense..... 5,031 2,514 1,297 214 41 (47) 63
Other income................... 1,120 911 1,012 1,263 765 318 434
------------ ------------ ------------ ------------ ------------ -------- --------
Earnings before income taxes,
discontinued operations,
minority interest and
extraordinary items............ 3,339 7,011 8,829 13,125 28,640 23,422 8,225
Income taxes..................... 1,211 2,533 3,077 4,838 10,529 8,691 2,962
Minority interests in earnings of
consolidated subsidiaries &
partnerships................... 123 309 513 294 351 91 229
------------ ------------ ------------ ------------ ------------ -------- --------
Earnings from continuing
operations before extraordinary
items.......................... 2,005 4,169 5,239 7,993 17,760 14,640 5,034
Discontinued Operations:
Income (loss) from operations
of restaurant subsidiary
disposed of, net of
applicable income taxes and
minority interest............ (31) (9) (41) 18 (75) (45) --
Extraordinary losses, net of
income tax benefit............. -- -- -- (215) (708) (708) --
------------ ------------ ------------ ------------ ------------ -------- --------
Net earnings..................... $ 1,974 $ 4,160 $ 5,198 $ 7,796 $ 16,977 $ 13,887 $ 5,034
============ ============ ============ ============ ============ ======== ========
</TABLE>
S-14
<PAGE> 15
SELECTED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
TWO FISCAL QUARTERS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, JULY 9, JULY 14,
1991 1992 1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Per Common And Common
Equivalent Share:
Primary:
Earnings from continuing
operations before
extraordinary items........ $ 0.52 $ 0.68 $ 0.67 $ 0.92 $ 2.08 $ 1.70 $ 0.60
============ ============ ============ ============ ============ ======== ========
Net earnings................. $ 0.51 $ 0.68 $ 0.66 $ 0.90 $ 1.99 $ 1.62 $ 0.60
============ ============ ============ ============ ============ ======== ========
Fully diluted:
Earnings from continuing
operations before
extraordinary items........ $ 0.52 $ 0.68 $ 0.67 $ 0.92 $ 1.87 $ 1.47 $ 0.60
============ ============ ============ ============ ============ ======== ========
Net earnings................. $ 0.51 $ 0.68 $ 0.66 $ 0.90 $ 1.80 $ 1.40 $ 0.60
============ ============ ============ ============ ============ ======== ========
Ratio of earnings to fixed
charges(1)................. 1.42x 2.14x 2.43x 2.58x 4.20x 5.86x 2.93x
Weighted Average Common And
Common Equivalent Shares
Outstanding:
Primary........................ 3,833 6,103 7,872 8,654 8,526 8,592 8,443
============ ============ ============ ============ ============ ======== ========
Fully diluted.................. 3,833 6,103 7,872 9,946 10,842 10,908 10,760
============ ============ ============ ============ ============ ======== ========
BALANCE SHEET DATA:
Working capital................ $ 1,297 $ 1,223 $ (370) $ 714 $ 4,786 $ (3,330) $(35,569)
Total assets................... 85,253 97,395 120,486 180,391 220,790 192,616 227,921
Long-term debt and capitalized
leases....................... 68,183 57,323 52,020 87,739 89,343 92,800 90,067
Shareholders' equity........... 5,467 29,177 54,883 65,158 82,737 79,316 87,575
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges on a pro forma basis, giving effect
to the offering and the application of the net proceeds therefrom, would
have been 3.53x for fiscal 1995 and 2.42x for the two fiscal quarters ended
July 14, 1996.
S-15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives revenues primarily from hotel room sales at its Sumner
Suites and Company-owned Shoney's Inn hotels. Through March 1995, the Company
managed AmeriSuites hotels and earned management fees for such services. The
Company also receives management fees for services it performs for two
franchised Shoney's Inns. The Company derives additional revenue from franchise
fees it receives as the exclusive franchisor of Shoney's Inns.
The Company's hotel operations have been supplemented by contract revenues
from construction and development of franchised Shoney's Inns and, until March
1995, AmeriSuites 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 projects. The Company has generally undertaken construction and
development projects for third parties only when its capacity has been
underutilized in constructing its own facilities. Construction revenues are
recognized on the percentage of completion basis. Because the Company expects to
concentrate on the development of Sumner Suites, management does not anticipate
generating further significant contract revenues from construction and
development.
From 1990 through the first quarter of fiscal 1995, the Company developed
and owned or managed hotels in the AmeriSuites hotel chain. In March 1995, the
Company terminated its relationship with AmeriSuites by (i) selling its option
to purchase 50% of the voting stock of Suites of America, Inc. ("Suites of
America") to Prime Hospitality Corp. ("Prime Hospitality") for $27.3 million and
(ii) conveying to Suites of America its interest in one additional AmeriSuites
hotel for $6.2 million. Five million dollars of the aggregate purchase price was
paid in cash on closing, while the remaining $28.5 million was paid pursuant to
a note that was repaid in January 1996. In connection with the sale of its
option in Suites of America, the Company canceled $14.9 million in existing
indebtedness of Suites of America to the Company. These transactions, together
with the sale of five AmeriSuites hotels in 1993 and 1994 (collectively, the
"AmeriSuites Transaction"), have been accounted for as installment sales of real
estate in the Company's Consolidated Financial Statements, and a pre-tax gain of
$17.9 million has been recognized through July 14, 1996 in connection therewith.
The transactions also resulted in the recognition in fiscal 1995 and the first
quarter of fiscal 1996 of previously deferred management fee revenue.
During the first quarter of fiscal 1996, the Company sold its 60% ownership
in five restaurants to the 40% owner. The income or loss from restaurant
operations for each of the reported periods is reported as discontinued
operations net of applicable income taxes and minority interests.
The Company's hotel operations have historically been seasonal in nature,
reflecting higher occupancy rates during spring and summer months, which may be
expected to cause fluctuations in the Company's quarterly revenues and earnings
from hotel operations. The Company's fiscal year ends on the last Sunday of the
calendar year. This resulted in fiscal 1995 consisting of 53 weeks as compared
with 52 weeks in fiscal 1994.
S-16
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items of revenue and expense to the total revenues of
the Company.
<TABLE>
<CAPTION>
TWO FISCAL QUARTERS
FISCAL YEAR ENDED ENDED
------------------------------------------ -------------------
DECEMBER 26, DECEMBER 25, DECEMBER 31, JULY 9, JULY 14,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotel.................................... 73.4% 60.0% 56.1% 43.4% 90.6%
Construction and development............. -- 10.2 11.7 14.5 1.6
Construction and development-other....... -- -- 18.9 25.3 0.6
Sale of hotels........................... 22.3 28.6 7.9 11.6 --
Profits not recognized on installment
sales................................. (3.2) (4.6) (2.5) (3.7) --
Franchising.............................. 5.1 4.3 3.7 2.9 6.8
Management............................... 2.4 1.5 0.6 0.5 0.4
Management -- previously deferred........ -- -- 3.6 5.5 --
----- ----- ----- ----- -----
Total operating revenues......... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Operating expenses:
Hotel................................. 41.8% 34.5% 33.0% 24.7% 49.8%
Construction and development.......... -- 8.6 12.8 14.3 2.2
Cost of hotels sold................... 19.1 24.0 5.4 7.9 --
Franchising........................... 5.3 4.0 3.7 2.7 5.7
----- ----- ----- ----- -----
Total operating expenses......... 66.2 71.1 54.9 49.6 57.7
----- ----- ----- ----- -----
Gross operating profit........... 33.8 28.9 45.1 50.4 42.3
General and administrative............ 3.3 2.3 2.4 1.7 4.8
----- ----- ----- ----- -----
Earnings before interest, taxes,
depreciation and amortization....... 30.5 26.6 42.7 48.7 37.5
Depreciation and amortization......... 8.1 6.7 7.2 5.3 12.3
----- ----- ----- ----- -----
Net operating profit (before
interest and taxes).............. 22.4 19.9 35.5 43.4 25.2
Earnings before income taxes, discontinued
operations, minority interest and
extraordinary items...................... 21.7 21.6 36.4 44.1 26.4
Earnings from continuing operations before
extraordinary items...................... 12.9 13.2 22.6 27.6 16.2
Net earnings............................... 12.8% 12.8% 21.6% 26.2% 16.2%
</TABLE>
For the Fiscal Year-to-date Periods Ended July 14, 1996 and July 9, 1995
For the two fiscal quarters ended July 14, 1996, total operating revenues
decreased 41.3% to $31.2 million from $53.1 million for the same period in 1995.
Revenues from hotel operations in the first two quarters of 1996 increased
22.4% to $28.2 million from $23.0 million for the same period in 1995. For the
29 same store hotels opened for both year-to-date periods, average daily room
rates in the first two quarters of 1996 increased 6.0% to $50.21 from $47.35 in
the first two quarters of 1995, and average occupancy rates decreased to 63.3%
from 65.4%, resulting in a net increase in same store hotel revenues of 2.1%.
The hotels opened during 1995 and the first two quarters of 1996 contributed
$5.3 million to hotel revenues in the first two quarters of 1996 compared to
$69,000 for the same prior year period. Approximately $3.0 million of the $5.3
million in revenues from the hotels opened since December 25, 1994 related to
Sumner Suites hotels. One hotel, which was sold in the first half of 1995,
contributed $550,000 to hotel revenues in the first two quarters of 1995.
S-17
<PAGE> 18
Revenues from regular construction and development activities for the first
two quarters of 1996 were $514,000 in contrast to $7.7 million for the same
prior year period. 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. Three outside construction projects were in
progress during the first two quarters of 1995 compared with only one during the
comparable period in 1996. No outside construction contracts are currently in
progress.
Revenues of $200,000 from "Construction and development -- other" in the
first two quarters of 1996 represent a portion of profits not previously
recognized on installment sales in connection with the AmeriSuites Transaction.
The $13.4 million reported for the first two quarters of 1995 represented the
earned portion of revenues, a portion of which was deferred from 1993 and 1994,
as a result of the consummation of the AmeriSuites Transaction.
Revenue from the sale of hotels in the first two quarters of 1995 was $4.2
million, net of profits not recognized on installment sales of $2.0 million,
representing the sale of one hotel in the first quarter of 1995 in conjunction
with the AmeriSuites Transaction. These net revenues were offset by the cost of
hotels sold, resulting in no gross operating profit from these transactions.
Franchise revenues in the first two quarters of 1996 increased 36.4% to
$2.1 million from $1.5 million for the same prior year period. This increase
resulted primarily from higher royalty and reservation center fees resulting
from increased revenues in the Shoney's Inn system. The number of franchised
Shoney's Inns at the end of the second quarter of 1996 increased to 56 from 48
at the end of the second quarter of 1995. Initial franchise fees may vary widely
from quarter to quarter.
Management contract revenues for the first two quarters of 1996 decreased
60.0% to $116,000 from $289,000 for the prior year period, due to the
cancellation of management contracts on 11 AmeriSuites hotels on March 31, 1995,
as a part of the AmeriSuites Transaction.
Revenues from "Management -- previously deferred" in the first two quarters
of fiscal 1995 of $2.9 million represent fees collected in 1993 and 1994 for the
Company's relinquishment of its profit participation in four hotels owned by
Suites of America. These profits were previously deferred due to the Company's
option to acquire a 50% ownership interest in Suites of America. In connection
with the sale of this option to Suites of America in March 1995, all of this
previously deferred revenue was recognized in the first quarter of 1995. This is
a non-recurring source of revenue.
Operating expenses from hotel operations for the first two quarters of 1996
increased 18.4% to $15.5 million in the first two quarters of 1996 from $13.1
million in the first two quarters of 1995 resulting from the 22.4% increase in
hotel operating revenues. Operating expenses from hotel operations, expressed as
a percentage of hotel operating revenues, decreased to 55.0% in the first two
quarters of 1996 from 56.9% in the first two quarters of 1995, thus increasing
the gross profit margin on all hotels to 45.0% in the first two quarters of 1996
from 43.1% in the same period of 1995. Hotels opened since 1994 have experienced
higher profit margins than hotels opened before 1994 and have generated a 47.8%
profit margin in the first two quarters of 1996. Seven of the new hotels are
Sumner Suites which generally have higher room rates than Shoney's Inns and
generally operate at a higher gross operating profit margin.
Costs and expenses of construction and development for the first two
quarters of 1996 decreased to $691,000 from $7.6 million for the first two
quarters of 1995. There were three outside construction contracts in the first
two quarters of 1995 compared to one during the comparable period in 1996.
Franchising operating expenses for the first two quarters of 1996 increased
23.0% to $1.8 million from $1.4 million for the same prior year period,
primarily due to additional expenses incurred by the reservation center in
meeting the added demand from additional properties served by that department.
As a result of the Shoney's Transaction, the Company will no longer be required
to pay a portion of its franchise fee revenues to Shoney's in the form of
royalty fees. See "Prospectus Summary -- Recent Developments -- Shoney's
Transaction." During the first two quarters of 1996, franchising operating
expenses included $586,000 of royalty fees to Shoney's.
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General and administrative expense for the first two quarters of 1996
increased 65.3% to $1.5 million from $900,000 for the prior year period, due
primarily to increased outside professional fees and increased payroll and
related expenses associated with increased staffing levels.
For the first two quarters of 1996, depreciation and amortization expense
increased 37.5% to $3.8 million from $2.8 million for the same prior year
period. Depreciation and amortization on the 11 hotels opened since the end of
the fourth quarter of 1994 accounted for $619,000 of the increase while
depreciation due to renovations and other additions to the remaining hotels
accounted for $285,000 of the increase over the first two quarters of 1995.
For the first two quarters of 1996, interest expense and interest income
decreased $2.6 million and $2.7 million, respectively, from the prior year
period resulting in an increase in net interest expense of $110,000. The
decrease in interest income resulted primarily from the collection of the
balance of first mortgage notes receivable of approximately $44 million from
Suites of America in the first quarter of 1996, which resulted in a reduction of
interest income for the first two quarters of 1996 of $2.2 million. The proceeds
were used to reduce outstanding debt, significantly reducing interest expense
for the first two quarters of 1996 as compared to the same prior year period.
The loss from discontinued operations, net of applicable income taxes and
minority interest, in the first two quarters of 1995 resulted from the Company's
sale of its 60% interest in a restaurant subsidiary to the 40% owner in the
first quarter of 1996. The extraordinary loss, net of income tax benefit, in the
first two quarters of 1995 represents the extraordinary non-cash write-off of
unamortized deferred financing costs, and early redemption premiums paid,
associated with the refinancing of certain indebtedness during the first two
quarters of 1995.
For the Fiscal Years Ended December 31, 1995 and December 25, 1994
For the fiscal year ended December 31, 1995, total operating revenues
increased 29.4% to $78.6 million from $60.8 million for the fiscal year ended
December 25, 1994.
Revenues from hotel operations in fiscal 1995 increased 21.1% to $44.1
million from $36.4 million for fiscal 1994. This increase resulted primarily
from more hotels being operated in fiscal 1995 as compared to fiscal 1994.
Eleven hotels which opened during fiscal 1994 and fiscal 1995 contributed $7.9
million more to revenues in fiscal 1995 than in fiscal 1994. One hotel was sold
during the first quarter of 1995, contributing only $549,000 to hotel revenues
in that year compared with $2.3 million in fiscal 1994 when it was owned and
operated for the entire fiscal year. Revenues from the 22 same store hotels
increased 5.0% to $32.8 million in fiscal 1995 from $31.2 million in fiscal
1994. Average daily room rates from same store hotels increased 6.3% to $47.85
in fiscal 1995 from $45.01 in fiscal 1994, and average occupancy rates on these
hotels decreased to 66.6% in fiscal 1995 from 69.1% in fiscal 1994. For all 33
hotels owned at the end of fiscal 1995, total revenues increased 27.8% to $43.6
million in fiscal 1995 from $34.1 million in fiscal 1994. These hotels reflected
an increase of 7.0% in average daily room rates to $48.49 in fiscal 1995 from
$45.31 in fiscal 1994, and average occupancy rates on these hotels declined to
64.1% in fiscal 1995 from 67.0% in fiscal 1994.
Construction and development revenues of $9.2 million in fiscal 1995 and
$6.2 million in fiscal 1994 were due to construction activities for third
parties. In each year construction work was performed on three outside
contracts, but revenues from these activities increased by $3.0 million in
fiscal 1995 over fiscal 1994 due to variances in percentages completed each
year.
Revenues from Construction and development--other and
Management--previously deferred, which together totaled $17.7 million in fiscal
1995, resulted from recognizing, in connection with the consummation of the
AmeriSuites Transaction, profits deferred from fiscal 1993 and fiscal 1994
relating to the development and management of hotels for Suites of America. The
Company's relationship with Suites of America ended on March 31, 1995, allowing
the previously deferred management revenues and a portion of the previously
deferred construction profit to be recognized in the first fiscal quarter of
1995. Additional previously deferred construction profit was recognized
throughout fiscal 1995, with the final portion recognized in the first fiscal
quarter of 1996, when the balance of the note receivable from Suites of America
was collected. The
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Company's 100% financing of five hotels developed and managed for Suites of
America resulted in the deferral of recognition of these profits from 1993 and
1994 to 1995 and 1996. The revenues from sale of hotels, net of profits not
recognized on installment sales, which amounted to $4.2 million in fiscal 1995
and $14.6 million in fiscal 1994, were also part of this arrangement for
developing hotels for Suites of America. In fiscal 1994, there were three hotels
developed and sold under this arrangement, whereas in fiscal 1995 there was only
one hotel which was sold on March 31, 1995. The cost of hotels sold in both
years is equal to the net revenues, resulting in no profit to the Company. All
the profit on these hotels is recognized in revenues from construction and
development -- other.
Franchise revenues in fiscal 1995 increased 11.2% to $2.9 million from $2.6
million in fiscal 1994, as a result of an increase in the number of Shoney's Inn
franchises sold, combined with franchisees' increased hotel revenues upon which
royalty and reservation fees are based. At the end of fiscal 1995 there were 50
franchised Shoney's Inns in operation compared with 45 at the end of fiscal
1994. Management fee revenue in fiscal 1995 decreased 52.2% to $438,000 from
$916,000 in fiscal 1994, due to the cancellation of management contracts on 11
hotels during the first fiscal quarter of 1995 as a part of the AmeriSuites
Transaction.
Hotel operating expenses for fiscal 1995 increased by 24.0% to $26.0
million from $20.9 million in fiscal 1994. The 11 hotels opened during fiscal
1994 and fiscal 1995, which were not in operation during the full year in either
fiscal 1994 or fiscal 1995, accounted for 95.3% of the total increase.
Additionally, operating expenses for the 22 hotels operated for all of both
years increased by $1.1 million, and operating expenses on the hotel sold during
the first fiscal quarter of 1995 declined by $904,000. These increases and
decreases in operating costs and expenses are related to the corresponding
increases and decreases in operating revenues on these hotels. The resulting
gross profit margin from hotel operations in fiscal 1995 declined to 41.2%
versus 42.5% in fiscal 1994. The gross operating profit margin on the 11 hotels
opened during fiscal 1994 and fiscal 1995 improved from 20.5% in fiscal 1994 to
34.3% in fiscal 1995, while the gross profit margin on the 22 hotels operating
for all of both years declined from 44.5% in fiscal 1994 to 43.7% in fiscal
1995.
Construction and development expenses increased by $4.9 million in fiscal
1995 due to the higher level of construction contract work performed in such
year and to cost overruns on certain third party contracts. Cost of hotels sold
declined by $10.4 million in fiscal 1995 from fiscal 1994.
Franchising expenses in fiscal 1995 increased 15.6% from fiscal 1994, while
franchising revenues only increased by 11.2%, due primarily to the decline of
initial franchise fee income in fiscal 1995 for which there was no corresponding
decrease in operating expenses.
General and administrative expense increased 39.9% to $1.9 million in
fiscal 1995 from $1.4 million in fiscal 1994, due primarily to additional
staffing levels for present and future growth of the Company, and to increased
legal and audit fees and expenses incurred.
Depreciation and amortization expense increased by 38.1% to $5.6 million in
fiscal 1995 from $4.1 million in fiscal 1994, due primarily to the 11 hotels
opened during fiscal 1994 and fiscal 1995.
Net interest expense in fiscal 1995 declined to $41,000 from $214,000 in
fiscal 1994, due to a significant reduction in interest rates on five industrial
revenue bond issues in early fiscal 1995 and to increased first mortgage lending
in the first fiscal quarter of 1995 in connection with the AmeriSuites
Transaction. Other income decreased by $498,000 in fiscal 1995 compared to
fiscal 1994 primarily due to a reclassification of certain miscellaneous hotel
revenues from other income to hotel operating revenues in fiscal 1995, and to a
decline of $81,000 in gains on the sale of property and equipment.
The increase in extraordinary charges to $708,000 net of income taxes in
fiscal 1995 from $215,000 in fiscal 1994 is due primarily to the write-off of
unamortized deferred financing costs associated with the refinancing of five
industrial revenue bond issues to substantially lower interest rates in fiscal
1995, compared with similar write-offs of lesser amounts in fiscal 1994.
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For the Fiscal Years Ended December 25, 1994 and December 26, 1993
For the fiscal year ended December 25, 1994, total operating revenues
increased 49.2% to $60.8 million from $40.7 million in 1993. The increase was
primarily due to an increase of $6.6 million in revenues from hotel operations,
$6.2 million from construction and development, $6.8 million from the sale of
hotels, net of deferred profit, and $544,000 from franchising activities.
The increase in revenues from hotel operations resulted primarily from an
increase in average occupancy rates and average daily room rates for the 21
Company-owned hotels open for the full year in both periods, plus hotel revenues
earned on hotels not open for the full two-year period. Same store hotel room
revenues increased by 6.6% in fiscal 1994 from fiscal 1993 due to a combination
of an increase in average occupancy rates from 70.1% in fiscal 1993 to 70.9% in
fiscal 1994 and an increase in average daily room rates of $2.63 from $43.93 in
fiscal 1993 to $46.56 in fiscal 1994. One hotel which opened in the middle of
fiscal 1993 reported room revenues of $1.0 million for the full fiscal year 1994
versus $361,000 for the partial fiscal year 1993. The eight hotels which opened
during fiscal 1994 contributed $3.8 million to fiscal 1994 hotel revenues. All
30 hotels averaged 67.7% occupancy and $46.31 average daily room rates in fiscal
1994.
The construction and development revenues of $6.2 million in fiscal 1994
were derived from construction activities for third parties. No third party
construction and development activities took place in fiscal 1993. In fiscal
1993 and fiscal 1994, the Company acquired real estate, developed AmeriSuites
hotels thereon and sold those hotels, providing 100% financing to the purchaser,
deferring profits to future years based upon the installment sales method of
accounting. As part of the AmeriSuites Transaction in fiscal 1994, three hotels
were developed and sold pursuant to these arrangements for a total sale price of
$17.4 million, of which the profits thereon totaling $2.8 million were deferred.
In fiscal 1993, two hotels were developed and sold for a total of $9.1 million,
of which deferred profits totaled $1.3 million. As of December 25, 1994, all the
profit from both fiscal 1993 and fiscal 1994 had been deferred.
The increase in franchising revenues was the result of an increase in the
number of Shoney's Inn franchises sold combined with franchisees' increased
hotel revenues upon which royalty and reservation fees are based. The decrease
in management revenues was due to the sale of the Company's profit participation
interest in certain AmeriSuites hotels. Profit participation fees earned and
included in management fee revenues in fiscal 1993 were $260,000, whereas only
$26,000 was earned in fiscal 1994. However, 78.2% of this decrease was offset
with management fee increases resulting from managing additional properties for
others in fiscal 1994 as compared to fiscal 1993.
Total operating expenses for fiscal 1994 increased 60.3% to $43.2 million
from $27.0 million in fiscal 1993. Construction and development expenses of $5.2
million in fiscal 1994, of which there were none in fiscal 1993, accounted for
32.2% of this increase, while an additional 41.8% of the increase was from the
increase in cost of hotels sold. Hotel operating expenses increased in fiscal
1994 by 22.9% to $20.9 million from $17.0 million in fiscal 1993, due primarily
to the eight additional hotels opened during fiscal 1994. These additional costs
were incurred in generating additional hotel revenues of $6.6 million. The
resulting gross profit margin from hotel operations in fiscal 1994 was 42.5%
versus 43.0% in fiscal 1993. The decline in hotel profit margin was due to more
new hotel openings (eight versus one) in fiscal 1994 than fiscal 1993.
The increase in franchising expenses from fiscal 1993 to fiscal 1994 was
due primarily to advertising and marketing expenses incurred in the earning of
higher franchising revenues. The increase in franchising expenses represented
59.2% of the increase in revenues from this activity, resulting in a gross
operating profit of $148,000 in fiscal 1994 compared to a $74,000 loss in fiscal
1993.
Depreciation and amortization expense increased by $793,000 in fiscal 1994
from fiscal 1993. Depreciation and amortization on eight hotels during fiscal
1994 which opened during fiscal 1994, combined with a full year's expense on one
hotel which opened in July 1993, resulted in $708,000 additional expense in
fiscal 1994. Additionally, amortization of goodwill from the acquisition of
minority interest in four hotels in early fiscal 1994 and amortization of
deferred charges incurred in fiscal 1994 added an additional $0.2 million to
this expense. Certain capital assets became fully depreciated in fiscal 1994.
General and administrative expense
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increased by $29,000, or 2.2%, in fiscal 1994 from fiscal 1993, due primarily to
increased administrative payroll costs.
Net interest expense declined by 83.5% in fiscal 1994 from fiscal 1993, due
to a reduction in levels of high-rate indebtedness and an increase in interest
income from additional first mortgage notes receivable on lodging facilities as
a result of application of net proceeds received from the Company's issuance of
$54.0 million in 7.5% convertible debentures in June 1994. Other income
increased by $251,000 in fiscal 1994 compared to fiscal 1993 due primarily to
gains on the sale of capital assets in the amount of $293,000 compared to only
$17,000 in fiscal 1993. Minority interest in earnings of consolidated
subsidiaries and partnerships decreased by $219,000 in fiscal 1994 from fiscal
1993 due primarily to the fact that effective February 15, 1994, the Company
acquired a minority interest, owned indirectly by Shoney's, Inc., in three
partnerships and one corporation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was $31.6 million in fiscal 1995 and $5.8
million in fiscal 1994. The Company currently has a total of $54.0 million in
unsecured revolving credit facilities with five banks, of which $47.5 million
expires in January 1997, $5.0 million expires in February 1997, and $1.5 million
expires in May 1997. Interest rates on these lines of credit are (i) $40.0
million at the lender's prime rate, or two hundred basis points over the 30, 60
or 90 day LIBOR rates, at the Company's option; (ii) $10.0 million at the
lender's prime rate, or one hundred ninety basis points over the 30, 60 or 90
days LIBOR rates, at the Company's option; and (iii) $1.5 million at the
lender's prime rate. As of October 6, 1996, the Company had $34.2 million
outstanding under these credit facilities. On October 25, 1996 the Company
incurred $7.3 million in additional revolving credit facility indebtedness in
connection with the Shoney's Transaction. The Company expects to use the net
proceeds of the offering of the Series A Notes to reduce the outstanding
balances under the revolving credit facilities. The Company anticipates seeking
a new $50.0 million to $75.0 million senior revolving credit facility following
this offering to replace its existing facilities. Management believes that the
Company will be able to renew the existing lines of credit or secure a new line
of credit prior to January 1997, but there can be no assurance that the Company
will be able to do so. See "Risk Factors -- Leverage."
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 $51.0
million for the first two fiscal quarters of 1996, $56.2 million in fiscal 1995
and $47.1 million in fiscal 1994.
The Company has opened two Shoney's Inns and eight Sumner Suites hotels
thus far in 1996 and three Sumner Suites hotels are scheduled to open during the
remainder of fiscal 1996. Additionally, renovations of several existing
properties are underway, scheduled for completion in fiscal 1996 and early
fiscal 1997. The Company also plans to develop and open an additional eight to
ten Sumner Suites hotels by the end of fiscal 1997. A new corporate headquarters
building is also under construction and is scheduled for completion by early
1997. The Company expects that approximately $100.0 million in additional
capital funds will be necessary through fiscal 1997 to fulfill these plans.
The Company has principal payments totaling $3.9 million due under existing
debt instruments, in addition to the repayment of the Company's revolving credit
facilities, through fiscal 1997. The Company believes that a combination of net
proceeds from this offering, net cash provided from operations, borrowings under
existing or new credit facilities, proceeds from the sale of excess land and
available furniture, fixtures and equipment financing packages will be
sufficient to fund its scheduled development and debt repayments through fiscal
1997.
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<PAGE> 23
BUSINESS
GENERAL
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 11 Sumner Suites are mid-scale, all-suites hotels located in
Florida, Georgia, Indiana, New Mexico, Ohio and Texas. The Shoney's Inn lodging
system consists of 88 Shoney's Inns containing 8,985 rooms of which 34
containing 4,164 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. Usually located
in or near business or leisure travel destinations in mid-sized and larger
metropolitan markets, Sumner Suites offer mid-scale accommodations at rates
between $65 and $85 per night. A typical Sumner Suites contains from 110 to 125
rooms, lounge facilities, meeting rooms and an exercise 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 will enable it to expand effectively its
development and ownership of the Sumner Suites system. As Sumner Suites has a
limited presence in the marketplace, the Company seeks to capitalize on 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 $39 and $58 per night. The typical Shoney's Inn includes 100 to
125 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not offer
full food service, many offer continental breakfast and 79 of the 88 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 other limited-service lodging chains by offering guest services
approximating those of full-service facilities without the additional capital
expenditures, operating costs or higher room rates.
In 1991, the Company became the exclusive franchisor of Shoney's Inns,
including the then existing Shoney's Inns. Management believes that Shoney's
Inns benefit from the association with the Shoney's national brand restaurant
system's reputation for consistency and value which provides an opportunity for
expansion in both existing and new markets. Shoney's Inns benefit directly from
cross-marketing efforts with Shoney's restaurants as well as indirectly from
Shoney's restaurant advertising.
GROWTH STRATEGY
The Company's strategy is to increase cash flow and earnings by (i)
increasing REVPAR while maintaining the Company's attractive suite and room
price/value relationships and controlling operating costs, (ii) developing
additional Sumner Suites and (iii) expanding the Shoney's Inn system through the
addition of new franchised units and selectively developing Company-owned
hotels.
Internal Growth. The Company intends to increase cash flow and earnings
from its existing hotels through increases in REVPAR while controlling operating
costs. The Company seeks to increase REVPAR by increasing average daily room
rates and supporting or increasing occupancy rates through targeted marketing
and advertising strategies, employing promotional activities in local markets
and capitalizing on the Company's proprietary central reservation system. In
addition, the Company is committed to sustaining the quality of its properties
through an ongoing renovation and maintenance program in order to increase
REVPAR. The Company seeks to minimize costs throughout its operations primarily
through the use of an in-house development and construction team and increased
economies of scale in purchasing.
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Development of Additional Sumner Suites. In addition to the two Sumner
Suites that were opened in December 1995 and a property that was converted to a
Sumner Suites in July 1995, the Company has developed and opened eight Sumner
Suites to date in 1996. Currently, three hotels are under construction and are
scheduled to open during the remainder of 1996. The Company intends to continue
expanding the Sumner Suites chain in 1997 by opening approximately eight to ten
additional Sumner Suites hotels, two of which are currently under construction.
Expansion of Shoney's Inn System. The Company is expanding the Shoney's Inn
system through the addition of new franchises and by selectively opening new
Company-owned hotels. The Company opened two Shoney's Inns and added six
franchised units to the system in 1995. Through November 6, 1996, the Company
has added two Company-owned Shoney Inns and a net total of six franchised units
to the system. The Company targets existing Shoney's Inn franchisees, existing
Shoney's restaurant franchisees and contacts within the industry as potential
franchisees for additional Shoney's Inns.
SUMNER SUITES CONCEPT
Sumner Suites are all-suites hotels positioned in the mid-scale segment to
appeal primarily to business travelers and, to a lesser extent, leisure
travelers. The Sumner Suites hotels are generally located in mid-sized to larger
metropolitan markets near business and leisure travel destinations such as
business parks, office buildings, local attractions and restaurants. Although
daily room rates typically range from $65 to $85, room rates at Sumner Suites
vary depending upon a number of factors, including location and competition. For
the first two fiscal quarters of 1996, the average daily room rate for the
Sumner Suites hotels was $74.21.
The Sumner Suites prototype hotel is a five story, interior corridor,
stucco building containing 110 to 125 rooms. The bedroom in each suite is
furnished with either a king size bed or two double beds, a night stand, vanity,
and closet area, and the sitting area contains a sleeper sofa, a desk, chairs
and reading lamps. A kitchenette area includes a sink, refrigerator, microwave
oven and cabinets that contain kitchen and cooking utensils.
The lobby area of each Sumner Suites hotel features marble floors and
seating areas with numerous couches, tables and chairs allowing for informal
meeting and lounge space. Adjacent to the seating area is a combination buffet
and beverage service area. Each Sumner Suites is equipped with large meeting
rooms that can be sectioned to meet individual guests' or groups' needs. An
exercise facility and swimming pool are additional features. The amenities
provided by the hotels include voice mail and facsimile machine services, deluxe
continental breakfast and lounge services in the evening. The Company believes
that Sumner Suites provides its guests with quality accommodations at an
attractive price/value relationship within the all-suites segment.
SHONEY'S INNS CONCEPT
Shoney's Inns are limited-service hotels positioned in the upper economy
segment to appeal to both business and leisure travelers and are located in 21
states in markets ranging from small towns to larger metropolitan areas.
Shoney's Inns are generally located in proximity to interstate highways, major
streets and highways providing convenient access to business establishments.
Seventy-nine of the 88 Shoney's Inns are located adjacent or in close proximity
to a Shoney's restaurant. Management believes that its strategy of locating its
Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it
a competitive advantage over other limited-service lodging chains. Daily room
rates at Shoney's Inns range from $39 to $58 and vary depending upon a number of
factors, including location, competition and type of room. For the first two
fiscal quarters of 1996, the average daily room rate for Company-owned Shoney's
Inns was $50.86.
Historically, the typical Shoney's Inn has been a two story, exterior
corridor, brick veneer building with plate glass fronts, containing 100 to 125
rooms. New prototypes for Shoney's Inns include a four story, interior corridor,
brick or stucco building containing 100 to 120 rooms as well as smaller
prototype buildings containing 80 rooms. Each room is professionally decorated
and is generally furnished with two double beds, a dresser, table and chairs and
a color television.
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<PAGE> 25
Amenities featured at most Shoney's Inns include swimming pools (some
indoors or heated), meeting rooms, facsimile machine service and continental
breakfast. The Company believes that Shoney's Inns provide its guests with
quality accommodations at an attractive price/value relationship within the
upper economy segment.
HOTEL CONSTRUCTION AND DEVELOPMENT
The Company's construction subsidiary has a full time core staff of
approximately 20 people who manage, supervise and control the construction of
the Company's hotels. Local subcontractors are employed by the Company for most
of the major construction components of a new hotel, including plumbing,
electrical, and mechanical subcontracts. The Company intends to continue to
build its own hotels because it believes that its in-house capabilities provide
advantages in controlling costs, quality, and development schedule as compared
to using independent contractors. The Company believes that its construction
experience and its relationship with many subcontractors will facilitate the
effective development of additional hotels.
The Company devotes significant resources to the identification and
evaluation of potential sites for its hotels. The Company generally targets
mid-sized to larger metropolitan markets for locating its Sumner Suites. In
identifying cities for possible expansion, the Company typically targets markets
with populations of 500,000 or more that have high levels of business
development and multiple sources of room demand. The site selection process for
Sumner Suites focuses on the competitive environment, including room and
occupancy rates and proximity to business parks, office buildings, and high
traffic retail and restaurant areas. The Company focuses on sites for its
Shoney's Inns in proximity to interstate highway access roads and major streets
and highways providing convenient access to local business establishments.
The Company anticipates developing Sumner Suites hotels averaging from 110
to 125 suites. Management believes that the development cost of a new Sumner
Suites hotel will be approximately $50,000 to $55,000 per suite, depending on
the location of the hotel, size of the hotel (number of suites), cost of land,
local zoning and permitting costs, construction period and local building costs
which are affected by the cost of building materials and construction labor.
Based on the Company's experience to date, the capital investment (including
land and pre-opening expenses) for a typical 125 suite Sumner Suites is
approximately $6.5 million (approximately $52,000 per suite). The Company's
Shoney's Inns typically range in cost from approximately $32,000 to $38,000 per
room.
The construction phase of a hotel generally requires six months after the
site and all approvals and permits have been obtained. The Company's experience
in selection and acquisition of sites has varied and generally averages six
months. The approval and permitting phase can occur simultaneously with site
acquisition and generally requires three months. The entire development process
generally ranges from 10 to 12 months but may take longer.
SALES AND MARKETING
The Company directs marketing efforts on behalf of both Sumner Suites and
Shoney's Inns primarily to business travelers, whom management believes have
represented the largest segment of its customers in recent years.
Sumner Suites. Marketing of the Sumner Suites brand is targeted primarily
towards the business traveler through a variety of efforts. Initially,
pre-opening sales calls are made by the general manager and director of sales of
each property in the local market area during the 90 days prior to opening. In
addition, advertisements are placed in the Hotel Travel Index, a comprehensive
listing of hotels worldwide used by travel agents for booking clients into
destination cities. The Sumner Suites toll-free reservation number,
1-800-74-SUITE, is promoted to the travel agents through advertising and direct
mailings. The Company believes that approximately one quarter of all Sumner
Suites room sales are booked through the reservation center. Finally, Sumner
Suites has joined TAC-Lite, an automatic, guaranteed payment system for travel
agents, in an effort to continue to expand Sumner Suites brand awareness.
Shoney's Inns. All Shoney's Inns participate in the "Sho Business" frequent
traveler program, entitling members to receive the lowest available rate, car
rental discounts, restaurant coupons, complimentary coffee
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<PAGE> 26
and newspaper, free room upgrades, express check-in and other privileges upon
presentation of a membership card. Approximately 11% of the rooms booked through
INNLINK for Shoney's Inns through October 1, 1996 have been reserved by guests
who are members of the Sho Business program. Historically, the Company has also
marketed its hotels directly to businesses whose employees travel in the
southeastern United States. The Company's marketing department gathers
information on business prospects, secures accounts and makes referrals to
individual hotels for follow up.
Additionally, the Company attempts to take advantage of the positive
reputation attached to the Shoney's name in the over-50 age group and in the
package tour market through advertisement in publications targeting such readers
and by encouraging franchisee participation in promotional discounts for
frequent customers over 50 and for tour operators. The Company's program for the
over-50 age group entitles its members to receive special room rate discounts,
complimentary coffee and newspaper and other benefits. The Shoney's Inn system
also advertises in the approximately 967 Shoney's restaurants, and individual
Shoney's Inns are encouraged to participate in joint mailings and other
promotions with local Shoney's restaurants.
The Company periodically publishes a Shoney's Inn system directory showing,
for each Inn, its address and telephone number, location as indicated on a
locator map, a brief description of the facilities, the services and amenities
provided and other relevant information. These directories are distributed in
each Shoney's Inn and Shoney's restaurant and are provided directly to travel
agents, sponsors of group tours, corporate travel departments and other selected
potential customers.
Most properties have a full-time director of sales whose responsibilities
include local marketing and direct and group sales. At the corporate level, a
Director of Marketing oversees national marketing plans and provides marketing
support for each corporate and franchised property, including smaller corporate
properties which may not have a full-time sales person. The Director of
Marketing also oversees management of the Shoney's Inn national advertising
fund, into which all Shoney's Inns pay 1% of revenue to support national
marketing efforts such as the annual system directory.
LODGING OPERATIONS
Hotel Management. Overall hotel operations are the responsibility of the
Vice President of Operations for Shoney's Inns and the Director of Operations
for Sumner Suites. Shoney's Inns are further managed by regional managers, who
directly supervise the general managers of each property. The Company expects to
add regional managers for its Sumner Suites system as it grows its hotel base
with each regional manager supervising between four and six hotels on a
geographic basis. The general manager of each Shoney's Inns or Sumner Suites is
fully responsible for day-to-day operations and is compensated by salary and
bonus systems which reward revenue and operating margin performance. Each
general manager, in conjunction with senior management, develops the property's
operating budget and is held accountable for meeting the goals and objectives of
the hotel.
Reservation System. The Company's proprietary central reservation system,
INNLINK, provides important support for the room reservation process for both
Sumner Suites and Shoney's Inns and is marketed to other chains as well. Other
chains that contract with the Company for the service include: Country Hearth
Inns, Key West Inns and Wilson Inns & Hotels. INNLINK operates 24 hours a day, 7
days a week. The INNLINK system may be accessed by individual travelers as well
as by travel agents, tour and group booking agents at 1-800-222-2222 for
Shoney's Inns and 1-800-74-SUITE for Sumner Suites. Electronically, INNLINK is
accessed through numerous global distribution systems (e.g., SABRE Travel
Information Network, Galileo International, System One and WorldSpan). The
reservation system includes specially designed hotel reservation software, with
adequate capacity, and state of the art hardware and telecommunications devices.
The Company believes that approximately one quarter and one fifth of room sales
for Sumner Suites and Shoney's Inns, respectively, are made through INNLINK.
Quality Control. To ensure quality and consistency, the Company regularly
inspects each of its hotels and each Shoney's Inn in the Shoney's Inn system for
compliance with facility and service standards. The Company also conducts
unannounced visits by unidentified "guests" who report on the quality of
services at individual hotels. Generally, in addition to its ongoing
refurbishment activities, the Company fully renovates
S-26
<PAGE> 27
each of the Company-owned Shoney's Inns after approximately seven years of
operation and expects a similar renovation schedule for Sumner Suites. In the
last 44 months, the Company has renovated 12 of the 20 Company-owned Shoney's
Inns opened prior to 1994 and plans to renovate seven Shoney's Inns over the
next year.
Training. The Company utilizes the services of an "opening team" to assist
with hiring and training new staff and opening new Company-owned hotels. The
opening team trains local hotel personnel in front desk operations, operational
policies, hotel accounting and cash handling procedures, record-keeping,
housekeeping and laundry, maintenance and repair, marketing, personnel
management, purchasing, quality assurance and sales. Sales training includes a
team of direct sales personnel that assists the local staff in the actual
pre-selling of rooms. An opening team generally remains on site for one to four
weeks depending on the prior experience of the local general manager.
FRANCHISE OPERATIONS
Franchise Marketing. The Company markets the Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, Shoney's restaurant
franchisees and other prospects known through management's contacts in the
lodging industry. The Company also markets franchises through advertisements in
trade publications and participation in trade shows and franchising conventions.
Management believes that the Company attracts potential new franchisees by
offering a high level of franchisee support services at a lower price than its
competitors. Management periodically monitors the initial fee, royalty fee,
advertising fee, reservation fee and other charges imposed by other franchisors
with whom the Company competes and believes that the fees charged by the Company
are competitive and, in many cases, lower than such other franchisors.
Fees. Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, a franchisee pays a $2,500 application fee. Upon
approval of the application, the Company and the franchisee enter into a 20-year
license agreement, and the franchisee pays a license fee equal to the greater of
$250 per room or $25,000. The application fee is applied against the license
fee.
Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, the franchisee pays monthly royalties of 3.5% of the
licensed hotel's gross sales during the term of the license agreement.
Additionally, a marketing cooperative fee of 1% of gross sales and a fee for
participation in the Shoney's Inn central reservation system of 1% of gross
sales are charged.
Franchisee Services. Management believes that the support the Company
offers to franchisees is a fundamental ingredient in determining its success as
a franchisor and that the Company's successful record as a Shoney's Inn builder,
owner and operator evidences valuable experience and abilities which can enhance
the franchisee support function. As franchisor, the Company draws on its own
operational experience to assist franchisees.
Once a Shoney's Inn is constructed, the Company offers the franchisee, for
an additional fee, training and "opening teams" similar to those used by the
Company when opening one of its own hotels. The Company also makes available
some of the most successful Company-owned Shoney's Inns as training centers.
The Company inspects every Shoney's Inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and Compliance
program, using trained field representatives. The Company encourages franchisees
to renovate each of the Shoney's Inns after approximately seven years of
operations, in the same manner that the Company renovates its own hotels.
The Company offers to provide management services to Shoney's Inn
franchisees pursuant to contractual arrangements. The Company's fee for these
services is a percentage of the managed hotel's gross revenues. Currently, the
Company manages two hotels under contract arrangement.
S-27
<PAGE> 28
LICENSE AGREEMENT WITH SHONEY'S
Under the License Agreement, the Company has certain rights to use and to
license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites"
in connection with lodging operations. Under the License Agreement, Shoney's
retains certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed, the nature and extent of on-site food and beverage service and
the terms of franchise agreements (other than the maximum fees and other
financial terms).
Prior to completion of the Shoney's Transaction on October 25, 1996, the
License Agreement entitled Shoney's to receive a portion of the franchise fees
collected by the Company equal, in substantially all cases, to 1.5% of 52
Shoney's Inns' gross revenues through October 1999 and 0.5% of the remaining and
all future Shoney's Inns' gross revenues for the first ten years of their
operation. Shoney's right to receive such fees was terminated as part of the
Shoney's Transaction. See "Prospectus Summary -- Recent Developments -- Shoney's
Transaction".
The rights in the "Shoney's Inn" and "Shoney's Inn & Suites" marks granted
to the Company under the License Agreement may be terminated upon certain
occurrences, including the bankruptcy of the Company, the failure to comply with
the terms of the License Agreement, and the failure to desist from any conduct
likely to impair Shoney's goodwill or reputation.
LODGING INDUSTRY
Smith Travel Research divides lodging chains into five segments based on
price. These segments are: upper and lower upscale, mid-scale, and upper and
lower economy. Smith Travel Research does not have a specific all-suites
segment, but the Company's Sumner Suites hotels would be included in the
mid-scale segment based on average daily room rates.
The following tables illustrate certain comparative information regarding
REVPAR and its components for the years indicated:
<TABLE>
<CAPTION>
AVERAGE AVERAGE DAILY
REVPAR OCCUPANCY RATE ROOM RATE(1)
---------------------------- ---------------------- ----------------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Industry-wide............. $39.04 $41.57 $44.04 63.0% 64.6% 65.3% $61.97 $64.35 $67.45
Upper economy segment..... 27.40 28.95 30.59 63.4 64.4 64.4 43.21 44.96 47.50
All Shoney's Inns......... 26.47 26.43 27.31 65.8 63.9 63.1 40.25 41.33 43.27
Company-owned Shoney's
Inns.................... 29.50 30.20 30.97 69.8 67.1 64.3 42.25 44.98 48.17
Mid-scale segment(2)...... 34.46 36.06 38.06 63.2 64.2 64.6 54.53 56.17 58.91
</TABLE>
- ---------------
(1) Room revenues divided by the number of rented rooms.
(2) Information with respect to Sumner Suites is unavailable or not meaningful
as two of the first three Sumner Suites hotels did not open until late 1995.
Source: Smith Travel Accommodation Reports. December year-to-date 1995, for
industry-wide, upper economy and mid-scale, and the Company's internal
data for all Shoney's Inns statistics.
The Company believes that the key elements underlying the improvements in
the industry's operating performance and profitability are favorable economic
conditions and a rate of room demand growth which exceeds the growth rate of
room supply. The rate of room demand growth exceeded the rate of room supply
growth in each of 1993, 1994 and 1995. While the growth in room supply has
increased and will continue to increase with the development of new hotels,
according to Coopers & Lybrand's "Hospitality Directions," October, 1996,
industry-wide room supply is projected to exceed room demand beginning in 1998,
but industry-wide average daily room rate ("ADR") is expected to continue to
increase through 1999 while
S-28
<PAGE> 29
occupancy is expected to decrease. Occupancy and ADR have increased consistently
throughout the lodging industry from 1993 through 1995.
COMPETITION
The lodging industry is highly competitive. In franchising the Shoney's Inn
system and managing its own lodging facilities, the Company encounters
competition from numerous lodging companies, many of which have greater industry
experience, name recognition, and financial and marketing resources than the
Company. While the actual competition for individual lodging facilities varies
by location, the primary competition for Shoney's Inns includes lodging chains
such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns
and Travelodges. The Company's Sumner Suites hotels experience competition from
chains such as AmeriSuites, Hampton Inns, Residence Inn, Courtyard by Marriott,
Quality Suites, Embassy Suites and Comfort Suites. Each of the Company's hotels
is located in a developed area that includes competing lodging facilities, and
the Company expects that future hotels which it constructs will be located in
similar areas. Management believes that the principal competitive factors in its
lodging operations are room rates, quality of accommodations, name recognition,
supply and availability of alternative lodging facilities, service levels,
reputation, reservation systems and convenience of location. In its franchising
operations, the principal competitive factors are fee structure and support
services. Management further believes that the Company is presently competitive
in all these respects.
PROPERTIES
The Company's corporate headquarters, owned by the Company, is located in
Gallatin, Tennessee and contains approximately 10,000 square feet of office
space. Another 5,000 square feet of office space is leased by the Company in
close proximity to the headquarters. The Company has purchased a site in
Hendersonville, Tennessee and has begun the process of building a new
headquarters building that will contain approximately 42,000 square feet of
space including storage and food services. Management believes that the new
building will contain sufficient space to accommodate the Company's currently
anticipated needs.
Approximately 38 of the 43 Company-owned hotels are located on sites owned
by the Company or a partnership in which the Company holds a majority interest.
The remaining hotels are located on sites that are leased pursuant to long-term
ground leases.
LITIGATION
The Company is subject to litigation from time to time in the ordinary
course of business. In one case filed during October 1994 the plaintiff, a
limited partner in one of the Company's partnerships, claims, among other
things, that the Company breached the partnership agreement by not offering the
partnership the right to participate in the profits from the management of a
neighboring AmeriSuites hotel. In February 1995, the court entered summary
judgment in favor of the plaintiff on this claim and referred the issue of
damages to a special master of the court. In November 1995, the special master
issued her report finding damages on this claim payable to the partnership (of
which the Company is a 60% partner) in the amount of approximately $3.0 million.
The report of the special master was confirmed by the court in December 1995 and
the Company subsequently appealed the judgment in March 1996. If the Company is
unsuccessful in its efforts to have the judgment reversed, the Company's
earnings could be adversely affected.
S-29
<PAGE> 30
MANAGEMENT
The following table contains certain information concerning the directors
and executive officers of the Company which information has been furnished to
the Company by the individuals named.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Leon Moore(1) 55 President, Chief Executive Officer, and Director
Richard L. Johnson 55 Executive Vice President, Director
Bob Marlowe Chief Accounting Officer, Secretary and Treasurer,
57 Director
Earl H. Sadler(1)(2)(3) 73 Director
Helen L. Moskovitz(1)(2)(3) 59 Director
James M. Grout 51 Executive Vice President
Michael A. Corbett 44 Chief Financial Officer
John C. Buttolph 67 Vice President -- Franchising and Development
</TABLE>
- ---------------
(1) Executive Committee member.
(2) Audit Committee member.
(3) Compensation Committee member.
The following is a brief summary of the business experience of each of the
directors and executive officers of the Company.
LEON MOORE founded the Company in 1976 and has served as its President and
Chief Executive Officer and a director since that time. Mr. Moore serves as
Chairman of the Executive Committee. Mr. Moore has more than 25 years of
experience in developing and operating lodging facilities and restaurants,
largely involving franchisees of Shoney's. He is also a director of The Bank of
Nashville.
RICHARD L. JOHNSON has been Executive Vice President and a director of the
Company since 1984 and is primarily responsible for strategic planning and
development. Before joining the Company in 1984, Mr. Johnson was a Vice
President and Manager of the Industrial and Commercial Group -- Municipal
Finance Section with J.C. Bradford & Co.
BOB MARLOWE has been Chief Accounting Officer, Secretary and Treasurer
since November 1995 and a director of the Company since 1984. From 1984 to
November 1995 he served as Chief Financial Officer, Secretary and Treasurer. Mr.
Marlowe is a certified public accountant. Before joining the Company in 1984, he
was the Senior Vice President and director of financial management with United
Southern Bank.
EARL H. SADLER has been a co-owner of Sadler Brothers Trucking and Leasing
Company, Inc. since 1948. Mr. Sadler joined the Company's Board of Directors in
1992, and is Chairman of the Compensation Committee.
HELEN L. MOSKOVITZ has been the President of Helen L. Moskovitz &
Associates, Inc., a destination management company, since 1979. Mrs. Moskovitz
joined the Company's Board of Directors in 1995.
JAMES M. GROUT was elected Executive Vice President of the Company in April
1995 and is primarily responsible for administration. From March 1995 until
April 1995, Mr. Grout was employed by the Company as director of development. He
was employed by Shoney's from 1980 until January 1995 in its hotel operating
division, most recently as President of Shoney's Division from February 1994
until January 1995.
MICHAEL A. CORBETT was elected Chief Financial Officer of the Company in
October 1995. He served as Treasurer of Genesco, Inc., a footwear apparel
manufacturer, from October 1993 until September 1995. From July 1989 to October
1993, Mr. Corbett was managing director of Highland Capital Corporation, a
consulting and advisory company to Fortune 500 clients in the textile,
healthcare, technology, insurance and financial service industries.
JOHN C. BUTTOLPH was elected Vice President -- Franchising and Development
for the Company in May 1993. Prior to that time he was Vice President of Suites
of America, Inc. from September 1991. Before
S-30
<PAGE> 31
joining Suites of America, Inc., he was Vice President of Prime Motor Inns, Inc.
from April 1989 to September 1991.
DESCRIPTION OF THE SERIES A NOTES
The following description of the Series A Notes offered hereby supplements
the description of the general terms and provisions of the Notes set forth in
the accompanying Prospectus, to which description reference is hereby made. The
statements under this caption are summaries of certain other terms applicable to
the Series A Notes. Such summaries do not purport to be complete and are
qualified in their entirety by the terms of the Indenture. Capitalized terms
defined in the Indenture shall have the same meanings herein.
The Series A Notes are the initial issue of Notes to be issued under an
Indenture dated as of November 15, 1996 by and between the Company and Bankers
Trust Company, as Trustee, as supplemented by a First Supplemental Indenture
establishing the terms of the Series A Notes. The Indenture, as so supplemented,
is referred to herein as the "Indenture."
The Series A Notes will be limited in principal amount to $30,000,000
($34,500,000 if the over-allotment option is exercised in full by the
Underwriters), all of which are being offered hereby. The Series A Notes will be
issuable as fully registered Notes in denominations of $1,000 and any integral
multiple thereof. The Series A Notes will bear interest at the rate per annum
set forth on the cover page of this Prospectus Supplement from and after their
date of original issuance. Payments of interest will be made quarterly on
February 1, May 1, August 1 and November 1 of each year commencing February 1,
1997, to each holder of record as of the close of business on the fifteenth day
of the month immediately preceding such interest payment date, by check of the
Trustee mailed to each such holder of record, except as provided in the
Indenture.
The Series A Notes will mature on November 1, 2006, and payments of the
principal of the Series A Notes will be made at the main trust office of the
Trustee in New York, New York. The Series A Notes are exchangeable and
transferable at such office without charge therefor except for any tax or other
governmental charge connected therewith, and provided that the Company shall not
be required to register a transfer of or to exchange the Series A Notes during
the period of 15 days immediately preceding any selection of Series A Notes for
redemption.
The Series A Notes constitute a separate series of securities for purposes
of the Indenture. For a description of the rights of holders of Notes, including
the Series A Notes, under the Indenture, see "Description of the Notes" in the
accompanying Prospectus.
OPTIONAL REDEMPTION BY THE COMPANY
The Series A Notes shall be redeemable at any time prior to the Stated
Maturity at the option of the Company as a whole at any time, or in part from
time to time, commencing December 1, 1999 on not less than 30 nor more than 60
days notice given as provided in the Indenture upon payment of the then
applicable redemption price (expressed in percentages of the principal amount)
set forth below under the heading "General Redemption Prices," together in each
case with accrued and unpaid interest to the date fixed for redemption. The
General Redemption Prices (expressed in percentages of the principal amount)
applicable during the 12-month period beginning December 1 in the years
indicated below are as follows:
GENERAL REDEMPTION PRICES
If redeemed during the 12 month period beginning December 1,
1999..........................104%
2000..........................103%
2001..........................102%
2002..........................101%
2003 and thereafter...........100%
S-31
<PAGE> 32
In case of the redemption of less than all of the outstanding Series A
Notes, the Series A Notes to be redeemed shall be selected by the Trustee by lot
or such other method as the Trustee shall deem reasonable, not more than sixty
(60) days prior to the Redemption Date, from the outstanding Series A Notes not
previously called for redemption, which method may provide for the selection for
redemption of portions (equal to $1,000 or any integral multiple thereof) of the
principal amount of such Series A Notes of a principal amount larger than
$1,000. In the case of any partial redemption, the Trustee is obligated to
notify the Company in writing of the serial numbers (and, in the case of any
Series A Note which is to be redeemed in part only, the portion of the principal
amount thereof to be redeemed) of the Series A Notes selected for redemption.
CERTAIN PROVISIONS REGARDING REDEMPTION AT HOLDER'S OPTION
The Series A Notes tendered by the personal representative or surviving
joint tenant, tenant by the entirety or tenant in common of a deceased
beneficial owner shall be redeemed within 60 days of tender, at par plus accrued
interest, subject to the amount limitations described below and in "Description
of the Notes -- Redemption at Holder's Option." Series A Notes tendered by
November 1 of each year commencing in 1999 shall be redeemed on the following
December 1 at par plus accrued interest, subject to the amount limitations and
other limitations described below and in "Description of the Notes -- Redemption
at Holder's Option." Of the Series A Notes tendered, the Company is only
required to redeem, for any twelve month period ending on December 1 of any
year, an aggregate maximum of 5% of the aggregate amount of all Notes of all
series issued under the Indenture, subject to a maximum of $50,000 per
beneficial owner, per period. Notes tendered by representatives of deceased
beneficial owners will be redeemed prior to Notes tendered by other Noteholders.
S-32
<PAGE> 33
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below have each agreed, severally, to
purchase from the Company the principal amount of the Series A Notes set forth
opposite their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF
NAME OF UNDERWRITER SERIES A NOTES
-------------------------------------------------------------------- ----------------
<S> <C>
J.C. Bradford & Co.................................................. $ 15,000,000
Dain Bosworth Incorporated.......................................... 8,000,000
Interstate/Johnson Lane Corporation................................. 7,000,000
-----------
Total..................................................... $ 30,000,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all of the Series A Notes
offered hereby, if any are purchased, excluding the Series A Notes covered by
the over-allotment option granted to the Underwriters.
The Underwriters have advised the Company that they propose initially to
offer the Series A Notes to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and may offer Series A Notes to
certain dealers at such price less a concession of not more than 2.0% of the
principal amount of the Series A Notes. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of 1.0% of the principal amount
of the Series A Notes to certain other brokers and dealers. After the
commencement of this offering, the public offering price, and concessions and
reallowances to dealers may be changed by the Underwriters.
The offering of the Series A Notes is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for purchase of the Series A Notes.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus Supplement, to purchase up to
$4,500,000 of additional aggregate principal amount of Series A Notes to cover
over-allotments at the same price per Series A Note to be paid by the
Underwriters for the other Series A Notes offered hereby. The Underwriters may
purchase such Series A Notes only to cover over-allotments, if any, in
connection with the offering made hereby.
There is no public market for the Series A Notes, and the Company does not
intend to apply for quotation of the Series A Notes on the Nasdaq National
Market or any other quotation system or listing of the Series A Notes on any
securities exchange. The Company has been advised by the Underwriters that,
following the public offering of the Series A Notes, the Underwriters presently
intend to make a market in the Series A Notes; however, the Underwriters are not
obligated to do so, and any market-making activity with respect to the Series A
Notes may be discontinued at any time without notice. There can be no assurances
as to the liquidity of the public market for the Series A Notes or that an
active public market for the Series A Notes will develop. If an active market
does not develop, the market price and liquidity of the Series A Notes may be
adversely affected.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including certain liabilities under the Securities Act of 1993, as amended, or
will contribute to payments which the Underwriters or any such controlling
persons may be required to make in respect thereof.
LEGAL MATTERS
Certain matters regarding the Series A Notes will be passed on for the
Company by Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee. Certain
legal matters regarding the Series A Notes will be passed on for the
Underwriters by Bass, Berry & Sims PLC, Nashville, Tennessee.
S-33
<PAGE> 34
PROSPECTUS
$125,000,000
SHOLODGE, INC.
SENIOR SUBORDINATED NOTES
------------------
ShoLodge, Inc. (the "Company") may offer from time to time up to
$125,000,000 in aggregate principal amount of its Senior Subordinated Notes (the
"Notes") at prices and on terms to be determined at the time of sale. The
aggregate principal amount, maturity, any premium, any interest rate (which may
be fixed or variable), any interest payment dates, any optional or mandatory
redemption terms, the initial public offering price and any other terms of the
offering of the series of Notes in respect of which this Prospectus is being
delivered are set forth in the accompanying Prospectus Supplement (the
"Prospectus Supplement"). The Notes will be unsecured and subordinated in right
of payment to the prior payment in full of all existing and future Senior
Indebtedness, as defined, of the Company and will be senior in right of payment
to or pari passu with all other subordinated indebtedness of the Company. The
Company may incur additional Senior Indebtedness subject to the "Restriction on
Additional Indebtedness" covenant in the Indenture, as defined.
Upon the occurrence of a Change in Control, as defined, of the Company, the
Company will be obligated to purchase Notes at the holder's option at par plus
accrued interest to the date of purchase. The change in control feature may have
an anti-takeover effect. See "Description of the Notes -- Repurchase at Holder's
Option Upon Change in Control." The Company will redeem Notes tendered by the
personal representative or surviving joint tenant, tenant in common or tenant by
the entirety of a deceased holder within 60 days of presentation of the
necessary documents, up to an annual maximum of $50,000 per holder and up to an
annual aggregate maximum amount equal to 5% of the aggregate original principal
amount of the Notes of all series issued under the Indenture. The Company will
redeem Notes tendered by other holders commencing on a certain date set forth in
the Prospectus Supplement and on each anniversary thereof subject to the per
holder and aggregate limitations. No sinking fund will be established to redeem
the Notes. See "Description of the Notes."
The Notes will be issued in integral multiples of $1,000 and will be in
fully registered form. The Company does not intend to list the Notes on the
Nasdaq National Market or any securities exchange.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 12, 1996
<PAGE> 35
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") which may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at certain Regional
Offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material may be obtained from the Public Reference
Section of the Commission, at prescribed rates. In addition, the Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. The Company is
required under the Indenture (as hereinafter defined) to file with the
Commission quarterly and annual reports required by the Exchange Act and to
furnish the holders copies of such reports. If the Company is not subject to the
periodic reporting and informational requirements of the Exchange Act, it will
provide the holders of the Notes with annual reports containing the information
required to be contained in Form 10-K promulgated under the Exchange Act,
quarterly reports containing the information required to be contained in Form
10-Q promulgated under the Exchange Act and from time to time such other
information as is required to be contained in Form 8-K promulgated under the
Exchange Act.
The Company has filed a registration statement on Form S-3 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained herein concerning any contract, agreement or
other document filed as an exhibit are not necessarily complete and, in each
instance, reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus its (i)
Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and (ii)
Quarterly Reports on Form 10-Q for the fiscal quarters ended April 21, 1996 and
July 14, 1996 filed by it with the Commission pursuant to the Exchange Act.
In addition, all reports and other documents filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus and to be
made a part hereof from the date of the filing of such reports and documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for the purpose of this Prospectus
to the extent that a statement contained herein (or in any other subsequently
filed document which also is incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of the documents which are incorporated by reference in this Prospectus (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents). Such request should be directed
to ShoLodge, Inc., 217 West Main Street, Gallatin, Tennessee 37066, Attention:
Michael A. Corbett, Chief Financial Officer.
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THE COMPANY
The Company develops, owns and operates all-suites hotels under the Sumner
Suites brand name and is an operator and exclusive franchisor of Shoney's Inns
and Shoney's Inn & Suites (collectively, "Shoney's Inns"). The Company's 11
Sumner Suites are mid-scale, all-suites hotels located in Florida, Georgia,
Indiana, New Mexico, Ohio and Texas. The Shoney's Inns lodging system consists
of 88 Shoney's Inns containing 8,985 rooms, of which 34 Shoney's Inns containing
4,164 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. Usually located
in or near business or leisure travel destinations in mid-sized and larger
metropolitan markets, Sumner Suites offer mid-scale accommodations at rates
between $65 and $85 per night. A typical Sumner Suites hotel contains
approximately 110 to 125 rooms, lounge facilities, meeting rooms and an exercise
room, and offers a deluxe continental breakfast.
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 $39 and $58 per night. The typical Shoney's Inn includes 100 to
125 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not offer
full food service, many offer continental breakfast and 79 of the 88 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 other limited-service lodging chains by offering guest services
approximating those of full-service facilities without the additional capital
expenditures and operating costs or higher room rates.
The Company's strategy is to increase cash flow and earnings by (i)
increasing revenue per available room while maintaining the Company's attractive
suite and room price/value relationships and controlling operating costs, (ii)
developing additional Sumner Suites, and (iii) expanding the Shoney's Inn system
through the addition of new franchised units and selectively developing
Company-owned hotels.
The principal executive offices of the Company are located at 217 West Main
Street, Gallatin, Tennessee 37066. The Company's telephone number is (615)
452-7200.
USE OF PROCEEDS
Except as otherwise described in the Prospectus Supplement, the net
proceeds to the Company from the sale of the Notes will be used to fund the
development and renovation of lodging facilities and construction of the
Company's headquarters, finance the Company's capital expenditures and working
capital requirements and reduce outstanding debt incurred for such purposes, as
well as other corporate purposes. A description of any indebtedness to be repaid
with the proceeds of the Notes will be set forth in the Prospectus Supplement.
Pending the above uses, the net proceeds to the Company will be invested in
investment grade, short-term, interest-bearing securities, such as Treasury
bills, repurchase agreements, commercial paper and short-term certificates of
deposit.
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture dated as of November 15,
1996, and one or more supplemental indentures (the "Indenture") between the
Company and Bankers Trust Company, as trustee (the "Trustee"). The particular
terms of any series of Notes offered by any Prospectus Supplement (each such
series individually the "Offered Notes") will be described in the Prospectus
Supplement relating to such Offered Notes (the "Applicable Prospectus
Supplement"). A copy of the Indenture is an exhibit to the Registration
Statement of which this Prospectus is a part and a copy of a form of
Supplemental Indenture will be filed by the Company with the Commission as an
exhibit to a document which will be incorporated by reference herein. The
following summaries of certain provisions of the Notes and the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the
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<PAGE> 37
Indenture and the applicable supplemental indenture, including the definitions
therein of certain terms. Capitalized terms not otherwise defined in this
Prospectus shall have the meanings given to them in the Indenture.
The Indenture provides that Notes may be issued thereunder from time to
time in one or more series in an aggregate principal amount up to $125,000,000.
The Notes will be issued as fully-registered Notes only in integral multiples of
$1,000, and will be unsecured, subordinated obligations of the Company.
The Applicable Prospectus Supplement will describe the following terms of
the Offered Notes: (a) the title of the Offered Notes; (b) any limit of the
aggregate principal amount of the Offered Notes; (c) the date or dates on which
the Offered Notes will mature; (d) the rate or rates per annum at which the
Offered Notes will bear interest and the date or dates from which such interest
will accrue and the dates on which such interest on the Offered Notes will be
payable and the Regular Record Dates for such Interest Payment Dates; (e) the
terms of any rights of the Company to redeem the Offered Notes at its option;
and (f) any other terms of the Offered Notes.
SUBORDINATION
The obligations of the Company to make any payment on account of the
principal of and premium, if any, and interest on the Notes will be subordinate
and junior in right of payment to the prior payment in full of all Senior
Indebtedness (as defined below). The Notes will rank senior to the Company's
7.5% convertible subordinated debentures due 2004 (the "1994 Debentures") and
senior to or pari passu with any other subordinated indebtedness of the Company.
No direct or indirect payment or distribution (other than payments or
distributions of amounts previously deposited in accordance with the defeasance
provisions of the Indenture) shall be made by or on behalf of the Company on
account or in respect of principal of or premium, if any, or interest on the
Notes or on account or in respect of the purchase, redemption or other
acquisition or deposits in trust in respect of defeasance of Notes (including
without limitation any purchase of a Note required as a result of a Change in
Control), if there shall have occurred and be continuing any default in the
payment when due (at maturity, upon acceleration of maturity, upon mandatory
prepayment, or otherwise) in respect of any Senior Indebtedness continuing
beyond the period of grace, if any, specified in the instrument or agreement
creating or evidencing such Senior Indebtedness (a "Payment Default"), unless
such default shall have been effectively waived in writing by the holders of
such Senior Indebtedness in default or unless the holders of such Senior
Indebtedness in default shall have delivered to the Trustee a written notice of
waiver of the benefits of this sentence. In addition, if any event of default
with respect to any Senior Indebtedness, other than a Payment Default, occurs
and is continuing and as a result thereof the maturity of such Senior
Indebtedness may be accelerated (such an event of default being referred to
herein as a "Covenant Default"), and the Company and the Trustee receive written
notice (such notice being herein referred to as a "Deferral Notice") thereof
from the holders of at least 10% in principal amount of Senior Indebtedness,
then no direct or indirect payment or distribution (other than payments or
distributions of amounts previously deposited in accordance with the defeasance
provisions of the Indenture) shall be made by or on behalf of the Company on
account or in respect of principal of or premium, if any, or interest on the
Notes or on account of the purchase, redemption or other acquisition or deposits
in trust in respect of defeasance of Notes (including without limitation any
purchase of a Note required as a result of a Change in Control) until the
earlier to occur of (x) the date such Covenant Default is cured, effectively
waived in writing by the holders of such Senior Indebtedness or otherwise ceases
to exist in accordance with the terms of the instruments or agreements creating
or evidencing such Senior Indebtedness, (y) the date the holders of such Senior
Indebtedness or their respective Representatives shall have delivered to the
Trustee a written notice of waiver of the benefits of this sentence, or (z) the
179th day after receipt by the Company or the Trustee of such Deferral Notice,
if in any such case the subordination provisions of the Indenture otherwise
permits such payment at such time; provided, however, that any number of
Deferral Notices may be given, but during any 365 consecutive day period only
one such period during which such payments on the Notes may not be made may
commence and the duration of such period may not exceed 179 days, and provided,
further, that no subsequent Deferral Notice relating to the same or any other
Covenant Default existing or continuing on the date of receipt of any
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<PAGE> 38
prior Deferral Notice, whether or not such subsequent Deferral Notice is
received by the Company or Trustee within 365 days shall further prohibit such
payments on the Notes unless all events of default in respect of such Senior
Indebtedness shall have been cured or waived after the date of receipt of such
prior Deferral Notice for a period of not less than 180 consecutive days.
Upon any payment or distribution of assets or securities of the Company in
any dissolution, winding up, total or partial liquidation or reorganization of
the Company, payment of the principal or, premium, if any, and interest on, and
any other amounts in respect of, the Notes will be subordinated, to the extent
and in the manner set forth in the Indenture, to the prior payment in full, in
cash, of all Senior Indebtedness, including any interest accruing on such Senior
Indebtedness subsequent to the commencement of a bankruptcy, insolvency or
similar proceeding.
By reason of such subordination, in the event of insolvency, holders of the
Notes may recover less, ratably, than other creditors of the Company.
"Senior Indebtedness" shall mean the following, whether outstanding as of
the date hereof or hereafter created, incurred, assumed or guaranteed by the
Company or any Subsidiary, (a) indebtedness (other than the Notes and the 1994
Debentures) for the payment of which the Company or any Subsidiary is
responsible or liable or the payment of which the Company or any Subsidiary has
guaranteed, (b) capital lease obligations of the Company or any Subsidiary
determined in accordance with generally accepted accounting principles, (c) any
obligation of the Company or any Subsidiary to reimburse banks or others
pursuant to letters of credit or guaranties extended by such banks or others,
advances made by such banks or others and other credit arrangements entered into
with such banks or others in connection with tax-exempt obligations issued for
the benefit of the Company or any Subsidiary, (d) any obligation of the Company
or any Subsidiary for the deferred purchase price of real or personal property,
including any purchase money indebtedness or conditional sales obligations and
obligations under title retention agreements, and (e) renewals, extensions,
modifications and refundings of any such indebtedness or obligations, provided,
however, that Senior Indebtedness shall not include indebtedness which by its
terms refers explicitly to the Notes issued hereunder and states that such
indebtedness shall not be senior thereto and shall be subordinate to the Notes
issued hereunder.
REDEMPTION AT HOLDER'S OPTION
Unless the Notes have been declared due and payable prior to their maturity
by reason of an Event of Default and such Event of Default has not been waived
and such declaration has not been rescinded or annulled, a holder has the right
to present Notes for payment prior to their maturity, and the Company will
redeem the same (or any portion of the principal amount thereof which is $1,000
or an integral multiple thereof, as the holder may specify), subject to the
following limitations: (a) the Company will have no obligation to redeem any
Notes prior to the initial holder's redemption date specified in the Note and
the applicable supplemental indenture (the "Initial Holder's Redemption Date"),
except on the death of a holder as described below, and (b) the Company will
have no obligation to redeem Notes (on the death of a holder or otherwise) in
excess of the following annual maximum amounts (collectively, the "Annual Amount
Limitations") of (i) $50,000 per holder and (ii) an aggregate amount for all
Notes submitted for redemption equal to five percent (5%) of the aggregate
original principal amount of the Notes of all series issued under the Indenture
(the "Five Percent Limitation"). The Initial Holder's Redemption Date and any
subsequent anniversary of such date are each referred to as a "Holder's
Redemption Date." Notes submitted for redemption on any Holder's Redemption
Date, except for Notes submitted for redemption following the death of a holder,
must be submitted by the date specified in the Note and the applicable
supplemental indenture with respect to such Holder's Redemption Date. If the
$50,000 per holder limitation has been reached and the Five Percent Limitation
has not been reached, if Notes have been properly presented for payment, each in
an aggregate principal amount exceeding $50,000, the Company will redeem such
Notes in order of their receipt (except Notes presented for payment in the event
of death of a holder, which will be given priority in order of their receipt),
up to the aggregate limitation of five percent (5%) of the aggregate principal
amount of the Notes of all series issued under this Indenture, notwithstanding
the $50,000 limitation.
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Subject to the Annual Amount Limitations (and unless the Notes have been
declared due and payable prior to their maturity by reason of an Event of
Default and such Event of Default has not been waived and such declaration has
not been rescinded or annulled), Notes submitted for redemption upon the death
of any holder (or any portion of the principal amount of such Notes which is
$1,000 or an integral multiple thereof, as the holder may specify), will be
redeemed within sixty (60) days following receipt by the Trustee of a written
request therefor from such holder's personal representative, or surviving joint
tenant(s), tenant by the entirety or tenant(s) in common.
The price to be paid by the Company for all Notes presented to it for
redemption pursuant to these provisions is 100% of the principal amount thereof
to be redeemed, plus accrued but unpaid interest on such principal amount to the
date of payment.
In the case of Notes registered in the name of banks, trust companies or
broker-dealers who are members of a national securities exchange or the National
Association of Securities Dealers, Inc. ("Qualified Institutions"), the $50,000
per holder limitation applies to each beneficial owner of Notes held by any
Qualified Institution as if such beneficial owner were a separate holder. A Note
held in tenancy by the entirety, joint tenancy or tenancy in common will be
deemed to be held by a single holder, and the death of a tenant by the entirety,
joint tenant or tenant in common will be deemed the death of a holder. The death
of a person who, during his or her lifetime, was entitled to substantially all
of the beneficial ownership interest of a Note, will be deemed the death of a
holder, regardless of the registered holder. Such beneficial interest will
normally be deemed to exist in typical cases of street name or nominee
ownership, ownership by a custodian for the benefit of a minor under the Uniform
Gifts to Minors Act, community property or other joint ownership arrangements
between a husband and wife (including individual retirement accounts or Keogh
plans maintained solely by or for the decedent, or by or for the decedent and
his or her spouse) and trusts and certain other arrangements whereby a person
has substantially all of the beneficial ownership interests in the Notes during
his or her lifetime. Beneficial interests shall include the power to sell,
transfer or otherwise dispose of a Note and the right to receive the proceeds
therefrom, as well as interest and principal payable with respect thereto.
Notes may be presented for redemption by delivering to the Trustee: (a) a
written request for redemption, on a form provided by the Trustee upon written
request, signed by the registered holder or his or her duly authorized
representative, (b) the Note to be redeemed and (c) in the case of a surviving
tenant or personal representative of a deceased holder or beneficial owner,
appropriate evidence of death and such other additional documents as the Trustee
shall require, including, but not limited to, inheritance or estate tax waivers
and evidence of authority of the personal representative. In their request for
prepayment on behalf of a beneficial owner, Qualified Institutions must submit
evidence, satisfactory to the Trustee, that they hold Notes on behalf of such
beneficial owner and that the aggregate requests for prepayment tendered by such
Qualified Institution on behalf of such beneficial owner per year do not exceed
$50,000. In addition, any request for prepayment must be delivered to the
Trustee by hand delivery or by registered mail, return receipt requested.
Any Notes tendered or any request for prepayment may be withdrawn by
written request received by the Trustee prior to the issuance of a check in
payment thereof.
Notes presented for redemption as set forth above will be redeemed in order
of their receipt by the Trustee, except that Notes presented for payment in the
event of death of a holder will be given priority in order of their receipt over
other Notes. Notes not redeemed in any such period because they have not been
presented prior to the date set forth in the Note and the applicable
supplemental indenture with respect to any Holder's Redemption Date or because
of the Annual Amount Limitations will be held in order of their receipt for
redemption during the following twelve (12) month period(s) until redeemed,
unless sooner withdrawn by the holder. Holders of Notes presented for redemption
shall be entitled to and shall receive scheduled monthly payments of interest
thereon on scheduled Interest Payment Dates until their Notes are redeemed.
In the case of any Notes which are presented for redemption in part only,
upon such redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes, without
service charge, a new Note(s), of any authorized denomination or denominations
as requested
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<PAGE> 40
by such holder, in aggregate principal amount equal to the unredeemed portion of
the principal of the Notes so presented. The Company may redeem, in acceptance
of tenders made pursuant hereto, Notes in excess of the principal amount that
the Company is obligated to redeem, and may purchase Notes in the open market.
However, the Company may not use any Notes purchased in the open market as a
credit against its redemption obligations hereunder.
The Company's obligation to prepay Notes properly tendered for prepayment
is not cumulative. Although the Company is obligated to prepay in any year up to
5% of the aggregate original principal amount of all series of the Notes issued
under the Indenture, it is not required to establish a sinking fund or otherwise
set aside funds for that purpose, and the Company has no present intention of
setting aside funds for the prepayment of Notes prior to maturity. The Company
intends to prepay Notes tendered out of its internally-generated funds or, if
necessary, short-term or other long-term borrowings. The obligation to prepay
the Notes, however, is an unsecured obligation of the Company.
REPURCHASE AT HOLDER'S OPTION UPON CHANGE IN CONTROL
In the event of any Change in Control (as defined below), each holder of
Notes will have the right, at the holder's option and subject to the terms and
conditions of the Indenture, to require the Company to purchase for cash all or
any part (provided the principal amount of such part is $1,000 or an integral
multiple thereof) of the holder's Notes on the date that is 35 business days
after the occurrence of the Change in Control (the "Change in Control Purchase
Date") at a price equal to 100% of the principal amount thereof plus accrued
interest to the Change in Control Purchase Date (the "Change in Control Purchase
Price").
Within 15 business days after the occurrence of a Change in Control, the
Company is obligated to mail a written notice of Change in Control to the
Trustee and to each holder (and to beneficial owners as required by applicable
law) and shall cause a copy of such notice to be published once in The Wall
Street Journal or another daily newspaper of national circulation. The notice
shall state, among other things, the events causing a Change in Control and the
date of such Change in Control, the date by which the Change in Control Purchase
Notice (as defined below) must be given, the Change in Control Purchase Date,
the Change in Control Purchase Price, the procedures the holder must follow to
exercise the holder's rights and the procedures for withdrawing a Change in
Control Purchase Notice.
A holder may exercise such holder's rights upon delivery of a written
notice of purchase (a "Change in Control Purchase Notice") to the Trustee at any
time prior to the close of business on the business day immediately prior to the
Change in Control Purchase Date, stating, among other things, the certificate
number of the Note which the holder will deliver to be purchased, the portion of
the principal amount of the Note which the holder will deliver to be purchased,
and that such Note will be submitted for purchase on the Change in Control
Purchase Date pursuant to the terms and conditions specified in the Notes.
Any Change in Control Purchase Notice may be withdrawn by the holder by a
written notice of withdrawal delivered to the Trustee or to any other office or
agency maintained for such purpose at any time before the close of business on
the business day immediately preceding the Change in Control Purchase Date. The
notice of withdrawal shall state the principal amount and the certificate
numbers of the Notes as to which the withdrawal notice relates and the principal
amount, if any, which remains subject to the original Change in Control Purchase
Notice.
Payment of the Change in Control Purchase Price for a Note for which a
Change in Control Purchase Notice has been delivered and not withdrawn is
conditioned upon delivery of such Note (together with any endorsements) to the
Trustee or to any other office or agency maintained for such purpose, at any
time (whether prior to, on or after the Change in Control Purchase Date) after
delivery of such Change in Control Purchase Notice. Payment of the Change in
Control Purchase Price for such Note will be made promptly following the later
of the Change in Control Purchase Date or the time of delivery of such Note. If
the Company has deposited with the Trustee, in accordance with the Indenture,
money sufficient to pay the Change in Control Purchase Price of such Note on the
Change in Control Purchase Date, then, on and after the Change in Control
Purchase Date, such Note shall cease to be outstanding and interest on such Note
will cease to accrue, whether or not such Note is delivered to the Trustee or to
any other office maintained for such
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<PAGE> 41
purpose, and all other rights of the holder shall terminate (other than the
right to receive the Change in Control Purchase Price upon delivery of such
Note).
Under the Indenture, a "Change in Control" shall be deemed to have occurred
at such time as either of the following events shall occur: (a) the Company
consolidates with or merges into another corporation, or conveys, transfers or
leases all or substantially all of its assets to any person, or any other
corporation merges into the Company, other than, in any case, a transaction in
which the shareholders of the Company immediately prior to such transaction
owned, directly or indirectly, immediately following such transaction, at least
50% of the combined voting power of the outstanding Voting Stock of the
corporation resulting from such transaction in substantially the same proportion
as their ownership of the Voting Stock of the Company immediately prior to such
transaction; or (b) there is a report filed by any person, including its
Affiliates and Associates (as defined in the Indenture), other than the Company
or its Subsidiaries or employee stock ownership plans or employee benefit plans
of the Company or its Subsidiaries, on Schedule 13D or 14D-1 (or any successor
schedule, form or report) pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), disclosing that such person (as defined in the
Indenture) has become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of more than 50% of the voting power of the Company's Voting
Stock then outstanding.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Notes to require
the Company to repurchase such Notes as a result of conveyance, transfer or
lease of less than all of the assets of the Company to another person may be
uncertain.
Except as described above with respect to a Change in Control, the
Indenture does not contain any other provisions that permit the holders of the
Notes to require that the Company repurchase the Notes in the event of a
takeover or similar transaction. Moreover, a recapitalization of the Company or
a transaction entered into by the Company with management or their affiliates
would not necessarily be included within the definition of a "Change in
Control." Accordingly, while such definition covers a wide variety of
arrangements which have traditionally been used to effect highly-leveraged
transactions, the Indenture does not afford the holders of Notes protection in
all circumstances from highly leveraged transactions, reorganizations,
restructurings, mergers or similar transactions involving the Company that may
adversely affect holders of Notes.
In accordance with the Indenture, no Notes may be purchased pursuant to
these provisions if there has occurred and is continuing an Event of Default
described under "Defaults and Certain Rights on Default" below (other than a
default in the payment of the Change in Control Purchase Price with respect to
such Notes).
The Change in Control feature of the Notes may, in certain circumstances,
make more difficult or discourage a takeover of the Company and thus removal of
incumbent management. The Change in Control feature, however, is not the result
of management's knowledge of any specific effort to obtain control of the
Company or part of a plan by management to adopt a series of antitakeover
provisions.
To the extent that the right of redemption by a holder in the event of a
Change in Control constitutes a tender offer under Section 14(e) of the Exchange
Act and the rules thereunder, the Company will comply with all applicable rules
under Section 14(e) of the Exchange Act.
DEFAULTS AND CERTAIN RIGHTS ON DEFAULT
An event of default will be defined in the Indenture as being: (a) default
in the payment of any installment of interest upon any of the Notes for a period
of 30 days; (b) default in the payment of the principal of and premium, if any,
on any of the Notes either at maturity, upon redemption or purchase by the
Company by declaration or otherwise; (c) failure on the part of the Company duly
to observe or perform in any material respect any other of the covenants
contained in the Notes or in the Indenture for a period of 60 days after the
date on which written notice of such failure shall have been given to the
Company; (d) an event or events of default as defined in any mortgage, bond,
indenture, loan agreement or other evidence of
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<PAGE> 42
Indebtedness in excess of $1,000,000 in the aggregate, which default or defaults
extend beyond any period of grace provided with respect thereto and which
default or defaults relate to (i) the obligation to pay the principal of or
interest on any such Indebtedness, or (ii) any other obligation which shall have
resulted in the holders of such Indebtedness causing such Indebtedness to become
or to be declared due and payable prior to the date on which it would otherwise
become due and payable; (e) the entry of a final nonappealable judgment for the
payment of money against the Company or any of its subsidiaries by a court
having jurisdiction which results in a liability (after provision for the
proceeds of any policy of insurance with respect to such liability) in excess of
$5,000,000 which remains unpaid for more than 60 days; or (f) certain events of
bankruptcy, insolvency, receivership or reorganization.
The Indenture will require the Company to file annually with the Trustee a
certificate either stating the absence of any default or specifying any default
that may exist, and to deliver to the Trustee within five days of the occurrence
thereof notice of certain defaults described above. The Indenture will provide
that the Trustee shall, within 30 days after the occurrence of a default, give
to the Noteholders notice of all uncured defaults known to it; provided that,
except in the case of default in the payment of principal of or premium, if any,
or interest on any of the Notes, the Trustee shall be protected in withholding
such notice if the Trustee in good faith determines that the withholding of such
notice is in the interest of the Noteholders. The term "default" for the purpose
of this provision only shall mean the happening of any Event of Default
specified in the Indenture or any applicable supplemental indenture excluding
any notice or grace periods.
The Indenture will contain a provision pursuant to which the Company will
indemnify the Trustee against any and all losses or liabilities incurred by the
Trustee in connection with its execution and performance of the Indenture;
provided, however, that such indemnification will not extend to losses resulting
from a breach of the Trustee's duties under the Indenture. The Indenture will
provide that the holders of a majority in principal amount of the outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred upon
the Trustee, subject to certain limitations set forth in the Indenture. The
Trustee is not required to take any action at the direction of the holders of
the Notes unless such holders have provided the Trustee with a reasonable
indemnity.
LIMITATION ON DIVIDENDS AND OTHER PAYMENTS
The Company has agreed pursuant to the Indenture that it will not make, pay
or declare any of the following (each, a "Restricted Payment"): (a) any dividend
or other distribution of property or assets in respect of its capital stock
other than dividends paid solely in the Company's capital stock, (b) any stock
repurchase, (c) any repayment or defeasance of any indebtedness which is
subordinate to the Notes (except, so long as the Notes are not in default,
required payments of principal or interest thereon) or (d) any exchange of
equity for newly issued debt, unless such Restricted Payment, when aggregated
with all other Restricted Payments by the Company after November 15, 1996, is
less than the sum of: (i) $8,500,000 plus (ii) 50% of the Company's aggregate
Consolidated Net Income (as defined in the Indenture) earned during the period
commencing October 7, 1996 and ending on the last day of the fiscal quarter of
the Company preceding such Restricted Payment, (or minus 100% of the Company's
aggregate Consolidated Net Loss (if any) (as defined in the Indenture) during
such period) plus (iii) the aggregate net proceeds (including the fair market
value of non-cash proceeds) received by the Company from public or private
offerings of equity securities after November 15, 1996 (including the issuance
of equity securities upon conversion of convertible debt securities or upon
exercise of any options, warrants or rights to acquire equity securities). In
addition, the Company is prohibited by the Indenture from making any Restricted
Payments if, by doing so, the Company would be in violation of any other
provision of the Indenture or any other loan agreement or indenture to which the
Company is a party.
RESTRICTIONS ON ADDITIONAL INDEBTEDNESS
Pursuant to the Indenture, the Company has agreed not to, and has agreed to
cause its Subsidiaries not to, incur or otherwise become liable for the payment
of any Indebtedness if, at the time of such incurrence, and after giving pro
forma effect thereto, the total Indebtedness of the Company and its
Subsidiaries, including the Notes, would exceed 70% of the Company's Total
Consolidated Capitalization (as defined in the Indenture).
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MINIMUM CONSOLIDATED NET WORTH
Under the Indenture, the Company has covenanted to maintain a minimum
Consolidated Net Worth of $75,000,000 plus 50% of the Company's cumulative
Consolidated Net Income earned since October 6, 1996.
MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION
The Company has covenanted that it will not merge or consolidate with any
other corporation or sell or convey all or substantially all of its assets to
any person, firm or corporation, unless (a) either the Company shall be the
continuing corporation, or the successor corporation (if other than the Company)
shall be a corporation organized under the laws of the United States of America
or any State thereof and shall expressly assume the due and punctual payment of
the principal of and premium, if any, and interest on all the Notes, and the due
and punctual performance and observance of all of the covenants and conditions
of the Indenture and any applicable supplemental indenture to be performed by
the Company, and (b) the Company or such successor corporation, as the case may
be, shall not, immediately after such merger or consolidation, or such sale or
conveyance, be in default in the performance of any such covenant or condition.
The Company's covenants also provide that if at any time there shall be any
consolidation or merger or sale or conveyance of property to which the foregoing
covenant is applicable, then in any such event the successor corporation will
promptly deliver to the Trustee in connection with the closing thereon: (a) an
Officers' Certificate stating that as of the time immediately after the
effective date of any such transaction the foregoing covenants of the Company
have been complied with and the successor corporation is not in default under
the provisions of the Indenture; and (b) an Opinion of Counsel stating that in
such Counsel's opinion such covenants have been complied with and that any
instrument or instruments executed in the performance of such covenants comply
with the requirements thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate all of its
obligations with respect to any series of outstanding Notes ("Legal Defeasance")
except for (i) the rights of holders of outstanding Notes to receive payment in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, issuing Notes to
replace, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to terminate its obligations with respect to the covenants that
are described in the Indenture with respect to such series of Notes ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to such series of
Notes. In the event Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to such series of Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to any series of Notes, (i) the Company must irrevocably deposit with
the Trustee, in trust, for the benefit of the holders of the series of Notes,
cash in U.S. dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the outstanding series of Notes on the stated
maturity or on the applicable redemption date, as the case may be, of such
principal or installment of principal of, premium, if any, or interest on the
outstanding series of Notes; (ii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit (or greater period of time in which any such deposit of trust funds may
remain subject to bankruptcy or insolvency laws insofar as those apply to the
deposit by the Company); (iii) such Legal Defeasance or Covenant Defeasance
shall not cause the Trustee to have a conflicting interest with respect to any
securities of the Company; (iv) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a
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<PAGE> 44
default under any agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (v) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of outside counsel reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
November 15, 1996, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders of the outstanding Notes of such series
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (vi) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
outside counsel reasonably acceptable to the Trustee confirming that the holders
of such series of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (vii) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion, (A) the trust funds
will not be subject to any rights of holders of indebtedness of the Company or
any of its Subsidiaries other than the series of Notes being defeased thereby
and (B) assuming no intervening bankruptcy of the Company between the date of
deposit and the 91st day following the deposit and assuming no holder of such
series of Notes is an insider of the Company, after the 91st day following the
deposit, the trust funds will not be subject to the effects of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally under any applicable United States or state law; (viii) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or others;
(ix) the Company shall have delivered to the Trustee an officers' certificate
and an opinion of outside counsel, each stating that all conditions precedent
provided in the Indenture and relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with and (x) the Company
shall have delivered to the Trustee an amount sufficient to cover its fees and
expenses as Trustee under the Indenture through the term of the series of Notes
to be defeased, or made adequate provision therefor to the satisfaction of the
Trustee.
MODIFICATION OF THE INDENTURE
With the consent of the holders of not less than fifty-one percent (51%) in
aggregate principal amount of the Notes then outstanding, the Company may modify
any provisions of the Indenture, any applicable supplemental indenture or the
rights of the Noteholders or the rights and obligations of the Company;
provided, however, that no such modification shall, without the consent of the
holder of each outstanding Note affected thereby (a) change the Stated Maturity
of any Note, or reduce the principal, the rate of interest or any applicable
premium payable upon redemption, (b) reduce the percentage(s) of the aggregate
principal amount of outstanding Notes, the consent of the holders of which is
required for any such modifications or for any waiver provided for in the
Indenture, or (c) modify any of the provisions of the Indenture addressing such
requirements, except to increase any such percentage or to provide that certain
other provisions of the Indenture cannot be modified or waived without the
consent of the holder of each Note affected thereby.
With respect to changes affecting one or more, but less than all, series of
Notes then outstanding, with the consent of the holders of not less than
fifty-one percent (51%) in aggregate principal amount of the Notes of such
affected series then outstanding, the Company may modify any provisions of the
Indenture, any applicable supplemental indenture or the rights of such
Noteholders or the rights and obligations of the Company; provided, however,
that no such supplemental indenture shall, without the consent of the holder of
each outstanding Note of such series affected thereby: (a) change the Stated
Maturity of any such series of Notes, or reduce the principal, the rate of
interest or any applicable premium payable upon redemption of such series of
Notes, (b) reduce the percentage(s) of the aggregate principal amount of
outstanding Notes of any such series, the consent of the holders of which is
required for any such modifications or for any waiver provided for in the
Indenture, or (c) modify any of the provisions of the Indenture addressing such
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<PAGE> 45
requirements pertaining to such series of Notes, except to increase any such
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the holder of each Note affected
thereby.
Notes shall be deemed to be "affected" by a supplemental indenture, if such
modification adversely affects or diminishes the rights of holders thereof
against the Company or against the property of the Company.
Without the consent of the holders of any Notes, the Company and the
Trustee may from time to time, subject to the terms of the Indenture, enter into
one or more supplemental indentures: (i) to evidence the succession of another
corporation to the Company as described above under "--Merger, Consolidation or
Sale of Assets; Successor Corporation," (ii) to add to the covenants of the
Company, to surrender any rights of the Company or ensure enforcement of the
remedies of the Trustee and the Noteholders, (iii) to cure any ambiguity or
inconsistency to the extent such modification does not adversely affect the
interest of the Noteholders or (iv) provide for the creation of any series of
Notes.
THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture. Its mailing
address is Four Albany Street, New York, New York 10006.
PLAN OF DISTRIBUTION
The Company may sell the Notes to or through one or more underwriters to be
named in the Prospectus Supplement. The Underwriters may include J.C. Bradford &
Co. or a group of underwriters represented by such firm or may be one or more
other firms.
Underwriters may offer and sell the Notes at a fixed price or prices, which
may be changed, or from time to time at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. In connection with the sale of the Notes, Underwriters may be deemed to
have received compensation from the Company in the form of underwriting
discounts or commissions and may also receive compensation from purchasers of
the Notes for whom they may act as agent. Underwriters may sell the Notes to or
through dealers and such dealers may receive compensation in the form of
discounts, concessions or commissions from the Underwriters or commissions from
the purchasers for whom they may act as agent.
The Company may enter into underwriting agreements to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
There is no public market for the Notes and the Company does not intend to
apply for listing of the Notes on the Nasdaq National Market or any securities
exchange. Any Underwriters or agents to or through whom the Notes are sold by
the Company may make a market in the Notes, although they will not be under any
obligation to do so and may discontinue any market-making at any time. No
assurance can be given as to the liquidity of the trading market for the Notes
or that an active trading market for the Notes will develop. If an active public
market does not develop, the market price and liquidity of the Notes may be
adversely affected.
LEGAL MATTERS
Certain matters regarding the Notes will be passed on for the Company by
Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee.
EXPERTS
The consolidated financial statements and the related supplemental schedule
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports, which
are incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
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<PAGE> 46
This page contains spaces for the following graphic and image
materials. The inside back cover contains exterior and interior photographs
of the Sumner Suites (Riverwalk) San Antonio, Texas and the Shoney's Inn,
Birmingham, Alabama.
<PAGE> 47
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS SUPPLEMENT
AND ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SERIES A NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN A
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Summary.................... S-3
Risk Factors.......................... S-8
Use of Proceeds....................... S-12
Capitalization........................ S-12
Selected Financial Data............... S-13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-16
Business.............................. S-23
Management............................ S-30
Description of the Series A Notes..... S-31
Underwriting.......................... S-33
Legal Matters......................... S-33
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Use of Proceeds....................... 3
Description of the Notes.............. 3
Plan of Distribution.................. 12
Legal Matters......................... 12
Experts............................... 12
</TABLE>
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$30,000,000
SHOLODGE, INC.
SHONEY'S SUMNER
INN SUITES
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2006, SERIES A
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PROSPECTUS SUPPLEMENT
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J.C. Bradford & Co.
Dain Bosworth
Incorporated
Interstated/Johnson Lane
Corporation
November 12, 1996
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